10-Q 1 0001.txt FIRST CITIZENS BANCSHARES, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the period ended September 30, 2000 Commission File Number: 0-16471 First Citizens BancShares, Inc (Exact name of Registrant as specified in its charter) Delaware 56-1528994 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 239 Fayetteville Street, Raleigh, North Carolina 27601 (Address of principal executive offices) (zip code) (919) 716-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No _____ Class A Common Stock--$1 Par Value-- 8,813,454 shares Class B Common Stock--$1 Par Value-- 1,716,372 shares (Number of shares outstanding, by class, as of November 13, 2000) INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 2000, December 31, 1999,and September 30, 1999 Consolidated Statements of Income for the three and nine-month periods ended September 30, 2000, and September 30, 1999 Consolidated Statements of Changes in Shareholders' Equity for thenine-month periods ended September 30, 2000, and September 30, 1999 Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2000, and September 30, 1999 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Market Risk Disclosure PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. During the quarter ended September 30, 2000, Registrant filed a Current Report on Form 8-K to report the sale of it's mortgage servicing rights. 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 BANCSHARES, INC. (Registrant) Dated: November 13, 2000 By:/s/Kenneth A. Black Kenneth A. Black Vice President, Treasurer, and Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries Third Quarter 2000
Consolidated Balance Sheets First Citizens BancShares, Inc. and Subsidiaries September 30* December 31# September 30* (thousands,except share data) 2000 1999 1999 Assets Cash and due from banks $529,897 $591,605 $461,792 Investment securities held to maturity 1,693,741 1,353,321 1,676,825 Investment securities available for sale 36,698 18,573 22,695 Overnight investments 450,446 473,393 316,158 Loans 7,097,773 6,751,039 6,574,807 Less reserve for loan losses 101,565 98,690 97,965 ------------------------------------------------------------------------------------------------------------- Net loans 6,996,208 6,652,349 6,476,842 Premises and equipment 427,245 397,397 386,990 Income earned not collected 59,708 52,621 57,980 Other assets 167,353 177,840 178,433 ------------------------------------------------------------------------------------------------------------- Total assets $10,361,296 $9,717,099 $9,577,715 ============================================================================================================= Liabilities Deposits: Noninterest-bearing $1,387,406 $1,343,353 $1,319,625 Interest-bearing 7,281,236 6,830,245 6,742,466 ------------------------------------------------------------------------------------------------------------- Total deposits 8,668,642 8,173,598 8,062,091 Short-term borrowings 632,318 568,301 554,866 Long-term obligations 154,687 155,683 156,840 Other liabilities 116,308 90,760 90,849 ------------------------------------------------------------------------------------------------------------- Total liabilities 9,571,955 8,988,342 8,864,646 Shareholders' Equity Common stock: Class A - $1 par value (8,813,454; 8,890,039 and 8,905,199 shares issued, respectively) 8,813 8,890 8,906 Class B - $1 par value (1,720,360 shares issued for all periods) 1,720 1,720 1,720 Surplus 143,766 143,766 143,760 Retained earnings 629,543 567,801 551,834 Accumulated other comprehensive income 5,499 6,580 6,849 ------------------------------------------------------------------------------------------------------------- Total shareholders' equity 789,341 728,757 713,069 ------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $10,361,296 $9,717,099 $9,577,715 ============================================================================================================= # Unaudited * Derived from the 1999 Annual Report on Form 10-K. See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc and Subsidiaries Third Quarter 2000
Consolidated Statements of Income First Citizens BancShares, Inc. and Subsidiaries Three Months Ended Nine Months Ended September 30 September 30 (thousands, except share data, unaudited) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Interest income Loans $150,083 $129,434 $431,376 $376,135 Investment securities: U. S. Government 24,953 26,497 69,192 84,663 State, county and municipal 60 37 163 112 Other 118 165 373 404 ------------------------------------------------------------------------------------------------------------------------- Total investment securities interest income 25,131 26,699 69,728 85,179 Overnight investments 7,752 4,091 17,738 11,326 ------------------------------------------------------------------------------------------------------------------------- Total interest income 182,966 160,224 518,842 472,640 Interest expense Deposits 79,944 61,175 214,414 182,528 Short-term borrowings 8,397 6,125 22,184 16,964 Long-term obligations 3,168 3,197 9,476 9,539 ------------------------------------------------------------------------------------------------------------------------- Total interest expense 91,509 70,497 246,074 209,031 ------------------------------------------------------------------------------------------------------------------------- Net interest income 91,457 89,727 272,768 263,609 Provision for loan losses 4,197 3,329 10,631 8,169 ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 87,260 86,398 262,137 255,440 Noninterest income Service charges on deposit accounts 14,898 14,677 43,674 40,486 Credit card income 9,990 8,367 26,915 22,258 Trust income 3,660 3,508 11,062 10,515 Fees from processing services 3,683 3,270 10,635 9,643 Commission income 4,146 2,797 10,253 8,082 ATM income 2,824 2,828 8,143 7,989 Gain on sale of mortgage servicing rights 20,187 - 20,187 - Mortgage income 704 1,134 3,704 5,144 Gain on sale of branches - 4,432 - 5,063 Other service charges and fees 3,074 2,692 9,405 7,373 Securities gains 2,246 - 2,268 777 Other 1,946 2,193 6,560 6,034 ------------------------------------------------------------------------------------------------------------------------- Total noninterest income 67,358 45,898 152,806 123,364 Noninterest expense Salaries and wages 43,485 41,207 126,106 120,102 Employee benefits 7,880 7,733 24,957 23,056 Occupancy expense 9,246 7,597 25,628 22,083 Equipment expense 9,730 9,334 28,189 27,866 Other 30,916 29,233 90,617 86,602 ------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 101,257 95,104 295,497 279,709 ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 53,361 37,192 119,446 99,095 Income taxes 20,006 14,060 45,123 36,612 ========================================================================================================================= Net income $33,355 $23,132 $74,323 $62,483 ========================================================================================================================= Average shares outstanding 10,534,049 10,625,559 10,559,305 10,625,559 ------------------------------------------------------------------------------------------------------------------------- Per Share Net income $3.17 $2.18 $7.04 $5.88 Cash dividends 0.25 0.25 0.75 0.75 ------------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Consolidated Statements of Changes in Shareholders' Equity First Citizens BancShares, Inc. and Subsidiaries Accumulated Class A Class B Other Total Common Common Retained Comprehensive Shareholders' (thousands,except share data, unaudited) Stock Stock Surplus Earnings Income Equity ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $8,906 $1,720 $143,760 $497,316 $9,047 $660,749 Net income 62,483 62,483 Unrealized securities losses, net of $1,251 tax benefit (2,198) (2,198) Cash dividends (7,965) (7,965) ============================================================================================================================= Balance at September 30, 1999 $8,906 $1,720 $143,760 $551,834 $6,849 $713,069 ============================================================================================================================= Balance at December 31, 1999 $8,890 $1,720 $143,766 $567,801 $6,580 $728,757 Redemption of 76,585 shares of Class A common stock (77) (4,652) (4,729) Net income 74,323 74,323 Unrealized securities losses, net of $654 tax benefit (1,081) (1,081) Cash dividends (7,929) (7,929) ============================================================================================================================= Balance at September 30, 2000 $8,813 $1,720 $143,766 $629,543 $5,499 $789,341 ============================================================================================================================= See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Consolidated Statements of Cash Flows First Citizens BancShares, Inc. and Subsidiaries Nine months ended September 30 ----------------------------------- 2000 1999 ------------------------------------------------------------------------------------------------------------------- (thousands, unaudited) Operating Activities Net income $74,323 $62,483 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 8,706 8,817 Provision for loan losses 10,631 8,169 Deferred tax benefit (1,296) (4,143) Change in current taxes payable 9,006 (2,944) Depreciation 22,566 22,823 Change in accrued interest payable 14,011 (7,526) Change in income earned not collected (7,087) 3,672 Securities gains (2,268) (777) Gain on sales of branches - (5,063) Gain on sale of mortgage servicing rights (20,187) - Provision for branches to be closed 2,681 - Origination of loans held for sale (109,578) (345,347) Proceeds from sale of loans held for sale 103,631 392,106 Loss (gain) on loans held for sale 225 (2,047) Net amortization of premiums and discounts 72 9,720 Net change in other assets (2,172) (277) Net change in other liabilities (150) (4,830) ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 103,114 134,836 ------------------------------------------------------------------------------------------------------------------- Investing Activities Net increase in loans outstanding (348,768) (467,494) Purchases of investment securities held to maturity (1,088,398) (559,826) Purchases of investment securities available for sale (20,352) (2,315) Proceeds from maturities of investment securities held to maturity 747,906 1,008,653 Proceeds from sales of investment securities available for sale 2,337 1,710 Proceeds from sale of mortgage servicing rights 26,513 - Net change in overnight investments 22,947 (83,433) Dispositions of premises and equipment 2,971 6,003 Additions to premises and equipment (55,385) (50,122) Purchase and sale of branches, net of cash transferred - (70,067) ------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (710,229) (216,891) ------------------------------------------------------------------------------------------------------------------- Financing Activities Net change in time deposits 504,242 (67,456) Net change in demand and other interest-bearing deposits (9,198) 131,548 Net change in short-term borrowings 63,021 (15,235) Repurchases of common stock (4,729) - Cash dividends paid (7,929) (7,965) ------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 545,407 40,892 ------------------------------------------------------------------------------------------------------------------- Change in cash and due from banks (61,708) (41,163) Cash and due from banks at beginning of period 591,605 502,955 =================================================================================================================== Cash and due from banks at end of period $529,897 $461,792 =================================================================================================================== Cash payments for: Interest $140,554 216,096 Income taxes 36,597 42,027 Supplemental disclosure of noncash investing and financing activities: Unrealized securities losses (1,735) (3,449) ------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000 Notes to Consolidated Financial Statements First Citizens BancShares, Inc. and Subsidiaries Note A - Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete statements. In the opinion of management, the consolidated statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. ("BancShares") as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes included in the 1999 First Citizens BancShares, Inc. Annual Report. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2000. However, the reclassifications have no effect on shareholders' equity or net income as previously reported. Note B - Comprehensive Income The following table displays comprehensive income for the periods indicated:
Three Months Ended September 30 Nine Months Ended September 30 (thousands) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------- Net income $33,355 $23,132 $74,323 $62,483 Other comprehensive income (loss) (315) 21 (1,081) (2,198) ======================================================================================================================= Comprehensive income $33,040 $23,153 $73,242 $60,285 =======================================================================================================================
Note C - Mortgage Servicing ------------------------------------------------------------------------------ During the three months ended September 30, 2000, BancShares sold the mortgage servicing rights relating to approximately $1.6 billion in loans serviced for others to an independent third party. As a result of this transaction, which resulted in a nonrecurring gain of $20.2 million, BancShares' carrying value of mortgage servicing rights was reduced from $6.8 million as of December 31, 1999 to zero. Also, BancShares has outsourced servicing for mortgage loans held in its own portfolio. As a result of these transactions, BancShares no longer services mortgage loans. First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Financial Summary Table 1 2000 1999 Nine Months Ended Third Second First Fourth Third September 30 (thousands, except per share data and ratios Quarter Quarter Quarter Quarter Quarter 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Summary of Operations Interest income $182,966 $171,890 $163,986 $161,251 $160,224 $518,842 $472,640 Interest expense 91,509 80,184 74,381 72,511 70,497 246,074 209,031 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 91,457 91,706 89,605 88,740 89,727 272,768 263,609 Provision for loan losses 4,197 2,975 3,459 3,503 3,329 10,631 8,169 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 87,260 88,731 86,146 85,237 86,398 262,137 255,440 Noninterest income 67,358 44,097 41,351 41,975 45,898 152,806 123,364 Noninterest expense 101,257 97,953 96,287 95,911 95,104 295,497 279,709 ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 53,361 34,875 31,210 31,301 37,192 119,446 99,095 Income taxes 20,006 13,421 11,696 11,984 14,060 45,123 36,612 Net income $33,355 $21,454 $19,514 $19,317 $23,132 $74,323 $62,483 =================================================================================================================================== Net interest income-taxable equivalent $92,162 $92,414 $90,374 $89,267 $90,258 $274,950 $265,299 ----------------------------------------------------------------------------------------------------------------------------------- Selected Averages Total assets $10,167,665 $9,772,765 $9,658,251 $9,721,360 $9,644,135 $9,866,386 $9,589,565 Investment securities 1,633,653 1,594,291 1,497,278 1,583,216 1,897,593 1,575,286 2,017,852 Loans 7,036,622 6,917,041 6,789,203 6,646,312 6,474,200 6,914,735 6,315,810 Interest-earning assets 9,142,585 8,788,776 8,667,039 8,627,990 8,689,146 8,867,141 8,642,421 Deposits 8,524,930 8,211,252 8,128,968 8,140,962 8,121,209 8,289,283 8,093,473 Interest-bearing liabilities 7,886,410 7,560,267 7,512,781 7,533,726 7,518,874 7,654,004 7,512,009 Long-term obligations 154,979 153,773 155,171 158,975 156,856 154,642 157,533 Shareholders' equity $770,418 $748,648 $734,777 $720,617 $702,065 $751,643 $684,687 Shares outstanding 10,534,049 10,551,766 10,592,378 10,625,208 10,625,559 10,559,305 10,625,559 ----------------------------------------------------------------------------------------------------------------------------------- Selected Period-End Balances Total assets $10,361,296 $9,943,877 $9,880,732 $9,717,099 $9,577,715 $10,361,296 $9,577,715 Investment securities 1,730,439 1,543,033 1,547,214 1,371,894 1,699,520 1,730,439 1,699,520 Loans 7,097,773 7,006,824 6,828,095 6,751,039 6,574,807 7,097,773 6,574,807 Interest-earning assets 9,278,658 8,871,522 8,896,750 8,596,326 8,590,485 9,278,658 8,590,485 Deposits 8,668,642 8,366,364 8,295,850 8,173,598 8,062,091 8,668,642 8,062,091 Interest-bearing liabilities 8,068,241 7,626,805 7,655,102 7,554,229 7,454,172 8,068,241 7,454,172 Long-term obligations 154,687 153,761 154,915 155,683 156,840 154,687 156,840 Shareholders' equity $789,341 $758,985 $741,136 $728,757 $713,069 $789,341 $713,069 Shares outstanding 10,533,814 10,534,614 10,566,849 10,610,399 10,625,559 10,533,814 10,625,559 ----------------------------------------------------------------------------------------------------------------------------------- Profitability Ratios (averages) Rate of return (annualized) on: Total assets 1.31 % 0.88 % 0.81 % 0.79 % 0.95 % 1.01 % 0.87 Shareholders' equity 17.22 11.53 10.68 10.64 13.07 13.21 12.20 Dividend payout ratio 7.88 12.32 13.59 13.74 11.47 10.65 12.76 ----------------------------------------------------------------------------------------------------------------------------------- Liquidity and Capital Ratios (averages) Loans to deposits 82.54 % 84.24 % 83.52 % 81.64 % 79.72 % 83.42 % 78.04 Shareholders' equity to total assets 7.58 7.66 7.61 7.41 7.28 7.62 7.14 Time certificates of $100,000 or more to total deposits 9.54 9.27 9.01 8.96 8.93 9.29 8.94 ----------------------------------------------------------------------------------------------------------------------------------- Per Share of Stock Net income $3.17 $2.03 $1.84 $1.82 $2.18 $7.04 $5.88 Cash dividends 0.25 0.25 0.25 0.25 0.25 0.75 0.75 Book value at period end 74.93 72.05 70.14 68.68 67.11 74.93 67.11 Tangible book value at period end 64.77 61.92 59.79 58.13 56.31 64.77 56.31 -----------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Outstanding Loans by Type Table 2 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Third Second First Fourth Third (thousands) Quarter Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------- Real estate: Construction and land development $209,592 $200,483 $208,518 $186,119 $170,467 Mortgage: 1-4 family residential 1,515,694 1,460,512 1,368,732 1,326,642 1,311,314 Commercial 1,980,802 1,934,302 1,866,544 1,810,904 1,732,853 Equity Line 838,198 813,908 776,164 755,342 706,271 Other 201,107 204,962 184,397 161,652 162,098 Commercial and industrial 942,507 946,067 950,445 985,738 971,199 Consumer 1,248,793 1,297,982 1,340,671 1,393,227 1,400,144 Lease financing 134,655 131,579 127,822 123,908 111,338 Other 26,425 17,029 4,802 7,507 9,123 ------------------------------------------------------------------------------------------------------------------------- Total loans 7,097,773 7,006,824 6,828,095 6,751,039 6,574,807 Less reserve for loan losses 101,565 100,515 99,590 98,690 97,965 ------------------------------------------------------------------------------------------------------------------------- Net loans $6,996,208 $6,906,309 $6,728,505 $6,652,349 $6,476,842 -------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Table 3 September 30, 2000 September 30, 1999 ------------------------------------------------------------------------------------------------------------------------------------ Average Taxable Average Taxable Book Fair Maturity Equivalent Book Fair Maturity Equivalent (thousands) Value Value (Yrs./Mos.) Yield Value Value (Yrs./Mos.) Yield ------------------------------------------------------------------------------------------------------------------------------------ U. S. Government: Within one year $1,363,229 $1,353,193 0/6 6.22 % $1,269,604 $1,267,703 0/6 5.55 % One to five years 317,202 317,700 1/6 6.91 393,652 385,725 1/5 5.71 Five to ten years 222 224 8/8 8.04 188 191 7/11 8.21 Over ten years 8,336 8,279 26/3 7.37 10,264 10,268 26/10 7.37 ------------------------------------------------------------------------------------------------------------------------------------ Total 1,688,989 1,679,396 0/8 6.35 1,673,708 1,663,887 0/8 5.59 State, county and municipal: Within one year 1,150 1,154 0/4 7.20 250 252 0/7 7.91 One to five years 1,759 1,774 2/8 7.42 2,412 2,459 2/2 7.21 Over ten years 1,538 1,588 17/6 8.58 150 152 17/11 9.14 ------------------------------------------------------------------------------------------------------------------------------------ Total 4,447 4,516 7/3 7.76 2,812 2,863 2/10 7.37 Other Within one year 10 10 0/4 5.88 - - - - One to five years 45 45 1/7 6.64 55 55 2/5 5.47 Five to ten years 250 250 8/1 4.50 250 250 8/10 2.25 ------------------------------------------------------------------------------------------------------------------------------------ Total 305 305 5/1 5.11 305 305 7/8 2.47 ------------------------------------------------------------------------------------------------------------------------------------ Total securities held to maturity 1,693,741 1,684,217 0/10 6.36 % $1,676,825 $1,667,055 0/10 5.60 % Marketable equity securities 24,500 36,698 - - 11,333 22,695 - - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities $1,718,241 $1,720,915 - - $1,688,158 $1,689,750 - - ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Table 4 2000 1999 Increase (decrease) due to: ------------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Yield/ Total (thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change ------------------------------------------------------------------------------------------------------------------------------- Assets Total loans $7,036,622 $150,752 8.52 % $6,474,200 $129,948 7.96 % $11,472 $9,332 $20,804 Investment securities: U. S. Government 1,600,409 24,953 6.20 1,871,805 26,497 5.62 (4,053) 2,509 (1,544) State, county and municipal 4,461 96 8.56 2,820 54 7.60 33 9 42 Other 28,783 118 1.63 22,968 165 2.85 33 (80) (47) ------------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,633,653 25,167 6.13 1,897,593 26,716 5.59 (3,987) 2,438 (1,549) Overnight investments 472,310 7,752 6.53 317,353 4,091 5.11 2,259 1,402 3,661 =============================================================================================================================== Total interest-earning assets $9,142,585 $183,671 7.99 % $8,689,146 $160,755 7.34 % $9,744 $13,172 $22,916 =============================================================================================================================== Liabilities Deposits: Checking With Interest $1,051,003 $1,555 0.59 % $1,061,601 $1,559 0.58 % ($23) $19 ($4) Savings 628,857 2,363 1.49 690,637 2,711 1.56 (234) (114) (348) Money market accounts 1,455,076 16,487 4.51 1,385,314 12,551 3.59 681 3,255 3,936 Time deposits 4,012,339 59,539 5.90 3,668,409 44,354 4.80 4,596 10,589 15,185 ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 7,147,275 79,944 4.45 6,805,961 61,175 3.57 5,020 13,749 18,769 Federal funds purchased 38,365 645 6.69 46,000 588 5.07 (114) 171 57 Repurchase agreements 181,891 2,360 5.16 120,580 1,164 3.83 692 504 1,196 Master notes 308,841 4,448 5.73 332,574 3,609 4.31 (303) 1,142 839 Other short-term borrowings 55,059 944 6.82 56,903 764 5.33 (29) 209 180 Long-term obligations 154,979 3,168 8.13 156,856 3,197 8.09 (41) 12 (29) =============================================================================================================================== Total interest-bearing liabilities $7,886,410 $91,509 4.62 % $7,518,874 $70,497 3.72 % $5,225 $15,787 $21,012 =============================================================================================================================== Interest rate spread 3.37 % 3.62 % ------------------------------------------------------------------------------------------------------------------------------- Net interest income and net yield on interest-earning assets $92,162 4.01 % $90,258 4.12 % $4,519 ($2,615) $1,904 ------------------------------------------------------------------------------------------------------------------------------- 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 each period, and state income tax rates of 7.00% for 2000 and 1999. The taxiable-equivalent adjustment was $705 for 2000 and $531 for 1999.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Table 5 2000 1999 Increase (decrease) due to: ----------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Yield/ Total (thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change ----------------------------------------------------------------------------------------------------------------------------- Assets Total loans $6,914,735 $433,463 8.37 % $6,315,810 $377,772 7.99 % $36,742 $18,949 $55,691 Investment securities: U. S. Government 1,549,675 69,192 5.96 1,990,566 84,663 5.69 (19,096) 3,625 (15,471) State, county and municipal 4,057 258 8.49 2,921 165 7.55 68 25 93 Other 21,554 373 2.31 24,365 404 2.22 (47) 16 (31) ----------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,575,286 69,823 5.92 2,017,852 85,232 5.65 (19,075) 3,666 (15,409) Overnight investments 377,120 17,738 6.28 308,759 11,326 4.90 2,866 3,546 6,412 ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $8,867,141 $521,024 7.85 % $8,642,421 $474,330 7.33 % $20,533 $26,161 $46,694 ============================================================================================================================= Liabilities Deposits: Checking with Interest $1,063,527 $4,669 0.59 % $1,073,106 $5,265 0.66 % ($41) ($555) ($596) Savings 642,781 7,392 1.54 693,574 8,107 1.56 (601) (114) (715) Money market accounts 1,463,926 46,039 4.20 1,330,206 34,052 3.42 3,829 8,158 11,987 Time deposits 3,770,027 156,314 5.54 3,711,848 135,104 4.87 2,387 18,823 21,210 ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 6,940,261 214,414 4.13 6,808,734 182,528 3.58 5,574 26,312 31,886 Federal funds purchased 36,113 1,674 6.19 55,147 1,970 4.78 (777) 481 (296) Repurchase agreements 163,181 5,923 4.85 112,865 3,065 3.63 1,597 1,261 2,858 Master notes 303,394 11,859 5.22 320,233 9,649 4.03 (569) 2,779 2,210 Other short-term borrowings 56,413 2,728 6.46 57,497 2,280 5.30 (46) 494 448 Long-term obligations 154,642 9,476 8.19 157,533 9,539 8.10 (172) 109 (63) ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $7,654,004 $246,074 4.29 % $7,512,009 $209,031 3.72 % $5,607 $31,436 $37,043 ============================================================================================================================= Interest rate spread 3.56 % 3.61 % ----------------------------------------------------------------------------------------------------------------------------- Net interest income and net yield on interest-earning assets $274,950 4.14 % $265,299 4.10 % $14,926 ($5,275) $9,651 ----------------------------------------------------------------------------------------------------------------------------- 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 each period, and state income tax rates of 7.00% for 2000 and 1999. The taxable equivalent adjustment was $2,187 and $1,690 for 2000 and 1999, respectively.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000
Table 6 2000 1999 Nine Months Ended Third Second First Fourth Third September 30 (thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Reserve balance at beginning of period $100,515 $99,590 $98,690 $97,965 $96,765 $98,690 $96,115 Provision for loan losses 4,197 2,975 3,459 3,503 3,329 10,631 8,169 Net charge-offs: Charge-offs (3,989) (3,395) (3,290) (3,841) (3,150) (10,674) (9,846) Recoveries 842 1,345 731 1,063 1,021 2,918 3,527 ----------------------------------------------------------------------------------------------------------------------------------- Net charge-offs (3,147) (2,050) (2,559) (2,778) (2,129) (7,756) (6,319) =================================================================================================================================== Reserve balance at end of period $101,565 $100,515 $99,590 $98,690 $97,965 $101,565 $97,965 =================================================================================================================================== Historical Statistics Balances Average total loans $7,036,622 $6,917,041 $6,789,203 $6,646,312 $6,474,200 $6,914,735 $6,315,810 Total loans at period-end 7,097,773 7,006,824 6,828,095 6,751,039 6,574,807 7,097,773 6,574,807 ----------------------------------------------------------------------------------------------------------------------------------- Risk Elements Nonaccrual loans $13,918 $9,910 $10,546 $10,720 $10,580 $13,918 $10,580 Other real estate acquired through foreclosure 2,079 1,249 2,071 1,600 1,614 2,079 1,614 ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $15,997 $11,159 $12,617 $12,320 $12,194 $15,997 $12,194 ----------------------------------------------------------------------------------------------------------------------------------- Accruing loans 90 days or more past due $6,866 $6,051 $5,294 $3,576 $7,350 $6,866 $7,350 ----------------------------------------------------------------------------------------------------------------------------------- Ratios Net charge-offs (annualized) to average total loans 0.18 % 0.12 % 0.15 % 0.17 % 0.13 % 0.15 % 0.13 % Reserve for loan losses to total loans at period-end 1.43 1.43 1.46 1.46 1.49 1.43 1.49 Nonperforming assets to total loans plus foreclosed real estate at period-end 0.23 0.16 0.18 0.18 0.19 0.23 0.19 -----------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2000 8 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. and Subsidiaries ("BancShares"). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. The focus of this discussion concerns BancShares' two banking subsidiaries. First-Citizens Bank & Trust Company ("FCB") operates branches in North Carolina, West Virginia, and Virginia. Atlantic States Bank ("ASB") operates offices in Georgia and Florida. SUMMARY BancShares realized an increase in earnings during the third quarter of 2000 compared to the third quarter of 1999. Consolidated net income during the third quarter of 2000 was $33.4 million, compared to $23.1 million earned during the corresponding period of 1999. Net income per share during the third quarter of 2000 totaled $3.17, compared to $2.18 during the third quarter of 1999. Return on average assets was 1.31 percent for the third quarter of 2000 compared to 0.95 percent during the same period of 1999. Return on average equity was 17.22 for the third quarter of 2000 compared to 13.07 for the same quarter of 1999. Much of the increase in earnings can be attributed to nonrecurring gains resulting from securities gains and the sale of mortgage servicing rights during the third quarter of 2000. Partially offsetting these gains were nonrecurring losses recorded in conjunction with planned branch closings. During the third quarter of 1999, BancShares recorded a nonrecurring gain resulting from the sale of branch offices. Ignoring the impact of the nonrecurring items during both periods, net income for the third quarter of 2000 would have been $20.9 million, compared to $20.3 million during 1999, an increase of 2.5 percent. Adjusting for the impact of the nonrecurring items, net income per share was $1.98 during the third quarter of 2000, compared to net income of $1.92 per share during the same period of 1999. For the first nine months of 2000, BancShares recorded net income of $74.3 million, compared to $62.5 million earned during the first nine months of 1999. Net income per share for the first nine months of 2000 was $7.04, compared to $5.88 during the same period of 1999. BancShares returned 1.01 percent on average assets during the first nine months of 2000 compared to 0.87 percent during the corresponding period of 1999. The return on average equity for 2000 was 13.21 percent, compared to 12.20 percent for the same period. The 18.9 percent increase in year-to-date net income resulted primarily from higher noninterest income due to the sale of mortgage servicing rights and securities gains, partially offset by the provision for the closing of branches. In addition to the nonrecurring items during the third quarter of 2000, BancShares had recorded nonrecurring securities gains of $458,000 and write-downs of impaired assets of $661,000 during the first six months of 2000. Adjusting for the impact of the nonrecurring items, year-to-date net income would have been $62.0 million during 2000 and $59.3 million during 1999, a 4.5 percent increase in 2000. Adjusted net income per share would have been $5.87 for 2000 and $5.62 for 1999. Various profitability, liquidity and capital ratios are presented in Table 1. To understand the changes and trends in interest-earning assets and interest-bearing liabilities, refer to the average balance sheets presented in Table 4 for the third quarter and Table 5 for the first nine months of 2000 and 1999. INTEREST-EARNING ASSETS Interest-earning assets for the third quarter of 2000 averaged $9.14 billion, an increase of $453.4 million or 5.2 percent from the third quarter of 1999. For the nine months ended September 30, 2000, earning assets averaged $8.87 billion, an increase of $224.7 million or 2.6 percent over the same period of 1999. These increases result from growth in the loan portfolio. Loans. At September 30, 2000 and 1999, gross loans totaled $7.10 billion and $6.57 billion, respectively. As of December 31, 1999, gross loans were $6.75 billion. The $523.0 million increase in loans from September 30, 1999 to September 30, 2000 primarily results from growth within BancShares' commercial and retail real estate-based lending. Table 2 details outstanding loans by type for the past five quarters. During the third quarter of 2000, loans averaged $7.04 billion, an increase of $562.4 million or 8.7 percent from the comparable period of 1999. Loan growth resulted from strong demand for commercial and business loans as well as continued growth among retail loans secured by real estate. Loans secured by real estate averaged $4.65 billion during the third quarter of 2000, an increase of $650.5 million, or 16.3 percent from the same period of 1999. The increase in real estate loans results from continued demand from commercial and business customers and continued growth in the EquityLine product. Consumer loans averaged $1.30 billion during the third quarter of 2000, a decrease of $120.2 million or 8.5 percent from the same period of 1999. The reduction in consumer loans during 2000 has resulted from a reduced emphasis on sales finance activity and a continued migration of traditional closed-end installment lending to real estate-secured home equity lines of credit. Loans originated for commercial purposes averaged $869.3 million during the third quarter of 2000, compared to $853.7 million during the third quarter of 1999, an increase of $15.6 million or 1.8 percent. Lease financing continues to grow, expanding $15.4 million or 20.7 percent from the third quarter of 1999 to the third quarter of 2000, when leases averaged $131.4 million. For the year-to-date, gross loans have averaged $6.91 billion for 2000 compared to $6.32 billion for the same period of 1999. This $598.9 million or 9.5 percent increase is likewise due to growth among commercial, business and retail real estate lending. As of September 30, 2000, $39.0 million in fixed-rate residential mortgage loans are classified as held for sale. All loans held for sale are carried at the lower of cost or fair value. Mortgage loan sale activity during the first nine months of 2000 has resulted from two primary goals. First, as in the past, management seeks to lessen the exposure to changes in interest rates by selling portions of its long-term fixed-rate loan production. Second, loan sales provide liquidity to meet ongoing loan demand. Sales of residential mortgage loans have supported both objectives. Despite the recent upward pressure on interest rates, management anticipates continued growth among commercial and business lending. Management projects continued reductions in retail installment loans, primarily resulting from a diminished emphasis on sales finance activity. All growth projections, however, remain dependent on interest rates, as continued upward pressure on interest rates will likely slow loan growth. Investment securities. At September 30, 2000 and 1999, the investment portfolio totaled $1.73 billion and $1.70 billion, respectively. At December 31, 1999, the investment portfolio was $1.37 billion. Average investment securities decreased by $263.9 million or 13.9 percent from the third quarter of 1999 to the third quarter of 2000, the result of loan growth that absorbed liquidity resulting from maturing securities. All securities that are classified as held-to-maturity reflect BancShares' ability and positive intent to hold those investments until maturity. Marketable equity securities are classified as available-for-sale and are reported at their aggregate fair value. Table 3 presents detailed information relating to the investment securities portfolio. Income on Interest-Earning Assets. Interest income amounted to $183.0 million during the third quarter of 2000, a 14.2 percent increase over the third quarter of 1999. Improved yields and loan growth contributed to higher interest income in the third quarter of 2000 when compared to the same period of 1999. The taxable-equivalent yield on interest-earning assets for the third quarter of 2000 was 7.99 percent, compared to 7.34 percent for the corresponding period of 1999. The higher yield on earning assets during 2000 results primarily from an increase in the blended taxable-equivalent loan yield, the result of increased market rates and a more favorable loan mix. Loan interest income for the third quarter of 2000 was $150.1 million, an increase of $20.6 million or 16.0 percent from the third quarter of 1999, due to volume growth and improved yields. The taxable-equivalent yield on the loan portfolio was 8.52 percent during the third quarter of 2000, compared to 7.96 percent during the same period of 1999, the increase resulting from higher market rates. In addition to higher market rates during 2000, the composition of the loan portfolio has shifted toward higher-yielding commercial and business loans and away from more thinly-priced installment or residential mortgage loans. For the nine months ended September 30, 2000, loan interest income was $431.4 million, an increase of $55.2 million or 14.7 percent over the same period of 1999. The increase in interest income during the nine-month period reflects the growth in the loan portfolio and higher loan yields. Income earned on the investment securities portfolio amounted to $25.1 million during the third quarter of 2000 and $26.7 million during the same period of 1999, a decrease of $1.6 million or 5.9 percent. This decrease is the result of a $263.9 million or 13.9 percent decrease in the average securities portfolio. The investment securities portfolio taxable-equivalent yield rose to 6.13 percent for the quarter ended September 30, 2000, compared to 5.59 percent for the quarter ended September 30, 1999. For the nine months ended September 30, 2000, interest income from investment securities was $69.7 million, compared to $85.2 million during the same period of 1999, a decrease of 18.1 percent. This decrease is the result of a 21.9 percent reduction in the average securities portfolio. The yield on average investment securities rose from 5.65 percent for the nine month period ended September 30, 1999 to 5.92 percent for the same period of 2000. INTEREST-BEARING LIABILITIES At September 30, 2000 and 1999, interest-bearing liabilities totaled $8.07 billion and $7.45 billion, respectively, compared to $7.55 billion as of December 31, 1999. During the third quarter of 2000, interest-bearing liabilities averaged $7.89 billion, an increase of $367.5 million or 4.9 percent from the third quarter of 1999. Total interest-bearing liabilities increased 1.9 percent during the first nine months of 2000 when compared to the same period of 1999. Deposits. At September 30, 2000, total deposits were $8.67 billion, an increase of $606.6 million or 7.5 percent over September 30, 1999. Compared to the December 31, 1999 balance of $8.17 billion, total deposits have increased $495.0 million or 6.1 percent. Average interest-bearing deposits were $7.15 billion during the third quarter of 2000 compared to $6.81 billion during the third quarter of 1999, an increase of 5.0 percent. Average time deposits increased $343.9 million, an increase of 9.4 percent, the result of marketing promotions during the year and customers electing to return to traditional bank time deposits as a result of higher rates and equity market volatility. Borrowed Funds. At September 30, 2000, short-term borrowings totaled $632.3 million compared to $568.3 million at December 31, 1999 and $554.9 million at September 30, 1999. For the quarters ended September 30, 2000 and 1999, short-term borrowings averaged $584.2 million and $556.1 million, respectively. This increase resulted from growth among overnight repurchase agreements, partially offset by lower average master note borrowings. Expense on Interest-Bearing Liabilities. BancShares' interest expense amounted to $91.5 million during the third quarter of 2000, a $21.0 million or 29.8 percent increase from the third quarter of 1999. The higher interest expense was the result of higher market rates and higher average volume. The average rate on these liabilities increased 90 basis points from the 3.72 percent during the third quarter of 1999 compared to 4.62 percent during the same period of 2000. Average interest-bearing liabilities increased $367.5 million from the third quarter of 1999 to the third quarter of 2000. For the third quarter, the rate on average time deposits grew 110 basis points from 4.80 percent in 1999 to 5.90 percent in 2000, while the rate on average money market accounts increased from 3.59 percent to 4.51 percent. The upward pressure on interest rates continues, as time deposits reprice to current market rates. Money market rate increases reflect continued competitive pricing for funding sources. The rate on average master notes for the third quarter of 2000 was 5.73 percent compared to 4.31 percent during the same period in 1999. Higher borrowings rates result from market conditions. For the year-to-date, interest expense was $246.1 million, compared to $209.0 million for the same period of 1999. The 17.7 percent increase results from higher interest rates for interest-bearing deposits and borrowings. The rate on average interest-bearing liabilities increased 57 basis points from 3.72 percent in 1999 to 4.29 percent for the first nine months in 2000. The rate on average time deposits increased 67 basis points from 4.87 percent to 5.54 percent during the nine month period ended September 30, 2000. NET INTEREST INCOME Net interest income totaled $91.5 million during the third quarter of 2000, an increase of $1.7 million or 1.9 percent from the third quarter of 1999. Interest income generated by the growth in the loan portfolio continues to allow net interest income to expand. However, the cost of funding that loan growth has continued to increase. As a result, the taxable-equivalent net yield on interest-earning assets was 4.01 percent for the third quarter of 2000, a decrease of 11 basis points from the 4.12 percent reported for the third quarter of 1999. The net yield reported during the first and second quarters of 2000 was 4.19 percent and 4.23 percent, respectively. The 22 basis point reduction from the second quarter of 2000 to the third quarter of 2000 highlights the reduction in net interest income during the third quarter of 2000, when compared to the preceding quarter. The decline in the interest rate spread resulted from the larger growth in the rate on interest-bearing liabilities than growth of the yield on interest-earning assets. A principal objective of BancShares' asset/liability management function is to manage interest rate risk or the exposure to changes in interest rates. 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. Management is aware of the potential negative impact that movements in market interest rates may have on net interest income. 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. As of September 30, 2000, BancShares' market risk profile has not changed significantly from December 31, 1999. BancShares continues to experience a liability-sensitive position which results in lower net interest income during periods of rising interest rates. However, as a result of asset growth rates at levels that exceed deposit growth rates, the liability sensitive position as a percentage of interest-earning assets has narrowed since December 31, 1999. ASSET QUALITY Reserve for loan losses. Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the reserve for loan losses. Such factors as the financial condition of the borrower, fair market value of collateral and other considerations are recognized in estimating probable credit losses. At September 30, 2000, the reserve for loan losses amounted to $101.6 million or 1.43 percent of loans outstanding. This compares to $98.7 million or 1.46 percent at December 31, 1999, and $98.0 million or 1.49 percent at September 30, 1999. Management considers the established reserve adequate to absorb losses that relate to loans outstanding at September 30, 2000. While management uses available information to establish provisions for loan losses, future additions to the reserve may be necessary based on changes in economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserve for loan losses. Those agencies may require the recognition of adjustments to the reserve based on their judgments of information available to them at the time of their examination. The provision for loan losses charged to operations during the third quarter of 2000 was $4.2 million, compared to $3.3 million during the third quarter of 1999. For the nine month periods ended September 30, total provision for loan losses was $10.6 million for 2000 and $8.2 million for 1999. The $2.5 million increase reflects the higher rate of net charge-offs and growth in the loan portfolio during 2000. Net charge-offs for the nine month period ended September 30, 2000 totaled $7.8 million, compared to $6.3 million during the same period of 1999. As a percentage of average loans outstanding, these losses represent 0.15 percent for the nine months ended September 30, 2000, compared to 0.13 percent for the same period of 1999. Gross charge-offs totaled $10.7 million for the nine month period ended September 30, 2000 and $9.8 million for the nine month period ended September 30, 1999. Recoveries were $2.9 million and $3.5 million for the respective periods. The increase in net charge-offs during 2000 results primarily from higher gross charge-offs and lower recoveries among commercial purpose loans. Management remains committed to maintaining high levels of credit quality. Table 6 provides details concerning the reserve and provision for loan losses over the past five quarters and for the year-to-date for 2000 and 1999. Nonperforming assets. At September 30, 2000, BancShares' nonperforming assets amounted to $16.0 million or 0.23 percent of gross loans plus foreclosed properties, compared to $12.3 million at December 31, 1999, and $12.2 million at September 30, 1999. The growth in nonperforming assets during the third quarter of 2000 resulted from credit deterioration among small business loans. While the ratio of non-performing assets to loans plus other real estate increased from 0.19 percent at September 30, 1999 to 0.23 percent at September 30, 2000, these remain low by industry standards. Regardless, management continues to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure. NONINTEREST INCOME During the first nine months of 2000, noninterest income was $152.8 million, compared to $123.4 million during the same period of 1999. The $29.4 million or 23.9 percent increase was primarily due to nonrecurring gains. During the third quarter of 2000, FCB completed the sale of mortgage servicing rights for approximately $1.6 billion in residential mortgage loans. Although the mortgage servicing operation contributed $5.2 million in noninterest income during 1999, management determined that BancShares lacked the scale necessary to successfully compete with the market leaders in this industry. Consequently, management elected to sell the existing servicing and to sell new loan production with servicing released. The sale of mortgage servicing rights generated a $20.2 million nonrecurring gain. Other nonrecurring items during 2000 include a $2.3 million gain resulting from securities transactions. During the third quarter of 1999, BancShares recorded gains of $4.4 million on the sale of branch offices. In addition to the benefit generated by the nonrecurring gains, noninterest income from the credit card operation contributed an additional $4.7 million during the first nine months of 2000 compared to the same period of 1999. This represents a 20.9 percent increase over the first nine months of 1999, the result of higher merchant income and interchange income generated by card usage. BancShares also reported a $3.2 million increase in service charge income during the first nine months of 2000, a 7.9 percent increase due to growth in deposit accounts. Commission income resulting from First Citizens Investor Services increased $2.2 million during the first nine months of 2000, an increase of 26.9 percent. This subsidiary of FCB continues to reach new customers and expand services provided to existing customers. Fees generated from processing services provided to other banks increased $992,000 during 2000, an increase of 10.3 percent. NONINTEREST EXPENSE Noninterest expense was $295.5 million for the first nine months of 2000, a 5.6 percent increase over the $279.7 million recorded during the same period of 1999. Much of the $15.8 million increase in noninterest expense relates to continued franchise expansion in Georgia and Florida by ASB. During the first nine months of 2000, BancShares recorded $2.7 million in expenses related to closings of various traditional and in-store locations that will occur by the second quarter of 2001. The facilities being closed have not achieved the anticipated levels of growth, and management has elected to discontinue operations at these ten locations. The accrual recognizes $1.8 million in impairments of leasehold improvements that will be abandoned when the branches close. This portion of the accrual is included in other expense. The remaining $910,000, which is included in occupancy expense, represents obligations under lease agreements that are owed for the leased facilities being closed. Expenses of salary and wages increased $6.0 million during 2000 when compared to the same period of 1999. This 5.0 percent increase reflects the growth in employee population required to staff new branch offices throughout the franchise. Employee benefits expense increased $1.9 million or 8.2 percent during the first nine months of 2000, compared to the corresponding period of 1999 due to the larger employee population and increased health insurance costs. Occupancy expense increased $3.5 million or 16.1 percent during the first nine months of 2000. During the third quarter of 2000, FCB accrued $910,000 in rent expense for branches to be closed. Additional increases in rent and depreciation expense related to new and renovated branch facilities resulted in the remaining increase in occupancy costs during 2000. The $4.0 million, or 4.6 percent, increase in other expenses resulted from higher credit card processing costs and losses recorded on the net book value of assets in branches to be closed. INCOME TAXES Income tax expense amounted to $45.1 million during the first nine months of 2000, compared to $36.6 million during the same period of 1999, a 23.2 percent increase resulting from higher pre-tax income. The effective tax rates for these periods were 37.8 percent and 36.9 percent, respectively. Higher effective tax rates during 2000 result from higher state income tax expense. LIQUIDITY Management relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. In the event additional liquidity is needed, BancShares maintains readily available sources to borrow funds through its correspondent network. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. At September 30, 2000 and 1999, the leverage capital ratio of BancShares was 8.22 percent and 7.80 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares' Tier 1 capital ratio was 10.35 percent at September 30, 2000, and 10.02 percent as of September 30, 1999. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratio was 11.64 percent at September 30, 2000 and 11.33 percent as of September 30, 1999. The minimum total capital ratio is 8 percent. BancShares and its subsidiary banks exceed the capital standards established by their respective regulatory agencies. CURRENT ACCOUNTING AND REGULATORY ISSUES In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. BancShares will adopt SFAS No. 133, as amended, on January 1, 2001. BancShares has historically made limited use of derivative instruments, and that practice is not expected to change following the adoption of SFAS No. 133. Currently, FCB regularly enters into forward commitments to sell residential mortgage loans, all of which all of which FCB believes should qualify as cash flow hedges under SFAS No. 133. As of September 30, 2000, FCB had committed to deliver $46 million in residential mortgage loans over a three-month period. These commitments are all believed to be highly effective in achieving the goal of limiting interest rate risk. Accordingly, these commitments would be recorded as assets or liabilities upon adoption of SFAS No. 133 with an offsetting gain or loss net of tax recognized as a component of other comprehensive income. As of September 30, 2000, the unrealized loss on these forward commitments was approximately $127,000. During September 2000, the FASB issued SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140). SFAS No. 140 replaces FASB Statement No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations. FORWARD-LOOKING STATEMENTS This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," 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.