-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G9y42fiF0uwd84aeG/OgFksGVWOK90Gk4pHFXODQ5yaJ4MnC4uNJ/G3PjJfVFFie DPHJyqgXmJ6ZH9xiO3IGBg== 0000950168-96-000413.txt : 19960805 0000950168-96-000413.hdr.sgml : 19960805 ACCESSION NUMBER: 0000950168-96-000413 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960422 FILED AS OF DATE: 19960313 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CITIZENS BANCSHARES INC /DE/ CENTRAL INDEX KEY: 0000798941 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 561528994 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16471 FILM NUMBER: 96534356 BUSINESS ADDRESS: STREET 1: 239 FAYETTEVILLE STREET MALL CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9197557000 MAIL ADDRESS: STREET 1: PO BOX 27131 STREET 2: CTWO7 CITY: RALEIGH STATE: NC ZIP: 27611-7131 DEF 14A 1 FIRST CITIZENS BANCSHARES, INC. DEF 14A #42132.1 PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ___) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] CHECK THE APPROPRIATE BOX: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (under Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12 First Citizens BancShares, Inc. (Name of Registrant as Specified In Its Charter) First Citizens BancShares, Inc. (Name of Person(s) Filing Proxy Statement) PAYMENT OF FILING FEES (Check the appropriate box): [X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2). [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: [ ] Fee paid previously with preliminary materials [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: FIRST CITIZENS BANCSHARES, INC. POST OFFICE BOX 27131 RALEIGH, NORTH CAROLINA 27611-7131 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 1996 NOTICE is hereby given that the Annual Meeting of Shareholders of First Citizens BancShares, Inc. ("BancShares") will be held as follows: Place: First-Citizens Bank & Trust Company Second Floor Conference Room 239 Fayetteville Street Mall Raleigh, North Carolina Date: Monday, April 22, 1996 Time: 1:00 p.m.
The purposes of the meeting are: 1. To elect a 25-member Board of Directors, each member to hold office for a term of one year or until his or her respective successor is duly elected and qualified. 2. To ratify the appointment of KPMG Peat Marwick LLP as BancShares' independent public accountants for 1996. 3. To transact any other business that may properly come before the Annual Meeting. SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. HOWEVER, TO ENSURE THE PRESENCE OF A QUORUM, ALL SHAREHOLDERS, EVEN THOUGH THEY PLAN TO ATTEND, ARE URGED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE POSTAGE PREPAID ENVELOPE PROVIDED FOR THAT PURPOSE. THE GIVING OF SUCH PROXY WILL NOT AFFECT YOUR RIGHT TO REVOKE IT AND VOTE IN PERSON IF YOU ATTEND THE MEETING. By Order of the Board of Directors (Signature of Alexander G. McFadyen, Jr.) ALEXANDER G. MACFADYEN, JR., Secretary March 13, 1996 FIRST CITIZENS BANCSHARES, INC. POST OFFICE BOX 27131 RALEIGH, NORTH CAROLINA 27611-7131 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 1996 This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of First Citizens BancShares, Inc. ("BancShares") for use at the Annual Meeting of Shareholders of BancShares to be held in the Second Floor Conference Room, Raleigh Main Office, First-Citizens Bank & Trust Company, 239 Fayetteville Street Mall, Raleigh, North Carolina, at 1 o'clock p.m. on April 22, 1996, or any adjournments thereof. In addition to solicitation by mail, proxies may be solicited personally or by telephone by directors, officers or employees of BancShares and its subsidiary, First-Citizens Bank & Trust Company ("Bank"). Expenses of such proxy solicitation will be paid by BancShares. Persons named in the proxy to represent shareholders at the meeting are: Lewis R. Holding, Frank B. Holding, James B. Hyler, Jr., Frank B. Holding, Jr., Lewis T. Nunnelee, II, and David L. Ward, Jr. This Proxy Statement is first being mailed to shareholders on March 13, 1996. A proxy form that is properly executed and returned, and not revoked, will be voted in accordance with the instructions contained in the proxy. If no instructions are given, the proxy will be voted FOR the slate of 25 nominees named herein for election to the Board of Directors, and FOR ratification of the appointment of KPMG Peat Marwick LLP as BancShares' independent public accountants for 1996. On such other matters as may properly come before the meeting, the proxy will be voted in accordance with the best judgment of the persons named in the proxy to represent the shareholders. If any nominee is unable to serve, the proxy may be voted for a person designated by the Board of Directors to replace such nominee. A shareholder who executes a proxy has the right to revoke it at any time before it is voted by filing with the Secretary of BancShares either an instrument revoking the proxy or a duly executed proxy bearing a later date, or by attending the Annual Meeting and requesting the right to vote in person. RECORD DATE; VOTING SECURITIES March 1, 1996, is the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting. At the Annual Meeting shareholders will be entitled to cast the number of votes to which they are entitled based on the shares of BancShares' voting securities standing of record in their respective names at the close of business on that date. As of March 1, 1996, BancShares had issued and outstanding: 9,639,129 shares of Class A Common Stock, $1 par value per share, each share being entitled to one vote on each matter submitted for voting and on each director to be elected, and 1,766,464 shares of Class B Common Stock, $1 par value per share, each share being entitled to 16 votes on each matter submitted for voting and on each director to be elected. In the voting on each proposal described in this Proxy Statement (other than the election of directors) abstentions will have the same effect as votes against the proposal, but broker non-votes will have no effect. PRINCIPAL HOLDERS OF VOTING SECURITIES As of March 1, 1996, the shareholders identified in the following table beneficially owned more than 5% of one or both classes of BancShares' voting securities:
COMBINED BENEFICIAL OWNERSHIP CLASS A AND CLASS A COMMON CLASS B COMMON CLASS B COMMON NAME AND ADDRESS AND PERCENTAGE AND PERCENTAGE PERCENTAGE OF OF BENEFICIAL OWNER OF CLASS OF CLASS TOTAL VOTES* Claire Holding Bristow 50,995(1) 100,812(1) 4.39% Summerville, SC (.53%) (5.71%) George H. Broadrick 1,265,048(2) 325,916(2) 17.10% Charlotte, NC (13.12%) (18.45%) Hope Holding Connell 39,569(3) 109,197(3) 4.72% Raleigh, NC (.41%) (6.18%) Elizabeth C. Holding 51,153(4) 100,885(4) 4.39% Washington, DC (.53%) (5.71%) Frank B. Holding 2,580,922(5) 633,977(5) 33.57% Smithfield, NC (26.78%) (35.89%) Frank B. Holding, Jr. 55,475(6) 105,943(6) 4.62% Raleigh, NC (.58%) (6.00%) Lewis R. Holding 1,200,946(7) 328,494(7) 17.04% Lyford Cay, Bahamas (12.46%) (18.60%) Olivia B. Holding 48,656(8) 104,015(8) 4.52% Raleigh, NC (.50%) (5.89%)
* This column reflects the aggregate votes attributable to the combined shares of Class A and Class B beneficially owned by each principal shareholder listed above, as a percentage of the aggregate votes that may be cast by the holders of all shares of BancShares' outstanding voting securities. (1) Claire Holding Bristow exercises sole voting and investment power as to 45,995 shares of Class A and 99,562 shares of Class B held on her own behalf. She exercises shared voting and investment power as to an additional 5,000 shares of Class A and 1,250 shares of Class B held in a trust for her benefit in a nominee name by the Bank's Trust Department. All of such shares also are included in the beneficial ownership shown above for her father, Frank B. Holding, who disclaims beneficial ownership as to such shares. (2) George H. Broadrick exercises sole voting and investment power as to 55,742 shares of Class A held on his own behalf and as to 953,806 shares of Class A and 262,041 shares of Class B held by him as sole trustee of two irrevocable trusts for the benefit of the adult daughters of Lewis R. Holding. He exercises shared voting and investment power as to 245,500 shares of Class A and 61,375 shares of Class B held by him and Carolyn S. Holding as co-trustees of four irrevocable trusts for the benefit of Lewis R. Holding's adult daughters, which shares also are included in the beneficial ownership of Lewis R. Holding. Mr. Broadrick disclaims beneficial ownership as to 10,000 shares of Class A and 2,500 shares of Class B included above and owned by his spouse. (3) Hope Holding Connell exercises sole voting and investment power as to 33,469 shares of Class A and 101,722 shares of Class B held on her own behalf. She disclaims beneficial ownership as to 1,200 shares of Class A and 6,250 shares of Class B held by her spouse on his own behalf and/or as custodian for their minor son. She exercises shared voting and investment power as to an additional 4,900 shares of Class A and 1,225 shares of Class B held in a trust for her benefit in a nominee name by the Bank's Trust Department. All of such shares also are included in the beneficial ownership shown above for her father, Frank B. Holding, who disclaims beneficial ownership as to such shares. (4) Elizabeth C. Holding exercises sole voting and investment power as to 46,153 shares of Class A and 99,635 shares of Class B held on her own behalf. She exercises shared voting and investment power as to an additional 5,000 shares of Class A and 1,250 shares of Class B held in a trust for her benefit in a nominee name by the Bank's Trust Department. All of such shares also are included in the beneficial ownership shown above for her father, Frank B. Holding, who disclaims beneficial ownership as to such shares. (5) Frank B. Holding exercises sole voting and investment power as to 1,638,050 shares of Class A held on his own behalf. He disclaims beneficial ownership as to 318,124 shares of Class A and 514,677 shares of Class B held by his spouse, 2 adult son and daughters and their spouses, and 24,700 shares of Class A and 6,175 shares of Class B held in a nominee name by the Bank's Trust Department for the benefit of his adult son and daughters, all of which shares are included above. He exercises shared voting and investment power as to an aggregate of 600,048 shares of Class A and 113,125 shares of Class B held by the following corporations and other entities which, for beneficial ownership purposes, are deemed controlled by Mr. Holding: First Citizens Bancorporation of South Carolina, Inc. (183,600 shares of Class A and 45,900 shares of Class B); Fidelity BancShares (N.C.), Inc. (100,000 shares of Class A); Southern BancShares (N.C.), Inc. (19,100 shares of Class A and 19,775 shares of Class B); Southern Bank and Trust Company (46,000 shares of Class A); Goshen, Inc. (54,000 shares of Class A); The Heritage Bank (23,628 shares of Class A); Yadkin Valley Company (4,995 shares of Class A and 1,725 shares of Class B); Yadkin Valley Life Insurance Company (700 shares of Class A and 175 shares of Class B); Twin States Farming, Inc. (4,900 shares of Class A and 1,225 shares of Class B); The Robert P. Holding Foundation, Inc., a charitable foundation of which Mr. Holding is a director (132,796 shares of Class A and 36,525 shares of Class B); and in a nominee name by the Bank's Trust Department (30,329 shares of Class A and 7,800 shares of Class B held in a fiduciary capacity for the benefit of various third parties). Included in Frank B. Holding's beneficial ownership are 268,820 shares of Class A and 46,225 shares of Class B also shown as beneficially owned by his brother, Lewis R. Holding, of which 30,329 shares of Class A and 7,800 shares of Class B also are included in the beneficial ownership of James B. Hyler, Jr. (See "OWNERSHIP OF SECURITIES BY MANAGEMENT"), and an aggregate of 245,848 shares of Class A and 520,852 shares of Class B also are included in the ownership of his adult son and daughters, each of whom is listed individually in the table above. (6) Frank B. Holding, Jr. exercises sole voting and investment power as to 40,095 shares of Class A and 85,318 shares of Class B held on his own behalf and 6,780 shares of Class A and 18,750 shares of Class B held by him as custodian for his minor children. He exercises shared voting and investment power as to an additional 4,900 shares of Class A and 1,225 shares of Class B held in a trust for his benefit in a nominee name by the Bank's Trust Department, and he disclaims beneficial ownership as to 3,700 shares of Class A and 650 shares of Class B included above and held by his spouse. All of such shares also are included in the beneficial ownership shown above for his father, Frank B. Holding, who disclaims beneficial ownership as to such shares. (7) Lewis R. Holding exercises sole voting and investment power as to 610,935 shares of Class A and 207,706 shares of Class B held on his own behalf. He disclaims beneficial ownership as to certain shares included above and held by his spouse individually (48,963 shares of Class A and 12,025 shares of Class B); by his spouse and George H. Broadrick as co-trustees of four irrevocable trusts for the benefit of his adult daughters (245,500 shares of Class A and 61,375 shares of Class B) and by his adult daughters (26,728 shares of Class A and 1,163 shares of Class B). He exercises shared voting and investment power as to an aggregate of 265,125 shares of Class A and 44,825 shares of Class B held by the following corporations and other entities which, for beneficial ownership purposes, are deemed controlled by Mr. Holding: Fidelity BancShares (N.C.), Inc. (100,000 shares of Class A); Yadkin Valley Company (4,995 shares of Class A and 1,725 shares of Class B); Yadkin Valley Life Insurance Company (700 shares of Class A and 175 shares of Class B); The Robert P. Holding Foundation, Inc., a charitable foundation of which Mr. Holding is a director (132,796 shares of Class A and 36,525 shares of Class B); and in a nominee name by the Bank's Trust Department (30,329 shares of Class A and 7,800 shares of Class B held in a fiduciary capacity for the benefit of various third parties). Included in Lewis R. Holding's beneficial ownership are 268,820 shares of Class A and 46,225 shares of Class B also shown as beneficially owned by his brother, Frank B. Holding, of which 30,329 shares of Class A and 7,800 shares of Class B also are included in the beneficial ownership of James B. Hyler, Jr. (See "OWNERSHIP OF SECURITIES BY MANAGEMENT"). (8) Olivia B. Holding exercises sole voting and investment power as to 43,756 shares of Class A and 102,790 shares of Class B held on her own behalf. She exercises shared voting and investment power as to an additional 4,900 shares of Class A and 1,225 shares of Class B held in a trust for her benefit in a nominee name by the Bank's Trust Department. All of such shares also are included in the beneficial ownership shown above for her father, Frank B. Holding, who disclaims beneficial ownership as to such shares. 3 OWNERSHIP OF SECURITIES BY MANAGEMENT As of March 1, 1996, the beneficial ownership of BancShares' voting securities by the directors, nominees for director, certain named executive officers, and by all directors, nominees and executive officers as a group, of BancShares and the Bank was as follows:
COMBINED BENEFICIAL OWNERSHIP* CLASS A AND CLASS A COMMON CLASS B COMMON CLASS B COMMON NAME AND ADDRESS AND PERCENTAGE AND PERCENTAGE PERCENTAGE OF OF BENEFICIAL OWNER OF CLASS OF CLASS TOTAL VOTES** John M. Alexander, Jr. 1,434 (1) 225 (1) .01% Raleigh, NC (.01%) (.01%) Ted L. Bissett 7,265 (2) 1,375 (2) .08% Spring Hope, NC (.08%) (.08%) B. Irvin Boyle 700 175 .01% Charlotte, NC (.01%) (.01%) George H. Broadrick 1,265,048 (3) 325,916 (3) 17.10% Charlotte, NC (13.12%) (18.45%) H. Max Craig, Jr. 12,299 (4) 3,550 (4) .18% Stanley, NC (.13%) (.20%) Betty M. Farnsworth 1,561 (5) 250 .01% Pilot Mountain, NC (.02%) (.01%) Lewis M. Fetterman 12,995 (6) 2,750 (6) .15% Clinton, NC (.13%) (.16%) Frank B. Holding 2,580,922 (7) 633,977 (7) 33.57% Smithfield, NC (26.78%) (35.89%) Frank B. Holding, Jr. 55,475 (8) 105,943 (8) 4.62% Raleigh, NC (.58%) (6.00%) Lewis R. Holding 1,200,946 (9) 328,494 (9) 17.04% Lyford Cay, Bahamas (12.46%) (18.60%) Charles B. C. Holt 2,570 (10) -0- .01% Fayetteville, NC (.03%) Edwin A. Hubbard 15,248 (11) -0- .04% Sanford, NC (.16%) James B. Hyler, Jr. 35,695 (12) 7,900 (12) .43% Raleigh, NC (.37%) (.45%) Gale D. Johnson 481 50 .01% Dunn, NC (.01%) (.01%) Freeman R. Jones 4,100 250 .02% Midland, NC (.04%) (.01%) Lucius S. Jones 1,000 -0- .01% Wendell, NC (.01%) I. B. Julian 13,000 3,500 .18% Fayetteville, NC (.13%) (.20%) Joseph T. Maloney, Jr. 22,452 5,400 .29% Fayetteville, NC (.23%) (.31%) J. Claude Mayo, Jr. 1,000 -0- .01% Rocky Mount, NC (.01%) William McKay 1,083 (13) -0- .01% Flat Rock, NC (.01%) Brent D. Nash 12,502 (14) -0- .03% Tarboro, NC (.13%) Lewis T. Nunnelee, II 600 450 .02% Wilmington, NC (.01%) (.03%) James M. Parker 1,002 (15) -0- .01% Raleigh, NC (.01%)
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COMBINED BENEFICIAL OWNERSHIP* CLASS A AND CLASS A COMMON CLASS B COMMON CLASS B COMMON NAME AND ADDRESS AND PERCENTAGE AND PERCENTAGE PERCENTAGE OF OF BENEFICIAL OWNER OF CLASS OF CLASS TOTAL VOTES** Talbert O. Shaw 119 -0- .01% Raleigh, NC (.01%) R. C. Soles, Jr. 13,838 -0- .04% Tabor City, NC (.14%) David L. Ward, Jr. 28,600 (16) 8,638 (16) .44% New Bern, NC (.30%) (.49%) All directors, nominees for 4,701,748 (17) 1,207,650 (17) 63.38%(17)(18) director and executive (48.76%) (18) (68.37%) officers as a group (36 persons)
* Except as otherwise stated in the footnotes following this table, shares shown as beneficially owned, to the best of BancShares' management's knowledge, are owned directly by the persons named and such persons exercise sole voting and investment power with respect to those shares. ** This column reflects the aggregate votes attributable to the combined shares of Class A and Class B beneficially owned by each director, nominee, and executive officer, and by the group, as a percentage of the aggregate votes that may be cast by the holders of all shares of BancShares' outstanding voting securities. (1) John M. Alexander, Jr. exercises sole voting and investment power as to 534 shares of Class A held on his own behalf. He exercises shared voting and investment power as to 900 shares of Class A and 225 shares of Class B held of record by Raleigh Tractor & Truck Company, of which he is President. (2) Ted L. Bissett exercises sole voting and investment power as to 5,581 shares of Class A and 1,075 shares of Class B held on his own behalf. He exercises shared voting and investment power as to 1,684 shares of Class A and 300 shares of Class B held by his children. (3) For an explanation of the nature of the beneficial ownership of George H. Broadrick, see "PRINCIPAL HOLDERS OF VOTING SECURITIES," footnote (2). (4) H. Max Craig, Jr. exercises sole voting and investment power as to 699 shares of Class A and 400 shares of Class B held on his own behalf. He exercises shared voting and investment power as to 11,600 shares of Class A and 3,150 shares of Class B held by Gaston County Dyeing Machine Company, of which he is President and Chairman of the Board. (5) Betty M. Farnsworth exercises sole voting and investment power as to 1,461 shares of Class A and 250 shares of Class B held on her own behalf. She disclaims beneficial ownership as to 100 shares of Class A held by an adult son. (6) Lewis M. Fetterman exercises sole voting and investment power as to 10,146 shares of Class A and 2,200 shares of Class B held on his own behalf. He disclaims beneficial ownership as to 2,849 shares of Class A and 550 shares of Class B included above and held in trust for his spouse. (7) For an explanation of the nature of the beneficial ownership of Frank B. Holding, see "PRINCIPAL HOLDERS OF VOTING SECURITIES," footnote (5). (8) For an explanation of the nature of the beneficial ownership of Frank B. Holding, Jr., see "PRINCIPAL HOLDERS OF VOTING SECURITIES," footnote (6). (9) For an explanation of the nature of the beneficial ownership of Lewis R. Holding, see "PRINCIPAL HOLDERS OF VOTING SECURITIES," footnote (7). (10) Charles B. C. Holt exercises sole voting and investment power as to 1,966 shares of Class A held on his own behalf. He exercises shared voting and investment power as to 139 shares of Class A held by him as Trustee of the Holt Oil Company, Inc. Retirement Plan, and disclaims beneficial ownership as to 465 shares of Class A held by his spouse. (11) Edwin A. Hubbard exercises sole voting and investment power as to 8,586 shares of Class A held on his own behalf. He disclaims beneficial ownership as to 6,662 shares of Class A held by his spouse. (12) James B. Hyler, Jr. exercises sole voting and investment power as to 4,805 shares of Class A and 100 shares of Class B held on his own behalf. In addition, he holds options exercisable within 60 days to buy 561 shares of Class A. 5 He exercises shared voting and investment power as to certain shares held in a nominee name by the Trust Department of the Bank, which shares, for beneficial ownership purposes, are deemed controlled by Mr. Hyler (30,329 shares of Class A and 7,800 shares of Class B held in a fiduciary capacity for the benefit of various third parties); such shares also are included in the beneficial ownership shown above for Lewis R. Holding and Frank B. Holding. (13) William McKay exercises sole voting and investment power as to 939 shares of Class A held on his own behalf. He exercises shared voting and investment power as to 144 shares of Class A held jointly with his spouse. (14) Brent D. Nash exercises sole voting and investment power as to 5,731 shares of Class A held on his own behalf. He disclaims beneficial ownership as to 5,685 shares of Class A owned by his spouse and 1,086 shares of Class A owned by his daughter. (15) James M. Parker exercises sole voting and investment power as to 451 shares of Class A held on his own behalf, and holds options exercisable within 60 days to buy an additional 551 shares of Class A. (16) David L. Ward, Jr. exercises sole voting and investment power as to 24,100 shares of Class A and 7,513 shares of Class B held on his own behalf. He exercises shared voting and investment power as to 1,000 shares of Class A and 250 shares of Class B held by him and J. Troy Smith, Jr. as Co-Trustees of the Ward and Smith, P.A. Profit-Sharing Trust. He disclaims beneficial ownership as to 3,500 shares of Class A and 875 shares of Class B owned by his spouse. (17) Certain numbers of shares included in the beneficial ownership of Frank B. Holding, Lewis R. Holding, James B. Hyler, Jr. and Frank B. Holding, Jr. are reflected separately in the beneficial ownership of each of such individuals, but are included only once in the beneficial ownership shown for the group. (18) Includes a total of 3,852 shares of Class A as to which the executive officers included in the group hold options that may be exercised within 60 days. The calculation of the percentage of Class A beneficially owned by the group, including the named executive officers, and the percentage of combined Class A and Class B total votes is based on the 9,639,129 shares of Class A outstanding at March 1, 1996, plus the 3,852 shares of Class A capable of being issued within 60 days to the executive officers in the group upon the exercise of their stock options pursuant to the 1994 Employee Stock Purchase Plan. No stock options were issued to non-employee members of the Board of Directors or to Lewis R. Holding, Frank B. Holding, or Frank B. Holding, Jr. 6 PROPOSAL 1: ELECTION OF DIRECTORS BancShares' Bylaws provide for not less than five nor more than 26 directors. Within those limits, the Board of Directors has the authority to establish the number of directors to be elected each year and has set the number of directors at 25 for election at the Annual Meeting. No more than 25 directors may be elected at this meeting and the 25 nominees receiving the highest numbers of votes will be deemed to have been elected. The persons named below have been nominated by the Board of Directors for election as directors of BancShares. Each nominee currently serves as a director of BancShares and has been nominated to be reelected for a term of one year or until resignation, retirement, death or until his or her respective successor has been duly elected and qualified:
YEAR PRINCIPAL OCCUPATION AND POSITIONS WITH FIRST BUSINESS EXPERIENCE FOR NAME AND AGE BANCSHARES AND BANK ELECTED (1) PAST FIVE YEARS John M. Alexander, Jr. (2) Director 1990 President and Chief Operating Officer, 46 Cardinal International Trucks, Inc. (truck dealer) Ted L. Bissett Director 1970 President, F.D. Bissett & Son, Inc. (farm 59 supplies) B. Irvin Boyle Director 1980 Attorney, of Counsel to Johnston, Taylor, 84 Allison & Hord; former Senior Partner of Boyle & Alexander (attorneys) George H. Broadrick (2) Director, Chairman of 1975 Retired President and Consultant, 73 Executive Committee First-Citizens Bank & Trust Company and and Consultant First Citizens BancShares, Inc. H. Max Craig, Jr. (2) Director 1981 President and Chairman of the Board, 65 Gaston County Dyeing Machine Company (textile machinery manufacturing) Betty M. Farnsworth Director 1985 Homemaker and former Director, Farmers 69 Bank, Pilot Mountain, N.C. Lewis M. Fetterman Director 1980 President and Owner, Fetterman Group and 74 LMF Consulting & Marketing Co.; Assistant to President, Heartland Enterprises, Inc.; Director, Lundy Packing Co.; former Chief Executive Officer, Fetterman Farms, Ltd., Innovative Pork Concepts, Indiana Packers Co. and IPC Genetics (agribusiness) Frank B. Holding (2)(3) Executive Vice 1962 Executive Vice Chairman of the Board 67 Chairman of the (former Vice Chairman), First-Citizens Board Bank & Trust Company and First Citizens BancShares, Inc.; Vice Chairman of the Board (former President), First-Citizens Bank and Trust Company of South Carolina and First Citizens Bancorporation of South Carolina, Inc. Frank B. Holding, Jr. (2)(3) President and 1993 President, First Citizens BancShares, 34 Director Inc. and First-Citizens Bank & Trust Company (former Area Vice President; prior to that, Regional Vice President, First-Citizens Bank & Trust Company) Lewis R. Holding (3) Chairman of the Board 1957 Chairman of the Board, First-Citizens 68 Bank & Trust Company and First Citizens BancShares, Inc.
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YEAR PRINCIPAL OCCUPATION AND POSITIONS WITH FIRST BUSINESS EXPERIENCE FOR NAME AND AGE BANCSHARES AND BANK ELECTED (1) PAST FIVE YEARS Charles B. C. Holt Director 1995 Secretary/Treasurer (former President), 63 Holt Oil Company, Inc. (wholesale petroleum products distributor); former Chairman of the Board, State Bank, Fayetteville, NC Edwin A. Hubbard Director 1996 Retired Businessman; Chairman of the 77 Board and Co-Owner, Stroud-Hubbard Company, Inc. (retail shoe company); former Chairman of the Board, Allied Bank Capital, Inc. and Summit Savings Bank, Inc., SSB, Sanford, NC James B. Hyler, Jr. Vice Chairman of the 1988 Vice Chairman of the Board and Chief 48 Board Operating Officer (former President), First-Citizens Bank & Trust Company and First Citizens BancShares, Inc. Gale D. Johnson, M.D. Director 1974 Retired Surgeon; Director, Health 76 Affairs, Campbell University; former President, Gale D. Johnson, M.D., P.A. Freeman R. Jones Director and Chairman 1974 President, EFC Corporation (real estate 69 of Salary Committee investment) Lucius S. Jones Director 1994 President and Owner, United Realty & 53 Construction Company, Inc. (residential construction, sales and development); former Vice Chairman of the Board, Pioneer Bancorp, Inc. and Pioneer Savings Bank, Inc., Rocky Mount, NC I. B. Julian Director 1977 Retired Executive and former Consultant, 88 First-Citizens Bank & Trust Company Joseph T. Maloney, Jr. Director 1976 Private Investor 66 J. Claude Mayo, Jr. Director 1994 Retired Owner, Mayo Insurance Agency; 68 former Chairman of the Board, Pioneer Bancorp, Inc. and Pioneer Savings Bank, Inc., Rocky Mount, NC William McKay Director 1991 Retired President, Chief Executive 70 Officer and Director, First Federal Savings Bank, Hendersonville, NC Brent D. Nash Director 1995 Senior Vice President, First-Citizens 60 Bank & Trust Company; former President, Chief Executive Officer and Director, Edgecombe Homestead Savings Bank, Inc., SSB, Tarboro, NC Lewis T. Nunnelee, II Director 1979 Chairman of the Board and former 70 President, Coastal Beverage Company, Inc. (wholesale beer distributor) Talbert O. Shaw, Ph.D. Director 1993 President, Shaw University (educator) 68
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YEAR PRINCIPAL OCCUPATION AND POSITIONS WITH FIRST BUSINESS EXPERIENCE FOR NAME AND AGE BANCSHARES AND BANK ELECTED (1) PAST FIVE YEARS R. C. Soles, Jr. Director 1995 Attorney and Partner, Soles, Phipps, Ray 61 & Prince (attorneys); Senator, North Carolina Senate; former Chairman of the Board, First Investors Savings Bank, Inc., SSB, Whiteville, NC David L. Ward, Jr. (2)(4) Director and Chairman 1971 Senior Attorney and President, Ward and 60 of Audit Committee Smith, P.A. (attorneys)
(1) The term "Year First Elected" refers to the year in which a director first became a director of BancShares or its predecessor, First Citizens Corporation, or, if elected prior to the formation of First Citizens Corporation in 1982, of the Bank. (2) The following directors of BancShares also serve as directors of other publicly held companies or their subsidiaries, as follows: John M. Alexander, Jr. serves as a director of North Carolina Railroad Company, Raleigh, N.C.; George H. Broadrick and Frank B. Holding serve as directors of First Citizens Bancorporation of South Carolina, Inc., Columbia, S.C.; H. Max Craig, Jr. serves as a director of Public Service Company of North Carolina, Inc., Gastonia, N.C.; Frank B. Holding serves as a director of Southern BancShares (N.C.), Inc., Mount Olive, N.C.; Frank B. Holding, Jr. serves as a director of North Carolina Natural Gas Corporation, Fayetteville, N.C.; and David L. Ward, Jr. serves as a director of Carolina Telephone and Telegraph Company, Wake Forest, N.C., a subsidiary of Sprint Corp. (3) Lewis R. Holding and Frank B. Holding are brothers; Frank B. Holding, Jr. is the son of Frank B. Holding and the nephew of Lewis R. Holding. (4) The law firm of Ward and Smith, P.A., New Bern, N.C., of which David L. Ward, Jr. is Senior Attorney and President, served as General Counsel for BancShares and the Bank during 1995, which relationship is expected to continue through 1996. BancShares and the Bank paid $2,078,884 in legal fees to Ward and Smith, P.A. during 1995. DIRECTORS' FEES AND COMPENSATION For their services as directors, each member of the Board of Directors (except Messrs. L. Holding, F. Holding, J. Hyler, F. Holding, Jr. and E. Hubbard) receives an annual retainer of $10,000, plus $500 for attendance at each meeting of the Board and $500 for attendance at each meeting of a committee that is held on a day other than in conjunction with a meeting of the Board. In addition to, or in lieu of, such director's fees, certain BancShares' directors receive other compensation from BancShares or the Bank, as follows: William McKay receives compensation in addition to the regular director's fees described above pursuant to various arrangements related to the Bank's 1991 acquisition of First Federal Savings Bank, Hendersonville, N.C. ("First Federal"). The acquisition was effected pursuant to an agreement which provided that the former directors of First Federal would serve as local advisory directors for the Bank and receive for such services a monthly fee of $700 (which is equal to the directors' fees previously paid by First Federal) until June 1994, plus an additional semiannual fee of $625 until January 1996. Mr. McKay served as Chairman of First Federal at the time of the acquisition and receives fees pursuant to this special arrangement as well as the fees described above for his services as a member of the Boards of Directors of BancShares and the Bank. Additionally, at the time of the acquisition, Mr. McKay (as well as certain other directors of First Federal) was a party to two agreements (entered into during 1985 and 1987) with First Federal providing for retirement benefits. Pursuant to the 1985 agreement, Mr. McKay deferred $300 per month of his directors' fees paid by First Federal for a period of five years and became entitled to a monthly retirement benefit of $1,249 for a period of ten years, commencing during 1990. Pursuant to the 1987 agreement, Mr. McKay began receiving a monthly retirement benefit of $835 during August 1992, which benefits will continue for a period of ten years. The Bank assumed First Federal's obligations for these payments as part of the acquisition. 9 Brent D. Nash receives compensation in addition to the regular director's fees described above pursuant to various arrangements related to the 1994 merger of Edgecombe Homestead Savings Bank, Inc., SSB, Tarboro, N.C. ("Edgecombe") into the Bank. The merger was effected pursuant to an agreement providing that Mr. Nash, the former President, Chief Executive Officer and a director of Edgecombe, would be appointed to the Board of Directors of BancShares. Pursuant to the written agreement pertaining to the merger, as of the effective date of the merger the Bank and Mr. Nash also entered into an employment agreement providing for his employment as a Senior Vice President in the Bank's Tarboro office at a salary of $113,000 per year. The employment agreement also includes various noncompetition and nonsolicitation covenants by Mr. Nash, provides normal employee benefits and has a term continuing to January 12, 2001, when Mr. Nash will reach age 65. Following that date, Mr. Nash will begin receiving retirement benefits pursuant to the Bank's Pension Plan. In addition, he will receive retirement payments pursuant to an agreement with Edgecombe, whereby he deferred his director's fees of $300 per month over a five year period in return for payments of $1,300 per month for a period of 120 months after age 65. The Bank assumed Edgecombe's responsibilities for such retirement payments as part of the merger. R. C. Soles, Jr. became a director of BancShares and the Bank in connection with the 1995 merger of First Investors Savings Bank, Inc., SSB, Whiteville, N.C. ("First Investors") into the Bank. Mr. Soles served as Chairman of the Board of First Investors prior to the merger. The written agreement pertaining to the merger provided that Mr. Soles would be appointed to the Board of Directors of BancShares and that the former directors of First Investors, including Mr. Soles, would become local advisory directors for the Bank and receive for such services a fee of $835 per quarter until February 23, 2000. Mr. Soles receives such fees for serving as a local advisory director in addition to the normal director's fees described above. Charles B. C. Holt became a director of BancShares and the Bank in connection with the 1995 merger of State Bank, Fayetteville, N.C. ("State Bank") into the Bank. Mr. Holt served as Chairman of the Board of State Bank prior to the merger. The written agreement pertaining to the merger provided that Mr. Holt would be appointed to the Board of Directors of BancShares and that the former directors of State Bank, including Mr. Holt, would become local advisory directors for the Bank and receive for such services a monthly fee of $250 until March 2, 1998. Mr. Holt receives such fees for serving as a local advisory director in addition to the normal director's fees described above. Edwin A. Hubbard receives special compensation, in lieu of the standard BancShares' director's fees described above, pursuant to an arrangement related to BancShares' February 14, 1996 acquisition of Allied Bank Capital, Inc., Sanford, N.C. ("Allied"). Mr. Hubbard served as Chairman of the Board of Allied. Pursuant to the Allied acquisition agreement, Mr. Hubbard was selected by BancShares to serve as a member of the Boards of BancShares and the Bank and will receive a monthly fee of $3,250 (which is equal to the directors' fees previously paid by Allied) until the end of his fourth elected term as a director of BancShares. Also, Mr. Hubbard (as well as certain other directors of Allied) was a participant in Allied's Independent Directors' Retirement Plan, which provides for monthly retirement benefits. Pursuant to the Plan, Mr. Hubbard will receive $1,200 per month for a period of ten years following BancShares' acquisition of Allied. The Bank assumed Allied's obligations for these retirement payments as part of the merger. George H. Broadrick, since his retirement as President of the Bank in 1987, has received additional compensation of $50 per hour, plus expenses, for services rendered pursuant to a consulting agreement with the Bank. In addition, Mr. Broadrick receives benefits under the Bank's Pension Plan and (for a period of 10 years following his retirement) payments of $4,778 per month pursuant to a separate agreement with the Bank under which he has agreed to provide the Bank with certain consultation services and that he will not "compete" (as defined in the agreement) against the Bank during the period following his retirement. Betty M. Farnsworth, Lucius S. Jones, I. B. Julian, Joseph T. Maloney, J. Claude Mayo, and Lewis T. Nunnelee, II, also serve on the local advisory boards of the Bank in their respective communities, and each receives quarterly fees of $125 for attendance at such local advisory board meetings in addition to the fees described above for their services as members of the Boards of Directors of BancShares and the Bank. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of BancShares held four meetings in 1995. All directors attended at least 75% of the aggregate number of meetings of BancShares' Board of Directors and any committees on which they served during their terms. 10 BancShares' Board of Directors and the Bank's Board of Directors have the same members. The Boards of Directors have several standing committees, including a Salary Committee and an Audit Committee. BancShares' Board of Directors does not have a standing nominating committee or any other committee performing an equivalent function. The Audit Committee of BancShares and the Bank consists of David L. Ward, Jr. - Chairman, John M. Alexander, Jr., H. Max Craig, Jr., Betty M. Farnsworth, and J. Claude Mayo, Jr. The Audit Committee oversees the establishment of the scope and detail of the continuous audit program conducted by the Bank's internal audit staff. The General Auditor of the Bank reports directly to the Audit Committee and, at least quarterly, the Committee reviews reports on the work of the internal audit staff, the Corporate Finance Department and the Commercial Credit Administration Department. Subject to the approval of BancShares' Board of Directors and ratification by the shareholders, the Audit Committee engages a qualified firm of independent certified public accountants to conduct an annual audit of BancShares' consolidated financial statements. It receives written reports, supplemented by such oral reports as it deems necessary, from such firm and reviews non-audit services proposed by management to be provided by the accounting firm. During 1995, the Audit Committee held four meetings. The members of the Salary Committee and the Cash Incentive Plan Committee of the Bank's Board of Directors are listed below. The Salary Committee provides overall guidance for the officer compensation programs, including salaries and other forms of compensation. At least annually, the Salary Committee reviews the officer compensation programs, including salary, pension and such other employee benefit matters as it deems appropriate. In conjunction with management, it makes recommendations to the entire Board of Directors with regard to proposed salaries and other forms of compensation, which recommendations are subject to approval by the Board. During 1995, the Salary Committee held one meeting. The Cash Incentive Plan Committee was appointed by the Board of Directors to make recommendations regarding the payment of bonuses under the Cash Incentive Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Salary Committee are Freeman R. Jones -- Chairman, Lewis M. Fetterman and Lewis T. Nunnelee, II. The members of the Cash Incentive Plan Committee are Freeman R. Jones -- Chairman, and George H. Broadrick. Mr. Broadrick retired as President of BancShares and the Bank in 1987 and currently serves as Chairman of the Executive Committees of BancShares and the Bank. After receipt of the recommendations of the Salary Committee, the Board of Directors makes all final decisions regarding executive compensation matters. Members of the Board of Directors who are executive officers abstain from participation in both the discussion of and the voting on such matters. COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Bank's goal is to provide an executive compensation program that will enable it to attract and retain qualified and motivated individuals as executive officers. Currently, the Bank's executive compensation program includes: (a) base salary, (b) a Section 423 employee stock purchase plan approved by shareholders during 1994 under which a grant of options to purchase shares of BancShares' Class A Common Stock was made during 1994 to all eligible employees (including the executive officers named in the Summary Compensation Table below, except Lewis R. Holding, Frank B. Holding and Frank B. Holding, Jr.), all of which options expire on June 15, 1996; and (c) contributions to the individual accounts of all participating employees (including executive officers) under the Bank's Section 401(k) salary deferral plan. In addition, the Bank provides other employee benefit and welfare plans customary for companies of its size. Effective as of January 1995, the Salary Committee made recommendations to the Board of Directors (and the Board of Directors made final decisions) regarding the amounts of the 1995 salaries of Lewis R. Holding, Frank B. Holding, James B. Hyler, Jr., and Frank B. Holding, Jr., and the maximum aggregate amount for 1995 merit increases in the salaries of the Bank's other officers and employees. With respect to Messrs. L. Holding, F. Holding, J. Hyler, and F. Holding, Jr., the Committee's recommendations were based on its evaluation of their individual levels of responsibility and performance and, in the case of Mr. L. Holding in particular, his current leadership and direction and his historical importance in the development and growth of both the Bank and BancShares. With respect to the salaries of other executive officers, the Vice Chairman, with the consent of the Chairman, was directed by the Board of Directors to set 1995 11 salaries on an individual merit basis. In connection with the Bank's normal annual performance review system, the performance of each such other executive officer is graded by the person to whom that officer reports. Based on the results of each individual officer's performance appraisal, for 1995 the officer could be awarded an annual merit increase of up to 8% of 1994 base salary. However, the performance review process and, thus, the setting of salaries largely are subjective and, except as described above, there are no specific formulae, objective criteria or other such mechanism by which adjustments to the salary of each executive officer (including Messrs. L. Holding, F. Holding, J. Hyler and F. Holding, Jr.) are tied empirically to his individual performance or to BancShares' financial performance. The 1995 Cash Incentive Plan (the "1995 Plan") was approved by the Board of Directors during January 1995 to provide an additional incentive (in the form of the opportunity to receive cash bonuses) for management to perform at higher levels and thereby improve BancShares' financial performance. Under the terms of the Plan, if BancShares' return on shareholders' equity ("ROE") for 1995 was 12% or higher, then the Cash Incentive Plan Committee could set aside a bonus pool for the payment of cash bonuses in an aggregate amount of up to 1% of BancShares' 1995 pre-tax income. However, as BancShares' ROE for 1995 was less than 12%, no cash bonuses were approved for 1995 and the Board of Directors did not approve a Cash Incentive Plan for 1996. The amounts of contributions to the separate accounts of executive officers under the Bank's 401(k) salary deferral plan and the amounts of stock options granted to executive officers under the 1994 employee stock purchase plan were determined solely by formulae under the terms of those plans. However, under tax laws applicable to the employee stock purchase plan, Messrs. L. Holding, F. Holding and F. Holding, Jr. were not eligible to be granted options because of their ownership of stock possessing 5% or more of the total combined voting power or value of all classes of BancShares' stock. Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the deductibility of annual compensation in excess of $1,000,000 paid to certain executive officers of public corporations. As none of BancShares' executive officers receive annual compensation approaching that amount, BancShares' Board of Directors has not yet adopted a policy with respect to Section 162(m). Salary Committee: FREEMAN R. JONES, LEWIS M. FETTERMAN, LEWIS T. NUNNELEE, II Cash Incentive Plan Committee: FREEMAN R. JONES, GEORGE H. BROADRICK 12 EXECUTIVE OFFICERS The following individuals have been designated by the Boards of Directors of BancShares and the Bank as "executive officers." All executive officers serve at the pleasure of the Board of Directors and each has served for the past five years in the capacities indicated, with the exceptions noted below:
NAME AGE POSITION Lewis R. Holding 68 Chairman of the Board, BancShares and Bank (Chief Executive Officer) Frank B. Holding 67 Executive Vice Chairman of the Board, BancShares and Bank; formerly Vice Chairman James B. Hyler, Jr. 48 Vice Chairman of the Board, BancShares and Bank (Chief Operating Officer); formerly President Frank B. Holding, Jr. 34 President of BancShares and Bank (Chief Administrative Officer); formerly Area Vice President and, prior to that, Regional Vice President of Bank Kenneth A. Black 43 Vice President and Treasurer of BancShares; Group Vice President and Treasurer of Bank (Chief Financial Officer); formerly General Vice President of Bank Alexander G. MacFadyen, Jr. 54 Secretary of BancShares; Group Vice President and Secretary of Bank; previously General Vice President of Bank Wayne D. Duncan 54 Executive Vice President of Bank (Retail Lending); formerly Senior Regional Vice President and, prior to that, Regional Vice President of Bank John R. Francis, Jr. 42 Executive Vice President of Bank (Virginia Regional Executive); formerly President, Community Bank Group, First Union National Bank, Roanoke, VA (successor by merger to Dominion Bank, Roanoke, VA, of which he served as Vice President, Blue Ridge Group) William C. Orr 53 Executive Vice President of Bank (Commercial Credit Administration); formerly Group Vice President and, prior to that, General Vice President of Bank James M. Parker 53 Executive Vice President of Bank (Eastern Regional Executive); formerly Regional Vice President of Bank Edward L. Willingham, IV 41 Executive Vice President of Bank (Central Regional Executive); formerly Regional Vice President and, prior to that, Senior Vice President of Bank J. Allen Woodward 45 Executive Vice President of Bank (Western Regional Executive); formerly Vice President and Area Executive, First Union National Bank of North Carolina, Durham, NC William J. Cathcart 56 Group Vice President of Bank (Trust Department); formerly General Vice President Joseph A. Cooper, Jr. 42 Group Vice President and Chief Information Officer of Bank; formerly Associate Partner, Andersen Consulting, Dallas, Texas; prior to that, Chief Technology Officer, NationsBank of NC, Charlotte, NC Richard H. Lane 51 Senior Vice President of Bank (General Auditor); formerly Audit Director and Vice President of NCNB Corp., Charlotte, NC
13 EXECUTIVE COMPENSATION The following table shows, for the years ending December 31, 1995, 1994, and 1993, the cash and certain other compensation paid to or received or deferred by each of the five named executive officers of BancShares and the Bank. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS OTHER RESTRICTED PAYOUTS NAME AND ANNUAL STOCK OPTIONS/ LTIP PRINCIPAL SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS POSITION (1) YEAR ($)(2)(3) ($)(4) ($) ($) (#) ($) Lewis R. Holding 1995 528,971 -0- -0- -0- -0- -0- Chairman of the Board 1994 504,247 29,669 -0- -0- -0- -0- 1993 471,274 41,593 -0- -0- -0- -0- Frank B. Holding 1995 528,971 -0- -0- -0- -0- -0- Executive Vice Chairman 1994 504,247 29,669 -0- -0- -0- -0- of the Board 1993 471,274 41,593 -0- -0- -0- -0- James B. Hyler, Jr. 1995 384,204 -0- -0- -0- -0- -0- Vice Chairman of the Board 1994 365,474 21,546 -0- -0- 1,197 -0- and Chief Operating Officer 1993 337,348 29,962 -0- -0- -0- -0- Frank B. Holding, Jr. 1995 230,125 -0- -0- -0- -0- -0- President and Chief 1994 210,333 12,900 -0- -0- -0- -0- Administrative Officer 1993 (6) -- -- -- -- -- -- James M. Parker, 1995 179,856 -0- -0- -0- -0- -0- Executive Vice President of the 1994 169,014 9,922 -0- -0- 551 -0- Bank and Eastern Regional Executive 1993 162,314 14,311 -0- -0- -0- -0- ALL NAME AND OTHER PRINCIPAL COMPENSATION POSITION (1) ($)(5) Lewis R. Holding 9,240 Chairman of the Board 9,240 10,173 Frank B. Holding 9,240 Executive Vice Chairman 9,240 of the Board 10,173 James B. Hyler, Jr. 9,240 Vice Chairman of the Board 9,240 and Chief Operating Officer 10,173 Frank B. Holding, Jr. 7,406 President and Chief 5,214 Administrative Officer -- James M. Parker, 5,940 Executive Vice President of the 5,940 Bank and Eastern Regional Executive 6,617
(1) Positions listed are the named executive officers' current positions with BancShares and the Bank. See "Executive Officers" above for a listing of each individual's previous positions. (2) Includes amounts deferred at the election of each named executive officer pursuant to the Bank's Section 401(k) salary deferral plan. (3) Of the salary shown above as paid to Frank B. Holding during 1995, 1994, and 1993, the Bank was reimbursed certain amounts by two of its affiliates as follows: First-Citizens Bank and Trust Company of South Carolina -- $86,214, $82,109 and $76,737, respectively; and Southern Bank and Trust Company -- $68,791, $65,512 and $61,229, respectively. These payments were made pursuant to agreements between the Bank and its affiliates whereby Mr. Holding provides certain management services to the affiliates in return for their reimbursement to the Bank of a portion of his salary. (4) Consists entirely of awards paid under BancShares' annual cash incentive plan. (5) For 1995 and 1994, consists entirely of the Bank's matching contributions on behalf of each named executive officer under the Bank's Section 401(k) salary deferral plan; for 1993, consists of, respectively, the Bank's matching contributions on behalf of each named executive officer, and the portion of the Bank's discretionary profit sharing contribution allocated to the individual account of each named executive officer, under the Bank's Section 401(k) salary deferral plan as follows: Mr. L. Holding -- $8,994 and $1,179; Mr. F. Holding -- $8,994 and $1,179; Mr. Hyler -- $8,994 and $1,179; and Mr. Parker -- $5,782 and $835. (6) Mr. F. Holding, Jr. first became an executive officer of the Bank in 1994. EMPLOYEE STOCK PURCHASE PLAN During 1994 options to purchase shares of BancShares Class A Common Stock were granted to substantially all employees of BancShares and its subsidiaries pursuant to the 1994 Employee Stock Purchase Plan (the "1994 Stock Plan"), which was approved by shareholders at the 1994 Annual Meeting. No additional options have been granted since 1994, and all options remaining unexercised as of June 15, 1996, will expire. 14 The following table contains information with respect to the exercise of stock options during 1995, and the value of options held at December 31, 1995, by each named executive officer. AGGREGATED OPTION EXERCISES IN 1995 AND DECEMBER 31, 1995 OPTION VALUES
VALUE OF UNEXERCISED IN-THE-MONEY NUMBER OF UNEXERCISED OPTIONS SHARES OPTIONS AT AT DECEMBER ACQUIRED VALUE DECEMBER 31, 1995 31, 1995 ON EXERCISE REALIZED (#) ($)(2) NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE Lewis R. Holding (3) -0- $ -0- -0- -0- $ -0- Frank B. Holding (3) -0- -0- -0- -0- -0- James B. Hyler, Jr. 561 8,581 561 4 9,703 Frank B. Holding, Jr. (3) -0- -0- -0- -0- -0- James M. Parker -0- -0- 551 -0- 9,530 NAME UNEXERCISABLE Lewis R. Holding (3) $-0- Frank B. Holding (3) -0- James B. Hyler, Jr. 69 Frank B. Holding, Jr. (3) -0- James M. Parker -0-
(1) Represents the aggregate fair market value of shares acquired on the dates options were exercised, minus the aggregate exercise or purchase price paid for those shares (at $37.83 per share). (2) Represents the aggregate fair market value at December 31, 1995, of shares underlying unexercised options, minus the aggregate exercise or purchase price of those shares (at $37.83 per share). (3) Under the terms of the 1994 Stock Plan, Messrs. L. Holding, F. Holding and F. Holding, Jr. were excluded from participation and were not granted any options. PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS The following table shows the estimated benefits payable to a covered participant at normal retirement age under the Bank's qualified defined benefit pension plan (the "Pension Plan") based on various specified numbers of years of service and various levels of covered compensation.
FINAL AVERAGE YEARS OF SERVICE COMPENSATION 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS $100,000 $ 16,815 $ 25,223 $ 33,630 $ 42,038 $ 50,446 58,853 $ 64,853 125,000 21,440 32,160 42,880 53,601 64,321 75,041 82,541 150,000 26,065 39,098 52,130 65,163 78,196 91,228 100,228 175,000 30,690 46,035 61,380 76,726 92,071 107,416 117,916 200,000 35,315 52,973 70,630 88,288 105,946 120,000 120,000 225,000 38,872 58,307 77,743 97,179 116,615 120,000 120,000 250,000 38,872 58,307 77,743 97,179 116,615 120,000 120,000 300,000 38,872 58,307 77,743 97,179 116,615 120,000 120,000 400,000 38,872 58,307 77,743 97,179 116,615 120,000 120,000 450,000 38,872 58,307 77,743 97,179 116,615 120,000 120,000 500,000 38,872 58,307 77,743 97,179 116,615 120,000 120,000 550,000 38,872 58,307 77,743 97,179 116,615 120,000 120,000
Benefits shown in the table are computed as straight life annuities beginning at age 65 and are not subject to a deduction for Social Security benefits or any other offset amount. A participant's compensation covered by the Pension Plan includes base salary (including amounts deferred pursuant to the Bank's Section 401(k) salary deferral plan) and bonuses, and the participant's benefits are based on his "final average compensation" which is the participant's highest average annual covered compensation for any five consecutive years during his last ten complete calendar years as a plan participant. However, under current tax laws, $150,000 is the maximum amount of compensation for 1995 that can be included for purposes of calculating a participant's "final average compensation". The estimated years of service and "final average compensation", respectively, as of January 1, 1996, for each of the named executive officers are as follows: Mr. L. Holding -- 42 years and $245,189; Mr. F. Holding -- 39 years and $243,221; Mr. Hyler -- 16 years and $216,942; Mr. F. Holding, Jr. -- 12 years and $112,931; Mr. Parker -- 29 years and $154,146. During 1995, the maximum annual 15 benefit permitted by tax laws for a retiring participant was $120,000 and the maximum eligible final average compensation was $219,224. In addition to benefits under the Pension Plan, each of certain senior officers of BancShares and the Bank is party to a separate agreement with the Bank under which the Bank has agreed to pay a specified monthly amount to the officer for a period of ten years following his retirement at age 65 (or at such other age as is agreed upon between the Bank and the officer). In return for such payments, each officer has agreed that he will provide certain limited consultation services to, and will not "compete"(as defined in the agreement) against, the Bank during the period following his retirement. If the officer dies during the period payments are being made under the agreement, the remaining balance of payments due under the agreement will be paid to the officer's designated beneficiary or his estate. The amounts of monthly payments provided for in agreements currently in effect between the Bank and each of the named executive officers are as follows: Mr. L. Holding -- $18,544; Mr. F. Holding -- $18,544; Mr. Hyler -- $13,358; Mr. F. Holding, Jr. -- $8,466; and Mr. Parker -- $4,134. PERFORMANCE GRAPH The following line graph compares the cumulative total shareholder return (the "CTSR") on BancShares' Class A Common Stock during the previous five fiscal years, with the CTSR over the same measurement period of the Nasdaq-U.S. index and the Nasdaq Banks index. Each line graph assumes $100 invested on January 1, 1991, and that dividends were reinvested in additional shares. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN AMONG FIRST CITIZENS BANCSHARES, INC., NASDAQ BANKS AND NASDAQ-US COMPANIES INDICES (The Performance Graph appears here. The plot points are listed in the table below:) Year + BancShares [ ] Nasdaq Banks * Nasdaq-US 1990 $100 $100 $100 1991 147 164 161 1992 274 239 187 1993 254 272 215 1994 242 271 210 1995 311 404 296 16 TRANSACTIONS WITH MANAGEMENT The Bank has banking transactions in the ordinary course of business with certain of its directors, executive officers, principal shareholders and their associates. All extensions of credit included in such transactions have been approved by the Board of Directors and were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features. Lewis R. Holding, Chairman and Chief Executive Officer of BancShares and the Bank, and Frank B. Holding, Executive Vice Chairman of BancShares and the Bank, also are principal shareholders of Southern BancShares (N.C.), Inc., Mount Olive, North Carolina ("Southern"), of which Frank B. Holding also serves as a director. During 1995, the Bank provided certain services to Southern's wholly owned bank subsidiary for which the Bank was paid an aggregate of $2,002,962. Services provided by the Bank included, without limitation, certain data and item processing services, securities portfolio management services, internal audit services, management consulting services, and service as trustee for Southern's pension and Section 401(k) plans. During 1996, the projected payments from Southern to the Bank for similar services, pursuant to various agreements between the Bank, Southern and its subsidiary, will amount to approximately $2,500,000. Certain specific relationships or transactions with directors are described above in footnote 4 to the table listing directors under the caption "PROPOSAL 1: ELECTION OF DIRECTORS". PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS Subject to ratification by the shareholders, the Board of Directors has approved the engagement of KPMG Peat Marwick LLP ("Peat Marwick"), certified public accountants, as BancShares' independent public accountants for 1996, and a proposal to ratify that appointment will be submitted at the Annual Meeting. Representatives of Peat Marwick are expected to be present at the Annual Meeting and available to respond to appropriate questions and will have the opportunity to make a statement if they so desire. THE AUDIT COMMITTEE AND BOARD OF DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR 1996. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTES REPRESENTED, IN PERSON AND BY PROXY, AND ENTITLED TO BE CAST AT THE ANNUAL MEETING IS REQUIRED FOR APPROVAL OF PROPOSAL 2. PROPOSALS OF SHAREHOLDERS Any proposal of a shareholder intended to be presented at the 1997 Annual Meeting must be received by BancShares at its principal office in Raleigh, North Carolina no later than November 30, 1996, in order that any such proposal be timely received for inclusion in the proxy solicitation materials to be issued in connection with that meeting. It is anticipated that the 1997 Annual Meeting will be held on a date during April 1997. ANNUAL REPORT ON FORM 10-K BancShares is required to file with the Securities and Exchange Commission an Annual Report on Form 10-K within 90 days following the end of each fiscal year. ON OR AFTER MARCH 30, 1996, UPON WRITTEN REQUEST TO KENNETH A. BLACK, CHIEF FINANCIAL OFFICER, CORPORATE FINANCE DEPARTMENT, FIRST-CITIZENS BANK & TRUST COMPANY, POST OFFICE BOX 27131, RALEIGH, NORTH CAROLINA 27611-7131, BY A SHAREHOLDER ENTITLED TO VOTE AT THE ANNUAL MEETING, A COPY OF BANCSHARES' ANNUAL REPORT ON FORM 10-K FOR 1995, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES THERETO, WILL BE FORWARDED WITHOUT CHARGE TO THE SHAREHOLDER MAKING SUCH REQUEST. 17 OTHER MATTERS Management knows of no other business that will be brought before the Annual Meeting or any adjournments thereof. Should other matters properly come before the meeting, the persons named in the proxy to represent the shareholders will vote in accordance with their best judgment on such matters. By Order of the Board of Directors (Signature of Alexander G. MacFadyen, Jr.) ALEXANDER G. MACFADYEN, JR., SECRETARY March 13, 1996 18 1995 ANNUAL REPORT 19 INTRODUCTION Management's discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. ("BancShares"), for the years 1995, 1994 and 1993. BancShares is a bank holding company with three wholly-owned banking subsidiaries -- First-Citizens Bank & Trust Company (the "Bank"), a North Carolina-chartered bank (with branches in North Carolina and Virginia), Bank of Marlinton ("Marlinton") and Bank of White Sulphur Springs ("WSS"), both of which are West Virginia-chartered banks. Marlinton was acquired by BancShares in September 1994, while WSS was acquired during June 1995. This discussion and related financial data should be read in conjunction with the audited consolidated financial statements and related footnotes presented on pages 39 through 58 of this report. TABLE 1 FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
1995 1994 1993 1992 1991 (THOUSANDS, EXCEPT SHARE DATA AND RATIOS) SUMMARY OF OPERATIONS Interest income........................................ $ 471,109 $ 376,005 $ 364,881 $ 390,380 $ 421,844 Interest income-taxable equivalent..................... $ 473,371 $ 377,858 $ 366,379 $ 391,668 $ 423,368 Interest expense....................................... 224,664 148,126 137,934 170,558 245,684 Net interest income-taxable equivalent................. 248,707 229,732 228,445 221,110 177,684 Taxable equivalent adjustment.......................... 2,262 1,853 1,498 1,288 1,524 Net interest income.................................... 246,445 227,879 226,947 219,822 176,160 Provision for loan losses.............................. 5,364 2,786 15,245 17,506 15,626 Net interest income after provision for loan losses...................................... 241,081 225,093 211,702 202,316 160,534 Noninterest income..................................... 92,128 83,325 85,737 74,303 70,270 Noninterest expense.................................... 245,880 230,582 213,213 199,199 187,596 Income before income taxes............................. 87,329 77,836 84,226 77,420 43,208 Income taxes........................................... 30,423 26,867 28,641 25,657 14,027 Net income............................................. $ 56,906 $ 50,969 $ 55,585 $ 51,763 $ 29,181 SELECTED AVERAGE BALANCES Total assets........................................... $6,846,959 $6,098,944 $5,576,179 $5,308,165 $5,084,615 Investment securities.................................. 1,611,549 1,599,565 1,522,715 1,522,571 1,597,060 Loans.................................................. 4,433,517 3,800,318 3,401,093 3,173,285 2,866,834 Interest-earning assets................................ 6,191,422 5,476,690 5,002,144 4,762,846 4,557,240 Deposits............................................... 5,952,090 5,335,057 4,894,319 4,684,982 4,491,509 Interest-bearing liabilities........................... 5,410,495 4,838,749 4,445,120 4,299,143 4,156,635 Long-term obligations.................................. 26,307 52,499 29,318 18,245 29,960 Shareholders' equity................................... $ 487,895 $ 416,983 $ 362,733 $ 307,818 $ 264,512 Shares outstanding..................................... 10,597,066 9,944,927 9,701,389 9,494,118 9,360,904 PROFITABILITY RATIOS (AVERAGES) Rate of return (annualized) on: Total assets......................................... 0.83% 0.84% 1.00% 0.98% 0.57% Shareholders' equity................................. 11.66 12.22 15.32 16.82 11.03 Dividend payout ratio.................................. 15.36 14.13 10.91 9.63 13.62 LIQUIDITY AND CAPITAL RATIOS (AVERAGES) Loans to deposits...................................... 74.49% 71.23% 69.49% 67.73% 63.83% Shareholders' equity to total assets................... 7.13 6.84 6.51 5.80 5.20 Time certificates of $100,000 or more to total deposits............................................. 8.33 6.41 5.81 6.36 7.88 PER SHARE OF STOCK Net income............................................. $ 5.37 $ 5.13 $ 5.73 $ 5.45 $ 3.12 Cash dividends......................................... 0.825 0.725 0.625 0.525 0.425 Market price at December 31 (Class A).................. 55.125 43.50 46.50 50.75 27.50 Book value at December 31.............................. 48.60 44.11 39.84 34.74 29.97 Tangible book value at December 31..................... 41.75 39.97 36.53 33.25 28.15
20 SUMMARY BancShares experienced an 11.6 percent increase in earnings during 1995, compared to 1994. The increase was due to increased levels of net interest income and noninterest income. These increases offset the growth in noninterest expense during 1995. Consolidated net income amounted to $56.9 million during 1995, compared to $51 million during 1994 and $55.6 million during 1993. Net income per share for the year ended December 31, 1995 totaled $5.37, compared to $5.13 and $5.73 for 1994 and 1993, respectively. Return on average assets totaled 0.83 percent, 0.84 percent and 1.00 percent during 1995, 1994 and 1993, respectively. An analysis of BancShares' financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities, and a discussion of these changes and trends follows. The information presented in Table 6 is useful in making such an analysis. Much of BancShares' growth in recent years has resulted from various business combinations. Table 2 details the significant transactions, all of which were accounted for as purchases, with the results of operations included with BancShares' Statements of Income since the respective acquisition dates. TABLE 2 SIGNIFICANT ACQUISITIONS
TOTAL TOTAL DATE INSTITUTION AND LOCATION ASSETS DEPOSITS (THOUSANDS) June 1995 Bank of White Sulphur Springs $ 64,589 $ 59,174 White Sulphur Springs, West Virginia May 1995 9 NationsBank of Virginia branches 133,175 143,494 Southern Virginia March 1995 State Bank 49,700 41,238 Fayetteville, North Carolina February 1995 Pace American Bank 58,660 53,303 Lawrenceville, Virginia February 1995 First Investors Savings Bank, Inc., SSB 44,426 40,846 Whiteville, North Carolina December 1994 First Republic Savings Bank, FSB 53,661 42,998 Roanoke Rapids, North Carolina September 1994 Bank of Marlinton 51,646 46,647 Marlinton, West Virginia August 1994 Edgecombe Homestead Savings Bank 39,181 30,195 Tarboro, North Carolina March 1994 Bank of Bladenboro 21,316 19,515 Bladenboro, North Carolina
INTEREST-EARNING ASSETS Interest-earning assets averaged $6.19 billion during 1995, an increase of $714.7 million or 13.1 percent over 1994 levels, compared to a 9.5 percent increase in 1994 over 1993 levels. The higher levels of interest-earning assets during 1995 resulted primarily from loan growth. LOANS. As of December 31, 1995, gross loans outstanding were $4.58 billion, a 10.4 percent increase over the December 31, 1994, balance of $4.15 billion. During 1995, loans resulting from acquisitions totaled $170.4 million. Loan balances for the last five years are provided in Table 3. During 1995, average loans were $4.43 billion, an increase of $633.2 million or 16.7 percent over 1994, compared to an increase of $399.2 million or 11.7 percent in 1994 when compared to 1993. Loans secured by real estate and loans to individuals experienced the strongest growth during 1995, expanding at rates of 21.5 percent and 15.4 percent, respectively over 1994. Loans secured by real estate averaged $2.75 billion during 1995, compared to $2.27 billion during 1994. Much of the growth in average real estate secured loans during 1995 was among commercial borrowers. Non-real estate commercial and industrial loans experienced little growth during 1995, averaging $438 million during the current year compared to $440.6 million in 1994. 21 TABLE 3 LOANS
DECEMBER 31, 1995 1994 1993 1992 1991 (THOUSANDS) Real estate: Construction and land development.................... $ 104,540 $ 100,708 $ 117,693 $ 149,847 $ 164,676 Mortgage: 1-4 family residential............................ 1,438,655 1,296,713 1,138,254 1,036,425 905,858 Commercial........................................ 770,246 720,407 614,018 565,735 579,593 Equity Line....................................... 397,225 349,092 293,200 283,331 283,565 Other............................................. 129,292 109,069 56,029 47,860 50,898 Commercial and industrial.............................. 466,462 373,947 408,565 371,656 420,251 Consumer............................................... 1,199,400 1,119,994 889,260 706,286 677,815 Lease financing........................................ 59,899 60,598 45,398 35,634 30,680 Other.................................................. 15,000 17,605 22,574 11,101 10,470 Total............................................. 4,580,719 4,148,133 3,584,991 3,207,875 3,123,806 Less reserve for loan losses........................... 78,495 72,017 70,049 58,380 53,730 Net loans......................................... $4,502,224 $4,076,116 $3,514,942 $3,149,495 $3,070,076
TABLE 4 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
DECEMBER 31, 1995 WITHIN ONE TO FIVE AFTER ONE YEAR YEARS FIVE YEARS TOTAL (THOUSANDS) Real estate: Construction and land development.................................. $ 34,013 $ 65,191 $ 5,336 $ 104,540 Mortgage: 1-4 family residential.......................................... 256,047 589,151 593,457 1,438,655 Commercial...................................................... 250,443 480,508 39,295 770,246 Equity Line..................................................... 27,806 99,306 270,113 397,225 Other........................................................... 42,020 80,679 6,593 129,292 Commercial and industrial............................................ 173,489 267,377 25,596 466,462 Consumer............................................................. 395,968 782,569 20,863 1,199,400 Lease financing...................................................... 14,975 44,924 -- 59,899 Other................................................................ 4,866 9,196 938 15,000 Total........................................................... $1,199,627 $ 2,418,901 $ 962,191 $4,580,719 Loans maturing after one year with: Fixed interest rates............................................... $ 1,627,398 $ 481,882 $2,109,280 Floating or adjustable rates....................................... 791,503 480,309 1,271,812 Total........................................................... $ 2,418,901 $ 962,191 $3,381,092
Loans to individuals averaged $1.17 billion during 1995 compared to $1 billion during 1994. The retail installment loan products continue to be attractive to individual borrowers wishing to finance purchases of new and used vehicles. Management anticipates sustained growth among commercial loans during 1996, with retail loans increasing at more modest levels. The fair value of loans outstanding as of December 31, 1995, net of the loan loss reserve, was $21.4 million above the book value. As of December 31, 1994, the book value exceeded fair value by $103 million. The improvement in the fair value relative to book is due changing market rates between the measurement dates. To minimize the potential adverse impact of interest rate fluctuations, management continuously monitors the maturity and repricing distribution of the loan portfolio. BancShares also offers variable rate loan products and fixed rate callable loans to ease the interest rate risk. Table 4 details the maturity and repricing distribution as of December 31, 1995. Of the gross loans outstanding on 22 December 31, 1995, 26.2 percent have scheduled maturities within one year, 52.8 percent have scheduled maturities between one and five years, while the remaining 21 percent have scheduled maturities extending beyond five years. INVESTMENT SECURITIES. At December 31, 1995 and 1994, the investment portfolio totaled $1.98 billion and $1.46 billion, respectively. In each period, U.S. Government securities represented substantially all of the portfolio. Investment securities averaged $1.61 billion during 1995, and $1.60 billion during 1994 and $1.52 billion during 1993. The average balance of the investment portfolio remained near 1994 levels during 1995, as deposit growth was sufficient to fund loan demand. The weighted-average maturity of the investment portfolio at December 31, 1995, was 15 months, compared to 11 months at December 31, 1994. Management modestly extended the average maturity of the securities portfolio during 1995 to capture higher yields. At December 31, 1995, the fair value of the Bank's investment portfolio was $8.6 million above book value. The unrealized loss existing as of December 31, 1994, was $35.3 million. The investment portfolio's fair value recovery during 1995 resulted from the maturity of lower-yielding securities and the reinvestment at higher market rates. Table 5 presents detailed information relating to the investment portfolio. TABLE 5 INVESTMENT SECURITIES
DECEMBER 31 1995 1994 1993 AVERAGE TAXABLE- BOOK MARKET MATURITY EQUIVALENT BOOK MARKET BOOK MARKET VALUE VALUE (YRS./MOS.) YIELD VALUE VALUE VALUE VALUE (THOUSANDS) U.S. Government: Within one year........... $ 927,931 $ 930,120 0/6 5.30% $ 849,279 $ 838,341 $ 589,666 $ 594,620 One to five years......... 1,034,722 1,040,954 1/10 5.78 599,147 575,193 1,223,348 1,223,384 Five to ten years......... 2,305 2,258 7/5 5.94 2,496 2,281 -- -- Over ten years............ 7,171 7,198 18/6 7.30 3,029 2,918 1,257 1,252 Total.................. 1,972,129 1,980,530 1/3 5.56 1,453,951 1,418,733 1,814,271 1,819,256 State, county and municipal: Within one year........... 1,324 1,328 0/3 7.27 361 364 100 102 One to five years......... 4,287 4,355 2/9 6.64 1,872 1,871 101 105 Five to ten years......... 2,227 2,323 6/0 7.48 2,370 2,314 -- -- Over ten years............ 195 195 21/8 9.00 -- -- -- -- Total.................. 8,033 8,201 3/9 7.03 4,603 4,549 201 207 Other: Within one year........... 506 506 0/11 5.48 100 100 -- -- One to five years......... 2,425 2,424 2/1 9.27 -- -- -- -- Five to ten years......... 55 55 6/2 8.00 315 315 315 315 Total.................. 2,986 2,985 1/11 8.60 415 415 315 315 Total investment securities........... $1,983,148 $1,991,716 1/3 5.57% $1,458,969 $1,423,697 $1,814,787 $1,819,778
INCOME ON INTEREST-EARNING ASSETS. Table 6 analyzes the Bank's interest-earning assets and interest-bearing liabilities for the five years ended December 31, 1995. Table 9 identifies the causes for changes in interest income and interest expense for 1995 and 1994. Taxable-equivalent interest income amounted to $473.4 million during 1995, a $95.5 million increase from 1994 levels, compared to an $11.5 million increase from 1993 to 1994. Volume growth contributed to the increase in interest income during both periods, while higher interest rates during 1995 boosted yields on earning assets and contributed to an increase in net interest income compared to 1994. 23 TABLE 6 AVERAGE BALANCE SHEETS
1995 1994 INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE (THOUSANDS, TAXABLE EQUIVALENT) ASSETS Loans: Secured by real estate.................................... $2,752,463 $233,055 8.47 % $2,265,054 $177,494 7.84 % Commercial and industrial................................. 437,970 41,099 9.38 440,566 34,165 7.75 Consumer.................................................. 1,167,923 102,666 8.79 1,012,359 85,523 8.45 Lease financing........................................... 58,332 4,499 7.71 51,160 3,861 7.55 Other..................................................... 16,829 1,402 8.33 31,179 1,741 5.58 Total loans............................................. 4,433,517 382,721 8.63 3,800,318 302,784 7.97 Investment securities: U.S. Government........................................... 1,600,713 81,219 5.07 1,597,051 71,573 4.48 State, county and municipal............................... 8,016 622 7.76 2,192 176 8.03 Other..................................................... 2,820 184 6.52 322 28 8.70 Total investment securities............................. 1,611,549 82,025 5.09 1,599,565 71,777 4.49 Federal funds sold.......................................... 146,356 8,625 5.89 76,807 3,297 4.29 Total interest-earning assets........................... 6,191,422 $473,371 7.65 % 5,476,690 $377,858 6.90 % Cash and due from banks..................................... 349,998 354,875 Premises and equipment...................................... 200,674 189,421 Other assets................................................ 180,675 148,932 Reserve for loan losses..................................... (75,810) (70,974) Total assets............................................ $6,846,959 $6,098,944 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking With Interest.................................... $ 816,391 $ 13,555 1.66 % $ 788,673 $ 13,495 1.71 % Savings................................................... 693,187 15,728 2.27 687,322 15,390 2.24 Money market accounts..................................... 742,537 25,167 3.39 788,063 19,280 2.45 Time...................................................... 2,824,074 152,784 5.41 2,279,639 89,127 3.91 Total interest-bearing deposits......................... 5,076,189 207,234 4.08 4,543,697 137,292 3.02 Short-term borrowings....................................... 307,999 15,773 5.12 242,553 8,314 3.43 Long-term obligations....................................... 26,307 1,657 6.30 52,499 2,520 4.80 Total interest-bearing liabilities...................... 5,410,495 $224,664 4.15 % 4,838,749 $148,126 3.06 % Demand deposits............................................. 875,901 791,360 Other liabilities........................................... 72,668 51,852 Shareholders' equity........................................ 487,895 416,983 Total liabilities and shareholders' equity.............. $6,846,959 $6,098,944 Interest rate spread........................................ 3.50 % 3.84 % Net interest income and net yield on interest-earning assets.................................................... $248,707 4.02 % $229,732 4.19 %
Average loan balances include nonaccrual loans. The average taxable-equivalent yield on the loan portfolio was 8.63 percent in 1995, 7.97 percent in 1994 and 8.03 percent in 1993. The higher yield during 1995 reflects the continued upward repricing of loans due to higher market rates. Taxable-equivalent loan income increased $79.9 million or 26.4 percent from 1994, the result of loan growth and higher rates. This followed an increase of 10.8 percent in taxable-equivalent loan income in 1994 from 1993. 24 TABLE 6 AVERAGE BALANCE SHEETS (CONTINUED)
1993 1992 1991 INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE (THOUSANDS, TAXABLE EQUIVALENT) $2,173,262 $170,150 7.83 % $2,075,604 $168,686 8.13 % $1,733,619 $168,056 9.69 % 381,722 27,596 7.23 390,132 34,241 8.78 423,003 40,233 9.51 789,374 71,112 9.01 664,924 70,158 10.55 672,694 79,488 11.82 40,576 3,433 8.46 31,911 3,108 9.74 27,502 2,876 10.46 16,159 985 6.10 10,714 650 6.07 10,016 813 8.12 3,401,093 273,276 8.03 3,173,285 276,843 8.72 2,866,834 291,466 10.17 1,521,949 90,655 5.96 1,521,154 112,447 7.39 1,585,307 125,391 7.91 451 43 9.53 1,102 102 9.26 11,569 1,049 9.07 315 20 6.35 315 16 5.08 184 13 7.07 1,522,715 90,718 5.96 1,522,571 112,565 7.39 1,597,060 126,453 7.92 78,336 2,385 3.04 66,990 2,260 3.37 93,346 5,449 5.84 5,002,144 $366,379 7.32 % 4,762,846 $391,668 8.22 % 4,557,240 $423,368 9.29 % 320,668 306,795 286,735 169,062 159,692 158,352 147,422 135,319 130,830 (63,117) (56,487) (48,542) $5,576,179 $5,308,165 $5,084,615 $ 704,614 $ 13,271 1.88 % $ 596,399 $ 15,192 2.55 % $ 464,851 $ 18,852 4.06 % 571,559 14,413 2.52 475,554 14,889 3.13 386,745 18,278 4.73 797,260 19,017 2.39 816,059 25,120 3.08 728,508 36,478 5.01 2,116,104 83,653 3.95 2,163,094 107,113 4.95 2,329,607 158,427 6.80 4,189,537 130,354 3.11 4,051,106 162,314 4.01 3,909,711 232,035 5.93 226,265 6,118 2.70 229,792 7,167 3.12 216,964 11,303 5.21 29,318 1,462 4.99 18,245 1,077 5.90 29,960 2,346 7.83 4,445,120 $137,934 3.10 % 4,299,143 $170,558 3.97 % 4,156,635 $245,684 5.91 % 704,782 633,876 581,798 63,544 67,328 81,670 362,733 307,818 264,512 $5,576,179 $5,308,165 $5,084,615 4.22 % 4.25 % 3.38 % $228,445 4.57 % $221,110 4.64 % $177,684 3.90 %
Taxable-equivalent income earned on the investment portfolio amounted to $82 million, $71.8 million and $90.7 million during the years ended December 31, 1995, 1994 and 1993, respectively. The average taxable-equivalent yield on the portfolio for these years was 5.09 percent, 4.49 percent and 5.96 percent, respectively. The $10.2 million increase in taxable-equivalent investment income during 1995 resulted from a 60 basis point yield increase. The $18.9 million reduction in taxable-equivalent interest income from 1993 to 1994 was the result of a 147 basis point yield reduction. Improved interest rates during 1995 allowed the portfolio yield to increase as securities purchased during 1993 and 1994 matured and were reinvested at higher rates. Recent reductions in interest rates will likely result in lower investment securities yields during 1996. 25 INTEREST-BEARING LIABILITIES At December 31, 1995 and 1994, interest-bearing liabilities totaled $5.84 billion and $4.98 billion, respectively. Interest-bearing liabilities averaged $5.41 billion during 1995, an increase of 11.8 percent over 1994 levels, with most of the growth occurring in interest-bearing deposits. During 1994, interest-bearing liabilities averaged $4.84 billion, an increase of 8.9 percent over 1993. DEPOSITS. At December 31, 1995, deposits totaled $6.39 billion, an increase of $870.5 million or 15.8 percent from December 31, 1994. Acquisitions contributed to $338.1 million of the increase, with the remaining growth coming from the existing branch network. Total deposits averaged $5.95 billion in 1995, an increase of 11.6 percent or $617 million over 1994. Average interest-bearing deposits were $5.08 billion during 1995, an increase of $532.5 million or 11.8 percent. Average time deposits increased $544.4 million or 23.9 percent from 1994 to 1995. While acquisitions contributed to some of this increase, higher interest rates during 1995 prompted greater interest in time deposits among both retail and business customers. BancShares avoids excessive reliance on high-cost volatile deposits, and during 1995, these funds averaged 8.33 percent of total average deposits. Table 7 provides a maturity distribution for these deposits. The fair value of all deposits was $163.7 million above book value as of December 31, 1995, compared to December 31, 1994, when the fair value was $6.8 million below book value. The increase in fair value relative to book value during 1995 resulted from changing interest rates. TABLE 7 MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1995 (THOUSANDS) Less than three months........................................................... $ 294,159 Three to six months.............................................................. 177,077 Six to 12 months................................................................. 77,820 More than 12 months.............................................................. 51,560 Total.......................................................................... $ 600,616
BORROWED FUNDS. BancShares has access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and lines of credit from correspondent banks. At December 31, 1995, short-term borrowings totaled $376.5 million, compared to $290.9 million one year earlier. For the year ended December 31, 1995, short-term borrowings averaged $308 million, compared to $242.6 million during 1994 and $226.3 million during 1993. The increase from 1994 to 1995 and from 1993 to 1994 resulted from growth in the Master note program, an overnight borrowing arrangement between BancShares and bank customers. The fair value of short-term borrowings equals the book value, as these financial instruments carry variable rates and adjust to current market conditions. Table 8 provides additional information regarding short-term borrowed funds. 26 TABLE 8 SHORT-TERM BORROWINGS
1995 1994 1993 AMOUNT RATE AMOUNT RATE AMOUNT RATE (THOUSANDS) Master notes At December 31............................................. $257,178 4.74 % $173,250 4.68 % $153,545 2.50 % Average during year........................................ 203,114 4.96 168,725 3.24 146,131 2.63 Maximum month-end balance during year...................... 257,178 -- 197,942 -- 171,111 -- Federal funds purchased At December 31............................................. 64,085 5.44 76,430 5.83 33,920 2.70 Average during year........................................ 49,226 5.83 21,079 4.09 29,323 2.90 Maximum month-end balance during year...................... 72,165 -- 76,430 -- 66,460 -- Repurchase agreements At December 31............................................. 25,022 4.46 14,970 4.43 18,374 2.25 Average during year........................................ 23,784 4.86 20,991 3.17 21,325 2.42 Maximum month-end balance during year...................... 25,337 -- 20,961 -- 24,111 -- U.S. Treasury tax and loan accounts At December 31............................................. 17,581 5.49 20,046 5.26 22,506 2.72 Average during year........................................ 17,070 5.71 24,195 3.78 26,273 2.79 Maximum month-end balance during year...................... 22,410 -- 30,117 -- 31,111 -- Other At December 31............................................. 12,665 4.50 6,165 4.58 8,152 4.86 Average during year........................................ 14,805 4.69 7,563 5.38 3,213 5.70 Maximum month-end balance during year...................... 16,666 -- 10,164 -- 8,152 --
At December 31, 1995 and 1994, long-term obligations totaled $23 million and $34.5 million, respectively. The reduction during 1995 results from the scheduled maturity of borrowings. The fair value of long-term obligations as of December 31, 1995, was $552,000 above the book value, compared to December 31, 1994, when the fair value was $1.6 million below the book value. Interest rate movements pushed the fair value of these obligations above their respective book values as of December 31, 1995. EXPENSE OF INTEREST-BEARING LIABILITIES. Interest expense amounted to $224.7 million in 1995, a $76.5 million or 51.7 percent increase from 1994. This followed a 7.4 percent increase in interest expense during 1994 compared to 1993. The increased interest expense during 1995 was the combined result of higher interest rates and growth in interest-bearing liabilities. Time deposits caused much of the increase in interest expense during 1995. In addition to the $544.4 million increase in average time deposits, the rate on these deposits experienced a 150 basis point rate increase, moving from 3.91 percent in 1994 to 5.41 percent in 1995. The aggregate rate on interest-bearing deposits was 4.08 percent during 1995, compared to 3.02 percent during 1994 and 3.11 percent during 1993. Interest expense on total interest-bearing deposits amounted to $207.2 million during 1995, $137.3 million during 1994 and $130.4 million during 1993. Interest expense on short-term borrowings amounted to $15.8 million in 1995, an increase of $7.5 million or 89.7 percent from 1994. The increase was attributable to a 169 basis point rate increase when compared to 1994 and the higher volume of short-term borrowings during 1995. Interest expense related to short-term borrowings totaled $8.3 million and $6.1 million, respectively, in 1994 and 1993. Interest expense associated with long-term obligations decreased during 1995 to $1.7 million from $2.5 million during 1994. The decrease results from a reduction in average long-term obligations. 27 TABLE 9 CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
1995 1994 CHANGE FROM PREVIOUS YEAR CHANGE FROM PREVIOUS YEAR DUE TO: DUE TO: YIELD/ TOTAL YIELD/ TOTAL VOLUME RATE CHANGE VOLUME RATE CHANGE (THOUSANDS) INTEREST INCOME Loans: Secured by real estate................................. $39,186 $ 16,375 $55,561 $ 7,157 $ 187 $ 7,344 Commercial and industrial.............................. (224) 7,158 6,934 4,419 2,150 6,569 Consumer............................................... 13,474 3,669 17,143 19,461 (5,050) 14,411 Lease financing........................................ 549 89 638 846 (418) 428 Other.................................................. (999) 660 (339) 878 (122) 756 Total loans......................................... 51,986 27,951 79,937 32,761 (3,253) 29,508 Investment securities: U.S. Government........................................ 194 9,452 9,646 3,994 (23,076) (19,082) State, county and municipal............................ 460 (14) 446 153 (20) 133 Other.................................................. 190 (34) 156 1 7 8 Total investment securities......................... 844 9,404 10,248 4,148 (23,089) (18,941) Federal funds sold....................................... 3,541 1,787 5,328 (57) 969 912 Total interest-earning assets....................... $56,371 $ 39,142 $95,513 $36,852 ($25,373) $ 11,479 INTEREST EXPENSE Deposits: Checking With Interest................................. $ 464 $ (404) $ 60 $ 1,501 $ (1,277) $ 224 Savings................................................ 132 206 338 2,747 (1,770) 977 Money market accounts.................................. (1,318) 7,205 5,887 (210) 473 263 Time................................................... 25,375 38,282 63,657 6,390 (916) 5,474 Total interest-bearing deposits..................... 24,653 45,289 69,942 10,428 (3,490) 6,938 Short-term borrowings.................................... 2,802 4,657 7,459 492 1,704 2,196 Long-term obligations.................................... (1,454) 591 (863) 1,135 (77) 1,058 Total interest-bearing liabilities.................. $26,001 $ 50,537 $76,538 $12,055 $ (1,863) $ 10,192 Change in net interest income....................... $30,370 $(11,395) $18,975 $24,797 $(23,510) $ 1,287
Changes in income relating to certain loans and investment securities are stated on a fully tax-equivalent basis at a rate that approximates BancShares' marginal tax rate. The taxable equivalent adjustment was $2,262, $1,853, and $1,498 for the years 1995, 1994 and 1993, respectively. Table 6 provides detailed information on average balances, income/expense and yield/rate by category. The rate/volume variance is allocated equally between the changes in volume and rate. NET INTEREST INCOME Taxable-equivalent net interest income totaled $248.7 million during 1995, an increase of 8.3 percent over 1994. This followed a slight increase during 1994. Table 9 presents the annual changes in net interest income by components due to changes in volume, yields and rates. This table is presented on a taxable-equivalent basis to adjust for the tax-exempt status of income earned on certain loans, leases and municipal securities. During 1995 and 1994, growth among interest-earning assets was sufficient to offset the impact of a decline in the interest rate spread from the prior year. The interest rate spread decreased to 3.50 percent during 1995 compared to 3.84 percent during 1994 and 4.22 percent in 1993. The average net yield on interest-earning assets decreased by 17 basis points to 4.02 percent in 1995 when compared to 1994. This followed a 38 basis point reduction in 1994 when compared to 1993. Management believes the interest rate spread and the net yield on interest-earning assets will stabilize during 1996 as improvements from the 1995 repricing of investment securities offset the impact of the lower interest rates projected for 1996. Management projects the lower interest rates will reduce the yields on interest-earning assets more rapidly than the accompanying 28 reduction in the rates on interest-bearing liabilities. However, based on projected asset growth, management anticipates net interest income will expand during 1996. RATE SENSITIVITY. A principal objective of BancShares' asset/liability function is to manage interest rate risk or the exposure to changes in interest rate. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. Table 10 provides BancShares' interest-sensitivity position as of December 31, 1995, which reflected a one year interest-sensitivity gap of $676 million. The liability-sensitive position is most acute in the first six months and results from growth among time deposits during 1995. As a result of this one year interest-sensitivity gap, movements in interest rates could have an unfavorable impact on net interest income. TABLE 10 INTEREST-SENSITIVITY ANALYSIS
DECEMBER 31, 1995 1-30 31-90 91-180 181-365 TOTAL DAYS DAYS DAYS DAYS ONE YEAR TOTAL SENSITIVE SENSITIVE SENSITIVE SENSITIVE SENSITIVE NONSENSITIVE TOTAL (THOUSANDS) ASSETS: Loans......................... $1,358,843 $ 143,782 $ 227,225 $ 451,076 $2,180,926 $2,399,793 $4,580,719 Investment securities......... 114,735 154,630 249,198 411,196 929,759 1,053,389 1,983,148 Federal funds sold............ 40,445 -- -- -- 40,445 -- 40,445 Total interest-earning assets................. $1,514,023 $ 298,412 $ 476,423 $ 862,272 $3,151,130 $3,453,182 $6,604,312 LIABILITIES: Checking With Interest........ -- -- -- -- -- $ 874,431 $ 874,431 Savings and money market accounts.................... $ 809,813 -- -- -- $ 809,813 691,894 1,501,707 Time deposits................. 666,599 $ 662,023 $ 839,114 $ 473,044 2,640,780 427,719 3,068,499 Short-term borrowings......... 363,891 10,285 285 2,070 376,531 -- 376,531 Long-term obligations......... -- -- -- -- -- 22,957 22,957 Total interest-bearing liabilities............ $1,840,303 $ 672,308 $ 839,399 $ 475,114 $3,827,124 $2,017,001 $5,844,125 Interest-sensitivity gap...... $ (326,280) $(373,896) $(362,976) $ 387,158 $ (675,994) $1,436,181 $ 760,187
Assets and liabilities with maturities of one year or less and those that may be adjusted within this period are considered interest-sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. Management continuously monitors the interest-sensitivity position in order to insure adequate liquidity, while maintaining an acceptable interest rate spread. In addition to other asset/liability management strategies, BancShares underwrites all long-term fixed-rate residential mortgage loans to secondary market standards and generally sells such loans as they are originated. As of December 31, 1995, BancShares had $15.4 million in residential mortgage loans held for sale that were reported at the lower of aggregate cost or market. Additionally, as a strategy to avoid exposure resulting from changes in market rates after a commitment is made and before a loan is closed, forward commitments to sell a percentage of residential mortgage loans are executed when a commitment is made. ASSET QUALITY NONPERFORMING ASSETS. Nonperforming assets consist of nonaccrual loans, restructured loans and foreclosed properties. The December 31 balances of these assets for the past five years are presented in Table 11. BancShares' nonperforming assets at December 31, 1995 included nonaccrual loans totaling $13.2 million and $2.2 million in foreclosed property. Nonperforming assets as of December 31, 1995 represent 0.34 percent of loans outstanding and total foreclosed property. Total nonperforming assets totaled $27 million and $50.2 million, respectively, as of December 31, 1994 and 1993. 29 TABLE 11 RISK ELEMENTS
DECEMBER 31 1995 1994 1993 1992 1991 (THOUSANDS, EXCEPT RATIOS) Nonaccrual loans....................................... $ 13,208 $ 21,069 $ 33,726 $ 25,814 $ 17,821 Restructured loans..................................... -- -- 571 2,267 -- Other real estate...................................... 2,154 5,926 15,879 8,000 9,026 Total nonperforming assets........................... $ 15,362 $ 26,995 $ 50,176 $ 36,081 $ 26,847 Accruing loans 90 days or more past due................ $ 4,230 $ 5,326 $ 9,202 $ 6,960 $ 12,829 Loans at December 31................................... $4,580,719 $4,148,133 $3,584,991 $3,207,875 $3,123,806 Ratio of nonperforming assets to total loans plus other real estate.......................................... 0.34% 0.65% 1.39% 1.12% 0.86% Interest income that would have been earned on nonperforming loans had they been performing......... $ 1,556 $ 1,430 $ 2,354 $ 2,413 $ 1,449 Interest income earned on nonperforming loans.......... 595 693 1,083 1,291 517
There are no loan concentrations to any multiple number of borrowers engaged in similar activities or industries in excess of 10 percent of total loans at December 31, 1995. There were no foreign loans outstanding in any period. Accrual of interest on loans is discontinued when management deems that collection of additional interest is doubtful. Loans are returned to an accrual status when both principal and interest are current, and the loan is determined to be performing in accordance with the applicable loan terms. Management continually monitors the loan portfolio to ensure that all loans potentially having a material adverse impact on future operating results, liquidity or capital resources have been classified as nonperforming. Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of nonperforming assets. RESERVE FOR LOAN LOSSES. Management evaluates the risk characteristics of the loan portfolio under current and projected economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in management's opinion, deserve current recognition in estimating possible credit losses. Further, management strives to maintain the reserve at a level sufficient to absorb both potential losses on identified nonperforming assets as well as general losses at historical and projected levels. At December 31, 1995, BancShares' reserve for loan losses was $78.5 million or 1.71 percent of loans outstanding. This compares to $72 million or 1.74 percent at December 31, 1994, and $70 million or 1.95 percent at December 31, 1993. The reduction in the reserve ratio over the two year period reflects the reduced level of nonperforming assets. 30 TABLE 12 SUMMARY OF LOAN LOSS EXPERIENCE
1995 1994 1993 1992 1991 (THOUSANDS, EXCEPT RATIOS) Balance at beginning of year........................... $ 72,017 $ 70,049 $ 58,380 $ 53,730 $ 44,539 Reserve of acquired institutions....................... 3,231 1,009 8,269 -- 7,191 Provision for loan losses.............................. 5,364 2,786 15,245 17,506 15,626 Charge-offs: Real estate: Construction and land development................. (118) (334) (786) (460) (871) Mortgage: 1-4 family residential.......................... (994) (1,048) (1,349) (1,376) (2,292) Commercial...................................... (255) (1,502) (2,013) (4,614) (1,949) Equity Line..................................... (47) (192) (250) (293) (48) Other........................................... (34) -- (3) (16) (24) Commercial and industrial............................ (826) (1,302) (7,331) (3,809) (3,247) Consumer............................................. (4,988) (4,085) (3,860) (4,965) (6,541) Lease financing...................................... -- (17) (51) (39) (15) Total charge-offs................................. (7,262) (8,480) (15,643) (15,572) (14,987) Recoveries: Real estate: Construction and land development................. 440 920 230 106 19 Mortgage: 1-4 family residential.......................... 1,160 834 286 218 136 Commercial...................................... 1,476 2,765 856 578 63 Equity Line..................................... 28 28 85 1 1 Other........................................... -- -- 3 -- 46 Commercial and industrial............................ 761 689 1,240 697 230 Consumer............................................. 1,233 1,396 1,085 1,116 865 Lease financing...................................... 47 21 13 -- 1 Total recoveries.................................. 5,145 6,653 3,798 2,716 1,361 Net charge-offs................................... (2,117) (1,827) (11,845) (12,856) (13,626) Balance at end of year................................. $ 78,495 $ 72,017 $ 70,049 $ 58,380 $ 53,730 HISTORICAL STATISTICS Balances Average total loans.................................. $4,433,517 $3,800,318 $3,401,093 $3,173,285 $2,866,834 Total loans at year-end.............................. 4,580,719 4,148,133 3,584,991 3,207,875 3,123,806 Ratios Net charge-offs to average total loans............... 0.05% 0.05% 0.35% 0.41% 0.48% Reserve for loan losses to total loans at year-end.......................................... 1.71 1.74 1.95 1.82 1.72
All information presented in this table relates to domestic loans as BancShares makes no foreign loans. The provision for loan losses charged to operations was $5.4 million during 1995 compared to $2.8 million during 1994 and $15.2 million during 1993. The increase in the provision during 1995 was due to loan growth and slightly higher net charge-offs. Net charge-offs for 1995 were $2.1 million, compared to $1.8 million during 1994 and $11.8 million during 1993. The ratio of net charge-offs to average loans equaled 0.05 percent during 1995 and 1994, down 30 basis points from 1993. Table 12 provides details concerning the reserve and provision for loan losses over the past five years. Management considers the established reserve adequate to absorb future losses that relate to loans outstanding at December 31, 1995, although future additions to the reserve may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserve 31 for loan losses. Such agencies may require the recognition of additions to the reserve based on their judgments of information available to them at the time of their examination. Table 13 illustrates management's allocation of the reserve among the various loan types. TABLE 13 ALLOCATION OF RESERVE FOR LOAN LOSSES
DECEMBER 31 1995 1994 1993 1992 1991 PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS TO TOTAL TO TOTAL TO TOTAL TO TOTAL RESERVE LOANS RESERVE LOANS RESERVE LOANS RESERVE LOANS RESERVE (THOUSANDS) Real estate: Construction and land development.................... $3,090 2.28% $2,919 2.43% $3,135 3.28% $3,491 4.67% $1,976 Mortgage: 1-4 family residential......... 13,125 31.42 13,459 31.26 15,175 31.74 13,373 32.31 10,417 Commercial..................... 15,305 16.81 13,636 17.37 13,997 17.13 13,181 17.64 9,245 Equity Line.................... 2,788 8.67 2,585 8.42 2,112 8.18 2,042 8.83 3,743 Other.......................... 1,318 2.82 1,581 2.63 1,493 1.56 738 1.49 82 Commercial and industrial.......... 8,384 10.18 10,029 9.01 11,650 11.40 8,190 11.59 5,043 Consumer........................... 21,587 26.18 20,373 27.00 17,079 24.81 14,875 22.01 17,305 Lease financing.................... 639 1.31 197 1.46 454 1.27 356 1.11 306 Other.............................. -- 0.33 -- 0.42 -- 0.63 -- 0.35 -- Unallocated........................ 12,259 -- 7,238 -- 4,954 -- 2,134 -- 5,613 Total.......................... $78,495 100.00% $72,017 100.00% $70,049 100.00% $58,380 100.00% $53,730 PERCENT OF LOANS TO TOTAL LOANS < Real estate: Construction and land development.................... 5.27% Mortgage: 1-4 family residential......... 29.00 Commercial..................... 18.55 Equity Line.................... 9.08 Other.......................... 1.63 Commercial and industrial.......... 13.45 Consumer........................... 21.70 Lease financing.................... 0.98 Other.............................. 0.34 Unallocated........................ -- Total.......................... 100.00%
At December 31, 1995, BancShares had no foreign loans or any material highly leveraged transactions. Further, management does not contemplate originating or participating in such transactions in the foreseeable future. NONINTEREST INCOME Total noninterest income increased 10.6 percent during 1995 to $92.1 million. This compares to $83.3 million during 1994 and $85.7 million during 1993. Table 14 presents the major components of noninterest income for the past five years. Trust income was $8.9 million in 1995, up 8 percent from 1994 due to higher commission income, particularly from growth in the number of accounts managed by retirement plan services. Income from service charges on deposit accounts was $39.9 million during 1995, an increase of 3.5 percent. This increase was the result of growth in retail individual service charge income due to an increase in the number of customer accounts. Income from deposit service charges amounted to $38.6 million and $43.3 million for the years ended December 31, 1994 and 1993, respectively. The reduction from 1993 to 1994 was primarily the result of higher interest rates, which increased the earnings credit used to offset service charges on certain commercial accounts. TABLE 14 NONINTEREST INCOME
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (THOUSANDS) Trust income........................................................... $ 8,886 $ 8,228 $ 7,197 $ 6,087 $ 4,902 Service charges on deposit accounts.................................... 39,909 38,567 43,277 42,130 38,451 Credit card income..................................................... 13,561 12,390 10,618 9,512 9,159 Other service charges and fees......................................... 21,227 16,672 8,564 8,078 6,049 Investment securities gains............................................ -- -- -- 2,363 -- Gain (loss) on sale of mortgage loans.................................. 809 (862) 8,010 1,345 -- Other.................................................................. 7,736 8,330 8,071 4,788 11,709 Total................................................................ $92,128 $83,325 $85,737 $74,303 $70,270
32 Credit card income was $13.6 million during 1995, a 9.5 percent increase over 1994, primarily the result of expanding merchant service activity. Management anticipates continued growth within the credit card function during 1996. Income from other service charges and fees amounted to $21.2 million in 1995, $16.7 million in 1994 and $8.6 million in 1993. Growth in this area during 1995 resulted from higher fees for processing services provided to various bank affiliates. These services resulted in an additional $1.7 million during 1995. Additionally, fees generated from the sale of mutual fund and annuity products by First Citizens Investor Services increased $1 million during 1995. During 1995, BancShares recorded $809,000 in gains on the ongoing sale of current fixed-rate mortgage loan production. The gains recorded during 1995 compare to an $862,000 loss recorded during 1994. During 1993, BancShares recorded an $8 million gain on the sale of $276.2 million in residential mortgage loans. Management intends to continue the sale of its long-term fixed-rate residential mortgage loan production, so gains or losses may be incurred due to interest rate volatility. However, management has elected to enter into forward commitments to sell loans as a strategy of limiting exposure to interest rate fluctuations. NONINTEREST EXPENSE Total noninterest expense for 1995 amounted to $245.9 million. This was a 6.6 percent increase over 1994, following an 8.1 percent increase of 1994 noninterest expenses over 1993. Table 15 presents the major components of noninterest expense for the past five years. Salary expense was $106.6 million during 1995, compared to $99.3 million during 1994, an increase of $7.3 million or 7.4 percent, following a $6.7 million or 7.2 percent increase in 1994 over 1993. Increases during each period resulted from merit increases as well as new positions established to centralize certain operational functions. Employee benefits were $17.1 million during 1995, an increase of $2.5 million from 1994. TABLE 15 NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (THOUSANDS) Salaries and wages............................................... $106,607 $ 99,282 $ 92,579 $ 85,195 $ 80,412 Employee benefits................................................ 17,080 14,535 13,500 12,791 13,137 Occupancy expense................................................ 20,446 18,691 16,972 15,675 15,799 Equipment expense................................................ 24,504 23,839 21,231 19,808 18,271 Credit card expense.............................................. 9,106 8,587 6,814 6,416 5,975 FDIC insurance................................................... 8,418 11,831 10,496 10,739 9,618 Telecommunication expense........................................ 6,790 6,743 6,528 5,717 5,606 Amortization of intangibles...................................... 5,877 3,993 3,157 3,349 3,510 Postage.......................................................... 5,701 4,907 3,996 3,920 3,624 Other............................................................ 41,351 38,174 37,940 35,589 31,644 Total.......................................................... $245,880 $230,582 $213,213 $199,199 $187,596
BancShares recorded occupancy expense of $20.4 million during 1995, an increase of $1.8 million or 9.4 percent due to increased rent expense. Occupancy expense was $18.7 million for 1994 and $17 million for 1993. Equipment expense for 1995 was $24.5 million, an increase of 2.8 percent over 1994, when total equipment expenses were $23.8 million. Costs related to deposit insurance fell during 1995. During the third quarter, the Bank Insurance Fund ("BIF") of the FDIC reached the reserve level mandated by Congress. At that time, premiums were reduced and a refund for overpayment retroactive to the date the BIF was fully capitalized was made to institutions for their BIF-insured deposits. However, financial institutions with deposits that are insured under the Savings Association Insurance Fund ("SAIF") continue to pay the higher premiums for SAIF-insured deposits. Of BancShares' total deposits, approximately one-third are SAIF-insured. Until the SAIF is fully capitalized, these deposits will continue to be subject to higher insurance rates. Various proposals are being considered by the United States Congress concerning a possible merger of the BIF and the SAIF. Central to that discussion is the recapitalization of the SAIF prior to such a merger, and most of the proposals mandate a special one-time assessment of SAIF-insured deposits at rates up to 85 basis points of the SAIF-insured deposits. As of December 31, 1995, BancShares had total SAIF deposits of $1.86 billion. A final assessment rate is yet to be 33 determined, and due to the uncertainty as to which, if any, of the various proposals will be adopted and the ultimate amount of the assessment to be levied on the SAIF-insured deposits, the impact of the proposals and the assessment is impossible to predict with certainty at this time. INCOME TAXES During 1995, BancShares recorded total income tax expense of $30.4 million, compared to $26.9 million in income tax expense during 1994, the increase resulting from higher pre-tax income. BancShares' effective tax rate was 34.8 percent in 1995, 34.5 percent in 1994 and 34 percent in 1993. Total effective tax rates were less than the statutory federal income tax rates primarily due to small amounts of tax-exempt interest income. LIQUIDITY Management recognizes the importance of maintaining a highly liquid investment portfolio with maturities designed to provide needed cash flows to meet the liquidity requirements of the Bank. At December 31, 1995, the investment portfolio totaled $1.98 billion or 26.9 percent of total assets. This compares to $1.46 billion or 23 percent in 1994. The Bank's ability to generate retail deposits is an additional source of liquidity. The rate of growth in average deposits was 11.6 percent during 1995, 9 percent during 1994 and 4.5 percent during 1993. The deposit increase resulted from the existing branch network as well as deposit liability assumptions associated with various business combinations. Another significant liquidity source is cash provided by operating activities. These operating activities generated $100.8 million during 1995, $167.6 million during 1994 and $48 million during 1993. These liquidity sources have enabled BancShares to place little dependence on short-term borrowed funds for its liquidity needs. However, there are readily available sources for borrowed funds through the correspondent bank network. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. BancShares' total risk-based capital ratios were 10.9 percent, 11.3 percent and 11.5 percent, respectively, at December 31, 1995, 1994 and 1993. BancShares' core capital ratios for December 31, 1995, 1994 and 1993 were 9.6 percent, 10.1 percent and 10.2 percent, respectively. The minimum capital ratios established by Federal Reserve guidelines are 8 percent for total capital and 4 percent for core capital. At December 31, 1995, BancShares' leverage capital ratio was 6.1 percent, compared to 6.5 percent and 5.9 percent at December 31, 1994 and 1993, respectively. The minimum leverage ratio is 3 percent. Failure to meet certain capital requirements may result in certain actions by regulatory agencies that could have a direct material effect on the consolidated financial statements. The rate of return on average shareholders' equity during 1995, 1994 and 1993 amounted to 11.7 percent, 12.2 percent and 15.3 percent, respectively. BancShares' internal capital generation rate was 9.9 percent in 1995, compared with 10.5 percent in 1994 and 13.7 percent in 1993. These rates reflect the ability to generate sufficient capital to support current levels of growth, although significant expansion would likely require additional capital be raised. During the fourth quarter of 1995 the Board of Directors of BancShares reauthorized the purchase of its Class A and Class B common stocks. Management views the purchase of its stock as a good investment and will continue to repurchase shares when market conditions are favorable for such transactions. The repurchase of these shares should not impair capital adequacy because of BancShares' high earnings retention percentage. FOURTH QUARTER ANALYSIS BancShares' net income for the fourth quarter of 1995 totaled $16.3 million, compared to $12.9 million during the same period of 1994. As shown in Table 16, during the fourth quarter of 1995 and 1994, total assets averaged $7.28 billion and $6.23 billion, respectively. Average interest-earning assets increased 18 percent during the fourth quarter of 1995, compared to the same period of 1994. Average loans outstanding during the fourth quarter increased $552.6 million during 1995 over 1994, largely due to growth among loans to individuals. Acquisition growth during 1995 contributed an additional $170.4 million in loans outstanding. Average investment securities increased $373.1 million between the two periods, the result of deposit growth at sufficient levels to generate additional liquidity. 34 Taxable-equivalent interest income on interest-earning assets increased $26.3 million or 26.1 percent in the fourth quarter of 1995 when compared to the same period of 1994. The improved interest income during 1995 resulted from a $15.6 million increase in loan interest income and a $9.2 million increase in investment securities interest income. Both of these increases resulted from average volume growth and higher yields. Interest-earning assets yielded 7.65 percent during the fourth quarter of 1995, a 48 basis point increase from the fourth quarter of 1994. TABLE 16 SELECTED QUARTERLY DATA
1995 1994 FOURTH THIRD SECOND FIRST FOURTH THIRD (THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) SUMMARY OF OPERATIONS Interest income....................... $ 126,372 $ 122,234 $ 116,282 $ 106,221 $ 100,203 $ 95,254 Interest income-taxable equivalent.... 126,950 122,801 116,845 106,774 100,693 95,731 Interest expense...................... 62,968 59,858 55,537 46,301 40,628 37,265 Net interest income-taxable equivalent.......................... 63,982 62,943 61,308 60,473 60,065 58,466 Taxable equivalent adjustment......... 578 567 563 553 490 477 Net interest income................... 63,404 62,376 60,745 59,920 59,575 57,989 Provision for loan losses............. 1,654 1,716 1,460 534 1,486 1,159 Net interest income after provision for loan losses..................... 61,750 60,660 59,285 59,386 58,089 56,830 Noninterest income.................... 23,856 23,560 23,057 21,655 21,080 21,354 Noninterest expense................... 60,925 59,716 62,876 62,363 59,444 57,361 Income before income taxes............ 24,681 24,504 19,466 18,678 19,725 20,823 Income taxes.......................... 8,395 8,686 6,842 6,500 6,796 7,138 Net income............................ $ 16,286 $ 15,818 $ 12,624 $ 12,178 $ 12,929 $ 13,685 SELECTED QUARTERLY AVERAGES Total assets.......................... $7,280,893 $7,053,579 $6,702,692 $6,323,537 $6,227,704 $6,102,964 Investment securities................. 1,871,272 1,694,776 1,493,415 1,380,424 1,498,143 1,543,548 Loans................................. 4,552,018 4,500,192 4,424,724 4,253,117 3,999,377 3,854,738 Interest-earning assets............... 6,599,377 6,376,273 6,061,732 5,716,572 5,590,432 5,480,912 Deposits.............................. 6,282,111 6,124,360 5,858,280 5,533,654 5,422,018 5,338,095 Interest-bearing liabilities.......... 5,753,538 5,569,496 5,299,570 5,009,276 4,895,564 4,818,665 Long-term obligations................. 23,365 24,595 26,174 32,564 43,854 48,908 Shareholders' equity.................. $ 512,768 $ 498,108 $ 482,885 $ 460,695 $ 443,833 $ 423,982 Shares outstanding.................... 10,700,435 10,688,019 10,618,902 10,376,351 10,192,150 9,980,530 PROFITABILITY RATIOS (averages) Rate of return (annualized) on: Total assets........................ 0.89% 0.89% 0.76% 0.78% 0.82% 0.89% Shareholders' equity................ 12.60 12.60 10.49 10.72 11.56 12.81 Dividend payout ratio................. 14.80 13.42 16.81 17.09 15.75 12.77 LIQUIDITY AND CAPITAL RATIOS (averages) Loans to deposits..................... 72.46% 73.48% 75.53% 76.86% 73.76% 72.21% Shareholders' equity to total assets.............................. 7.04 7.06 7.20 7.29 7.13 6.95 Time certificates of $100,000 or more to total deposits................... 9.27 8.61 8.04 7.30 6.63 6.41 PER SHARE OF STOCK Net income............................ $ 1.52 $ 1.49 $ 1.19 $ 1.17 $ 1.27 $ 1.37 Cash dividends........................ 0.225 0.20 0.20 0.20 0.20 0.175 Class A sales price High................................ 551/2 533/4 50 46 461/2 451/2 Low................................. 521/2 481/2 44 42 411/2 41 Class B sales price High................................ 541/2 531/4 491/2 45 451/2 441/2 Low................................. 521/2 49 45 44 42 41 SECOND FIRST SUMMARY OF OPERATIONS Interest income....................... $ 91,351 $ 89,197 Interest income-taxable equivalent.... 91,806 89,628 Interest expense...................... 35,307 34,926 Net interest income-taxable equivalent.......................... 56,499 54,702 Taxable equivalent adjustment......... 455 431 Net interest income................... 56,044 54,271 Provision for loan losses............. (947) 1,088 Net interest income after provision for loan losses..................... 56,991 53,183 Noninterest income.................... 20,517 20,374 Noninterest expense................... 57,022 56,755 Income before income taxes............ 20,486 16,802 Income taxes.......................... 7,128 5,805 Net income............................ $ 13,358 $ 10,997 SELECTED QUARTERLY AVERAGES Total assets.......................... $6,061,930 $6,037,860 Investment securities................. 1,641,857 1,717,729 Loans................................. 3,712,429 3,618,555 Interest-earning assets............... 5,434,768 5,386,963 Deposits.............................. 5,303,041 5,275,596 Interest-bearing liabilities.......... 4,810,625 4,829,639 Long-term obligations................. 57,534 59,917 Shareholders' equity.................. $ 406,002 $ 394,388 Shares outstanding.................... 9,828,295 9,769,973 PROFITABILITY RATIOS (averages) Rate of return (annualized) on: Total assets........................ 0.88% 0.74% Shareholders' equity................ 13.20 11.31 Dividend payout ratio................. 12.87 15.49 LIQUIDITY AND CAPITAL RATIOS (averages) Loans to deposits..................... 70.01% 68.59% Shareholders' equity to total assets.............................. 6.70 6.53 Time certificates of $100,000 or more to total deposits................... 6.28 6.21 PER SHARE OF STOCK Net income............................ $ 1.36 $ 1.13 Cash dividends........................ 0.175 0.175 Class A sales price High................................ 441/2 45 Low................................. 40 40 Class B sales price High................................ 43 441/2 Low................................. 401/2 401/2
Stock information related to Class A common stock reflects the sales price, as reported on the Nasdaq National Market System. Stock information for Class B was obtained from a broker-dealer, reflecting the bid prices, prior to any mark-ups, mark-downs or commissions. 35 As of December 31, 1995, there were 3,926 holders of record of the Class A common stock and 745 holders of record of the Class B common stock. Average interest-bearing liabilities experienced an $858 million increase from the fourth quarter of 1994 to the same period of 1995, largely the result of acquisitions and internally generated deposit growth. The rate on these interest-bearing liabilities increased from 3.29 percent to 4.34 percent between the two periods. Taxable-equivalent net interest income increased $3.9 million from the fourth quarter of 1994 to the fourth quarter of 1995. The increase resulted from growth among interest-earning assets, while higher interest rates had a net adverse impact on net interest income. Noninterest income for the fourth quarter of 1995 was $23.9 million, an increase of 13.2 percent. Much of the increase resulted from higher fee income generated from processing services. Noninterest expense amounted to $60.9 million for the quarter ended December 31, 1995, compared to $59.4 million for the quarter ended December 31, 1994. Most of the 2.5 percent increase was in salary expense and various other operating expenses. Tables 16 and 17 are useful when making quarterly comparisons. TABLE 17 CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS -- FOURTH QUARTER
1995 1994 INCREASE INTEREST INTEREST (DECREASE) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ DUE TO: BALANCE EXPENSE RATE BALANCE EXPENSE RATE VOLUME (THOUSANDS) ASSETS Loans: Secured by real estate.............. $2,826,705 $58,918 8.18 % $2,397,516 $48,548 7.99% $ 8,831 Commercial and industrial........... 461,955 12,771 10.51 425,484 8,459 7.83 1,182 Consumer............................ 1,189,310 25,330 8.45 1,097,205 24,364 8.87 2,038 Lease financing..................... 58,058 1,177 8.11 56,454 1,041 7.38 31 Other............................... 15,990 315 7.82 22,718 490 8.57 3,260 Total loans....................... 4,552,018 98,511 8.63 3,999,377 82,902 8.25 15,342 Investment securities: U.S. Government..................... 1,860,076 25,652 5.47 1,492,930 16,507 4.39 4,572 State, county and municipal......... 8,208 157 7.59 4,898 98 7.94 64 Other............................... 2,988 44 5.84 315 5 6.30 0 Total investment securities....... 1,871,272 25,853 5.48 1,498,143 16,610 4.40 4,636 Federal funds sold.................... 176,087 2,586 5.83 92,912 1,182 5.05 1,139 Total interest-earning assets..... $6,599,377 $126,950 7.66 % $5,590,432 $100,694 7.17% $21,117 LIABILITIES Deposits: Checking With Interest.............. $ 852,002 $ 3,342 1.56 % $ 813,596 $ 3,526 1.72% $ 155 Savings............................. 701,528 4,030 2.28 703,405 3,988 2.25 (11) Money market accounts............... 766,821 7,086 3.67 782,683 5,336 2.70 (133) Time................................ 3,035,811 43,313 5.66 2,294,337 24,392 4.22 9,241 Total interest-bearing deposits... 5,356,162 57,771 4.28 4,594,021 37,242 3.22 9,252 Short-term borrowings................. 374,011 4,816 5.11 257,689 2,823 4.35 1,387 Long-term obligations................. 23,365 381 6.47 43,854 563 5.09 (298) Total interest-bearing liabilities..................... $5,753,538 $62,968 4.34 % $4,895,564 $40,628 3.29% $10,341 Interest rate spread.................. 3.32 % 3.88% Net interest income and net yield on interest-earning assets............. $63,982 3.85 % $60,066 4.26% $10,776 YIELD/ TOTAL RATE CHANGE ASSETS Loans: Secured by real estate.............. $ 1,539 $10,370 Commercial and industrial........... 3,130 4,312 Consumer............................ (1,072) 966 Lease financing..................... 105,136 Other............................... (3,435) (175 ) Total loans....................... 267 15,609 Investment securities: U.S. Government..................... 4,573 9,145 State, county and municipal......... (5) 59 Other............................... 39 39 Total investment securities....... 4,607 9,243 Federal funds sold.................... 265 1,404 Total interest-earning assets..... $ 5,139 $26,256 LIABILITIES Deposits: Checking With Interest.............. $ (339) $ (184 ) Savings............................. 53 42 Money market accounts............... 1,883 1,750 Time................................ 9,680 18,921 Total interest-bearing deposits... 11,277 20,529 Short-term borrowings................. 606 1,993 Long-term obligations................. 116 (182 ) Total interest-bearing liabilities..................... $ 11,999 $22,340 Interest rate spread.................. Net interest income and net yield on interest-earning assets............. $ (6,860) $3,916
LEGAL PROCEEDINGS BancShares and various subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares' consolidated financial position. 36 CURRENT ACCOUNTING AND REGULATORY ISSUES In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("Statement 121") which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for those to be disposed of. Statement 121 requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss should be recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Those assets to be disposed of are to be reported at the lower of the carrying amount or fair value, less costs to sell. Adoption of Statement 121 is required for fiscal years beginning after December 15, 1995. Adoption of this statement should not have a material effect on BancShares' consolidated financial statements at the date of adoption. However this statement could have a material impact on BancShares' consolidated financial statements for future periods should an event or changes in circumstances occur in such future periods, requiring a review by management for impairment. In October 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing Rights, an amendment of SFAS No. 65 ("Statement 122"). Statement 122 amends SFAS No. 65, Accounting for Certain Mortgage Banking Activities, to require that a mortgage banking enterprise, or an entity engaged in mortgage banking activities, recognize as separate assets rights to service mortgage loans for others, however those rights are acquired. A mortgage banking enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values if it is practicable to estimate those fair values. Statement 122 also requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair values of these rights. Impairment should be recognized through a valuation allowance for each impaired stratum. Statement 122 applies prospectively in fiscal years beginning after December 31, 1995. BancShares will adopt Statement 122 prospectively on January 1, 1996, and does not believe that it will have a material effect on the consolidated financial statements upon adoption. However, this statement could have a material impact on BancShares' future consolidated financial statements in the event that changes in market conditions result in an increased volume of mortgage banking activities or the recognition of impairment valuation allowances. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation ("Statement 123"). Statement 123 defines a fair value method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. It also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Statement 123 requires that an employer's financial statements include certain disclosures about stock-based compensation arrangements regardless of the method used to account for them. Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in Statement 123 had been applied. The accounting requirements of Statement 123 are effective for transactions entered into in fiscal years that begin after December 31, 1995. The disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which Statement 123 is initially adopted for recognizing compensation cost. Pro forma disclosures required for entities that elect to continue to measure compensation cost using APB 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. BancShares will continue to measure compensation cost using APB 25, and therefore will make the appropriate disclosures in its financial statements for the year ending December 31, 1996, of net income and earnings per share as if the fair value based method of accounting defined in Statement 123 had been applied. Management has not yet quantified these pro forma disclosures. The FASB also issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of BancShares and monitors the status of changes to issued exposure drafts and to proposed effective dates. Other than the SAIF assessment under consideration, management is not aware of any current recommendations by the 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. 37 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS FIRST CITIZENS BANCSHARES, INC. We have audited the accompanying consolidated balance sheets of First Citizens BancShares, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Citizens BancShares, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Raleigh, North Carolina January 22, 1996 38 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 1995 1994 (THOUSANDS, EXCEPT SHARE DATA) ASSETS Cash and due from banks........................................................................... $ 448,630 $ 455,710 Investment securities (market value $1,991,716 in 1995; $1,423,697 in 1994)....................... 1,983,148 1,458,969 Federal funds sold................................................................................ 40,445 6,750 Loans............................................................................................. 4,580,719 4,148,133 Less reserve for loan losses...................................................................... 78,495 72,017 Net loans.................................................................................. 4,502,224 4,076,116 Premises and equipment............................................................................ 208,240 188,824 Income earned not collected....................................................................... 58,237 45,194 Other assets...................................................................................... 143,026 101,761 Total assets............................................................................... $7,383,950 $6,333,324 LIABILITIES Deposits: Noninterest-bearing............................................................................. $ 943,445 $ 858,537 Interest-bearing................................................................................ 5,444,637 4,659,052 Total deposits............................................................................. 6,388,082 5,517,589 Short-term borrowings............................................................................. 376,531 290,861 Long-term obligations............................................................................. 22,957 34,542 Other liabilities................................................................................. 75,543 40,921 Total liabilities.......................................................................... 6,863,113 5,883,913 SHAREHOLDERS' EQUITY Common stock: Class A -- $1 par value (11,000,000 shares authorized; 8,949,703 shares issued for 1995; 8,419,389 shares issued for 1994)............................................................ 8,950 8,419 Class B -- $1 par value (2,000,000 shares authorized; 1,766,464 shares issued for 1995; 1,769,451 shares issued for 1994)............................................................ 1,766 1,770 Surplus........................................................................................... 106,954 82,631 Retained earnings................................................................................. 403,167 356,591 Total shareholders' equity................................................................. 520,837 449,411 Total liabilities and shareholders' equity................................................. $7,383,950 $6,333,324
See accompanying Notes to Consolidated Financial Statements. 39 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1995 1994 1993 (THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) INTEREST INCOME Loans............................................................................. $ 380,676 $ 300,993 $ 271,792 Investment securities: U.S. Government................................................................. 81,219 71,514 90,610 State, county and municipal..................................................... 405 114 29 Other........................................................................... 184 87 65 Total investment securities interest income................................ 81,808 71,715 90,704 Federal funds sold................................................................ 8,625 3,297 2,385 Total interest income...................................................... 471,109 376,005 364,881 INTEREST EXPENSE Deposits.......................................................................... 207,234 137,292 130,354 Short-term borrowings............................................................. 15,773 8,314 6,118 Long-term obligations............................................................. 1,657 2,520 1,462 Total interest expense..................................................... 224,664 148,126 137,934 Net interest income........................................................ 246,445 227,879 226,947 Provision for loan losses......................................................... 5,364 2,786 15,245 Net interest income after provision for loan losses........................ 241,081 225,093 211,702 NONINTEREST INCOME Trust income...................................................................... 8,886 8,228 7,197 Service charges on deposit accounts............................................... 39,909 38,567 43,277 Credit card income................................................................ 13,561 12,390 10,618 Other service charges and fees.................................................... 21,227 16,672 8,564 Gain (loss) on sale of mortgage loans............................................. 809 (862) 8,010 Other............................................................................. 7,736 8,330 8,071 Total noninterest income................................................... 92,128 83,325 85,737 333,209 308,418 297,439 NONINTEREST EXPENSE Salaries and wages................................................................ 106,607 99,282 92,579 Employee benefits................................................................. 17,080 14,535 13,500 Occupancy expense................................................................. 20,446 18,691 16,972 Equipment expense................................................................. 24,504 23,839 21,231 Other............................................................................. 77,243 74,235 68,931 Total noninterest expense.................................................. 245,880 230,582 213,213 Income before income taxes........................................................ 87,329 77,836 84,226 Income taxes...................................................................... 30,423 26,867 28,641 Net income................................................................. $ 56,906 $ 50,969 $ 55,585 Per share information Net income...................................................................... $ 5.37 $ 5.13 $ 5.73 Cash dividends.................................................................. 0.825 0.725 0.625 Weighted average shares outstanding............................................... 10,597,066 9,944,927 9,701,389
See accompanying Notes to Consolidated Financial Statements. 40 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CLASS CLASS A B TOTAL COMMON COMMON RETAINED SHAREHOLDERS' STOCK STOCK SURPLUS EARNINGS EQUITY (THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1992................................... $7,815 $1,793 $ 55,447 $268,732 $ 333,787 Issuance of 164,917 shares of Class A common stock pursuant to employee stock purchase plans................................ 165 5,966 6,131 Redemption of 13,147 shares of Class B common stock............ (13 ) (687) (700) Issuance of 6,134 shares of Class A common stock pursuant to the Dividend Reinvestment Plan............................... 6 304 310 Net income..................................................... 55,585 55,585 Cash dividends................................................. (6,063) (6,063) Balance at December 31, 1993................................... 7,986 1,780 61,717 317,567 389,050 Issuance of 79,408 shares of Class A common stock pursuant to employee stock purchase plans................................ 79 2,586 2,665 Redemption of 85,850 shares of Class A common stock and 10,617 shares of Class B common stock............................... (86 ) (10 ) (4,132) (4,228) Issuance of 6,694 shares of Class A common stock pursuant to the Dividend Reinvestment Plan............................... 7 276 283 Issuance of 433,068 shares of Class A common stock in connection with various acquisitions......................... 433 18,052 18,485 Net income..................................................... 50,969 50,969 Cash dividends................................................. (7,311) (7,311) Other.......................................................... (502) (502) Balance at December 31, 1994................................... 8,419 1,770 82,631 356,591 449,411 Issuance of 64,881 shares of Class A common stock pursuant to employee stock purchase plans................................ 65 2,556 2,621 Redemption of 28,386 shares of Class A common stock and 2,987 shares of Class B common stock............................... (28 ) (4 ) (1,513) (1,545) Issuance of 8,998 shares of Class A common stock pursuant to the Dividend Reinvestment Plan............................... 9 406 415 Issuance of 484,821 shares of Class A common stock in connection with various acquisitions......................... 485 21,361 21,846 Net income..................................................... 56,906 56,906 Cash dividends................................................. (8,817) (8,817) Balance at December 31, 1995................................... $8,950 $1,766 $106,954 $403,167 $ 520,837
See accompanying Notes to Consolidated Financial Statements. 41 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 1994 1993 (THOUSANDS) OPERATING ACTIVITIES Net income......................................................................... $ 56,906 $ 50,969 $ 55,585 Adjustments: Amortization of intangibles...................................................... 5,877 3,993 3,157 Provision for loan losses........................................................ 5,364 2,786 15,245 Deferred tax benefit............................................................. (1,454) (1,579) (4,807) Change in current taxes payable.................................................. 3,241 (3,993) (3,540) Depreciation..................................................................... 16,882 15,885 13,092 Change in accrued interest payable............................................... 26,696 3,242 (273) Change in income earned not collected............................................ (11,746) 1,007 (2,173) Origination of loans held for sale............................................... (85,148) (72,804) (315,517) Proceeds from sale of loans...................................................... 75,964 116,125 284,216 (Gain) loss on sale of mortgage loans............................................ (809) 862 (8,010) Net amortization of premiums and discounts....................................... 19,634 27,439 17,493 Net change in other assets....................................................... (15,383) 39,980 (8,396) Net change in other liabilities.................................................. 4,798 (16,263) 1,944 Net cash provided by operating activities.......................................... 100,822 167,649 48,016 INVESTING ACTIVITIES Dispositions of premises and equipment........................................... 3,445 2,364 910 Additions to premises and equipment.............................................. (31,147) (20,254) (34,390) Net increase in loans outstanding................................................ (254,326) (498,396) (86,550) Purchases of investment securities............................................... (1,328,178) (207,601) (1,045,662) Proceeds from maturities of investment securities................................ 826,129 576,293 708,145 Proceeds from sale of investment securities...................................... -- -- 3,956 Net change in federal funds sold................................................. (25,023) 16,300 90,000 Purchases of institutions, net of cash acquired.................................. 106,092 (6,533) 128,041 Net cash used by investing activities.............................................. (703,008) (137,827) (235,550) FINANCING ACTIVITIES Repurchases of common stock...................................................... (1,545) (4,228) (700) Proceeds from issuance of stock, net of related costs............................ 3,036 2,948 6,441 Cash dividends paid.............................................................. (8,817) (7,311) (6,063) Net change in time deposits...................................................... 536,251 (4,854) 6,631 Net change in demand and other interest-bearing deposits......................... (3,811) 24,901 174,161 Net change in short-term borrowings.............................................. 70,188 38,874 34,122 Repayments of long-term obligations.............................................. (196) (17,294) (541) Net cash provided by financing activities.......................................... 595,106 33,036 214,051 Change in cash and due from banks.................................................. (7,080) 62,858 26,517 Cash and due from banks at beginning of year....................................... 455,710 392,852 366,335 Cash and due from banks at end of year............................................. $ 448,630 $ 455,710 $ 392,852 Cash payments for: Interest......................................................................... $ 197,334 $ 144,844 $ 137,812 Income taxes..................................................................... 27,454 27,667 34,021 Supplemental disclosure of noncash investing and financing activities: Common stock issued for acquisitions............................................. $ 21,846 $ 18,485 -- Long-term obligations issued for acquisitions.................................... 2,494 -- $ 849
See accompanying Notes to Consolidated Financial Statements. 42 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION First Citizens BancShares, Inc. ("BancShares") is a bank holding company with three banking subsidiaries -- First-Citizens Bank & Trust Company (the "Bank"), Bank of Marlinton ("Marlinton"), and Bank of White Sulphur Springs ("WSS"). On January 1, 1996, a fourth banking subsidiary, based in Virginia, was merged into the Bank. The accounting and reporting policies of BancShares and its subsidiaries are in accordance with generally accepted accounting principles and, with regard to the banking subsidiaries, conform to general industry practices. The Bank, Marlinton and WSS conduct a full-service banking business designed to meet the needs of both consumers and commercial entities in the markets in which they serve. These services include normal taking of deposits, commercial and consumer lending, a full service trust department and other activities incidental to commercial banking. The Bank also services residential mortgages for other entities in exchange for a monthly servicing fee. The Bank's primary market area includes North Carolina and Virginia, while Marlinton and WSS both serve individual communities within West Virginia. The Bank has ten wholly-owned subsidiaries. Neuse, Incorporated owns a substantial number of the facilities in which the Bank operates branches and also operates an insurance agency, which acts as agent for credit-related insurance associated with various areas of the Bank's business. American Guaranty Insurance Company is engaged in writing fire and casualty insurance. Triangle Life Insurance Company writes credit life and credit accident and health insurance. First Citizens Processing Services provides operating support services for affiliate banks. First Citizens Investor Services provides investment services, including sales of annuities and third party mutual funds, to customers of the Bank. Other subsidiaries are either inactive or are not material to the consolidated financial statements. 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 disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by BancShares in the preparation of its consolidated financial statements are the determination of the reserve for loan losses, the valuation allowance for deferred tax assets, and fair value estimates. Intercompany accounts and transactions have been eliminated. Certain amounts for prior years have been reclassified to conform with the presentations for 1995. However, the reclassifications have no effect on shareholders' equity or net income as previously reported. INVESTMENT SECURITIES BancShares adopted Statement of Financial Accounting Standards No. 115 ("Statement 115") effective January 1, 1994. Statement 115 requires segregation of the investment portfolio, with all securities classified as held to maturity, available for sale, or held for trading purposes. As of December 31, 1995 and 1994, all investment securities are classified as held to maturity, as BancShares has the ability and the positive intent to hold its investment securities until maturity. These securities are stated at cost adjusted for amortization of premium and accretion of discount. Accreted discounts and amortized premiums are included in interest income on an effective yield basis. At December 31, 1995 and 1994, BancShares had no investment securities classified as either available for sale or held in a trading portfolio. LOANS Loans that are held for investment purposes are carried at their principal amount outstanding. Those loans that are held for sale are carried at the lower of aggregate cost or market. Interest on substantially all loans is accrued and credited to interest income based upon the daily principal amount. 43 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued LOAN FEES Fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans, using a method that approximates a constant yield. MORTGAGE SERVICING RIGHTS BancShares adopted Statement of Financial Accounting Standards No. 122 ("Statement 122") effective January 1, 1996. Statement 122 requires any entity engaged in mortgage banking activities to recognize as separate assets any rights to service mortgage loans for others. When mortgage servicing rights are acquired or result from the sale of origination activity with servicing rights retained, the servicer should assign a value to the servicing rights based on the relative fair values if it is practicable to estimate those fair values. Statement 122 also requires a servicer to assess its capitalized mortgage servicing rights for impairment based on the fair values of those rights. BancShares does not believe that the adoption of Statement 122 will have a material impact on its consolidated financial statements upon adoption. However, Statement 122 could have a material impact on BancShares' future consolidated financial statements should market conditions result in an increased volume of mortgage banking activities or the recognition of impairment valuation allowances. RESERVE FOR LOAN LOSSES The reserve for loan losses is established by charges to operating expense and recognition of acquired institutions' previously established reserves. To determine the reserve needed, management evaluates the risk characteristics of the loan portfolio under current and projected economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in management's opinion, deserve current recognition in estimating possible credit losses. BancShares adopted Statements of Financial Accounting Standards No. 114 and No. 118 (collectively, "Statement 114") effective January 1, 1995. The adoption of Statement 114 did not have a material effect on BancShares' financial condition or results of operations. Under Statement 114, the reserve for loan losses related to loans that are identified as impaired is based on discounted cash flows using the loans' initial interest rates or, if the loan is secured, the fair value of the collateral. Residential mortgage loans, retail installment loans and credit card loans are excluded from Statement 114 as they are evaluated collectively for impairment since they are homogeneous and generally carry smaller individual balances. Management considers the established reserve adequate to absorb future losses that relate to loans outstanding as of December 31, 1995, although future additions to the reserve may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's reserve for loan losses. Such agencies may require the recognition of additions to the reserve based on their judgments of information available to them at the time of their examination. NONACCRUAL LOANS AND OTHER REAL ESTATE Accrual of interest on loans (including impaired loans) is discontinued when management deems that collection of additional interest is doubtful. At that time, any interest receivable that was accrued during the current period is reversed and any interest accrued in prior periods is charged off. Any payments received from the borrower while the loan is classified as nonaccrual are generally applied to the outstanding principal balance. Loans are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable loan terms. Other real estate acquired through foreclosure is valued at the lower of the loan balance at the time of foreclosure or estimated fair market value net of selling costs and is included in other assets. Once acquired, other real estate is periodically reviewed to ensure that the fair market value of the property supports the carrying value, with writedowns recorded 44 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued when necessary. Gains and losses resulting from the sale or writedown of other real estate and income and expenses related to the operation of other real estate are recorded in other expense. INTANGIBLE ASSETS Goodwill arising from acquisitions in which the purchase price exceeds the fair value of net assets acquired is amortized using the straight-line method over a 15 year period. Deposit base intangibles are amortized over the expected life of the specific deposit base using either the straight-line or an accelerated method of amortization based on when the asset was recorded. Intangible assets are subject to periodic review and are adjusted for any impairment of value. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121 ("Statement 121") which became effective January 1, 1996, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill. Statement 121 requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss should be recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Those assets to be disposed of are to be reported at the lower of the carrying amount or fair value less costs to sell. Adoption of Statement 121 should not have a material effect on BancShares' consolidated financial statements at the date of adoption. However, Statement 121 could have a material impact on BancShares' consolidated financial statements for future periods should an event or changes in circumstances occur in such future periods, requiring a review by management for impairment. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed by the straight-line method and are charged to operations over the estimated useful lives of the assets, which range from 25 to 40 years for premises and three to 10 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Gains and losses on dispositions are recorded in other income. Maintenance and repairs are charged to occupancy expense or equipment expense as incurred. INCOME TAXES Income tax expense is based on consolidated net income and generally differs from income taxes paid due to deferred income taxes and benefits arising from income and expenses being recognized in different periods for financial and income tax reporting purposes. BancShares and its subsidiaries file a consolidated federal income tax return. Each subsidiary pays its allocation of federal income taxes or receives a payment to the extent that tax benefits are realized. BancShares and its subsidiaries each file separate state income tax returns. PER SHARE DATA Net income per share has been computed by dividing net income by the weighted average number of both classes of common shares outstanding during each period. The weighted average number of shares outstanding for 1995, 1994 and 1993 was 10,597,066; 9,944,927 and 9,701,389, respectively. Outstanding options to purchase shares of common stock were not materially dilutive to the computation of net income per share in any period. Cash dividends per share apply to both Class A and Class B common stock as both classes share equally in dividends. Class A common stock carries one vote per share, while shares of Class B common stock carry 16 votes per share. 45 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE B -- INVESTMENT SECURITIES The aggregate values of investment securities at December 31 along with gross unrealized gains and losses are as follows:
GROSS GROSS BOOK UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE 1995 U.S. Government....................................................... $ 1,972,129 $ 10,697 $ (2,296) $ 1,980,530 State, county and municipal........................................... 8,033 178 (10) 8,201 Other................................................................. 2,986 4 (5) 2,985 Total investment securities........................................ $ 1,983,148 $ 10,879 $ (2,311) $ 1,991,716 1994 U.S. Government....................................................... $ 1,453,951 $ 39 $(35,257) $ 1,418,733 State, county and municipal........................................... 4,603 10 (64) 4,549 Other................................................................. 415 0 0 415 Total investment securities........................................ $ 1,458,969 $ 49 $(35,321) $ 1,423,697
The maturities of investment securities at December 31 are as follows:
1995 1994 BOOK MARKET BOOK MARKET VALUE VALUE VALUE VALUE Within one year...................................................... $ 929,761 $ 931,954 $ 849,740 $ 838,804 One through five years............................................... 1,041,434 1,047,733 601,019 577,065 Five to 10 years..................................................... 4,587 4,636 5,181 4,910 More than 10 years................................................... 7,366 7,393 3,029 2,918 Total investment securities..................................... $ 1,983,148 $ 1,991,716 $ 1,458,969 $ 1,423,697
Investment securities having an aggregate par value of $819,043 at December 31, 1995, and $730,195 at December 31, 1994, were pledged as collateral to secure public funds on deposit and for other purposes as required by law. NOTE C -- LOANS Loans at December 31 are summarized as follows:
1995 1994 Loans secured by real estate: Construction and land development....................................... $ 104,540 $ 100,708 Mortgage................................................................ 2,735,418 2,475,281 Commercial and industrial................................................. 466,462 373,947 Consumer.................................................................. 1,199,400 1,119,994 Lease financing........................................................... 59,899 60,598 All other loans........................................................... 15,000 17,605 Total loans............................................................. $ 4,580,719 $ 4,148,133
Included in total loans as of December 31, 1995 and 1994 is unearned income of $4,913 and $4,316, respectively, substantially all of which relates to deferred origination fees. There were no foreign loans outstanding during either period, nor were there any material highly leveraged transactions. There are no loan concentrations exceeding 10 percent of loans outstanding involving multiple borrowers in similar activities or industries at December 31, 1995. Substantially all loans are to customers domiciled within BancShares' principal market areas. 46 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE C -- LOANS -- Continued At December 31, 1995 and 1994 nonperforming loans consisted of nonaccrual loans and amounted to $13,208 and $21,069, respectively. Gross interest income on nonperforming loans that would have been recorded had these loans been performing was $1,556, $1,430 and $2,354 during 1995, 1994 and 1993, respectively. Interest income recognized on nonperforming loans was $595, $693 and $1,083 during the respective periods. As of December 31, 1995 and 1994, the balance of other real estate acquired through foreclosure was $2,154 and $5,926, respectively. Loans transferred to other real estate totaled $2,110, $1,894 and $5,037 during 1995, 1994 and 1993, respectively. Activity related to the sale of loans is summarized as follows:
1995 1994 1993 Loans held for sale at December 31....................................................... $ 15,388 $ 5,395 $ 49,578 For the year ended December 31: Loans sold............................................................................. 75,155 116,987 276,206 Net gain (loss) on sale of loans....................................................... 809 (862) 8,010
NOTE D -- RESERVE FOR LOAN LOSSES Activity in the reserve for loan losses is summarized as follows:
1995 1994 1993 Balance at beginning of year............................................................. $72,017 $70,049 $58,380 Reserve of acquired institutions......................................................... 3,231 1,009 8,269 Provision for loan losses................................................................ 5,364 2,786 15,245 Loans charged off........................................................................ (7,262 ) (8,480 ) (15,643 ) Loans recovered.......................................................................... 5,145 6,653 3,798 Net charge-offs.......................................................................... (2,117 ) (1,827 ) (11,845 ) Balance at end of year................................................................. $78,495 $72,017 $70,049
At December 31, 1995, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $11,119, all of which were classified as nonaccrual. Specific reserves of $865 have been established for these loans. The average recorded investment in impaired loans during the year ended December 31, 1995, was approximately $14,326. For the year ended December 31, 1995, BancShares recognized interest income on those impaired loans of approximately $543. The amount of interest income recognized on a cash basis for impaired loans was not material. NOTE E -- PREMISES AND EQUIPMENT Major classifications of premises and equipment at December 31 are summarized as follows:
1995 1994 1993 Land..................................................................................... $ 46,200 $ 40,827 $ 34,921 Premises and leasehold improvements...................................................... 160,116 141,332 138,660 Furniture and equipment.................................................................. 112,070 106,482 101,082 Total.................................................................................. 318,386 288,641 274,663 Less accumulated depreciation and amortization........................................... 110,146 99,817 89,789 Net book value......................................................................... $ 208,240 $ 188,824 $ 184,874 Depreciation expense charged to operations............................................... $ 16,882 $ 15,885 $ 13,092
Premises with a book value of $3,188 at December 31, 1995, and $3,142 at December 31, 1994, were pledged to secure mortgage notes payable. 47 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE E -- PREMISES AND EQUIPMENT -- Continued BancShares leases certain premises and equipment under various lease agreements that provide for payment of property taxes, insurance and maintenance costs. Generally, operating leases provide for one or more renewal options on the same basis as current rental terms. However, certain leases require increased rentals under cost of living escalation clauses. Certain of the leases also provide purchase options. Future minimum rental commitments for noncancellable operating leases with initial or remaining terms of one or more years consisted of the following at December 31, 1995:
YEAR ENDING DECEMBER 31: AMOUNT 1996.......................................................................... $ 9,726 1997.......................................................................... 9,304 1998.......................................................................... 8,321 1999.......................................................................... 7,314 2000.......................................................................... 5,588 Thereafter.................................................................... 63,176 Total minimum payments...................................................... $ 103,429
Total rent expense for all operating leases amounted to $11,998 in 1995, $11,118 in 1994 and $10,449 in 1993. NOTE F -- SHORT-TERM BORROWINGS Short-term borrowings at December 31 are as follows:
1995 1994 Master notes...................................................... $ 257,178 $ 173,250 Federal funds purchased........................................... 64,085 76,430 Repurchase agreements............................................. 25,022 14,970 U.S. Treasury tax and loan accounts............................... 17,581 20,046 Other............................................................. 12,665 6,165 Total short-term borrowings..................................... $ 376,531 $ 290,861
Master notes are overnight unsecured borrowings by BancShares from Bank customers. The rate on Master notes was 4.74 percent as of December 31, 1995. During 1995, the weighted average rate on Master note borrowings was 4.96 percent, and the average amount outstanding was $203,114. The largest amount outstanding at any month-end during 1995 was $257,178. 48 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE G -- LONG-TERM OBLIGATIONS Long-term obligations at December 31 are as follows:
1995 1994 Variable rate note at 6.77 percent and 6.25 percent at December 31, 1995 and 1994, respectively, payable in quarterly installments with final payment of $9,305 due in April 1997, unsecured................... $ 9,305 $ 10,445 Federal Home Loan Bank advances with a weighted average rate of 5.21 percent at December 31, 1995, and 4.66 percent at December 31, 1994, with maturities extending to 1999, secured by U.S. Government securities............................................................................................ 7,999 20,531 Mortgage notes payable at 8 percent, due in periodic payments through 2004, secured by premises......... 1,821 2,017 Note payable at 7.89 percent, maturing in 2009, secured by collateralized mortgage obligation........... 489 700 Subordinated notes payable at 7 percent maturing June 18, 1998.......................................... 849 849 Subordinated notes payable at 8 percent maturing February 23, 2000...................................... 170 -- Subordinated notes payable at 7.50 percent maturing February 23, 2005................................... 2,324 -- Total long-term obligations........................................................................... $ 22,957 $ 34,542
Long-term obligations maturing in each of the five years subsequent to December 31, 1995, are as follows: 1996........................................................................... $ 176 1997........................................................................... 9,495 1998........................................................................... 1,055 1999........................................................................... 8,222 2000........................................................................... 411 Thereafter..................................................................... 3,598 $ 22,957
NOTE H -- COMMON STOCK On October 23, 1995, the Board of Directors of BancShares authorized the corporation to purchase on the open market or in private transactions up to 300,000 shares of its outstanding Class A common stock and up to 100,000 shares of its outstanding Class B common stock. The authorization is effective for a period of 12 months. The following table sets forth information related to shares purchased for the years ended December 31:
1995 1994 1993 Class A Number of shares purchased.............................. 28,386 85,850 -- Cash disbursed.......................................... $ 1,394 $ 3,769 -- Class B Number of shares purchased.............................. 2,987 10,617 13,147 Cash disbursed.......................................... $ 151 $ 459 $ 700
Shares purchased are retired by a charge to common stock for the par value of the shares retired and to retained earnings for the cost in excess of par value. As of December 31, 1995, there were 226,329 shares reserved for issuance under the Dividend Reinvestment and Stock Purchase Plan. Additionally, as of December 31, 1995, a total of 923,917 shares that have been registered for issuance under an employee stock purchase plan remain unissued. 49 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE I -- ESTIMATED FAIR VALUES Fair value estimates for financial instruments are made at a discrete point in time based on relevant market information and information about each financial instrument. Where information regarding the market value of a financial instrument is available, those values are used, as is the case with investment securities and residential mortgage loans. In these cases, an open market exists in which those financial instruments are actively traded. Because no market exists for many financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For those financial instruments with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. Generally, the fair value of variable rate financial instruments equals the book value. Estimated fair values for financial instruments at December 31 are as follows:
1995 1994 BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE Financial Assets: Cash and due from banks............................................ $ 448,630 $ 448,630 $ 455,710 $ 455,710 Investment securities.............................................. 1,983,148 1,991,716 1,458,969 1,423,697 Federal funds sold................................................. 40,445 40,445 6,750 6,750 Loans, net of reserve for loan losses.............................. 4,502,224 4,523,601 4,076,116 3,973,097 Income earned not collected........................................ 58,237 58,237 45,194 45,194 Financial Liabilities: Deposits........................................................... 6,388,082 6,551,761 5,517,589 5,510,810 Short-term borrowings.............................................. 376,531 376,531 290,861 290,861 Long-term obligations.............................................. 22,957 23,509 34,542 32,933 Accrued interest payable........................................... 47,721 47,721 20,391 20,391
Forward commitments to sell loans as of December 31, 1995, and 1994 had no carrying value and unrealized losses of $20 and $23, respectively. For other off-balance sheet commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any projected credit loss from those financial instruments. These amounts are not material to BancShares' financial position. NOTE J -- EMPLOYEE BENEFIT PLANS Employees who qualify under length of service and other requirements participate in a noncontributory defined benefit pension plan. Under the plan, retirement benefits are based on years of service and average earnings. The policy is to fund the maximum amount allowable for federal income tax purposes. No contribution was made during the three-year period ending December 31, 1995. The plan's assets consist primarily of investments in the Bank's common trust funds, which include listed common stocks and fixed income securities. At December 31, 1995, the plan's assets also included BancShares common stock with a market value of $8,710. While applicable regulations would generally prohibit the ownership of BancShares stock by the plan, the Bank has received an exemption from the Department of Labor which allows the plan to continue to hold the stock. However, the plan's interests for all purposes with respect to the stock are now represented by an independent fiduciary. BancShares has executed an agreement to purchase any or all of the shares held by the plan if the fiduciary determines that it is in the best interest of the plan. 50 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE J -- EMPLOYEE BENEFIT PLANS -- Continued The following table sets forth the plan's funded status at December 31:
1995 1994 Pension benefit obligation: Vested............................................................................................. $ (81,717) $(68,928) Nonvested.......................................................................................... (1,564) (1,578) Accumulated benefit obligation....................................................................... (83,281) (70,506) Effect of projected future compensation levels....................................................... (19,800) (17,889) Projected benefit obligation......................................................................... (103,081) (88,395) Market value of plan assets.......................................................................... 128,911 105,376 Plan assets in excess of projected benefit obligation................................................ 25,830 16,981 Unrecognized net transition asset.................................................................... (8,530) (9,759) Unrecognized net (gain) loss due to difference in past experience and assumptions.................... (17,006) (6,620) Unrecognized prior service cost...................................................................... 1,505 1,659 Prepaid pension asset................................................................................ $ 1,799 $ 2,261
The net periodic pension cost (credit) for the years ended December 31 included the following:
1995 1994 1993 Service costs....................................................... $ 3,139 $ 3,275 $ 2,686 Interest costs...................................................... 7,073 6,544 6,183 Actual return on plan assets........................................ (26,745) 2,101 (7,440) Net amortization and deferral....................................... 16,842 (11,373) (1,474) Net periodic pension cost (credit).................................. $ 309 $ 547 ($ 45)
Prior service cost is being amortized on a straight-line basis over the estimated average remaining service period of employees. In determining the projected benefit obligation at December 31, 1995, 1994, and 1993, the following assumptions were used:
1995 1994 1993 Weighted average discount rate............................................ 7.25% 7.75% 7.25% Rate of future compensation increases..................................... 4.25 4.50 4.50 Long-term rate of return on plan assets................................... 8.25 8.50 8.25
Employees are also eligible to participate in a matching savings plan after one year of service. During 1995 BancShares made participating contributions to this plan of $3,155 compared to $2,907 during 1994 and $2,709 during 1993. 51 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE J -- EMPLOYEE BENEFIT PLANS -- Continued Certain employees have been granted options to purchase shares of BancShares' Class A common stock through employee stock purchase plans. The plans are qualified plans under the Internal Revenue Code. The number of options granted was determined based on each eligible employee's salary as of the grant date. The option price for each of the plans is fixed at 85 percent of the market price on the grant date. As of December 31, 1995, options to purchase a total of 146,800 shares remained, net of the 41,230 options that have been forfeited. Additional information is as follows:
1994 PLAN 1992 PLAN Options granted.................................................... 264,113 474,768 Grant date......................................................... July 1, 1994 July 1, 1992 Option price per share............................................. $37.83 $29.96 Number of shares purchased during: 1995............................................................. 64,881 -- 1994............................................................. 11,202 68,206 1993............................................................. -- 164,917 Plan termination date.............................................. June 30, 1996 June 30, 1994
NOTE K -- OTHER INCOME AND OTHER EXPENSE Included in other income for the year ended December 31, 1995, was net premium income earned by the insurance subsidiaries, which amounted to $3,964. Net premium income earned during 1994 and 1993 was $4,495 and $4,953, respectively. Other expense for the years ended December 31 consisted of the following:
1995 1994 1993 Credit card expense.......................................................................... $ 9,106 $ 8,587 $ 6,814 FDIC insurance............................................................................... 8,418 11,831 10,496 Telecommunication............................................................................ 6,790 6,743 6,528 Amortization of intangibles.................................................................. 5,877 3,993 3,157 Postage...................................................................................... 5,701 4,907 3,996 Other........................................................................................ 41,351 38,174 37,940 Total other expense................................................................... $ 77,243 $ 74,235 $ 68,931
NOTE L -- INCOME TAXES At December 31, income tax expense consisted of the following:
1995 1994 1993 Current tax expense Federal.................................................................................... $30,757 $28,446 $33,448 State...................................................................................... 1,120 -- -- Total current tax expense............................................................... 31,877 28,446 33,448 Deferred tax expense (benefit) Federal.................................................................................... (111) (1,579) (4,807) State...................................................................................... (1,343) -- -- Total deferred tax benefit.............................................................. (1,454) (1,579) (4,807) Total tax expense....................................................................... $30,423 $26,867 $28,641
52 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE L -- INCOME TAXES -- Continued Income tax expense differed from the amounts computed by applying the federal income tax rate of 35 percent in each period to pretax income as a result of the following:
1995 1994 1993 Income tax at statutory rates................................................................ $30,565 $27,243 $29,479 Increase (reduction) in income taxes resulting from: Adjustment to deferred tax assets and liabilities for enacted changes in laws and rates.... -- -- (483) Amortization of goodwill................................................................... 1,280 674 382 Nontaxable income on loans and investments, net of nondeductible expenses.................. (1,378) (1,346) (1,070) State and local income taxes (benefit), including change in valuation allowance, net of federal income tax...................................................................... (145) 73 40 Other, net................................................................................. 101 223 293 Total tax expense....................................................................... $30,423 $26,867 $28,641
The net deferred tax asset included the following components at December 31:
1995 1994 Loan loss reserve....................................................................................... $31,426 $27,780 Net deferred loan fees and costs........................................................................ 2,066 1,682 Losses on other real estate............................................................................. 1,286 1,198 Net operating loss carryforwards........................................................................ 978 1,024 Other................................................................................................... 6,068 6,190 Gross deferred tax asset.............................................................................. 41,824 37,874 Less: valuation allowance............................................................................... (2,620) (3,493) Deferred tax asset.................................................................................... 39,204 34,381 Accelerated depreciation................................................................................ 4,654 3,344 Accretion of bond discount.............................................................................. 768 292 Net periodic pension credit............................................................................. 639 791 Tax loan loss reserve reversal.......................................................................... 1,295 1,071 Other................................................................................................... 5,449 4,276 Deferred tax liability................................................................................ 12,805 9,774 Net deferred tax asset................................................................................ $26,399 $24,607
Due to changes in asset mix and the resulting composition of net interest income, BancShares incurred income tax expense within its principal state jurisdiction in 1995. Prior to 1995, BancShares incurred immaterial amounts of state income tax expense and established a valuation allowance for the entire amount of its net state deferred tax asset. During 1995, the valuation allowance, which is recorded net of federal taxes, was reduced by $873, which resulted in a deferred state tax benefit in 1995 of $1,343. At December 31, 1995, the state tax valuation allowance represents approximately 75% of the gross state deferred tax asset. The net state deferred tax asset of $1,343 is the amount which BancShares believes is more likely than not to be realized. NOTE M -- RELATED PARTY TRANSACTIONS The banks have had, and expect to have in the future, banking transactions in the ordinary course of business with several directors, officers and their associates ("related parties"), on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Those transactions neither involve more than the normal risk of collectibility nor present any unfavorable features. 53 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE M -- RELATED PARTY TRANSACTIONS -- Continued An analysis of changes in aggregate amounts of related party loans for the year ended December 31, 1995, which excludes aggregate loans totaling less than $60 to any one related party, is as follows: Balance at beginning of year....................................... $ 5,643 New loans.......................................................... 8,141 Repayments......................................................... 1,842 Balance at end of year............................................. $ 11,942
BancShares provides certain processing and operational services to other financial institutions. Certain of these institutions are deemed to be related parties since certain control persons of BancShares are also deemed to be control persons of the other banks. During 1995 and 1994, BancShares received $9,031 and $7,976, respectively, for services rendered to related parties, substantially all of which is included in fee income and relates to data processing services provided. The amount earned by BancShares during 1993 was not material. NOTE N -- ACQUISITIONS BancShares and the Bank have entered into and consummated numerous acquisitions in recent years. All of the transactions have been accounted for as purchases, with the results of operations not included in BancShares' Statements of Income until after the transaction date. The pro forma impact of the acquisitions as though they had been made at the beginning of the periods presented is not material to BancShares' consolidated financial statements. As of December 31, 1995 and 1994, BancShares had goodwill of $50,249 and $31,274, respectively. Deposit intangibles totaled $23,140 and $10,842, respectively. The following table provides information regarding the significant acquisitions that have been consummated during the three-year period ending December 31, 1995:
DEPOSIT ASSETS LIABILITIES RESULTING DATE INSTITUTION/LOCATION ACQUIRED ASSUMED INTANGIBLE June 1995 Bank of White Sulphur Springs White Sulphur Springs, West Virginia $ 64,589 $ 59,174 $ 5,691 May 1995 9 NationsBank of Virginia branches Southern Virginia 133,175 143,494 10,801 March 1995 State Bank Fayetteville, North Carolina 49,700 41,238 5,555 February 1995 First Investors Savings Bank, Inc., SSB Whiteville, North Carolina 44,426 40,846 4,325 February 1995 Pace American Bank Lawrenceville, Virginia 58,660 53,303 6,954 December 1994 First Republic Savings Bank, FSB Roanoke Rapids, North Carolina 53,661 42,998 6,250 September 1994 Bank of Marlinton Marlinton, West Virginia 51,646 46,647 4,605 August 1994 Edgecombe Homestead Savings Bank Tarboro, North Carolina 39,181 30,195 4,547 March 1994 Bank of Bladenboro Bladenboro, North Carolina 21,316 19,515 1,607 September 1993 Pioneer Bancorp, Inc. Rocky Mount, North Carolina 268,845 216,226 8,114 June 1993 Caldwell Savings Bank, Inc. SSB Lenoir, North Carolina 45,863 40,662 724
54 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE N -- ACQUISITIONS -- Continued During 1993, the Bank also assumed $105,662 in deposit liabilities from the Resolution Trust Corporation ("RTC") in conjunction with the resolution of two institutions by the RTC. The Bank paid a premium of $7,318 for these deposits. During February 1996, BancShares acquired Sanford, North Carolina-based Allied Bank Capital, Inc., and its two subsidiaries, Summit Savings Bank Inc., SSB and Peoples Savings Bank, Inc., SSB. The Bank acquired assets of approximately $265,855 and assumed deposit liabilities of $213,960. The approximate value of the intangible asset which will be recorded is $32,000. NOTE O -- REGULATORY REQUIREMENTS BancShares and its banking subsidiaries are subject to certain requirements imposed by state and federal banking statutes and regulations. These regulations establish guidelines for minimum capital levels, restrict certain dividend payments and require the maintenance of noninterest-bearing reserve balances at the Federal Reserve Bank. Such reserves averaged $159,417 during 1995, of which $86,215 was satisified by vault cash and the remainder by amounts held in the Federal Reserve Bank. Various regulatory agencies have implemented guidelines that evaluate capital based on risk adjusted assets. An additional capital computation evaluates capital after adjusting for intangibles. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the financial statements. BancShares' capital ratios as of December 31, 1995 and 1994, and the minimum capital standards established by regulatory agencies are set forth below:
REGULATORY 1995 1994 MINIMUM Leverage capital.......................................... 6.1 % 6.5 % 3.0% As a percentage of risk adjusted assets: Core capital............................................ 9.6 % 10.1 % 4.0% Total capital........................................... 10.9 % 11.3 % 8.0%
The Board of Directors of the Bank may declare a dividend of a portion of its undivided profits as it may deem appropriate, subject to the requirements of the General Statutes of North Carolina, without prior approval from the requisite regulatory authorities. As of December 31, 1995, this amount was approximately $335,727. Dividends declared by the Bank amounted to $39,273 in 1995, $10,667 in 1994, and $970 in 1993. Various proposals are being considered by the United States Congress concerning a possible merger of the two deposit funds administered by the Federal Deposit Insurance Corporation, the Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). Central to that discussion is the recapitalization of the SAIF prior to such a merger, and most of the proposals mandate a special one-time assessment of SAIF-insured deposits at rates up to 85 basis points of the SAIF-insured deposits. A final assessment rate has yet to be determined, and due to the uncertainty as to which, if any, of the proposals will be adopted and the ultimate amount of the assessment to be levied on the SAIF-insured deposits, the impact of the proposals and the assessment is impossible to predict with certainty at this time. As of December 31, 1995, BancShares and its subsidiaries had $1,857,928 of SAIF-insured deposits. NOTE P -- COMMITMENTS AND CONTINGENCIES In the normal course of business, BancShares and its subsidiaries have financial instruments with off-balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and forward commitments to sell loans. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk. 55 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE P -- COMMITMENTS AND CONTINGENCIES -- Continued Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit-risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment. At December 31, 1995 and 1994, BancShares had unused commitments totaling $1,403,938 and $1,245,613, respectively. Standby letters of credit are conditional commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, the BancShares' credit policies also govern the issuance of standby letters of credit. At December 31, 1995 and 1994, BancShares had standby letters of credit amounting to $12,188 and $10,410, respectively. Management has elected to enter into forward commitments to sell loans as a hedge against fluctuations in market rates for the commitments to originate residential mortgage loans. These forward commitments, which totaled $16,000 and $1,453 at December 31, 1995 and 1994, respectively, were at fixed prices and were scheduled to settle within 60 days of that date. At December 31, 1995 and 1994, these forward commitments had no carrying value and unrealized losses of $20 and $23, respectively. These amounts are included with the carrying value of loans held for sale and commitments to originate mortgage loans when determining whether a valuation allowance is required to reduce the loans and commitments to originate mortgage loans to the lower of cost or fair value. BancShares and various subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares' consolidated financial position. NOTE Q -- FIRST CITIZENS BANCSHARES, INC. ("PARENT COMPANY") First Citizens BancShares, Inc.'s principal assets are its investments in and receivables from its banking subsidiaries. Its sources of income are dividends and interest income on funds borrowed by the Bank. The Parent Company's condensed balance sheets as of December 31, 1995 and 1994, and the related condensed statements of income and cash flows for the years ended December 31, 1995, 1994, and 1993 are as follows: CONDENSED BALANCE SHEETS
DECEMBER 31 1995 1994 ASSETS Cash.................................................................................................. $ 752 $ 725 Investment in bank subsidiaries....................................................................... 482,018 418,409 Due from bank subsidiaries............................................................................ 261,959 178,736 Other assets.......................................................................................... 39,783 27,901 Total assets.......................................................................................... $ 784,512 $ 625,771 LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings................................................................................. $ 257,178 $ 173,250 Other liabilities..................................................................................... 6,497 3,110 Common stock: Class A............................................................................................. 8,950 8,419 Class B............................................................................................. 1,766 1,770 Surplus............................................................................................... 106,954 82,631 Retained earnings..................................................................................... 403,167 356,591 Total liabilities and shareholders' equity.......................................................... $ 784,512 $ 625,771
56 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE Q -- FIRST CITIZENS BANCSHARES, INC. ("PARENT COMPANY") -- Continued CONDENSED INCOME STATEMENTS
YEAR ENDED DECEMBER 31 1995 1994 1993 Interest income.............................................................................. $ 10,562 $ 6,135 $ 4,136 Interest expense............................................................................. 10,081 5,470 3,836 Net interest income.......................................................................... 481 665 300 Dividends from bank subsidiary............................................................... 39,273 10,667 970 Other income................................................................................. 39 56 22 Other expense................................................................................ 3,472 2,559 1,737 Income (loss) before income tax benefit and equity in undistributed net income of subsidiaries............................................................................... 36,321 8,829 (445) Income tax benefit........................................................................... 75 14 118 Income (loss) before equity in undistributed income of subsidiaries.......................... 36,396 8,843 (327) Equity in undistributed net income of subsidiaries........................................... 20,510 42,126 55,912 Net income................................................................................. $ 56,906 $ 50,969 $55,585
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1995 1994 1993 OPERATING ACTIVITIES Net income................................................................................. $ 56,906 $50,969 $ 55,585 Adjustments: Amortization of goodwill................................................................. 2,769 1,814 1,092 Undistributed net income of subsidiaries................................................. (20,510) (42,126) (55,912) Change in other assets................................................................... (98,897) 4,795 -- Change in other liabilities.............................................................. 3,387 (3,739) (3,280) Net cash (used) provided by operating activities........................................... (56,345) 11,713 (2,515) INVESTING ACTIVITIES Net change in due from subsidiaries...................................................... (83,223) (17,736) (22,960) Investment in subsidiaries............................................................... (43,099) -- -- Purchase of institutions, net of cash acquired........................................... 106,092 (6,533) -- Net cash used by investing activities...................................................... (20,230) (24,269) (22,960) FINANCING ACTIVITIES Repurchase of common stock............................................................... (1,545) (4,228) (700) Proceeds from stock issuance, net of related costs....................................... 3,036 2,948 6,441 Cash dividends paid...................................................................... (8,817) (7,311) (6,063) Net change in short-term borrowings...................................................... 83,928 19,705 25,294 Net cash provided by financing activities.................................................. 76,602 11,114 24,972 Increase (decrease) in cash................................................................ 27 (1,442) (503) Cash balance at beginning of year.......................................................... 725 2,167 2,670 Cash balance at end of year................................................................ $ 752 $ 725 $ 2,167 Cash payments for: Interest................................................................................. $ 10,081 $ 5,470 $ 3,836 Income taxes............................................................................. 27,454 27,667 34,021 Supplemental disclosure of noncash investing and financing activities: Common stock issued for acquisitions..................................................... $ 21,846 $18,485 --
57 ******************************************************************************* APPENDIX FIRST CITIZENS BANCSHARES, INC. POST OFFICE BOX 27131 RALEIGH, NORTH CAROLINA 27611-7131 PROXY SOLICITED BY BOARD OF DIRECTORS The undersigned hereby appoints Lewis R. Holding, Frank B. Holding, James B. Hyler, Jr., Frank B. Holding, Jr., Lewis T. Nunnelee, II, and David L. Ward, Jr., or any of them, attorneys and proxies, with power of substitution, to vote all outstanding shares of Class A and/or Class B common stock of First Citizens BancShares, Inc. ("BancShares") held of record by the undersigned on March 1, 1996, at the Annual Meeting of Shareholders of BancShares to be held in the Second Floor Conference Room at the office of First-Citizens Bank & Trust Company, 239 Fayetteville Street Mall, Raleigh, North Carolina, at 1 o'clock p.m. on April 22, 1996, or any adjournments thereof, on the matters listed below: 1. ELECTION OF DIRECTORS: [ ] FOR all nominees listed below (except as indicated otherwise). [ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
Nominees: J. M. Alexander, Jr.; T. L. Bissett; B. I. Boyle; G. H. Broadrick; H. M. Craig, Jr.; B. M. Farnsworth; L. M. Fetterman; F. B. Holding; F. B. Holding, Jr.; L. R. Holding; C. B. C. Holt; E. A. Hubbard; J. B. Hyler, Jr.; G. D. Johnson; F. R. Jones; L. S. Jones; I. B. Julian; W. McKay; J. T. Maloney, Jr.; J. C. Mayo, Jr.; B. D. Nash; L. T. Nunnelee, II; T. O. Shaw; R. C. Soles, Jr., D. L. Ward, Jr. (Instruction: To withhold authority to vote for any individual nominee, write that nominee's name on the line below.) 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS: Proposal to ratify the appointment of KPMG Peat Marwick LLP as the independent public accountants of BancShares for 1996. [ ] FOR [ ] AGAINST [ ] ABSTAIN 3. OTHER BUSINESS: In their discretion, the persons named herein as attorneys and proxies are authorized to vote upon such other matters as may properly come before the meeting. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AND THIS PROXY WILL BE CARRIED OUT IN ACCORDANCE WITH THE SPECIFIC INSTRUCTIONS ABOVE. IN THE ABSENCE OF INSTRUCTIONS, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF EACH OF THE NOMINEES LISTED IN PROPOSAL 1 ABOVE AND "FOR" PROPOSAL 2 ABOVE. IF, AT OR BEFORE THE TIME OF THE MEETING, ANY OF THE NOMINEES LISTED IN PROPOSAL 1 HAVE BECOME UNAVAILABLE FOR ANY REASON, THE PROXYHOLDERS HAVE THE DISCRETION TO VOTE FOR A SUBSTITUTE NOMINEE OR NOMINEES. THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED BY FILING WITH THE SECRETARY AN INSTRUMENT REVOKING THE PROXY OR A DULY EXECUTED PROXY BEARING A LATER DATE OR BY ATTENDING THE ANNUAL MEETING AND REQUESTING THE RIGHT TO VOTE IN PERSON. Please date and sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. Dated , 1996 (SEAL) (Signature) (SEAL) (Signature if held jointly) PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE. -----END PRIVACY-ENHANCED MESSAGE-----