-----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, Lj5tHGHo9Yg3bFooa239OagSJgPTwLnyV7u2BGBk3kmgF4wHwoLdSoGTEpW1VS6X ZzaBmekxbkDyrEvp//nu9A== 0000950168-97-000644.txt : 19970325 0000950168-97-000644.hdr.sgml : 19970325 ACCESSION NUMBER: 0000950168-97-000644 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CITIZENS BANCSHARES INC /DE/ CENTRAL INDEX KEY: 0000798941 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 561528994 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16471 FILM NUMBER: 97561144 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 10-K/A 1 FIRST CITIZENS 10-K 48503.1 First Citizens BancShares, Inc. Form 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 December 31, 1996 0-16471 For the fiscal year ended Commission File Number FIRST CITIZENS BANCSHARES, INC. (Exact name of Registrant as specified in the charter) Delaware 56-1528994 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 239 Fayetteville Street Mall Raleigh, North Carolina 27601 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (919) 755-7000 Securities registered pursuant to: Section 12(b) of the Act None Section 12(g) of the Act: Class A Common Stock, Par Value $1 Class B Common Stock, Par Value $1 (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based on last reported sales prices on March 12, 1997, the aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant as of such date was $427,758,000. On March 12, 1997, there were 9,637,940 outstanding shares of the Registrant's Class A Common Stock and 1,758,370 outstanding shares of the Registrant's Class B Common Stock. Portions of the Registrant's definitive Proxy Statement dated March 14, 1997 are incorporated in Part III of this report, as is information contained in the 1996 Annual Report. Part I Item 1. Business First Citizens BancShares, Inc ("BancShares") was incorporated under the laws of Delaware on August 7, 1986, to become the successor to First Citizens Corporation ("FCC"), a North Carolina corporation that was the bank holding company of First-Citizens Bank & Trust Company ("Bank"), its banking subsidiary. On October 21, 1986, FCC was merged into BancShares, and BancShares became the sole shareholder of the Bank. The Bank was chartered on March 4, 1893, as the Bank of Smithfield, Smithfield, North Carolina and, through a series of mergers and name changes, it later became First-Citizens Bank & Trust Company. The Bank is the fifth largest commercial bank in North Carolina based upon total deposits. Its growth has been generated principally by acquisitions and de novo branching that have occurred under the leadership of the R.P. Holding family. As of December 31, 1996, the Bank operated 308 offices in North Carolina and Virginia. On September 1, 1994, BancShares acquired Bank of Marlinton, a West Virginia-chartered bank with headquarters in Marlinton, West Virginia. Bank of Marlinton operated two offices and had $60 million in assets as of December 31, 1996. On June 1, 1995, BancShares acquired Bank of White Sulphur Springs ("WSS"), a West Virginia-chartered bank with headquarters in White Sulphur Springs, West Virginia. WSS operated two offices and had $68.6 million in assets as of December 31, 1996. BancShares' executive offices are located at 239 Fayetteville Street, Raleigh, North Carolina, 27601, and its telephone number is (919) 716-7000. At December 31, 1996, BancShares and its subsidiaries employed a full-time staff of 3,457 and a part-time staff of 825 for a total of 4,282 employees. BancShares' principal assets are its investment in and receivables from its banking subsidiaries. Its primary sources of income are dividends from the Bank and interest income on funds loaned by BancShares to the Bank. Certain legal restrictions exist regarding the ability of the Bank to transfer funds to BancShares in the form of cash dividends or loans. For information regarding these restrictions, see Note P of BancShares' consolidated financial statements, contained in this report. The subsidiary banks seek to meet the needs of both consumers and commercial entities in their respective market areas. These services, offered at most offices, include normal taking of deposits, cashing of checks, and providing for individual and commercial cash needs; numerous checking and savings plans; commercial and consumer lending; a full-service trust department; and other activities incidental to commercial banking. Bank subsidiaries American Guaranty Insurance Company and Triangle Life Insurance Company underwrite and sell various forms of credit-related insurance products. Neuse, Incorporated ("Neuse"), owns a substantial number of the facilities in which the Bank operates branches. First Citizens Investor Services, Inc., provides various investment products, including third-party mutual funds to customers. Various other subsidiaries are either inactive or not material to BancShares' consolidated financial position or to consolidated net income. As of December 31, 1996, BancShares had consolidated assets of $8.1 billion, consolidated deposits of $7 billion and shareholders' equity of $615.5 million. Table 6 includes information such as average assets, deposits, shareholders' equity and interest-earning assets of BancShares for the five years ended December 31, 1996. Rates of return on average assets and average equity and the ratio of shareholders' equity to total assets for the last five years are presented in Table 1 of this report. The banking laws of North Carolina, West Virginia and Virginia allow for statewide branching. Consequently, commercial banking in these states is highly competitive. BancShares' subsidiaries compete with other financial institutions throughout their market areas. During 1994, Congress approved legislation that will allow adequately capitalized and managed bank holding companies to acquire control of banks in any state ("the Interstate Banking Law"). Acquisitions will be subject to anti-trust provisions that limit the state and national deposits that may be controlled by a single bank holding company. Under the Interstate Banking Law, banks will be permitted, beginning June 1, 1997, to merge across state lines, subject to concentration, capital and Community Reinvestment Act requirements and regulatory approval. A state may authorize mergers earlier than June 1, 1997, or a state may enact restrictions on mergers prior to that date. The Interstate Banking Law also allows states to permit out-of-state banks to open new branches within their borders. Currently, in North Carolina, the Reciprocal Interstate Banking Act and the Interstate Branch Banking Act allow a bank or bank holding company based in other states to acquire banks or bank 2 holding companies or establish branches within the State of North Carolina, provided similar laws exist in the other state. The banks operate under the jurisdiction of the Federal Deposit Insurance Corporation and the respective state banking authorities and are subject to the laws administered by those authorities and the rules and regulations thereunder. As a registered bank holding company, BancShares is subject to the jurisdiction of the Board of Governors of the Federal Reserve System. BancShares also is registered as a bank holding company with the North Carolina Commissioner of Banks and is subject to the regulations promulgated by the Commissioner. The internal affairs of BancShares, including the rights of its shareholders, are governed by Delaware law and by its Certificate of Incorporation and Bylaws. BancShares files periodic reports under the Securities Exchange Act of 1934 and is subject to the jurisdiction of the Securities and Exchange Commission. 3 Part I (continued) Item 2. Properties As of December 31, 1996, the Bank owned land improved by office buildings in which its operates offices at 212 locations. The Bank leases from Neuse 58 locations that have office buildings located thereon in which the Bank maintains offices. In addition, the Bank leases 136 other locations from third parties. Additional information relating to premises, equipment and lease commitments is set forth in Note E of BancShares' consolidated financial statements. Item 3. Legal Proceedings BancShares, the banks and various Bank 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. Item 4. Submission of Matters to a Vote of Security Holders None 4 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters BancShares' Class A and Class B common stock is traded in the over-the-counter market, and the Class A common stock is listed on the National Association of Securities Dealers Automated Quotation National Market System under the symbol FCNCA. Stock information for the two-year period ending December 31, 1996, is presented in Table 16. The per share cash dividends paid by BancShares during each quarterly period during 1996 and 1995 are set forth in Table 16 of this report. A cash dividendof 25 cents per share was declared by the Board of Directors on January 27, 1997,payable April 7, 1997, to holders of record as of March 17, 1997. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. Subject to the foregoing, it is currently management's expectation that comparable cash dividends will continue to be paid in the future. Additional information is included on page 36 of Registrant's 1996 Annual Report. Item 6. Selected Financial Data Information is included on page 20 of Registrant's 1996 Annual Report in the table 'Financial Summary and Selected Average Balances and Ratios'. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information is included on pages 20 through 37 of Registrant's 1996 Annual Report Item 8. Financial Statements and Supplementary Data Information is included on the indicated pages of Registrant's 1996 Annual Report: Independent Auditors' Report 38 Consolidated Balance Sheets at December 31, 1996 and 1995 39 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1996 40 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 1996 41 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996 42 Notes to Consolidated Financial Statements 43-59 Quarterly Financial Summary for 1996 and 1995 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable Part III Information required by Part III of this Report on Form 10-K is incorporated herein by reference from the indicated pages of Registrant's definitive Proxy Statement dated March 14, 1997, as follows: Item 10. Directors and Executive Officers of the Registrant Information found on pages 6-9 under the caption "Proposal 1: Election of Directors" and 12 under the caption "Executive Officers." Item 11. Executive Compensation Information found on pages 9-10 under the caption "Directors' Fees and Compensation;" 11 under the caption "Compensation Committee Interlocks and Insider Participation;" 13-15 under the captions "Executive Compensation," "Employee Stock Purchase Plan," and "Pension Plan and Other Post-Retirement Benefits." Item 12. Security Ownership of Certain Beneficial Owners and Management Information found on pages 2-6 under the captions "Principal Holders of Voting Securities", "Ownership of Securities by Management" and "Required Reports of Beneficial Ownership." Item 13. Certain Relationships and Related Transactions Information found on pages 9 in footnote (4) to the table under the caption "Proposal 1: Election of Directors" and 16 under the caption "Transactions with Management." 5 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1.Financial Statements. See Item 8 2. Financial Statement Schedules. All schedules are omitted as the required information is either inapplicable or is presented in the consolidated financial statements of the Registrant. 3. Exhibits. The following documents are attached hereto or incorporated herein by reference as exhibits: 3.1 Certificate of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 of the 1992 Annual Report to the SEC on Form 10-K) 3.2 Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.2 of the 1993 Annual Report to the SEC on Form 10-K) 4.1 Specimen of Registrant's Class A Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the 1993 Annual Report to the SEC on Form 10-K) 4.2 Specimen of Registrant's Class B Common Stock certificate (incorporated herein by reference to Exhibit 4.2 of the 1993 Annual Report to the SEC on Form 10-K) *10.1 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 1, 1986, as amended by the Third Amendment of Employee Death Benefit and PostRetirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Lewis R. Holding (incorporated herein by reference to Exhibit 10.1 of Registrant's 1993 Annual Report to the SEC on Form 10-K) *10.2 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 1, 1986, as amended by the Third Amendment of Employee Death Benefit and PostRetirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Frank B. Holding (incorporated herein by reference to Exhibit 10.2 of Registrant's 1993 Annual Report to the SEC on Form 10-K) *10.3 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 1, 1986, as amended by the Third Amendment of Employee Death Benefit and PostRetirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and James B. Hyler, Jr. (incorporated herein by reference to Exhibit 10.3 of Registrant's 1993 Annual Report to the SEC on Form 10-K) *10.4 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 23, 1996, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Frank B. Holding, Jr.(incorporated herein by reference to Exhibit 10.4 of Registrant's 1994 Annual Report to the SEC on Form 10-K) *10.5 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement dated August 23, 1989, as amended by the Second Amendment of Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and James M. Parker (incorporated herein by reference to Exhibit 10.8 of Registrant's 1993 Annual Report to the SEC on Form 10-K) *10.6 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement dated January 1, 1986, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and George H. Broadrick (incorporated herein by reference to Exhibit 10.6 of the 1987 Annual Report to the SEC on Form 10K) 6 Part IV (continued) *10.7 Consulting Agreement dated February 17, 1988, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and George H. Broadrick (incorporated herein by reference to Exhibit 10.7 of the 1987 Annual Report to the SEC on Form 10-K) *10.9 Retirement Payment Agreement dated May 1, 1985, between First Federal Savings and Loan Association, Hendersonville, North Carolina ("First Federal"), and William McKay, which agreement was ratified by Registrant upon its acquisition of First Federal (incorporated herein by reference to Exhibit 10.9 of the 1991 Annual Report to the SEC on Form 10-K) *10.10 Retirement Payment Agreement dated August 1, 1987, between First Federal and William McKay, which agreement was ratified by Registrant upon its acquisition of First Federal (incorporated herein by reference to Exhibit 10.10 of the 1991 Annual Report to the SEC on Form 10-K) *10.11 Employment Agreement dated August 4, 1995, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Brent D. Nash (incorporated herein by reference to Exhibit 10.11 of the 1994 Annual Report to the SEC on Form 10-K) *10.12 Retirement Payment Agreement dated August 8, 1991, between Edgecombe Homestead and Loan Assn., Inc. ("Edgecombe"), and Brent D. Nash, which agreement was ratified by Registrant upon its acquisition of Edgecombe (incorporated herein by reference to Exhibit 10.12 of the 1994 Annual Report to the SEC on Form 10-K) *10.13 Article IV Section 4.1.d of the Agreement and Plan of Reorganization and Merger by and among First Investors Savings Bank, Inc., SSB, First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1995, located at page II-38 of Registrant's S-4 Registration Statement filed with the Commission on December 19, 1994 (Registration No. 33-84514) *10.14 Article IV Section 4.1.e of the Agreement and Plan of Reorganization and Merger by and among State Bank and First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1995, located at page I-36 of Registrant's S-4 Registration Statement filed with the Commission on November 16, 1994 (Registration No. 33-86286) *10.15 Article V Section 5.4.a of the Agreement and Plan of Reorganization and Merger By and Between Allied Bank Capital, Inc. and First Citizens BancShares, Inc., dated August 7, 1996, located at page I-47 of Registrant's S-4 Registration Statement filed with the Commission on September 28, 1995 (Registration No. 33-63009) 13 Registrant's Annual Report to Shareholders for the year ended December 31, 1996 (filed herewith) 22 Subsidiaries of the Registrant (filed herewith) 99 Registrant's definitive Proxy Statement dated March 14, 1997 (filed pursuant to Rule 14a6(c)) - ------------------ * Denotes a management contract or compensation plan or arrangement in which an executive officer or director of Registrant participates. (b) Reports on Form 8K. During the fourth quarter of 1996 the Registrant filed no Form 8K Current Reports. 7 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 13, 1997 FIRST CITIZENS BANCSHARES, INC. (Registrant) /s/ James B. Hyler, Jr. James B. Hyler, Jr. Vice Chairman and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities indicated on March 18, 1996. Signature Title Date /s/Lewis R. Holding Chairman and Chief March 13, 1997 Lewis R. Holding Executive Officer (principal executive officer) /s/Frank B. Holding Executive Vice Chairman March 13, 1997 Frank B. Holding /s/James B. Hyler, Jr. Vice Chairman March 13, 1997 James B. Hyler, Jr. /s/Frank B. Holding, Jr. President March 13, 1997 Frank B. Holding, Jr. /s/Kenneth A. Black Vice President, March 13, 1997 Treasurer, and Chief Kenneth A. Black Financial Officer (principal financial and accounting officer) 8 Signature Title Date John M. Alexander, Jr. Director March 13, 1997 /s/Ted L. Bissett Director March 13, 1997 Ted L. Bissett Director March 13, 1997 B. Irvin Boyle /s/George H. Broadrick Director March 13, 1997 George H. Broadrick Director March 13, 1997 H. Max Craig, Jr. /s/Betty M. Farnsworth Director March 13, 1997 Betty M. Farnsworth Director March 13, 1997 Lewis M. Fetterman 9 Signature Title Date Director March 13, 1997 Carmen P. Holding Director March 13, 1997 Charles B.C. Holt Director March 13, 1997 Edwin A. Hubbard /s/Gale D. Johnson Director March 13, 1997 Gale D. Johnson /s/Freeman R. Jones Director March 13, 1997 Freeman R. Jones Director March 13, 1997 Lucius S. Jones /s/I. B. Julian Director March 13, 1997 I. B. Julian 10 Signature Title Date Director March 13, 1997 Joseph T. Maloney, Jr. /s/J. Claude Mayo, Jr. Director March 13, 1997 J. Claude Mayo, Jr. Director March 13, 1997 William McKay /s/Brent D. Nash Director March 13, 1997 Brent D. Nash /s/Lewis T. Nunnelee, II Director March 13, 1997 Lewis T. Nunnelee, II Director March 13, 1997 Talbert O. Shaw Director March 13, 1997 R. C. Soles, Jr. /s/David L. Ward, Jr. Director March 13, 1997 David L. Ward, Jr. 11 EXHIBIT INDEX
Exhibit Sequential Number Description of Exhibit Page Number 3.1 Certificate of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 of the 1992 Annual Report to the SEC on Form 10-K) - 3.2 Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.2 of the 1993 Annual Report to the SEC on Form 10K) - 4.1 Specimen of Registrant's Class A Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the 1993 Annual Report to the SEC on Form 10-K) - 4.2 Specimen of Registrant's Class B Common Stock certificate (incorporated herein by reference to Exhibit 4.2 of the 1993 Annual Report to the SEC on Form 10-K) - 10.1 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 1, 1986, as amended by the Third Amendment of Employee Death Benefit and PostRetirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Lewis R. Holding (incorporated herein by reference to Exhibit 10.1 of the 1993 Annual Report to the SEC on Form 10-K) - 10.2 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 1, 1986, as amended by the Third Amendment of Employee Death Benefit and PostRetirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Frank B. Holding (incorporated herein by reference to Exhibit 10.2 of the 1993 Annual Report to the SEC on Form 10-K) - 10.3 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 1, 1986, as amended by the Third Amendment of Employee Death Benefit and PostRetirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and James B. Hyler, Jr. (incorporated herein by reference to Exhibit 10.3 of the 1993 Annual Report to the SEC on Form 10-K) - 10.4 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated January 23, 1995, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Frank B. Holding, Jr. (incorporated herein by reference to Exhibit 10.4 of the 1994 Annual Report to the SEC on Form 10-K) - 10.5 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement, dated August 23, 1989, as amended by the Second Amendment of Employee Death Benefit and PostRetirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and James M. Parker (incorporated herein by reference to Exhibit 10.8 of the 1993 Annual Report to the SEC on Form 10-K) - 10.6 Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreement dated January 1, 1986, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and George H. Broadrick (incorporated herein by reference to Exhibit 10.6 of the 1987 Annual Report to the SEC on Form 10K) - 12 EXHIBIT INDEX (continued) Exhibit Sequential Number Description of Exhibit Page Number 10.7 Consulting Agreement dated February 17, 1988, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and George H. Broadrick (incorporated herein by reference to Exhibit10.7 of the 1987 Annual Report to the SEC on Form 10-K) - 10.9 Retirement Payment Agreement dated May 1, 1985, between First Federal and William McKay, which agreement was ratified by Registrant upon its acquisition of First Federal (incorporated herein by reference to Exhibit 10.9 of the 1991 Annual Report to the SEC on Form 10-K) - 10.10 Retirement Payment Agreement dated August 1, 1987, between First Federal Savings Bank and William McKay, which agreement was ratified by Registrant upon its acquisition of First Federal (incorporated herein by reference to Exhibit 10.10 of the 1991 Annual Report to the SEC on Form 10-K) - 10.11 Employment Agreement dated August 4, 1995, between Registrant's subsidiary, FirstCitizens Bank & Trust Company, and Brent D. Nash (incorporated herein by reference to Exhibit 10.10 of the 1994 Annual Report to the SEC on Form 10-K) - 10.12 Retirement Payment Agreement dated August 8, 1991, between Edgecombe Homestead and Loan Assn., Inc. ("Edgecombe"), and Brent D. Nash, which agreement was ratified by Registrant upon its acquisition of Edgecombe (incorporated herein by reference to Exhibit 10.10 of the 1994 Annual Report to the SEC on Form 10-K) - 10.13 Article IV Section 4.1.d of the Agreement and Plan of Reorganization and Merger by and among First Investors Savings Bank, Inc., SSB, First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1994, located at page II-38 of Registrant's S-4 Registration Statement filed with the Commission on December 19, 1994 (Registration No. 33-84514) - 10.14 Article IV Section 4.1.e of the Agreement and Plan of Reorganization and Merger by and among State Bank and First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1994, located at page I-36 of Registrant's S-4 Registration Statement filed with the Commission on November 16, 1994 (Registration No. 33-86286) - 10.15 Article V Section 5.4.a of the Agreement and Plan of Reorganization and Merger By and Between Allied Bank Capital, Inc. and First Citizens BancShares, Inc., dated August 7, 1995, located at page I-47 of Registrant's S-4 Registration Statement filed with the Commission on September 28, 1995 (Registration No. 33-63009) - 13 Registrant's 1996 Annual Report for the year ended December 31, 1996 (filed herewith) 13 22 Subsidiaries of the Registrant (filed herewith) 78 99 Registrant's definitive Proxy Statement dated March 14, 1997 (filed pursuant to Rule 14a6(c)) -
13 EX-13 2 EXHIBIT 13 FIRST CITIZENS BANCSHARES, INC. POST OFFICE BOX 27131 RALEIGH, NORTH CAROLINA 27611-7131 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 28, 1997 NOTICE is hereby given that the Annual Meeting of Shareholders of First Citizens BancShares, Inc. ("BancShares") will be held as follows: Place: Conference Room A Raleigh Civic Center (Raleigh Convention and Conference Center Complex) 500 Fayetteville Street Mall Raleigh, North Carolina Date: Monday, April 28, 1997 Time: 1:00 p.m.
The purposes of the meeting are: 1. To elect a 26-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 1997. 3. To consider the adoption of an amendment to the bylaws of BancShares to increase the maximum authorized number of directors from 26 to 30. 4. 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 [sig. appears here] ALEXANDER G. MACFADYEN, JR., Secretary March 14, 1997 FIRST CITIZENS BANCSHARES, INC. POST OFFICE BOX 27131 RALEIGH, NORTH CAROLINA 27611-7131 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 28, 1997 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 Conference Room A, Raleigh Civic Center (Raleigh Convention and Conference Center Complex), 500 Fayetteville Street Mall, Raleigh, North Carolina, at 1 o'clock p.m. on April 28, 1997, 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: George H. Broadrick, Lewis R. Holding, Frank B. Holding, James B. Hyler, Jr., Frank B. Holding, Jr., Carmen P. Holding, Lewis T. Nunnelee, II, and David L. Ward, Jr. This Proxy Statement is first being mailed to shareholders on March 14, 1997. 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 26 nominees named herein for election to the Board of Directors, FOR ratification of the appointment of KPMG Peat Marwick LLP as BancShares' independent public accountants for 1997, and FOR amendment of the Bylaws of BancShares to increase the maximum authorized number of directors from 26 to 30. 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 6, 1997, 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 6, 1997, BancShares' voting securities consisted of 9,637,940 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 1,758,370 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 6, 1997, 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) 4.41% Summerville, SC (.53%) (5.73%) George H. Broadrick 1,265,048(2) 325,916(2) 17.15% Charlotte, NC (13.13%) (18.54%) Hope Holding Connell 39,569(3) 109,197(3) 4.73% Raleigh, NC (.41%) (6.21%) Elizabeth C. Holding 51,153(4) 100,885(4) 4.41% Chapel Hill, NC (.53%) (5.74%) Frank B. Holding 2,567,982(5) 632,021(5) 33.57% Smithfield, NC (26.64%) (35.94%) Frank B. Holding, Jr. 55,475(6) 105,943(6) 4.63% Raleigh, NC (.58%) (6.03%) Lewis R. Holding 1,195,046(7) 324,094(7) 16.89% Lyford Cay, Bahamas (12.40%) (18.43%) Olivia B. Holding 48,656(8) 104,015(8) 4.53% Raleigh, NC (.50%) (5.92%)
* 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 H. Bristow exercises sole voting and investment power as to 45,995 shares of Class A and 83,562 shares of Class B held individually. She disclaims beneficial ownership as to 16,000 shares of Class B held by her spouse as custodian for their minor children. She exercises shared voting and investment power as to 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 individually 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. Pursuant to a notice of change of control filed with the Federal Reserve Bank of Richmond, Virginia during January 1997, it is anticipated that Mr. Broadrick, as sole trustee of two trusts for the benefit of the daughters of Lewis R. Holding, will exchange certain shares of Class A currently held by the trusts for an equal number of shares of Class B currently held by Lewis R. Holding, resulting in a significant increase in the percentage of Class B shown as beneficially owned by Mr. Broadrick and a significant decrease in the Class B beneficial ownership shown for Mr. Holding. Such share exchange will not take place until after the transaction has been approved by the Federal Reserve Bank of Richmond. (3) Hope H. Connell exercises sole voting and investment power as to 33,069 shares of Class A and 96,722 shares of Class B held individually. She disclaims beneficial ownership as to 1,600 shares of Class A and 11,250 shares of Class B held by her spouse individually and/or as custodian for their minor sons. 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. 2 (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 individually. 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 1,637,834 shares of Class A held individually. He disclaims beneficial ownership as to 320,396 shares of Class A and 514,677 shares of Class B held by his spouse, 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 585,052 shares of Class A and 111,169 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. (167,600 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. (24,584 shares of Class A and 22,219 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 (18,845 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. (6,320 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 (126,896 shares of Class A and 36,525 shares of Class B); and in a nominee name by the Bank's Trust Department (16,479 shares of Class A and 3,400 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 262,920 shares of Class A and 41,825 shares of Class B also shown as beneficially owned by his brother, Lewis R. Holding, of which 16,479 shares of Class A and 3,400 shares of Class B also are included in the beneficial ownership of James B. Hyler, Jr. (See "OWNERSHIP OF SECURITIES BY MANAGEMENT"), and 345,096 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 individually 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 individually. 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 262,920 shares of Class A and 41,825 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 (18,845 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 (126,896 shares of Class A and 36,525 shares of Class B); and in a nominee name by the Bank's Trust Department (16,479 shares of Class A and 3,400 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 262,920 shares of Class A and 41,825 shares of Class B also shown as beneficially owned by his brother, Frank B. Holding, of which 16,479 shares of Class A and 3,400 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 individually. 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 6, 1997, the beneficial ownership of BancShares' voting securities by the directors, certain named executive officers, and by all directors 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) 17.15% Charlotte, NC (13.13%) (18.54%) 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 12,955 (6) 2,750 (6) .15% Clinton, NC (.13%) (.16%) Carmen P. Holding 147,929 (7) 31,281 (7) 1.72% Atlanta, GA (1.53%) (1.78%) Frank B. Holding 2,567,982 (8) 632,021 (8) 33.57% Smithfield, NC (26.64%) (35.94%) Frank B. Holding, Jr. 55,475 (9) 105,943 (9) 4.63% Raleigh, NC (.58%) (6.03%) Lewis R. Holding 1,195,046 (10) 324,094 (10) 16.89% Lyford Cay, Bahamas (12.40%) (18.43%) Charles B. C. Holt 2,570 (11) -0- .01% Fayetteville, NC (.03%) Edwin A. Hubbard 14,578 (12) -0- .04% Sanford, NC (.15%) James B. Hyler, Jr. 21,845 (13) 3,500 (13) .21% Raleigh, NC (.23%) (.20%) 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 12,000 3,500 .18% Fayetteville, NC (.12%) (.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 1,072 (14) -0- .01% Flat Rock, NC (.01%) Brent D. Nash 12,373 (15) -0- .03% Tarboro, NC (.13%) Lewis T. Nunnelee, II 600 450 .02% Wilmington, NC (.01%) (.03%)
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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** James M. Parker 842 -0- .01% Raleigh, NC (.01%) Talbert O. Shaw 119 -0- .01% Raleigh, NC (.01%) R. C. Soles, Jr. 15,138 -0- .04% Tabor City, NC (.16%) David L. Ward, Jr. 27,100 (16) 8,638 (16) .44% New Bern, NC (.28%) (.49%) All directors and executive 4,685,501 (17) 1,209,094 (17) 63.62%(17) officers as a group (37 (48.62%) (68.76%) 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 individually 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 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 individually. 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 individually. 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 individually. 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 individually. 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 individually. 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) Carmen P. Holding exercises sole voting and investment power as to 25,129 shares of Class A and 581 shares of Class B held individually. An additional 122,800 shares of Class A and 30,700 shares of Class B are held in various family trusts for her benefit, as to which shares she has shared voting and investment power, which shares also are included in the beneficial ownership shown above for George H. Broadrick and Lewis R. Holding. (8) For an explanation of the nature of the beneficial ownership of Frank B. Holding, see "PRINCIPAL HOLDERS OF VOTING SECURITIES," footnote (5). (9) For an explanation of the nature of the beneficial ownership of Frank B. Holding, Jr., see "PRINCIPAL HOLDERS OF VOTING SECURITIES," footnote (6). (10) For an explanation of the nature of the beneficial ownership of Lewis R. Holding, see "PRINCIPAL HOLDERS OF VOTING SECURITIES," footnote (7). (11) Charles B. C. Holt exercises sole voting and investment power as to 1,966 shares of Class A held individually. 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. 5 (12) Edwin A. Hubbard exercises sole voting and investment power as to 8,251 shares of Class A held individually. He disclaims beneficial ownership as to 6,327 shares of Class A held by his spouse. (13) James B. Hyler, Jr. exercises sole voting and investment power as to 5,366 shares of Class A and 100 shares of Class B held individually. 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 (16,479 shares of Class A and 3,400 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. (14) William McKay exercises sole voting and investment power as to 928 shares of Class A held individually and shared voting and investment power as to 144 shares of Class A held jointly with his spouse. (15) Brent D. Nash exercises sole voting and investment power as to 5,645 shares of Class A held individually and disclaims beneficial ownership as to 5,642 shares of Class A owned by his spouse and 1,086 shares of Class A owned by his daughter. (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 individually. 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 George H. Broadrick, Carmen P. Holding, Frank B. Holding, Frank B. Holding, Jr., Lewis R. Holding, and James B. Hyler, 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. REQUIRED REPORTS OF BENEFICIAL OWNERSHIP BancShares' directors and executive officers are required to file certain reports with the Securities and Exchange Commission regarding the amount of and changes in their beneficial ownership of BancShares' Class A and Class B common stock. Based on its review of copies of those reports, BancShares' proxy materials are required to disclose failures to report shares beneficially owned or changes in such beneficial ownership or to timely file required reports. It has come to BancShares' attention that James B. Hyler, Jr. (two reports) and James M. Parker (one report) inadvertently filed untimely reports of changes in their beneficial ownership of BancShares' stock. However, each of the required reports was filed prior to the end of 1996. PROPOSAL 1: ELECTION OF DIRECTORS BancShares' Bylaws currently 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 26 for election at the Annual Meeting. No more than 26 directors may be elected at this meeting and the 26 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, General Manager and Chief 47 Operating Officer, Cardinal International Trucks, Inc. (truck dealer) Ted L. Bissett Director 1970 President, F.D. Bissett & Son, Inc. (farm 60 supplies)
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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 B. Irvin Boyle Director 1980 Attorney, of Counsel to Johnston, Taylor, 85 Allison & Hord; former Senior Partner of Boyle & Alexander (attorneys) George H. Broadrick(2) Director; Chairman of 1975 Retired President and Consultant, 74 Executive First-Citizens Bank & Trust Company and Committee; First Citizens BancShares, Inc. Consultant H. Max Craig, Jr.(2) Director 1981 President, CEO and Chairman of the Board, 66 Gaston County Dyeing Machine Company (textile machinery manufacturing) Betty M. Farnsworth Director 1985 Homemaker and former Director, Farmers 70 Bank, Pilot Mountain, NC Lewis M. Fetterman Director 1980 President and Owner, LMF Consulting & 75 Marketing Co.; Assistant to President, Heartland Pork Enterprises, Inc.; Director, Lundy Packing Co.; former Chief Executive Officer, Fetterman Farms, Ltd. (agribusiness) Carmen P. Holding(2)(3) Director 1996 Director, First-Citizens Bank and Trust 28 Company of South Carolina and First Citizens Bancorporation of South Carolina, Inc.; former Office Manager, Interweb, Inc. (web site designer and provider); prior to that, showroom salesperson, Scalamandre, Inc. (decorative fabrics manufacturer and wholesaler) Frank B. Holding(2)(3) Executive Vice 1962 Executive Vice Chairman of the Board, 68 Chairman of the First-Citizens Bank & Trust Company and Board First Citizens BancShares, Inc.; Vice Chairman of the Board, 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, 35 Director Inc. and First-Citizens Bank & Trust Company; Director, Exchange Bank of Kingstree, SC Lewis R. Holding(3) Chairman of the Board 1957 Chairman of the Board, First-Citizens 69 Bank & Trust Company and First Citizens BancShares, Inc. Charles B. C. Holt Director 1995 Secretary/Treasurer (former President), 64 Holt Oil Company, Inc. (wholesale petroleum products distributor); former Chairman of the Board, State Bank, Fayetteville, NC Edwin A. Hubbard Director 1996 Retired; former Chairman of the Board, 78 Stroud-Hubbard Company, Inc. (retail shoe company); former Chairman of the Board, Allied Bank Capital, Inc. and Summit Savings Bank, Inc., SSB, Sanford, NC
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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 James B. Hyler, Jr. Vice Chairman of the 1988 Vice Chairman of the Board and Chief 49 Board Operating Officer, First-Citizens Bank & Trust Company and First Citizens BancShares, Inc. Gale D. Johnson, M.D. Director 1974 Retired Surgeon; Director, Health 77 Affairs, Campbell University Freeman R. Jones Director; Chairman of 1974 Retired; President, EFC Corporation (real 70 Salary Committee estate investment) Lucius S. Jones Director 1994 President and Owner, United Realty & 54 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, First-Citizens Bank & 89 Trust Company Joseph T. Maloney, Jr. Director 1976 Private Investor 67 J. Claude Mayo, Jr. Director 1994 Retired; former Owner, Mayo Insurance 69 Agency; former Chairman of the Board, Pioneer Bancorp, Inc. and Pioneer Savings Bank, Inc., Rocky Mount, NC William McKay Director 1991 Retired; former President and CEO, First 71 Federal Savings Bank, Hendersonville, NC Brent D. Nash Director 1995 Senior Vice President, First-Citizens 61 Bank & Trust Company; former President and CEO, Edgecombe Homestead Savings Bank, Inc., SSB, Tarboro, NC Lewis T. Nunnelee, II Director 1979 Chairman of the Board, Coastal Beverage 71 Company, Inc. (wholesale beer distributor) Talbert O. Shaw, Ph.D. Director 1993 President, Shaw University (educator) 69 R. C. Soles, Jr. Director 1995 Attorney and Senior Partner, Soles, 62 Phipps, Ray, Prince & Williford (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; Chairman of 1971 Senior Attorney and President, Ward and 61 Audit Committee Smith, P.A. (attorneys)
(1) The term "Year First Elected" refers to the year in which a director first took office as 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, Carmen P. Holding, and Frank B. Holding serve as directors of First Citizens Bancorporation of South 8 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.; and Frank B. Holding, Jr. serves as a director of North Carolina Natural Gas Corporation, Fayetteville, N.C. (3) Lewis R. Holding and Frank B. Holding are brothers. Carmen P. Holding is the daughter of Lewis R. Holding and the niece of Frank B. Holding. Frank B. Holding, Jr. is the son of Frank B. Holding and the nephew of Lewis R. Holding. Frank B. Holding, Jr. and Carmen P. Holding are first cousins. (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 1996, which relationship is expected to continue through 1997. BancShares and the Bank paid $2,411,248 in legal fees to Ward and Smith, P.A. during 1996. DIRECTORS' FEES AND COMPENSATION For their services as directors, each member of the Board of Directors (except Messrs. L. Holding, F. Holding, J. Hyler, Jr., 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"), of which Mr. McKay served as a director and President. 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. 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 9 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 receives 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 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 1996. 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. 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 1996, the Audit Committee held four meetings. The members of the Salary 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 1996, the Salary Committee held one meeting. 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. 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. 10 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, and (b) 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 1996, the Salary Committee made recommendations to the Board of Directors (and the Board of Directors made final decisions) regarding the amounts of the 1996 salaries of Lewis R. Holding, Frank B. Holding, James B. Hyler, Jr., and Frank B. Holding, Jr., and the maximum aggregate amount for 1996 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 1996 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 1996 the officer could be awarded an annual merit increase of up to 8% of 1995 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 amounts of contributions to the separate accounts of executive officers under the Bank's 401(k) salary deferral plan were determined solely by the terms of that plan. 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 11 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 69 Chairman of the Board of BancShares and Bank (Chief Executive Officer) Frank B. Holding 68 Executive Vice Chairman of the Board of BancShares and Bank; formerly Vice Chairman James B. Hyler, Jr. 49 Vice Chairman of the Board of BancShares and Bank (Chief Operating Officer); formerly President Frank B. Holding, Jr. 35 President of BancShares and Bank (Chief Administrative Officer); formerly Area Vice President and Regional Vice President of Bank Kenneth A. Black 44 Vice President and Treasurer of BancShares; Group Vice President and Treasurer of Bank (Chief Financial Officer) Alexander G. MacFadyen, Jr. 55 Secretary of BancShares; Group Vice President and Secretary of Bank Wayne D. Duncan 55 Executive Vice President of Bank (Retail Lending) John R. Francis, Jr. 43 Executive Vice President of Bank (Virginia and West 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 54 Executive Vice President of Bank (Commercial Credit Administration) James M. Parker 54 Executive Vice President of Bank (Eastern Regional Executive) Edward L. Willingham, IV 42 Executive Vice President of Bank (Central Regional Executive); formerly Regional Vice President of Bank J. Allen Woodward 46 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 57 Group Vice President of Bank (Trust Department) Joseph A. Cooper, Jr. 43 Group Vice President and Chief Information Officer of Bank; formerly Associate Partner, Andersen Consulting, Dallas, Texas, and Chief Technology Officer, NationsBank of NC, Charlotte, NC Richard H. Lane 52 Senior Vice President of Bank (General Auditor)
12 EXECUTIVE COMPENSATION The following table shows, for the years ending December 31, 1996, 1995, and 1994, 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 PAYOUTS OTHER RESTRICTED NAME AND ANNUAL STOCK OPTIONS/ LTIP PRINCIPAL SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS POSITION (1) YEAR ($)(2)(3) ($)(4) ($) ($) (#) ($) Lewis R. Holding 1996 570,979 -0- -0- -0- -0- -0- Chairman of the Board 1995 528,971 -0- -0- -0- -0- -0- 1994 504,247 29,669 -0- -0- -0- -0- Frank B. Holding 1996 571,086 -0- -0- -0- -0- -0- Executive Vice Chairman 1995 528,971 -0- -0- -0- -0- -0- of the Board 1994 504,247 29,669 -0- -0- -0- -0- James B. Hyler, Jr. 1996 422,329 -0- -0- -0- -0- -0- Vice Chairman of the Board 1995 384,204 -0- -0- -0- -0- -0- and Chief Operating Officer 1994 365,474 21,546 -0- -0- 1,197 -0- Frank B. Holding, Jr. 1996 250,552 -0- -0- -0- -0- -0- President and Chief 1995 230,125 -0- -0- -0- -0- -0- Administrative Officer 1994 210,333 12,900 -0- -0- -0- -0- James M. Parker, 1996 199,371 -0- -0- -0- -0- -0- Executive Vice President of the 1995 179,856 -0- -0- -0- -0- -0- Bank and Eastern Regional Executive 1994 169,014 9,922 -0- -0- 551 -0- ALL NAME AND OTHER PRINCIPAL COMPENSATION POSITION (1) ($)(5) Lewis R. Holding 9,500 Chairman of the Board 9,240 9,240 Frank B. Holding 9,500 Executive Vice Chairman 9,240 of the Board 9,240 James B. Hyler, Jr. 9,500 Vice Chairman of the Board 9,240 and Chief Operating Officer 9,240 Frank B. Holding, Jr. 8,312 President and Chief 7,406 Administrative Officer 5,214 James M. Parker, 6,108 Executive Vice President of the 5,940 Bank and Eastern Regional Executive 5,940
(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 1996, 1995, and 1994, the Bank was reimbursed certain amounts by two of its affiliates as follows: First-Citizens Bank and Trust Company of South Carolina -- $90,525, $86,214, and $82,109, respectively; and Southern Bank and Trust Company -- $72,231, $68,791, and $65,512, respectively. These payments were made pursuant to agreements between the Bank and its affiliates whereby Mr. Holding provides certain management services to the affiliates in return for their reimbursement to the Bank of a portion of his salary. (4) Consists entirely of awards paid under BancShares' annual cash incentive plan, which was discontinued by the Board of Directors in January 1996. (5) Consists entirely of the Bank's matching contributions on behalf of each named executive officer under the Bank's Section 401(k) salary deferral plan. EMPLOYEE STOCK PURCHASE PLAN During 1994 options to purchase shares of BancShares Class A Common Stock were granted to substantially all employees of BancShares and its subsidiaries pursuant to the 1994 Employee Stock Purchase Plan (the "1994 Stock Plan"), which was approved by shareholders at the 1994 Annual Meeting. No additional options have been granted since 1994, and all options remaining unexercised as of June 15, 1996, expired on that date. 13 The following table contains information with respect to the exercise of stock options during 1996: AGGREGATED OPTION EXERCISES IN 1996 AND DECEMBER 31, 1996 OPTION VALUES
VALUE OF UNEXERCISED IN-THE-MONEY NUMBER OF UNEXERCISED OPTIONS SHARES OPTIONS AT AT DECEMBER ACQUIRED VALUE DECEMBER 31, 1996 31, 1996 ON EXERCISE REALIZED (#) ($) NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE Lewis R. Holding (2) -0- $ -0- -0- -0- $ -0- Frank B. Holding (2) -0- -0- -0- -0- -0- James B. Hyler, Jr. 561 12,437 -0- -0- -0- Frank B. Holding, Jr. (2) -0- -0- -0- -0- -0- James M. Parker 551 13,869 -0- -0- -0- NAME UNEXERCISABLE Lewis R. Holding (2) $ -0- Frank B. Holding (2) -0- James B. Hyler, Jr. -0- Frank B. Holding, Jr. (2) -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) 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 $ 16,708 $ 25,061 $ 33,415 $ 41,769 $ 50,123 $ 58,476 $ 64,476 125,000 21,333 31,999 42,665 53,331 63,998 74,664 82,164 150,000 25,958 38,936 52,915 64,894 77,873 90,851 99,851 175,000 30,583 45,874 61,165 76,456 91,748 107,039 117,539 200,000 35,208 52,811 70,415 88,019 105,623 120,000 120,000 225,000 38,764 58,146 77,528 96,910 116,292 120,000 120,000 250,000 38,764 58,146 77,528 96,910 116,292 120,000 120,000 300,000 38,764 58,146 77,528 96,910 116,292 120,000 120,000 400,000 38,764 58,146 77,528 96,910 116,292 120,000 120,000 450,000 38,764 58,146 77,528 96,910 116,292 120,000 120,000 500,000 38,764 58,146 77,528 96,910 116,292 120,000 120,000 550,000 38,764 58,146 77,528 96,910 116,292 120,000 120,000
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 1996 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, 1997, for each of the named executive officers are as follows: Mr. L. Holding -- 43 years and $237,904; Mr. F. Holding -- 40 years and $237,372; Mr. Hyler -- 17 years and $216,942; Mr. F. Holding, Jr. -- 13 years and $128,212; Mr. Parker -- 30 years and $154,146. During 1996, the maximum annual 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 14 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, 1992, 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 [CHART APPEARS HERE] YEAR + BANCSHARES [ ] NASDAQ BANKS * NASDAQ-US 1991 $100 $100 $100 1992 186 146 116 1993 172 166 134 1994 164 165 131 1995 210 246 185 1996 296 326 227 15 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 Frank B. Holding, Executive Vice Chairman of BancShares, and George H. Broadrick, a director and Chairman of the Executive Committee, also are principal shareholders of First Citizens Bancorporation of South Carolina, Inc. ("Bancorp"). BancShares' directors George H. Broadrick, Carmen P. Holding, and Frank B. Holding also serve as directors of Bancorp. During 1996, BancShares purchased from Bancorp 16,000 shares of the Class A common stock of BancShares at the then current market value of $66 per share, for an aggregate purchase price of $1,056,000. The transaction was pre-approved by the Boards of Directors of both BancShares and Bancorp. Certain specific relationships or transactions with directors are described above in the footnotes 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 1997, 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 1997. 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. PROPOSAL 3: AMENDMENT OF BYLAWS TO INCREASE MAXIMUM AUTHORIZED NUMBER OF DIRECTORS On January 27, 1997, BancShares' Board of Directors approved, and recommended for shareholder consideration and adoption, an amendment to BancShares' Bylaws increasing the maximum number of BancShares' directors from 26 to 30. Under the current Bylaws, the Board of Directors has reached its maximum membership of 26 directors, and no additional directors can be elected without shareholder approval of the proposed bylaw amendment. The Board of Directors recommends that shareholders vote to adopt the proposed bylaw amendment to increase the authorized number of directorships of BancShares. The Board believes that an increase in the authorized number of directors will benefit BancShares by providing flexibility to expand its Board if and when such expansion is deemed appropriate and advisable by the Board, and if qualified candidates for such directorships have been identified. If this proposal is approved by shareholders at the Annual Meeting, Article III, Section 2 of BancShares' Bylaws would be amended to read as follows: Section 2. NUMBER, TERM AND QUALIFICATIONS: The number of directors of the corporation shall be not less than five nor more than thirty. The directors, by a majority vote of the remaining directors, though less than a quorum, or by the sole remaining director, shall determine the exact number of directors, which shall not be less than five nor more than thirty without a Bylaw modification. Each director shall hold office until his death, resignation, retirement, removal, disqualification, or until his successor is elected and qualified. Directors need not be residents of the State of Delaware nor shareholders of the corporation; provided, however, that not less than three-fourths ( 3/4) of the directors shall be residents of the State of North Carolina and stock ownership for qualification shall be subject to North Carolina law. 16 THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSED AMENDMENT OF THE BYLAWS TO INCREASE THE MAXIMUM AUTHORIZED NUMBER OF DIRECTORS OF THE CORPORATION TO THIRTY. THE AFFIRMATIVE VOTE OF A MAJORITY OF VOTES REPRESENTED, IN PERSON AND BY PROXY, AND ENTITLED TO BE CAST AT THE ANNUAL MEETING IS REQUIRED FOR APPROVAL OF PROPOSAL 3. PROPOSALS OF SHAREHOLDERS Any proposal of a shareholder intended to be presented at the 1998 Annual Meeting must be received by BancShares at its principal office in Raleigh, North Carolina no later than November 30, 1997, 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 1998 Annual Meeting will be held on a date during April 1998. 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 31, 1997, 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 1996, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES THERETO, WILL BE FORWARDED WITHOUT CHARGE TO THE SHAREHOLDER MAKING SUCH REQUEST. 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 [sig. appears here] ALEXANDER G. MACFADYEN, JR., SECRETARY March 14, 1997 17 [THIS PAGE LEFT BLANK INTENTIONALLY] 18 1996 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 1996, 1995 and 1994. 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 59 of this report. TABLE 1 FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
1996 1995 1994 1993 1992 (THOUSANDS, EXCEPT SHARE DATA AND RATIOS) SUMMARY OF OPERATIONS Interest income........................................ $ 534,195 $ 471,109 $ 376,005 $ 364,881 $ 390,380 Interest income-taxable equivalent..................... 536,501 $ 473,371 $ 377,858 $ 366,379 $ 391,668 Interest expense....................................... 248,250 224,664 148,126 137,934 170,558 Net interest income-taxable equivalent................. 288,251 248,707 229,732 228,445 221,110 Taxable equivalent adjustment.......................... 2,306 2,262 1,853 1,498 1,288 Net interest income.................................... 285,945 246,445 227,879 226,947 219,822 Provision for loan losses.............................. 8,907 5,364 2,786 15,245 17,506 Net interest income after provision for loan losses...................................... 277,038 241,081 225,093 211,702 202,316 Noninterest income..................................... 103,304 92,128 83,325 85,737 74,303 Noninterest expense.................................... 278,668 245,880 230,582 213,213 199,199 Income before income taxes............................. 101,674 87,329 77,836 84,226 77,420 Income taxes........................................... 36,207 30,423 26,867 28,641 25,657 Net income............................................. $ 65,467 $ 56,906 $ 50,969 $ 55,585 $ 51,763 SELECTED AVERAGE BALANCES Total assets........................................... $7,681,019 $6,846,959 $6,098,944 $5,576,179 $5,308,165 Investment securities.................................. 1,998,059 1,611,549 1,599,565 1,522,715 1,522,571 Loans.................................................. 4,842,266 4,433,517 3,800,318 3,401,093 3,173,285 Interest-earning assets................................ 6,987,659 6,191,422 5,476,690 5,002,144 4,762,846 Deposits............................................... 6,653,302 5,952,090 5,335,057 4,894,319 4,684,982 Interest-bearing liabilities........................... 6,044,553 5,410,495 4,838,749 4,445,120 4,299,143 Long-term obligations.................................. 13,483 26,307 52,499 29,318 18,245 Shareholders' equity................................... $ 576,988 $ 487,895 $ 416,983 $ 362,733 $ 307,818 Shares outstanding..................................... 11,340,982 10,597,066 9,944,927 9,701,389 9,494,118 PROFITABILITY RATIOS (AVERAGES) Rate of return on: Total assets......................................... 0.85% 0.83% 0.84% 1.00% 0.98% Shareholders' equity................................. 11.35 11.66 12.22 15.32 16.82 Dividend payout ratio.................................. 16.03 15.36 14.13 10.91 9.63 LIQUIDITY AND CAPITAL RATIOS (AVERAGES) Loans to deposits...................................... 72.78% 74.49% 71.23% 69.49% 67.73% Shareholders' equity to total assets................... 7.51 7.13 6.84 6.51 5.80 Time certificates of $100,000 or more to total deposits............................................. 8.99 8.33 6.41 5.81 6.36 PER SHARE OF STOCK Net income............................................. $ 5.77 $ 5.37 $ 5.13 $ 5.73 $ 5.45 Cash dividends......................................... 0.925 0.825 0.725 0.625 0.525 Market price at December 31 (Class A).................. 77.00 55.125 43.50 46.50 50.75 Book value at December 31.............................. 53.94 48.60 44.11 39.84 34.74 Tangible book value at December 31..................... 45.42 41.75 39.97 36.53 33.25
20 SUMMARY BancShares experienced a 15 percent increase in earnings during 1996, compared to 1995. The increase was due to increased levels of net interest income and noninterest income. These increases offset the growth in noninterest expense and provision for loan losses that was experienced during 1996. Consolidated net income amounted to $65.5 million during 1996, compared to $56.9 million during 1995 and $51 million during 1994. Net income per share for the year ended December 31, 1996 totaled $5.77, compared to $5.37 and $5.13 for 1995 and 1994, respectively. Return on average assets totaled 0.85 percent, 0.83 percent and 0.84 percent during 1996, 1995 and 1994, respectively. An analysis of BancShares' financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities, and a discussion of these changes and trends follows. The information presented in Table 6 is useful in making such an analysis. BancShares' growth in recent years has resulted partially from various business combinations. Table 2 details the significant transactions for 1995 and 1996, all of which were accounted for as purchases, with the results of operations included with BancShares' Consolidated Statements of Income since the respective acquisition date. TABLE 2 SIGNIFICANT ACQUISITIONS
TOTAL TOTAL DATE INSTITUTION AND LOCATION ASSETS DEPOSITS (THOUSANDS) February 1996 Allied Bank Capital, Inc. $248,998 $208,394 Sanford, North Carolina June 1995 Bank of White Sulphur Springs 64,589 59,174 White Sulphur Springs, West Virginia May 1995 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
INTEREST-EARNING ASSETS Interest-earning assets averaged $6.99 billion during 1996, an increase of $796.2 million or 12.9 percent over 1995 levels, compared to a 13.1 percent increase in 1995 over 1994 levels. Growth among interest-earning assets during 1996 was divided among loans and investment securities. LOANS. As of December 31, 1996, gross loans outstanding were $4.93 billion, a 7.6 percent increase over the December 31, 1995 balance of $4.58 billion. During 1996, loans resulting from acquisitions totaled $205.1 million. Loan balances for the last five years are provided in Table 3. During 1996, average loans were $4.84 billion, an increase of $408.7 million or 9.2 percent over 1995, compared to an increase of $633.2 million or 16.7 percent in 1995 when compared to 1994. Loans secured by real estate averaged $3.04 billion during 1996, compared to $2.75 billion during 1995. Much of the growth in average real estate secured loans during 1996 was among commercial borrowers. Non-real estate commercial and industrial loans also experienced strong growth during 1996, averaging $500.3 million during the current year compared to $438 million in 1995, an increase of $62.3 million or 14.2 percent. Commercial and industrial growth during 1996 was especially strong among small business customers, as BancShares targeted its product array and sales efforts toward these customers. 21 TABLE 3 LOANS
DECEMBER 31, 1996 1995 1994 1993 1992 (THOUSANDS) Real estate: Construction and land development.................... $ 109,806 $ 104,540 $ 100,708 $ 117,693 $ 149,847 Mortgage: 1-4 family residential............................ 1,542,836 1,438,655 1,296,713 1,138,254 1,036,425 Commercial........................................ 882,067 770,246 720,407 614,018 565,735 Equity Line....................................... 411,856 397,225 349,092 293,200 283,331 Other............................................. 132,954 129,292 109,069 56,029 47,860 Commercial and industrial.............................. 514,535 466,462 373,947 408,565 371,656 Consumer............................................... 1,251,704 1,199,400 1,119,994 889,260 706,286 Lease financing........................................ 68,694 59,899 60,598 45,398 35,634 Other.................................................. 16,056 15,000 17,605 22,574 11,101 Total............................................. 4,930,508 4,580,719 4,148,133 3,584,991 3,207,875 Less reserve for loan losses........................... 81,439 78,495 72,017 70,049 58,380 Net loans......................................... $4,849,069 $4,502,224 $4,076,116 $3,514,942 $3,149,495
TABLE 4 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
DECEMBER 31, 1996 WITHIN ONE TO FIVE AFTER ONE YEAR YEARS FIVE YEARS TOTAL (THOUSANDS) Real estate: Construction and land development.................................. $ 39,205 $ 63,878 $ 6,723 $ 109,806 Mortgage: 1-4 family residential.......................................... 273,156 578,660 691,020 1,542,836 Commercial...................................................... 315,033 513,015 54,019 882,067 Equity Line..................................................... 28,830 102,964 280,062 411,856 Other........................................................... 47,506 77,302 8,146 132,954 Commercial and industrial............................................ 200,906 281,616 32,013 514,535 Consumer............................................................. 416,955 809,611 25,138 1,251,704 Lease financing...................................................... 17,174 51,520 -- 68,694 Other................................................................ 5,860 9,046 1,150 16,056 Total........................................................... $1,344,625 $ 2,487,612 $1,098,271 $4,930,508 Loans maturing after one year with: Fixed interest rates............................................... $ 1,758,174 $ 611,179 $2,369,353 Floating or adjustable rates....................................... 729,438 487,092 1,216,530 Total........................................................... $ 2,487,612 $1,098,271 $3,585,883
Consumer loans averaged $1.22 billion during 1996 compared to $1.17 billion during 1995. Demand for retail installment financing continued to languish during 1996. However, the credit card products were in high demand during 1996, the result of a heavy promotion of these products within existing markets early in the year. During 1996, credit card loans averaged $141.8 million, compared to $105.2 million during 1995, an increase of 34.8 percent. During 1997, management anticipates continued growth among commercial loans as the focus on small business and commercial customers continues. Retail loan demand is projected to remain at very modest levels, except for credit card loans, which are expected to continue their expansion through growth within existing markets. The fair value of loans outstanding as of December 31, 1996, net of the loan loss reserve, was $3.5 million above the book value. As of December 31, 1995, the fair value exceeded book value by $21.4 million. The decline in the fair value relative to book is due to changing market rates between the measurement dates. To minimize the potential adverse 22 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, 1996. Of the gross loans outstanding on December 31, 1996, 27.3 percent have scheduled maturities within one year, 50.5 percent have scheduled maturities between one and five years, while the remaining 22.2 percent have scheduled maturities extending beyond five years. INVESTMENT SECURITIES. At December 31, 1996, and 1995, the investment portfolio totaled $2.14 billion and $1.98 billion, respectively. In each period, U.S. Treasury securities represented substantially all of the portfolio. Investment securities averaged $2 billion during 1996, $1.61 billion during 1995 and $1.60 billion during 1994. The $386.5 million or 24 percent increase in the average investment security portfolio during 1996 was the result of enhanced liquidity resulting from sustained deposit growth. The weighted-average maturity of the investment portfolio was 17 months at December 31, 1996, compared to 15 months at December 31, 1995. Management continues to maintain a portfolio of securities with short maturities, an indication of BancShares' strong focus on liquidity. At December 31, 1996, the fair value of the investment portfolio was $800,000 below book value. The unrealized gain existing as of December 31, 1995, was $8.6 million. The investment portfolio's decline in fair value at December 31, 1996 resulted from the maturity of higher-yielding securities and the reinvestment at lower market rates during late 1996. Table 5 presents detailed information relating to the investment portfolio. TABLE 5 INVESTMENT SECURITIES
DECEMBER 31 1996 AVERAGE TAXABLE- 1995 1994 BOOK FAIR MATURITY EQUIVALENT BOOK FAIR BOOK FAIR VALUE VALUE (YRS./MOS.) YIELD VALUE VALUE VALUE VALUE (THOUSANDS) U.S. Government: Within one year........... $ 778,908 $ 779,668 0/6 5.83% $ 927,931 $ 930,120 $ 849,279 $ 838,341 One to five years......... 1,340,399 1,338,453 1/10 5.78 1,034,722 1,040,954 599,147 575,193 Five to ten years......... 3,312 3,301 6/9 5.82 2,305 2,258 2,496 2,281 Over ten years............ 7,418 7,501 18/6 7.42 7,171 7,198 3,029 2,918 Total.................. 2,130,037 2,128,923 1/5 5.80 1,972,129 1,980,530 1,453,951 1,418,733 State, county and municipal: Within one year........... 1,128 1,135 0/7 6.38 1,324 1,328 361 364 One to five years......... 3,717 3,997 2/10 7.00 4,287 4,355 1,872 1,871 Five to ten years......... 1,456 1,493 7/6 7.45 2,227 2,323 2,370 2,314 Over ten years............ -- -- -- -- 195 195 -- -- Total.................. 6,301 6,625 3/7 6.99 8,033 8,201 4,603 4,549 Other: Within one year........... 1,300 1,299 0/5 6.73 506 506 100 100 One to five years......... 1,158 1,149 1/10 11.56 2,425 2,424 -- -- Five to ten years......... 35 35 5/7 6.96 55 55 315 315 Total.................. 2,493 2,483 11/9 8.62 2,986 2,985 415 415 Total investment securities........... $2,138,831 $2,138,031 1/5 5.81% $1,983,148 $1,991,716 $1,458,969 $1,423,697
At December 31, 1996, BancShares had marketable equity securities with a fair value of $22.1 million classified as available for sale that were included in other assets. These securities are recorded at their fair value, and the unrealized gain is recorded as a component of shareholders' equity. INCOME ON INTEREST-EARNING ASSETS. Table 6 analyzes the Bank's interest-earning assets and interest-bearing liabilities for the five years ending December 31, 1996. Table 9 identifies the causes for changes in interest income and interest expense for 1996 and 1995. Taxable-equivalent interest income amounted to $536.5 million during 1996, a $63.1 million increase from 1995 levels, compared to a $95.5 million increase from 1994 to 1995. Volume growth and higher yields contributed to the increase in interest income during both periods. 23 TABLE 6 AVERAGE BALANCE SHEETS
1996 1995 INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE (THOUSANDS, TAXABLE EQUIVALENT) ASSETS Loans: Secured by real estate.................................... $3,037,689 $250,356 8.24 % $2,752,463 $233,055 8.47 % Commercial and industrial................................. 500,313 44,911 8.98 437,970 41,099 9.38 Consumer.................................................. 1,221,063 110,838 9.08 1,167,923 102,666 8.79 Lease financing........................................... 66,557 5,398 8.11 58,332 4,499 7.71 Other..................................................... 16,644 1,329 7.98 16,829 1,402 8.33 Total loans............................................. 4,842,266 412,832 8.53 4,433,517 382,721 8.63 Investment securities: U.S. Government........................................... 1,988,518 114,831 5.77 1,600,713 81,219 5.07 State, county and municipal............................... 6,607 507 7.67 8,016 622 7.76 Other..................................................... 2,934 172 5.86 2,820 184 6.52 Total investment securities............................. 1,998,059 115,510 5.78 1,611,549 82,025 5.09 Federal funds sold.......................................... 147,334 8,159 5.54 146,356 8,625 5.89 Total interest-earning assets........................... 6,987,659 $536,501 7.68 % 6,191,422 $473,371 7.65 % Cash and due from banks..................................... 324,353 349,998 Premises and equipment...................................... 218,434 200,674 Other assets................................................ 231,140 180,675 Reserve for loan losses..................................... (80,567) (75,810) Total assets............................................ $7,681,019 $6,846,959 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking With Interest.................................... $ 878,878 $ 10,791 1.23 % $ 816,391 $ 13,555 1.66 % Savings................................................... 719,962 15,059 2.09 693,187 15,728 2.27 Money market accounts..................................... 825,139 29,217 3.54 742,537 25,167 3.39 Time...................................................... 3,258,713 175,838 5.40 2,824,074 152,784 5.41 Total interest-bearing deposits......................... 5,682,692 230,905 4.06 5,076,189 207,234 4.08 Short-term borrowings....................................... 348,378 16,388 4.70 307,999 15,773 5.12 Long-term obligations....................................... 13,483 957 7.10 26,307 1,657 6.30 Total interest-bearing liabilities...................... 6,044,553 $248,250 4.11 % 5,410,495 $224,664 4.15 % Demand deposits............................................. 970,610 875,901 Other liabilities........................................... 88,868 72,668 Shareholders' equity........................................ 576,988 487,895 Total liabilities and shareholders' equity.............. $7,681,019 $6,846,959 Interest rate spread........................................ 3.57 % 3.50 % Net interest income and net yield on interest-earning assets.................................................... $288,251 4.13 % $248,707 4.02 %
Average loan balances include nonaccrual loans. While total interest-earning assets yielded 7.68 percent during 1996, a slight increase over the 7.65 percent reported in 1995, the average taxable-equivalent yield on the loan portfolio fell from 8.63 percent in 1995 to 8.53 percent in 1996. The lower loan yield during 1996 reflects the competitive pricing that exists in BancShares' market areas. Taxable-equivalent loan interest income increased $30.1 million or 7.9 percent from 1995, the result of loan growth. This followed an increase of 26.4 percent in taxable-equivalent loan income in 1995 from 1994. 24 TABLE 6 AVERAGE BALANCE SHEETS (CONTINUED)
1994 1993 1992 INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE (THOUSANDS, TAXABLE EQUIVALENT) $2,265,054 $177,494 7.84 % $2,173,262 $170,150 7.83 % $2,075,604 $168,686 8.13 % 440,566 34,165 7.75 381,722 27,596 7.23 390,132 34,241 8.78 1,012,359 85,523 8.45 789,374 71,112 9.01 664,924 70,158 10.55 51,160 3,861 7.55 40,576 3,433 8.46 31,911 3,108 9.74 31,179 1,741 5.58 16,159 985 6.10 10,714 650 6.07 3,800,318 302,784 7.97 3,401,093 273,276 8.03 3,173,285 276,843 8.72 1,597,051 71,573 4.48 1,521,949 90,655 5.96 1,521,154 112,447 7.39 2,192 176 8.03 451 43 9.53 1,102 102 9.26 322 28 8.70 315 20 6.35 315 16 5.08 1,599,565 71,777 4.49 1,522,715 90,718 5.96 1,522,571 112,565 7.39 76,807 3,297 4.29 78,336 2,385 3.04 66,990 2,260 3.37 5,476,690 $377,858 6.90 % 5,002,144 $366,379 7.32 % 4,762,846 $391,668 8.22 % 354,875 320,668 306,795 189,421 169,062 159,692 148,932 147,422 135,319 (70,974) (63,117) (56,487) $6,098,944 $5,576,179 $5,308,165 $ 788,673 $ 13,495 1.71 % $ 704,614 $ 13,271 1.88 % $ 596,399 $ 15,192 2.55 % 687,322 15,390 2.24 571,559 14,413 2.52 475,554 14,889 3.13 788,063 19,280 2.45 797,260 19,017 2.39 816,059 25,120 3.08 2,279,639 89,127 3.91 2,116,104 83,653 3.95 2,163,094 107,113 4.95 4,543,697 137,292 3.02 4,189,537 130,354 3.11 4,051,106 162,314 4.01 242,553 8,314 3.43 226,265 6,118 2.70 229,792 7,167 3.12 52,499 2,520 4.80 29,318 1,462 4.99 18,245 1,077 5.90 4,838,749 $148,126 3.06 % 4,445,120 $137,934 3.10 % 4,299,143 $170,558 3.97 % 791,360 704,782 633,876 51,852 63,544 67,328 416,983 362,733 307,818 $6,098,944 $5,576,179 $5,308,165 3.84 % 4.22 % 4.25 % $229,732 4.19 % $228,445 4.57 % $221,110 4.64 %
Taxable-equivalent interest income earned on the investment portfolio amounted to $115.5 million, $82 million and $71.8 million during the years ended December 31, 1996, 1995 and 1994, respectively. The average taxable-equivalent yield on the portfolio for these years was 5.78 percent, 5.09 percent and 4.49 percent, respectively. The $33.5 million increase in taxable-equivalent investment interest income during 1996 reflected the benefit of the portfolio growth as well as a 69 basis point yield increase. The $10.2 million increase in taxable-equivalent interest income from 1994 to 1995 was the result of a 60 basis point yield increase. During 1996, securities purchased during 1994 matured and were reinvested at higher rates, allowing the portfolio yield to increase. 25 INTEREST-BEARING LIABILITIES At December 31, 1996 and 1995, interest-bearing liabilities totaled $6.27 billion and $5.84 billion, respectively. Interest-bearing liabilities averaged $6.04 billion during 1996, an increase of 11.7 percent over 1995 levels, with most of the growth occurring in interest-bearing deposits. During 1995, interest-bearing liabilities averaged $5.41 billion, an increase of 11.8 percent over 1994. DEPOSITS. At December 31, 1996, deposits totaled $6.95 billion, an increase of $565.9 million or 8.9 percent from December 31, 1995. Acquisitions contributed to $208.4 million of the increase, with the remaining growth coming from the existing branch network. Total deposits averaged $6.65 billion in 1996, an increase of 11.8 percent or $701.2 million over 1995. Average interest-bearing deposits were $5.68 billion during 1996, an increase of $606.5 million or 11.9 percent over 1995. Time deposits averaged $3.26 billion during 1996, an increase of $434.6 million or 15.4 percent over 1995. Average time deposits increased $544.4 million or 23.9 percent from 1994 to 1995. Various acquisitions contributed to some of these increases, as did higher demand for time certificates as rates increased slightly during 1995 and early 1996. The average rate on time deposits increased from 3.91 percent in 1994 to 5.41 percent in 1995 and 5.40 percent in 1996. BancShares avoids excessive reliance on large denomination deposits. During 1996, these funds averaged 8.99 percent of total average deposits, compared to 8.33 percent in 1995. Table 7 provides a maturity distribution for these deposits. TABLE 7 MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1996 (THOUSANDS) Less than three months........................................................... $ 297,213 Three to six months.............................................................. 173,205 Six to 12 months................................................................. 98,990 More than 12 months.............................................................. 47,668 Total.......................................................................... $ 617,076
BORROWED FUNDS. BancShares has access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and credit lines with various correspondent banks. At December 31, 1996, short-term borrowings totaled $392 million, compared to $376.5 million one year earlier. For the year ended December 31, 1996, short-term borrowings averaged $348.4 million, compared to $308 million during 1995 and $242.6 million during 1994. The increase from 1995 to 1996 and from 1994 to 1995 resulted from growth in First Citizens' Master Note program, an overnight borrowing arrangement between BancShares and bank customers. Table 8 provides additional information regarding short-term borrowed funds. 26 TABLE 8 SHORT-TERM BORROWINGS
1996 1995 1994 AMOUNT RATE AMOUNT RATE AMOUNT RATE (THOUSANDS) Master notes At December 31............................................. $295,428 4.23 % $257,178 4.74 % $173,250 4.68 % Average during year........................................ 266,476 4.46 203,114 4.96 168,725 3.24 Maximum month-end balance during year...................... 316,628 -- 257,178 -- 197,942 -- Federal funds purchased At December 31............................................. 45,075 6.27 64,085 5.44 76,430 5.83 Average during year........................................ 32,948 6.24 49,226 5.83 21,079 4.09 Maximum month-end balance during year...................... 57,740 -- 72,165 -- 76,430 -- Repurchase agreements At December 31............................................. 21,816 3.98 25,022 4.46 14,970 4.43 Average during year........................................ 21,633 4.30 23,784 4.86 20,991 3.17 Maximum month-end balance during year...................... 22,497 -- 25,337 -- 20,961 -- U.S. Treasury tax and loan accounts At December 31............................................. 20,356 4.38 17,581 5.49 20,046 5.26 Average during year........................................ 15,318 5.09 17,070 5.71 24,195 3.78 Maximum month-end balance during year...................... 27,248 -- 22,410 -- 30,117 -- Other At December 31............................................. 9,331 6.02 12,665 4.50 6,165 4.58 Average during year........................................ 12,003 6.14 14,805 4.69 7,563 5.38 Maximum month-end balance during year...................... 19,901 -- 16,666 -- 10,164 --
At December 31, 1996 and 1995, long-term obligations totaled $6.9 million and $23 million, respectively. During 1996, long-term obligations averaged $13.5 million, compared to $26.3 million during 1995 and $52.5 million during 1994. The reduction from 1994 to 1995 and from 1995 to 1996 results from the reclassification of long-term obligations to short-term borrowings once the scheduled maturity is within twelve months. The larger balances in prior years primarily related to liabilities assumed from acquired institutions. EXPENSE OF INTEREST-BEARING LIABILITIES. Interest expense amounted to $248.3 million in 1996, a $23.6 million or 10.5 percent increase from 1995. This followed a 51.7 percent increase in interest expense during 1995 compared to 1994. The increased interest expense during 1996 was the result of growth in interest-bearing liabilities, while the increase from 1994 to 1995 was the combined result of higher market rates and growth in deposit liabilities. The aggregate rate on interest-bearing deposits was 4.06 percent during 1996, compared to 4.08 percent during 1995 and 3.02 percent during 1994. Interest expense on total interest-bearing deposits amounted to $230.9 million during 1996, $207.2 million during 1995 and $137.3 million during 1994. Interest expense on short-term borrowings amounted to $16.4 million in 1996, an increase of $615,000 or 3.9 percent from 1995. The increase was attributable to the growth in short-term borrowings during 1996. Interest expense related to short-term borrowings totaled $15.8 million and $8.3 million, respectively, in 1995 and 1994. Interest expense associated with long-term obligations decreased during 1996 to $957,000 from $1.7 million recorded during 1995. The decrease results from a reduction in average long-term obligations. 27 TABLE 9 CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
1996 1995 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.................................. $23,895 $(6,594) $17,301 $39,186 $ 16,375 $ 55,561 Commercial and industrial............................... 5,706 (1,894) 3,812 (224) 7,158 6,934 Consumer................................................ 4,484 3,688 8,172 13,474 3,669 17,143 Lease financing......................................... 650 249 899 549 89 638 Other................................................... (15) (58) (73) (999) 660 (339) Total loans.......................................... 34,720 (4,609) 30,111 51,986 27,951 79,937 Investment securities: U.S. Government......................................... 21,034 12,578 33,612 194 9,452 9,646 State, county and municipal............................. (109) (6) (115) 460 (14) 446 Other................................................... 7 (19) (12) 190 (34) 156 Total investment securities.......................... 20,932 12,553 33,485 844 9,404 10,248 Federal funds sold........................................ 52 (518) (466) 3,541 1,787 5,328 Total interest-earning assets........................ $55,704 $ 7,426 $63,130 $56,371 $ 39,142 $ 95,513 INTEREST EXPENSE Deposits: Checking With Interest.................................. $ 892 $(3,656) $(2,764) $ 464 $ (404) $ 60 Savings................................................. 593 (1,262) (669) 132 206 338 Money market accounts................................... 2,868 1,182 4,050 (1,318) 7,205 5,887 Time.................................................... 23,425 (371) 23,054 25,375 38,282 63,657 Total interest-bearing deposits...................... 27,778 (4,107) 23,671 24,653 45,289 69,942 Short-term borrowings..................................... 1,988 (1,373) 615 2,802 4,657 7,459 Long-term obligations..................................... (859) 159 (700) (1,454) 591 (863) Total interest-bearing liabilities................... $28,907 $(5,321) $23,586 $26,001 $ 50,537 $ 76,538 Change in net interest income........................ $26,797 $12,747 $39,544 $30,370 $(11,395) $ 18,975
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 $2,306, $2,262, and $1,853 for the years 1996, 1995 and 1994, respectively. Table 6 provides detailed information on average balances, income/expense and yield/rate by category. The unallocated variance is divided equally between the changes in volume and rate. NET INTEREST INCOME Taxable-equivalent net interest income totaled $288.3 million during 1996, an increase of 15.9 percent over 1995. This followed an increase of 8.3 percent during 1995. 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. The interest rate spread increased to 3.57 percent during 1996 compared to 3.50 percent during 1995 but was less than the 3.84 percent achieved in 1994. The average net yield on interest-earning assets increased by 11 basis points to 4.13 percent in 1996 when compared to 1995. This followed a 17 basis point reduction in 1995 when compared to 1994. 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 28 December 31, 1996, which reflected a one year interest-sensitivity gap of $913 million. The liability-sensitive position is most acute in the first six months. As a result of this one year interest-sensitivity gap, increases in interest rates could have an unfavorable impact on net interest income. TABLE 10 INTEREST-SENSITIVITY ANALYSIS
DECEMBER 31, 1996 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......................... $1,310,186 $ 150,803 $ 235,709 $ 471,141 $2,167,839 $2,762,669 $4,930,508 Investment securities......... 99,228 125,832 159,241 399,638 783,939 1,354,892 2,138,831 Federal funds sold............ 156,000 -- -- -- 156,000 -- 156,000 Total interest-earning assets................. $1,565,414 $ 276,635 $ 394,950 $ 870,779 $3,107,778 $4,117,561 $7,225,339 LIABILITIES: Checking With Interest........ -- -- -- -- -- $ 943,900 $ 943,900 Savings and money market accounts.................... $ 892,953 -- -- -- $ 892,953 712,525 1,605,478 Time deposits................. 598,393 $ 748,147 $ 855,057 $ 534,394 2,735,991 581,185 3,317,176 Short-term borrowings......... 382,701 -- 9,305 -- 392,006 -- 392,006 Long-term obligations......... -- -- -- -- -- 6,922 6,922 Total interest-bearing liabilities............ $1,874,047 $ 748,147 $ 864,362 $ 534,394 $4,020,950 $2,244,532 $6,265,482 Interest-sensitivity gap...... $ (308,633) $(471,512) $(469,412) $ 336,385 $ (913,172) $1,873,029 $ 959,857
Assets and liabilities with maturities of one year or less and those that may be adjusted within this period are considered interest-sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. In addition to other asset/liability management strategies, BancShares generally underwrites long-term fixed-rate residential mortgage loans to secondary market standards and sells such loans as they are originated. As of December 31, 1996, BancShares had $27.7 million in residential mortgage loans available 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 asset balances for the past five years are presented in Table 11. BancShares' nonperforming assets at December 31, 1996 included nonaccrual loans totaling $12.8 million and $1.2 million in foreclosed property. Nonperforming assets as of December 31, 1996 represent 0.28 percent of loans outstanding. Total nonperforming assets totaled $15.4 million and $27 million, respectively, as of December 31, 1995, and 1994. Of the $12.8 million in nonaccrual loans at December 31, 1996, $9.9 million was classified as impaired. Of the $13.2 million in nonaccrual loans at December 31, 1995, $11.1 million was classified as impaired. 29 TABLE 11 RISK ELEMENTS
DECEMBER 31 1996 1995 1994 1993 1992 (THOUSANDS, EXCEPT RATIOS) Nonaccrual loans....................................... $ 12,810 $ 13,208 $ 21,069 $ 33,726 $ 25,814 Restructured loans..................................... -- -- -- 571 2,267 Other real estate...................................... 1,160 2,154 5,926 15,879 8,000 Total nonperforming assets........................... $ 13,970 $ 15,362 $ 26,995 $ 50,176 $ 36,081 Accruing loans 90 days or more past due................ $ 4,983 $ 4,230 $ 5,326 $ 9,202 $ 6,960 Loans at December 31................................... $4,930,508 $4,580,719 $4,148,133 $3,584,991 $3,207,875 Ratio of nonperforming assets to total loans plus other real estate.......................................... 0.28% 0.34% 0.65% 1.39% 1.12% Interest income that would have been earned on nonperforming loans had they been performing......... $ 1,162 $ 1,556 $ 1,430 $ 2,354 $ 2,413 Interest income earned on nonperforming loans.......... 259 595 693 1,083 1,291
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, 1996. 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, 1996, BancShares' reserve for loan losses was $81.4 million or 1.65 percent of loans outstanding. This compares to $78.5 million or 1.71 percent at December 31, 1995, and $72 million or 1.74 percent at December 31, 1994. 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
1996 1995 1994 1993 1992 (THOUSANDS, EXCEPT RATIOS) Balance at beginning of year........................... $ 78,495 $ 72,017 $ 70,049 $ 58,380 $ 53,730 Reserve of acquired institutions....................... 1,387 3,231 1,009 8,269 -- Provision for loan losses.............................. 8,907 5,364 2,786 15,245 17,506 Charge-offs: Real estate: Construction and land development................. (40) (118) (334) (786) (460) Mortgage: 1-4 family residential.......................... (1,604) (994) (1,048) (1,349) (1,376) Commercial...................................... (248) (255) (1,502) (2,013) (4,614) Equity Line..................................... (58) (47) (192) (250) (293) Other........................................... (52) (34) -- (3) (16) Commercial and industrial............................ (1,076) (826) (1,302) (7,331) (3,809) Consumer............................................. (8,515) (4,988) (4,085) (3,860) (4,965) Lease financing...................................... (60) -- (17) (51) (39) Total charge-offs................................. (11,653) (7,262) (8,480) (15,643) (15,572) Recoveries: Real estate: Construction and land development................. 307 440 920 230 106 Mortgage: 1-4 family residential.......................... 1,534 1,160 834 286 218 Commercial...................................... 530 1,476 2,765 856 578 Equity Line..................................... 19 28 28 85 1 Other........................................... -- -- -- 3 -- Commercial and industrial............................ 493 761 689 1,240 697 Consumer............................................. 1,420 1,233 1,396 1,085 1,116 Lease financing...................................... -- 47 21 13 -- Total recoveries.................................. 4,303 5,145 6,653 3,798 2,716 Net charge-offs................................... (7,350) (2,117) (1,827) (11,845) (12,856) Balance at end of year................................. $ 81,439 $ 78,495 $ 72,017 $ 70,049 $ 58,380 HISTORICAL STATISTICS Balances Average total loans.................................. $4,842,266 $4,433,517 $3,800,318 $3,401,093 $3,173,285 Total loans at year-end.............................. 4,930,508 4,580,719 4,148,133 3,584,991 3,207,875 Ratios Net charge-offs to average total loans............... 0.15% 0.05% 0.05% 0.35% 0.41% Reserve for loan losses to total loans at year-end.......................................... 1.65 1.71 1.74 1.95 1.82
All information presented in this table relates to domestic loans as BancShares makes no foreign loans. The provision for loan losses charged to operations was $8.9 million during 1996 compared to $5.4 million during 1995 and $2.8 million during 1994. The increase in the provision during 1996 was primarily due to higher net charge-offs and growth in unsecured credit card loans. Net charge-offs for 1996 totaled $7.4 million, compared to $2.1 million during 1995 and $1.8 million during 1994. The rise in net charge-offs during 1996 can be attributed to an increase in charge-offs among consumer loans. Net charge-offs of consumer loans during 1996 were $7.1 million, compared to $3.8 million during 1995 and $2.7 million during 1994, as higher losses were sustained within the retail installment and credit card portfolios. Net charge-offs of credit card loans during 1996 was $2.7 million, compared to $1.2 million during 1995 and $1 million during 1994. Management believes that during 1997, total charge-offs, as a percentage of loans, will approximate the losses sustained during 1996. As a result of the higher level of personal bankruptcies, retail charge-offs will continue to be closely monitored. Continued strong credit quality should result in very modest commercial charge-offs. 31 During 1996, loans secured by real estate experienced net recoveries of $382,000. During 1995 and 1994, net recoveries on these loans were $1.7 million and $1.5 million, respectively. Commercial and industrial loans experienced net charge-offs of $583,000 during 1996, compared to net charge-offs of $65,000 in 1995. Stringent underwriting standards continue to result in minimal losses among the commercial and real-estate secured portfolios. The ratio of net charge-offs to average loans equaled 0.15 percent during 1996, up 10 basis points from the 0.05 percent levels of 1995 and 1994. Despite the increase in net charge-offs during 1996, the loss ratios reflect the quality of BancShares' balance sheet, as these ratios are low by industry standards. 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, 1996, although future additions to the reserve may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserve for loan losses. Such agencies may require the recognition of additions to the reserve based on their judgments of information available to them at the time of their examination. Table 13 details management's allocation of the reserve among the various loan types. At December 31, 1996, BancShares had no foreign loans or any material highly leveraged transactions. Further, management does not contemplate originating or participating in such transactions in the foreseeable future. TABLE 13 ALLOCATION OF RESERVE FOR LOAN LOSSES
DECEMBER 31 1996 1995 1994 1993 1992 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.................... $3,234 2.23% $3,090 2.28% $2,919 2.43% $3,135 3.28% $3,491 Mortgage: 1-4 family residential......... 13,127 31.29 13,125 31.42 13,459 31.26 15,175 31.74 13,373 Commercial..................... 16,514 17.89 15,305 16.81 13,636 17.37 13,997 17.13 13,181 Equity Line.................... 2,898 8.35 2,788 8.67 2,585 8.42 2,112 8.18 2,042 Other.......................... 1,798 2.70 1,318 2.82 1,581 2.63 1,493 1.56 738 Commercial and industrial.......... 9,243 10.44 8,384 10.18 10,029 9.01 11,650 11.40 8,190 Consumer........................... 24,890 25.38 21,587 26.18 20,373 27.00 17,079 24.81 14,875 Lease financing.................... 985 1.39 639 1.31 197 1.46 454 1.27 356 Other.............................. 324 0.33 -- 0.33 -- 0.42 -- 0.63 -- Unallocated........................ 8,426 -- 12,259 -- 7,238 -- 4,954 -- 2,134 Total.......................... $81,439 100.00% $78,495 100.00% $72,017 100.00% $70,049 100.00% $58,380 PERCENT OF LOANS TO TOTAL LOANS Real estate: Construction and land development.................... 4.67% Mortgage: 1-4 family residential......... 32.31 Commercial..................... 17.64 Equity Line.................... 8.83 Other.......................... 1.49 Commercial and industrial.......... 11.59 Consumer........................... 22.01 Lease financing.................... 1.11 Other.............................. 0.35 Unallocated........................ -- Total.......................... 100.00%
NONINTEREST INCOME Total noninterest income was $103.3 million during 1996, an increase of 12.1 percent. This compares to $92.1 million during 1995 and $83.3 million during 1994. Table 14 presents the major components of noninterest income for the past five years. Trust income was $10 million in 1996, up 12.6 percent from 1995 principally due to growth in retirement plan services. Income from service charges on deposit accounts was $40.7 million during 1996, an increase of 2 percent. This increase was the result of growth in retail individual service charge income due to an increase in the number of customer accounts. Service charge income amounted to $39.9 million and $38.6 million for the years ended December 31, 1995 and 1994, respectively. 32 TABLE 14 NONINTEREST INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 (THOUSANDS) Trust income.......................................................... $ 10,008 $ 8,886 $ 8,228 $ 7,197 $ 6,087 Service charges on deposit accounts................................... 40,710 39,909 38,567 43,277 42,130 Credit card income.................................................... 16,147 13,561 12,390 10,618 9,512 Other service charges and fees........................................ 23,878 21,227 16,672 8,564 8,078 Investment securities gains........................................... -- -- -- -- 2,363 Gain (loss) on sale of mortgage loans................................. 502 809 (862) 8,010 1,345 Other................................................................. 12,059 7,736 8,330 8,071 4,788 Total............................................................... $103,304 $92,128 $83,325 $85,737 $74,303
Credit card income was $16.1 million during 1996, a $2.6 million or 19.1 percent increase over 1995, primarily the result of increased bankcard interchange income. The $13.6 million earned by the credit card operation during 1995 represented an increase of $1.2 million or 9.5 percent over 1994. During 1996, BancShares conducted a successful promotion of various credit card products, including a new feature that allows cardholders to accumulate mileage toward discounted or free airline travel. The program was well-received by both existing customers and new customers, and approximately 26,000 new accounts were opened during 1996. Management believes there is significant growth potential in the credit card function within existing markets. In an effort to maximize the profitability of the operation, BancShares plans to relocate the credit card function to the Roanoke, Virginia area. Virginia banking laws offer greater flexibility in rates and fees and will allow more competitive credit card terms. Subject to regulatory approval, the move is scheduled for mid-1997. Management anticipates continued growth within the credit card function during 1997. Fee-based income amounted to $23.9 million in 1996, $21.2 million in 1995 and $16.7 million in 1994. Growth in this area during 1996 resulted from fees generated from the sale of mutual fund and annuity products by First Citizens Investor Services. During 1996, BancShares collected $2.8 million from ATM convenience fees, a fee paid by non-customers who access their accounts at other banks through BancShares' ATM network. No such fees were collected during 1995. Sales of portions of the current production of residential mortgage loan portfolio resulted in net gains of $502,000 during 1996. During 1995, BancShares recorded net gains of $809,000. Despite an increase in the gross proceeds from the sale of mortgage loans, market rate changes reduced the net gains that were recorded. During 1996, as a result of these loan sales, BancShares capitalized an originated mortgage servicing asset of $606,000. As of December 31, 1996, management is not aware of any impairment issues related to that asset. NONINTEREST EXPENSE Total noninterest expense for 1996 amounted to $278.7 million. This was a 13.3 percent increase over 1995, following an 6.6 percent increase of 1995 noninterest expenses over 1994. Table 15 presents the major components of noninterest expense for the past five years. Salary expense was $115.5 million during 1996, compared to $106.6 million during 1995, an increase of $8.9 million or 8.3 percent, following a $7.3 million or 7.4 percent increase in 1995 over 1994. Increases during each period resulted from merit increases and acquisitions, as well as new positions established for certain operational functions. During 1995, BancShares centralized the credit underwriting process for various loan products. During 1996, BancShares established FCDirect, a significant expansion of the alternative delivery network. This resulted in new positions for telephone banking, home banking, and financial service center banking. Employee benefits were $20.4 million during 1996, an increase of $3.3 million or 19.6 percent from 1995. The $17.1 million in benefits expense recorded during 1995 represented an increase of $2.5 million or 17.5 percent over 1994. During 1996, BancShares' health and life plans cost $7.2 million, compared to $5.8 million during 1995, as health costs continue to increase. Higher pension and FICA expenses also contributed to the increase in total employee benefits expense. 33 TABLE 15 NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 (THOUSANDS) Salaries and wages............................................... $115,461 $106,607 $ 99,282 $ 92,579 $ 85,195 Employee benefits................................................ 20,425 17,080 14,535 13,500 12,791 Occupancy expense................................................ 22,023 20,446 18,691 16,972 15,675 Equipment expense................................................ 27,068 24,504 23,839 21,231 19,808 FDIC insurance................................................... 13,586 8,418 11,831 10,496 10,739 Credit card expense.............................................. 10,097 9,106 8,587 6,814 6,416 Amortization of intangibles...................................... 8,197 5,877 3,993 3,157 3,349 Telecommunication expense........................................ 7,711 6,790 6,743 6,528 5,717 Postage.......................................................... 6,383 5,701 4,907 3,996 3,920 Other............................................................ 47,717 41,351 38,174 37,940 35,589 Total.......................................................... $278,668 $245,880 $230,582 $213,213 $199,199
BancShares recorded occupancy expense of $22 million during 1996, an increase of $1.6 million or 7.7 percent during 1996 due to increased local property tax expense and higher depreciation expense on new and renovated facilities. Occupancy expense during 1995 was $20.4 million, an increase of $1.8 million or 9.4 percent over 1994. Equipment expense for 1996 was $27.1 million, an increase of $2.6 million or 10.5 percent over 1995, when total equipment expenses were $24.5 million. The increase during 1996 resulted from the replacement of much of the computer equipment in the branch network during late 1995 and early 1996. This upgrade was necessary to improve the efficiency of the product delivery systems. The cost of FDIC insurance was $13.6 million during 1996, an increase of $5.2 million or 61.4 percent. The increase was due to a special one-time assessment on deposit liabilities insured by the FDIC's Savings Association Insurance Fund ("SAIF"). First Citizens paid $10 million for the assessment, which was to establish sufficient reserves for the SAIF. Following the September 30, 1996 assessment, the SAIF was adequately capitalized, and excess prepaid premiums were refunded, resulting in a reduction in the impact of the assessment. Total cost of FDIC insurance was $8.4 million in 1995 and $11.8 million during 1994. The reduction from 1994 to 1995 occurred as a result of the earlier recapitalization of the FDIC's Bank Insurance Fund. Expenses related to the amortization of intangibles were $8.2 million during 1996, an increase of $2.3 million or 39.5 percent. The increase resulted from the goodwill capitalized in the acquisition of Allied Bank Capital, Inc. Intangible amortization totaled $5.9 million during 1995 and $4 million during 1994, the increase resulting from intervening acquisitions. Telecommunications expense increased $921,000 during 1996 due to the introduction of FCDirect, the network of alternative delivery channels that includes telephone banking and PC banking. Telecommunications expense was $7.7 million during 1996, $6.8 million during 1995 and $6.7 million during 1994. INCOME TAXES During 1996, BancShares recorded total income tax expense of $36.2 million, compared to $30.4 million in income tax expense during 1995, the increase resulting from higher pre-tax income. BancShares' effective tax rate was 35.6 percent in 1996, 34.8 in 1995 and 34.5 percent in 1994. 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, 1996, the investment portfolio totaled $2.14 billion or 26.6 percent of total assets. This compares to $1.98 billion or 26.9 percent in 1995. 34 The Bank's ability to generate retail deposits is an additional source of liquidity. The rate of growth in average deposits was 11.8 percent during 1996, 11.6 percent during 1995 and 9 percent during 1994. The deposit increase results from the existing branch network as well as deposit liability assumptions associated with various business combinations. These liquidity sources have enabled BancShares to place little dependence on 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 11.5 percent, 10.9 percent and 11.3 percent, respectively, at December 31, 1996, 1995 and 1994. BancShares' core capital ratios for December 31, 1996, 1995 and 1994 were 10.2 percent, 9.6 percent, and 10.1 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, 1996, BancShares' leverage capital ratio was 6.4 percent, compared to 6.1 percent and 6.5 percent at December 31, 1995 and 1994, respectively. The minimum leverage ratio is 3 percent. Failure to meet certain capital requirements may result in certain actions by regulatory agencies that could have a direct material effect on the financial statements. The rate of return on average shareholders' equity during 1996, 1995 and 1994 amounted to 11.4 percent, 11.7 percent and 12.2 percent, respectively. During the fourth quarter of 1996 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 1996 totaled $19.8 million, compared to $16.3 million during the same period of 1995. As shown in Table 16, during the fourth quarter of 1996 and 1995, total assets averaged $7.94 billion and $7.28 billion, respectively. Average interest-earning assets increased 9.3 percent during the fourth quarter of 1996, compared to the same period of 1995. Average loans outstanding during the fourth quarter increased $343.8 million during 1996 over 1995. Average investment securities increased $226.4 million between the two periods, the result of deposit growth at sufficient levels to generate additional liquidity. Taxable-equivalent interest income on interest-earning assets increased $11.3 million or 8.9 percent in the fourth quarter of 1996 when compared to the same period of 1995. The improved interest income during 1996 resulted from a $5.9 million increase in loan interest income and a $5.0 million increase in investment securities interest income. These increases resulted from average volume growth among loans and investments. Interest-earning assets yielded 7.63 percent during the fourth quarter of 1996, a 3 basis point decrease from the fourth quarter of 1995. 35 TABLE 16 SELECTED QUARTERLY DATA
1996 1995 FOURTH THIRD SECOND FIRST FOURTH THIRD (THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) SUMMARY OF OPERATIONS Interest income....................... $ 137,655 $ 134,270 $ 132,270 $ 129,568 $ 126,372 $ 122,234 Interest income-taxable equivalent.... 138,222 134,837 133,283 130,159 126,950 122,801 Interest expense...................... 62,964 61,378 61,484 62,424 62,968 59,858 Net interest income-taxable equivalent.......................... 75,258 73,459 71,799 67,735 63,982 62,943 Taxable equivalent adjustment......... 567 567 581 591 578 567 Net interest income................... 74,691 72,892 71,218 67,144 63,404 62,376 Provision for loan losses............. 3,321 1,787 2,255 1,544 1,654 1,716 Net interest income after provision for loan losses..................... 71,370 71,105 68,963 65,600 61,750 60,660 Noninterest income.................... 28,082 26,077 25,260 23,885 23,856 23,560 Noninterest expense................... 69,023 78,097 68,263 63,285 60,925 59,716 Income before income taxes............ 30,429 19,085 25,960 26,200 24,681 24,504 Income taxes.......................... 10,611 6,647 9,575 9,374 8,395 8,686 Net income............................ $ 19,818 $ 12,438 $ 16,385 $ 16,826 $ 16,286 $ 15,818 SELECTED QUARTERLY AVERAGES Total assets.......................... $7,935,197 $7,670,538 7,658,682 $7,462,756 $7,280,893 $7,053,579 Investment securities................. 2,097,690 1,919,935 1,990,346 1,984,027 1,871,272 1,694,776 Loans................................. 4,895,815 4,907,435 4,884,818 4,679,692 4,552,018 4,500,192 Interest-earning assets............... 7,209,982 6,989,109 6,975,341 6,779,461 6,599,377 6,376,273 Deposits.............................. 6,831,926 6,641,427 6,660,204 6,477,795 6,282,111 6,124,360 Interest-bearing liabilities.......... 6,185,161 6,017,476 6,043,119 5,934,180 5,753,538 5,569,496 Long-term obligations................. 6,866 7,762 15,676 23,763 23,365 24,595 Shareholders' equity.................. $ 599,953 $ 589,618 $ 576,742 $ 546,603 $ 512,768 $ 498,108 Shares outstanding.................... 11,415,943 11,441,007 11,432,661 11,072,395 10,700,435 10,688,019 PROFITABILITY RATIOS (averages) Rate of return (annualized) on: Total assets........................ 0.99% 0.65% 0.86% 0.91% 0.89% 0.89% Shareholders' equity................ 13.14 8.39 11.43 12.38 12.60 12.60 Dividend payout ratio................. 14.37 19.57 15.73 14.80 14.80 13.42 LIQUIDITY AND CAPITAL RATIOS (averages) Loans to deposits..................... 71.66% 73.89% 73.34% 72.24% 72.46% 73.48% Shareholders' equity to total assets.............................. 7.56 7.69 7.53 7.32 7.04 7.06 Time certificates of $100,000 or more to total deposits................... 8.79 8.56 9.23 9.59 9.27 8.61 PER SHARE OF STOCK Net income............................ $ 1.74 $ 1.15 $ 1.43 $ 1.52 $ 1.52 $ 1.49 Cash dividends........................ 0.250 0.225 0.225 0.225 0.225 0.20 Class A sales price High................................ 83.00 67.00 67.00 66.25 55.50 53.75 Low................................. 64.50 59.50 59.00 53.75 52.50 48.50 Class B sales price High................................ 71.00 63.50 64.25 55.00 54.25 53.25 Low................................. 71.00 60.00 55.00 48.06 52.50 49.00 SECOND FIRST SUMMARY OF OPERATIONS Interest income....................... $ 116,282 $ 106,221 Interest income-taxable equivalent.... 116,845 106,774 Interest expense...................... 55,537 46,301 Net interest income-taxable equivalent.......................... 61,308 60,473 Taxable equivalent adjustment......... 563 553 Net interest income................... 60,745 59,920 Provision for loan losses............. 1,460 534 Net interest income after provision for loan losses..................... 59,285 59,386 Noninterest income.................... 23,057 21,655 Noninterest expense................... 62,876 62,363 Income before income taxes............ 19,466 18,678 Income taxes.......................... 6,842 6,500 Net income............................ $ 12,624 $ 12,178 SELECTED QUARTERLY AVERAGES Total assets.......................... $6,702,692 $6,323,537 Investment securities................. 1,493,415 1,380,424 Loans................................. 4,424,724 4,253,117 Interest-earning assets............... 6,061,732 5,716,572 Deposits.............................. 5,858,280 5,533,654 Interest-bearing liabilities.......... 5,299,570 5,009,276 Long-term obligations................. 26,174 32,564 Shareholders' equity.................. $ 482,885 $ 460,695 Shares outstanding.................... 10,618,902 10,376,351 PROFITABILITY RATIOS (averages) Rate of return (annualized) on: Total assets........................ 0.76% 0.78% Shareholders' equity................ 10.49 10.72 Dividend payout ratio................. 16.81 17.09 LIQUIDITY AND CAPITAL RATIOS (averages) Loans to deposits..................... 75.53% 76.86% Shareholders' equity to total assets.............................. 7.20 7.29 Time certificates of $100,000 or more to total deposits................... 8.04 7.30 PER SHARE OF STOCK Net income............................ $ 1.19 $ 1.17 Cash dividends........................ 0.20 0.20 Class A sales price High................................ 50.00 46.00 Low................................. 44.00 42.00 Class B sales price High................................ 49.50 45.00 Low................................. 45.00 44.00
Stock information related to Class A common stock reflects the sales price, as reported on the Nasdaq National Market System. Stock information for Class B was obtained from a broker-dealer, reflecting the bid prices, prior to any mark-ups, mark-downs or commissions. As of December 31, 1996, there were 3,991 holders of record of the Class A common stock and 725 holders of record of the Class B common stock. Average interest-bearing liabilities experienced a $431.6 million increase from the fourth quarter of 1995 to the same period of 1996, largely the result of acquisitions and internally generated deposit growth. The rate on these interest-bearing liabilities decreased from 4.34 percent to 4.04 percent between the two periods. 36 Taxable-equivalent net interest income increased $11.3 million from the fourth quarter of 1995 to the fourth quarter of 1996. The increase resulted from growth among interest-earning assets. Noninterest income for the fourth quarter of 1996 was $28.1 million, an increase of 17.7 percent. Much of the increase resulted from ATM convenience fees. Noninterest expense amounted to $69 million for the quarter ended December 31, 1996, compared to $60.9 million for the quarter ended December 31, 1995. Most of the 13.3 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
1996 1995 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.............. $3,056,155 $63,112 8.22 % $2,826,705 $58,918 8.18 % $ 4,757 Commercial and industrial........... 514,554 11,205 8.65 461,955 12,771 10.51 1,086 Consumer............................ 1,238,383 28,325 9.13 1,189,310 25,330 8.45 1,719 Lease financing..................... 70,192 1,492 8.50 58,058 1,177 8.11 252 Other............................... 16,531 316 7.58 15,990 315 7.82 11 Total loans....................... 4,895,815 104,450 8.50 4,552,018 98,511 8.63 7,825 Investment securities: U.S. Government..................... 2,088,697 30,647 5.82 1,860,076 25,652 5.47 3,247 State, county and municipal......... 6,188 119 7.63 8,208 157 7.59 (39 ) Other............................... 2,805 41 5.80 2,988 44 5.84 0 Total investment securities....... 2,097,690 30,807 5.83 1,871,272 25,853 5.48 3,208 Federal funds sold.................... 216,477 2,965 5.43 176,087 2,586 5.83 574 Total interest-earning assets..... $7,209,982 $138,222 7.63 % $6,599,377 $126,950 7.66 % $11,607 LIABILITIES Deposits: Checking With Interest.............. $ 917,915 $ 2,584 1.12 % $ 852,002 $ 3,342 1.56 % $ 221 Savings............................. 722,281 3,750 2.06 701,528 4,030 2.28 113 Money market accounts............... 855,950 7,693 3.57 766,821 7,086 3.67 811 Time................................ 3,293,064 44,166 5.32 3,035,811 43,313 5.66 3,554 Total interest-bearing deposits... 5,789,210 58,193 3.99 5,356,162 57,771 4.28 4,699 Short-term borrowings................. 389,085 4,627 4.72 374,011 4,816 5.11 186 Long-term obligations................. 6,866 144 8.32 23,365 381 6.47 (307 ) Total interest-bearing liabilities..................... $6,185,161 $62,964 4.04 % $5,753,538 $62,968 4.34 % $ 4,578 Interest rate spread.................. 3.59 % 3.32 % Net interest income and net yield on interest-earning assets............. $75,258 4.14 % $63,982 3.85 % $ 7,029 YIELD/ TOTAL RATE CHANGE ASSETS Loans: Secured by real estate.............. $ (563) $4,194 Commercial and industrial........... (2,652) (1,566 ) Consumer............................ 1,276 2,995 Lease financing..................... 63 315 Other............................... (10) 1 Total loans....................... (1,886) 5,939 Investment securities: U.S. Government..................... 1,748 4,995 State, county and municipal......... 1 (38 ) Other............................... (3) (3 ) Total investment securities....... 1,746 4,954 Federal funds sold.................... (195) 379 Total interest-earning assets..... $ (335) $11,272 LIABILITIES Deposits: Checking With Interest.............. $ (979) $ (758 ) Savings............................. (393) (280 ) Money market accounts............... (204) 607 Time................................ (2,701) 853 Total interest-bearing deposits... (4,277) 422 Short-term borrowings................. (375) (189 ) Long-term obligations................. 70 (237 ) Total interest-bearing liabilities..................... $ (4,582) $ (4 ) Interest rate spread.................. Net interest income and net yield on interest-earning assets............. $ 4,247 $11,276
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. 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Raleigh, North Carolina January 27, 1997 38 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 1996 1995 (THOUSANDS, EXCEPT SHARE DATA) ASSETS Cash and due from banks........................................................................... $ 437,029 $ 448,630 Investment securities held to maturity (fair value $2,138,031 in 1996; $1,991,716 in 1995)............................................................................. 2,138,831 1,983,148 Federal funds sold................................................................................ 156,000 40,445 Loans............................................................................................. 4,930,508 4,580,719 Less reserve for loan losses...................................................................... 81,439 78,495 Net loans.................................................................................. 4,849,069 4,502,224 Premises and equipment............................................................................ 229,496 208,240 Income earned not collected....................................................................... 60,175 58,237 Other assets...................................................................................... 184,972 143,026 Total assets............................................................................... $8,055,572 $7,383,950 LIABILITIES Deposits: Noninterest-bearing............................................................................. $1,087,474 $ 943,445 Interest-bearing................................................................................ 5,866,554 5,444,637 Total deposits............................................................................. 6,954,028 6,388,082 Short-term borrowings............................................................................. 392,006 376,531 Long-term obligations............................................................................. 6,922 22,957 Other liabilities................................................................................. 87,109 75,543 Total liabilities.......................................................................... 7,440,065 6,863,113 SHAREHOLDERS' EQUITY Common stock: Class A -- $1 par value (11,000,000 shares authorized; 9,651,900 shares issued for 1996; 8,949,703 shares issued for 1995)............................................................ 9,652 8,950 Class B -- $1 par value (2,000,000 shares authorized; 1,758,980 shares issued for 1996; 1,766,464 shares issued for 1995)............................................................ 1,759 1,766 Surplus........................................................................................... 143,760 106,954 Retained earnings................................................................................. 453,640 403,167 Unrealized gains on marketable equity securities, net of taxes.................................... 6,696 -- Total shareholders' equity................................................................. 615,507 520,837 Total liabilities and shareholders' equity................................................. $8,055,572 $7,383,950
See accompanying Notes to Consolidated Financial Statements. 39 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994 (THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) INTEREST INCOME Loans............................................................................ $ 410,703 $ 380,676 $ 300,993 Investment securities: U. S. Government............................................................... 114,831 81,219 71,514 State, county and municipal.................................................... 330 405 114 Other.......................................................................... 172 184 87 Total investment securities interest income............................... 115,333 81,808 71,715 Federal funds sold............................................................... 8,159 8,625 3,297 Total interest income..................................................... 534,195 471,109 376,005 INTEREST EXPENSE Deposits......................................................................... 230,905 207,234 137,292 Short-term borrowings............................................................ 16,388 15,773 8,314 Long-term obligations............................................................ 957........ 1,657...... 2,520 Total interest expense.................................................... 248,250 224,664 148,126 Net interest income....................................................... 285,945 246,445 227,879 Provision for loan losses........................................................ 8,907 5,364 2,786 Net interest income after provision for loan losses....................... 277,038 241,081 225,093 NONINTEREST INCOME Trust income..................................................................... 10,008 8,886 8,228 Service charges on deposit accounts.............................................. 40,710 39,909 38,567 Credit card income............................................................... 16,147 13,561 12,390 Other service charges and fees................................................... 23,878 21,227 16,672 Other............................................................................ 12,561 8,545 7,468 Total noninterest income.................................................. 103,304 92,128 83,325 380,342 333,209 308,418 NONINTEREST EXPENSE Salaries and wages............................................................... 115,461 106,607 99,282 Employee benefits................................................................ 20,425 17,080 14,535 Occupancy expense................................................................ 22,023 20,446 18,691 Equipment expense................................................................ 27,068 24,504 23,839 Other............................................................................ 93,691 77,243 74,235 Total noninterest expense................................................. 278,668 245,880 230,582 Income before income taxes....................................................... 101,674 87,329 77,836 Income taxes..................................................................... 36,207 30,423 26,867 Net income................................................................ $ 65,467 $ 56,906 $ 50,969 PER SHARE INFORMATION Net income..................................................................... $ 5.77 $ 5.37 $ 5.13 Cash dividends................................................................. 0.925 0.825 0.725 Weighted average shares outstanding.............................................. 11,340,982 10,597,066 9,944,927
See accompanying Notes to Consolidated Financial Statements. 40 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED CLASS CLASS GAIN ON A B MARKETABLE TOTAL COMMON COMMON RETAINED EQUITY SHAREHOLDERS' STOCK STOCK SURPLUS EARNINGS SECURITIES EQUITY (THOUSANDS, EXCEPT SHARE DATA) 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 Issuance of 87,992 shares of Class A common stock pursuant to employee stock purchase plans....... 88 3,958 4,046 Redemption of 63,195 shares of Class A common stock and 7,484 shares of Class B common stock........................................... (64 ) (7 ) (4,435) (4,506) Issuance of 8,746 shares of Class A common stock pursuant to the Dividend Reinvestment Plan...... 9 114 123 Issuance of 668,654 shares of Class A common stock in connection with various acquisitions......... 669 32,734 33,403 Net income........................................ 65,467 65,467 Unrealized gain on marketable equity securities, net of taxes.................................... 6,696 6,696 Cash dividends.................................... (10,559) (10,559) Balance at December 31, 1996...................... $9,652 $1,759 $143,760 $453,640 $6,696 $ 615,507
See accompanying Notes to Consolidated Financial Statements. 41 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 1996 1995 1994 (THOUSANDS) OPERATING ACTIVITIES Net income......................................................................... $ 65,467 $ 56,906 $ 50,969 Adjustments: Amortization of intangibles...................................................... 8,197 5,877 3,993 Provision for loan losses........................................................ 8,907 5,364 2,786 Deferred tax benefit............................................................. (1,833) (1,454) (1,579) Change in current taxes payable.................................................. (88) 3,241 (3,993) Depreciation..................................................................... 16,932 16,882 15,885 Change in accrued interest payable............................................... 1,807 26,696 3,242 Change in income earned not collected............................................ (862) (11,746) 1,007 Origination of loans held for sale............................................... (149,146) (85,148) (72,804) Proceeds from sale of loans...................................................... 137,314 75,964 116,125 (Gain) loss on sale of mortgage loans............................................ (502) (809) 862 Net amortization of premiums and discounts....................................... 11,658 19,634 27,439 Net change in other assets....................................................... (4,301) (15,383) 39,980 Net change in other liabilities.................................................. (1,225) 4,798 (16,263) Net cash provided by operating activities........................................ 92,325 100,822 167,649 INVESTING ACTIVITIES Net increase in loans outstanding................................................ (139,670) (254,326) (498,396) Purchases of investment securities............................................... (1,039,460) (1,328,178) (207,601) Proceeds from maturities of investment securities................................ 890,363 826,129 576,293 Net change in federal funds sold................................................. (115,555) (25,023) 16,300 Dispositions of premises and equipment........................................... 5,983 3,445 2,364 Additions to premises and equipment.............................................. (42,184) (31,147) (20,254) Purchase of institutions, net of cash acquired................................... 7,584 106,092 (6,533) Net cash used by investing activities............................................ (432,939) (703,008) (137,827) FINANCING ACTIVITIES Net change in time deposits...................................................... 99,448 536,251 (4,854) Net change in demand and other interest-bearing deposits......................... 258,104 (3,811) 24,901 Net change in short-term borrowings.............................................. (17,643) 69,992 21,580 Repurchases of common stock...................................................... (4,506) (1,545) (4,228) Proceeds from issuance of stock.................................................. 4,169 3,036 2,948 Cash dividends paid.............................................................. (10,559) (8,817) (7,311) Net cash provided by financing activities........................................ 329,013 595,106 33,036 Change in cash and due from banks................................................ (11,601) (7,080) 62,858 Cash and due from banks at beginning of period................................... 448,630 455,710 392,852 Cash and due from banks at end of period......................................... $ 437,029 $ 448,630 $ 455,710 CASH PAYMENTS FOR: Interest......................................................................... $ 246,443 $ 197,334 $ 144,844 Income taxes..................................................................... 35,554 27,454 27,667 Supplemental disclosure of noncash investing and financing activities: Common stock issued for acquisitions............................................. $ 33,403 $ 21,846 $ 18,485 Long-term obligations issued for acquisitions.................................... 1,468 2,494 -- Unrealized gain on marketable equity securities.................................. 11,167 -- --
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 Virginia banking subsidiary was merged into the Bank. The Bank's primary market area includes North Carolina and Virginia, while Marlinton and WSS both serve individual communities within West Virginia. 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 has nine 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 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 accounting and reporting policies of BancShares and its subsidiaries are in accordance with generally accepted accounting principles and, with regard to the banking subsidiaries, conform to general industry practices. The preparation of 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 statement presentations for 1996. However, the reclassifications have no effect on shareholders' equity or net income as previously reported. INVESTMENT SECURITIES As of December 31, 1996 and 1995, 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. Included in other assets at December 31, 1996 are marketable equity securities classified as available for sale with a cost basis of $10,916 and a fair value of $22,083. These securities are carried at their fair value, and the difference between the cost basis and the fair value, net of deferred income taxes, is recorded as a component of shareholders' equity. At December 31, 1996 and 1995, BancShares had no investment securities classified as either available for sale or held in a trading portfolio, other than the aforementioned marketable equity securities. LOANS Loans that are held for investment purposes are carried at their principal amount outstanding. Those loans that are available for sale are carried at the lower of aggregate cost or market. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding. 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. The deferred fees and costs are recorded as an adjustment to loans outstanding 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 entities to recognize as separate assets any rights to service mortgage loans for others. Mortgage servicing rights that are acquired or result from the sale of a loan with servicing rights retained should carry a value based on the relative fair values of the mortgage servicing rights and the related loans. Statement 122 also requires a servicer to assess its capitalized mortgage servicing rights for impairment based on the fair values of those rights. The adoption of Statement 122 did not have a material effect on BancShares' financial condition or results of operations. However, changes in circumstances in future periods could result in the recognition of significant mortgage servicing rights or an impairment of the recorded asset. RESERVE FOR LOAN LOSSES The reserve for loan losses is established by charges to operating expense. To determine the reserve needed, management evaluates the risk characteristics of the loan portfolio under current and projected economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in management's opinion, deserve current recognition in estimating possible credit losses. Management considers the established reserve adequate to absorb future losses that relate to loans outstanding as of December 31, 1996, 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, IMPAIRED LOANS AND OTHER REAL ESTATE Accrual of interest on loans is discontinued when management deems that collection of additional interest is doubtful. Loans are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable loan terms. Management considers a loan to be impaired when based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to contractual terms of the loan agreement. Impaired loans are valued using either the discounted expected cash flow method or the collateral value. When the ultimate collectibility of an impaired loan's principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Future cash receipts are recorded as recoveries of any amounts previously charged off. Other real estate acquired through foreclosure is valued at the lower of the loan balance at the time of foreclosure or estimated fair value net of selling costs and is included in other assets. Once acquired, other real estate is periodically reviewed to ensure that the fair value of the property supports the carrying value, with writedowns recorded when necessary. Gains and losses resulting from the sale or writedown of other real estate and income and expenses related to the operation of other real estate are recorded in other expense. 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 44 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued 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") was adopted January 1, 1996 and had no material impact on BancShares' financial position or results of operations. Statement 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill, by requiring that such assets 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. 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 uses the asset and liability method to account for deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of BancShares' assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled. BancShares and its subsidiaries file a consolidated federal income tax return. Each subsidiary pays its allocation of federal income taxes or receives a payment to the extent that tax benefits are realized. BancShares and its subsidiaries each file separate state income tax returns. PER SHARE DATA 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 1996, 1995 and 1994 was 11,340,982; 10,597,066 and 9,944,927, 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 carrries 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 gains and losses determined on an individual security basis are as follows:
GROSS GROSS BOOK UNREALIZED UNREALIZED FAIR VALUE GAINS LOSSES VALUE 1996 U. S. Government...................................................... $ 2,130,037 $ 855 $ (1,969) $ 2,128,923 State, county and municipal........................................... 6,301 324 0 6,625 Other................................................................. 2,493 0 (10) 2,483 Total investment securities........................................ $ 2,138,831 $ 1,179 $ (1,979) $ 2,138,031 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
The maturities of investment securities at December 31 are as follows:
1996 1995 BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE Within one year...................................................... $ 781,336 $ 782,102 $ 929,761 $ 931,954 One through five years............................................... 1,345,274 1,343,599 1,041,434 1,047,733 Five to 10 years..................................................... 4,803 4,829 4,587 4,636 Over 10 years........................................................ 7,418 7,501 7,366 7,393 Total investment securities..................................... $ 2,138,831 $ 2,138,031 $ 1,983,148 $ 1,991,716
Investment securities having an aggregate par value of $1,025,145 at December 31, 1996, and $819,043 at December 31, 1995, 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:
1996 1995 Loans secured by real estate: Construction and land development loans................................. $ 109,806 $ 104,540 Residential mortgage loans.............................................. 1,954,692 1,835,880 Other real estate mortgage loans........................................ 1,015,021 899,538 Total loans secured by real estate........................................ 3,079,519 2,839,958 Commercial and industrial................................................. 514,535 466,462 Consumer.................................................................. 1,251,704 1,199,400 Lease financing........................................................... 68,694 59,899 All other loans........................................................... 16,056 15,000 Total loans............................................................. $ 4,930,508 $ 4,580,719
Included in total loans as of December 31, 1996 and 1995 is unearned income of $6,412 and $4,913, respectively, substantially all of which relates to deferred origination fees. There were no foreign loans outstanding during either period, nor were there any highly leveraged transactions. There are no loan concentrations exceeding 10 percent of loans 46 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE C -- LOANS -- Continued outstanding involving multiple borrowers in similar activities or industries at December 31, 1996. Substantially all loans are to customers domiciled within BancShares' principal market areas. At December 31, 1996 and 1995 nonperforming loans consisted of nonaccrual loans and amounted to $12,810 and $13,208, respectively. Gross interest income on nonperforming loans that would have been recorded had these loans been performing was $1,162, $1,556 and $1,430 during 1996, 1995 and 1994, respectively. Interest income recognized on nonperforming loans was $259, $595 and $693 during the respective periods. As of December 31, 1996 and 1995, the balance of other real estate acquired through foreclosure was $1,160 and $2,154. Loans transferred to other real estate totaled $1,649, $2,110 and $1,894 during 1996, 1995 and 1994. Activity related to the sale of loans is summarized as follows:
1996 1995 1994 Loans held for sale at December 31....................................................... $ 27,722 $ 15,388 $ 5,395 For the year ended December 31: Loans sold............................................................................. 136,812 75,155 116,987 Net gain (loss) on sale of loans....................................................... 502 809 (862)
The Bank services mortgage loans for itself and others. The carrying value of loans serviced for others as of December 31, 1996 and 1995, was $657,520 and $543,488, respectively. NOTE D -- RESERVE FOR LOAN LOSSES Activity in the reserve for loan losses is summarized as follows:
1996 1995 1994 Balance at beginning of year............................................................. $78,495 $72,017 $70,049 Reserves of acquired institutions........................................................ 1,387 3,231 1,009 Provision for loan loses................................................................. 8,907 5,364 2,786 Loans charged off........................................................................ (11,653 ) (7,262 ) (8,480 ) Loans recovered.......................................................................... 4,303 5,145 6,653 Net charge-offs.......................................................................... (7,350 ) (2,117 ) (1,827 ) Balance at end of year................................................................... $81,439 $78,495 $72,017
At December 31, 1996 and 1995, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $9,880 and $11,119, respectively, all of which were classified as nonaccrual. Specific reserves of $833 and $865 have been established for impaired loans outstanding at December 31, 1996 and 1995, respectively. The average recorded investment in impaired loans during the years ended December 31, 1996 and 1995, was $11,463 and $14,326, respectively. For the years ended December 31, 1996 and 1995, BancShares recognized interest income on those impaired loans of approximately $57 and $543, respectively. The amount of interest income recognized on a cash basis for impaired loans was not material in any period. 47 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE E -- PREMISES AND EQUIPMENT Major classifications of premises and equipment at December 31 are summarized as follows:
1996 1995 1994 Land..................................................................................... $ 44,254 $ 46,200 $ 40,827 Premises and leasehold improvements...................................................... 184,970 160,116 141,332 Furniture and equipment.................................................................. 116,643 112,070 106,482 Total.................................................................................. 345,867 318,386 288,641 Less accumulated depreciation and amortization........................................... 116,371 110,146 99,817 Net book value......................................................................... $ 229,496 $ 208,240 $ 188,824 Depreciation and amortization charged to operations...................................... $ 16,932 $ 16,882 $ 15,885
Premises with a book value of $2,887 at December 31, 1996, and $3,188 at December 31, 1995, were pledged to secure mortgage notes payable. BancShares leases certain premises and equipment under various lease agreements that provide for payment of property taxes, insurance and maintenance costs. Generally, operating leases provide for one or more renewal options on the same basis as current rental terms. However, certain leases require increased rentals under cost of living escalation clauses. Certain of the leases also provide purchase options. Future minimum rental commitments for noncancellable operating leases with initial or remaining terms of one or more years consisted of the following at December 31, 1996:
YEAR ENDING DECEMBER 31: AMOUNT 1997........................................................................... $ 11,703 1998........................................................................... 8,490 1999........................................................................... 6,141 2000........................................................................... 3,321 2001........................................................................... 2,684 Thereafter..................................................................... 44,854 Total minimum payments....................................................... $ 77,193
Total rent expense for all operating leases amounted to $13,501 in 1996, $11,998 in 1995 and $11,118 in 1994. NOTE F -- DEPOSITS Deposits at December 31 are summarized as follows:
1996 1995 Demand........................................................ $ 1,087,474 $ 943,445 Checking With Interest........................................ 943,900 874,431 Savings....................................................... 712,525 691,894 Money market accounts......................................... 892,953 809,813 Time.......................................................... 3,317,176 3,068,499 Total deposits.............................................. $ 6,954,028 $ 6,388,082
Total time deposits with a minimum denomination of $100 were $617,076 and $600,616 at December 31, 1996 and 1995, respectively. 48 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE F -- DEPOSITS -- Continued At December 31, 1996, the scheduled maturities of time deposits were: 1997........................................................................ $ 2,735,991 1998........................................................................ 258,081 1999........................................................................ 91,494 2000........................................................................ 151,146 2001 and thereafter......................................................... 80,463 Total time deposits....................................................... $ 3,317,175
NOTE G -- SHORT-TERM BORROWINGS Short-term borrowings at December 31 are as follows:
1996 1995 Master notes...................................................... $ 295,428 $ 257,178 Federal funds purchased........................................... 45,075 64,085 Repurchase agreements............................................. 21,816 25,022 U. S. Treasury tax and loan accounts.............................. 20,356 17,581 Other............................................................. 9,331 12,665 Total short-term borrowings..................................... $ 392,006 $ 376,531
Master notes are overnight unsecured borrowings by BancShares from Bank customers. The rate on Master notes was 4.23 percent as of December 31, 1996. During 1996, the weighted average rate on Master note borrowings was 4.46 percent, and the average amount outstanding was $266,476. The largest amount outstanding at any month-end during 1996 was $316,628. NOTE H -- LONG-TERM OBLIGATIONS Long-term obligations at December 31 are as follows:
1996 1995 Subordinated notes payable: 7 percent maturing June 18, 1998....................................................................... $ 849 $ 849 7 percent maturing February 22, 1999................................................................... 135 -- 7.5 percent maturing February 23, 2000................................................................. 170 170 7.25 percent maturing February 22, 2001................................................................ 1,332 -- 8 percent maturing February 23, 2005................................................................... 2,278 2,324 Unsecured variable rate note at 6.77 percent payable in quarterly installments........................... -- 9,305 Federal Home Loan Bank advances with a weighted average rate of 2.60 percent at December 31, 1996, and 5.21 percent at December 31, 1995 with maturities extending to 2012, secured by U.S. Government securities............................................................................................. 232 7,999 8 percent mortgage notes, due in periodic payments through 2004, secured by premises..................... 1,659 1,821 Note payable at 7.89 percent, maturing in 2009, secured by collateralized mortgage obligation............ 267 489 Total long-term obligations............................................................................ $ 6,922 $ 22,957
49 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE H -- LONG-TERM OBLIGATIONS -- Continued Long-term obligations maturing in each of the five years subsequent to December 31, 1996, are as follows: 1997............................................................................. $ 175 1998............................................................................. 1,039 1999............................................................................. 340 2000............................................................................. 393 2001............................................................................. 1,573 Thereafter....................................................................... 3,402 $ 6,922
NOTE I -- COMMON STOCK On October 28, 1996, the Board of Directors of BancShares authorized the purchase in 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:
1996 1995 1994 Class A Number of shares purchased.............................. 63,195 28,386 85,850 Cash disbursed.......................................... $ 4,027 $ 1,394 $ 3,769 Class B Number of shares purchased.............................. 7,484 2,987 10,617 Cash disbursed.......................................... $ 479 $ 151 $ 459
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. NOTE J -- ESTIMATED FAIR VALUES Fair value estimates are made at a specific 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 these financial instruments with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. Generally, the fair value of variable rate financial instruments equals the book value. 50 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE J -- ESTIMATED FAIR VALUES -- Continued Estimated fair values for financial instruments at December 31 are as follows:
1996 1995 BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE Financial Assets: Cash and due from banks............................................ $ 437,029 $ 437,029 $ 448,630 $ 448,630 Investment securities.............................................. 2,138,831 2,138,031 1,983,148 1,991,716 Federal funds sold................................................. 156,000 156,000 40,445 40,445 Loans, net of reserve for loan losses.............................. 4,849,069 4,852,568 4,502,224 4,523,601 Income earned not collected........................................ 60,175 60,175 58,237 58,237 Financial Liabilities: Deposits........................................................... 6,954,028 6,957,475 6,388,082 6,551,761 Short-term borrowings.............................................. 392,006 392,006 376,531 376,531 Long-term obligations.............................................. 6,922 7,267 22,957 23,509 Accrued interest payable........................................... 49,528 49,528 47,721 47,721
Forward commitments to sell loans as of December 31, 1996, and 1995 had no carrying value and unrealized losses of $39 and $20, respectively. For other off-balance sheet commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any projected credit loss from those financial instruments. These amounts are not material to BancShares' financial position. NOTE K -- EMPLOYEE BENEFIT PLANS Employees who qualify under length of service and other requirements participate in a noncontributory defined benefit pension plan. Under the plan, retirement benefits are based on years of service and average earnings. The policy is to fund the maximum amount allowable for federal income tax purposes. No contribution was made during the three-year period ending December 31, 1996. 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, 1996, the plan's assets also included BancShares common stock with a market value of $12,166. 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. 51 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE K -- EMPLOYEE BENEFIT PLANS -- Continued The following table sets forth the plan's funded status at December 31:
1996 1995 Pension benefit obligation: Vested............................................................................................ $ (86,838) $ (81,717) Nonvested......................................................................................... (1,653) (1,564) Accumulated benefit obligation...................................................................... (88,491) (83,281) Effect of projected future compensation levels...................................................... (20,893) (19,800) Projected benefit obligation........................................................................ (109,384) (103,081) Market value of plan assets......................................................................... 137,758 128,911 Plan's assets in excess of projected benefit obligation............................................. 28,374 25,830 Unrecognized net transition asset................................................................... (7,303) (8,530) Unrecognized net gain due to difference in past experience and assumptions.......................... (21,769) (17,006) Unrecognized prior service cost..................................................................... 1,352 1,505 Prepaid pension asset............................................................................... $ 654 $ 1,799
The net periodic pension cost for the years ended December 31 included the following:
1996 1995 1994 Service costs....................................................... $ 3,596 $ 3,139 $ 3,275 Interest costs...................................................... 7,565 7,073 6,544 Actual return on plan assets........................................ (13,491) (26,745) 2,101 Net amortization and deferral....................................... 3,475 16,842 (11,373) Net periodic pension cost........................................... $ 1,145 $ 309 $ 547
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, 1996, 1995, and 1994, the following assumptions were used:
1996 1995 1994 Weighted average discount rate............................................ 7.25% 7.25% 7.75 Rate of future compensation increases..................................... 4.25 4.25 4.50 Long-term rate of return on plan assets................................... 8.25 8.25 8.50
Employees are also eligible to participate in a matching savings plan after one year of service. During 1996 BancShares made participating contributions to this plan of $3,473 compared to $3,155 during 1995 and $2,907 during 1994. 52 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE K -- EMPLOYEE BENEFIT PLANS -- Continued Prior to 1995, certain employees had received options to purchase shares of BancShares' Class A common stock through employee stock purchase plans. The number of options granted was determined based on each eligible employee's salary as of the grant date. The option prices were fixed at 85 percent of the market price on the respective grant date. All unexercised options expired on June 30, 1996. 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: 1996............................................................. 87,992 -- 1995............................................................. 64,881 -- 1994............................................................. 11,202 68,206 Option expiration date............................................. June 30, 1996 June 30, 1994
BancShares adopted Statement of Financial Accounting Standards No. 123 ("Statement 123") on January 1, 1996. During the years ended December 31, 1996 and 1995, BancShares made no grants of stock awards or stock options, so the adoption of Statement 123 had no impact on BancShares. NOTE L -- OTHER INCOME AND OTHER EXPENSE Other income for the years ended December 31 consisted of the following:
1996 1995 1994 ATM income...................................................................................... $ 5,289 $ 2,729 $ 2,264 Net premium income.............................................................................. 3,364 3,964 4,495 Other........................................................................................... 3,908 1,852 709 Total other income....................................................................... $ 12,561 $ 8,545 $ 7,468
Other expense for the years ended December 31 consisted of the following:
1996 1995 1994 FDIC insurance............................................................................... $ 13,586 $ 8,418 $ 11,831 Credit card expense.......................................................................... 10,097 9,106 8,587 Amortization of intangibles.................................................................. 8,197 5,877 3,993 Telecommunication............................................................................ 7,711 6,790 6,743 Postage...................................................................................... 6,383 5,701 4,907 Other........................................................................................ 47,717 41,351 38,174 Total other expense................................................................... $ 93,691 $ 77,243 $ 74,235
During 1996, FDIC insurance expense included a special assessment on deposit liabilities insured by the FDIC's Savings Association Insurance Fund. The gross amount of the assessment was $10,007. 53 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE M -- INCOME TAXES At December 31, income tax expense consisted of the following:
1996 1995 1994 Current tax expense Federal.................................................................................... $37,923 $30,757 $28,446 State...................................................................................... 117 1,120 -- Total current tax expense............................................................... 38,040 31,877 28,446 Deferred tax benefit Federal.................................................................................... (1,255) (111) (1,579) State...................................................................................... (578) (1,343) -- Total deferred tax benefit.............................................................. (1,833) (1,454) (1,579) Total tax expense....................................................................... $36,207 $30,423 $26,867
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:
1996 1995 1994 Income tax at statutory rates................................................................ $35,586 $30,565 $27,243 Increase (reduction) in income taxes resulting from: Amortization of goodwill................................................................... 1,991 1,280 674 Nontaxable income on loans and investments, net of nondeductible expenses.................. (1,387) (1,378) (1,346) State and local income taxes (benefit), including change in valuation allowance, net of federal income tax benefit.............................................................. (168) (145) 73 Other, net................................................................................. 185 101 223 Total tax expense....................................................................... $36,207 $30,423 $26,867
The net deferred tax asset included the following components at December 31:
1996 1995 Loan loss reserve....................................................................................... $32,553 $31,426 Net deferred loan fees and costs........................................................................ 2,292 2,066 Losses on other real estate............................................................................. 1,512 1,286 Net operating loss carryforwards........................................................................ 871 978 Other................................................................................................... 6,580 6,068 Gross deferred tax asset.............................................................................. 43,808 41,824 Less: valuation allowance............................................................................... (2,617) (2,620) Deferred tax asset.................................................................................... 41,191 39,204 Accelerated depreciation................................................................................ 4,692 4,654 Accretion of bond discount.............................................................................. 1,094 768 Net periodic pension credit............................................................................. 160 639 Tax loan loss reserve reversal.......................................................................... 1,424 1,295 Unrealized gain on marketable equity securities......................................................... 4,471 -- Other................................................................................................... 6,089 5,449 Deferred tax liability................................................................................ 17,930 12,805 Net deferred tax asset................................................................................ $23,261 $26,399
54 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE M -- INCOME TAXES -- Continued BancShares has historically incurred immaterial amounts of state income tax expense. The valuation allowance of $2,617 and $2,620 at December 31, 1996 and 1995, respectively, is the amount necessary to reduce BancShares' gross state deferred tax asset to the amount which is more likely than not to be realized. NOTE N -- RELATED PARTY TRANSACTIONS The banks have had, and expect to have in the future, banking transactions in the ordinary course of business with several directors, officers and their associates ("related parties"), on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Those transactions neither involve more than the normal risk of collectibility nor present any unfavorable features. An analysis of changes in aggregate amounts of related party loans for the year ended December 31, 1996, which excludes aggregate loans totaling less than $60 to any one related party, is as follows: Balance at beginning of year....................................... $ 11,942 New loans.......................................................... 5,529 Repayments......................................................... 4,975 Balance at end of year............................................. $ 12,496
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 1996, 1995 and 1994, BancShares' received $9,953, $9,031 and $7,976 respectively, for services rendered to these related parties, substantially all of which is included in other service charges and fees and relates to data processing services provided. NOTE O -- ACQUISITIONS BancShares and the Bank have consummated numerous acquisitions in recent years. All of the transactions have been accounted for as purchases, with the results of operations not included in BancShares' Consolidated Statements of Income until after the transaction date. The pro forma impact of the acquisitions as though they had been made at the beginning of the periods presented is not material to BancShares' consolidated financial statements. As of December 31, 1996 and 1995, BancShares had goodwill of $72,910 and $50,249, respectively. Deposit intangibles totaled $24,344 and $23,140, respectively. 55 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE O -- ACQUISITIONS -- Continued The following table provides information regarding the acquisitions that have been consummated during the three-year period ending December 31, 1996:
DEPOSIT ASSETS LIABILITIES RESULTING DATE INSTITUTION/LOCATION ACQUIRED ASSUMED INTANGIBLE February 1996 Allied Bank Capital, Inc. $248,998 $ 208,394 $ 29,031 Sanford, North Carolina June 1995 Bank of White Sulphur Springs 64,589 59,174 5,691 White Sulphur Springs, West Virginia May 1995 9 NationsBank of Virginia branches 133,175 143,494 10,801 Southern Virginia March 1995 State Bank 49,700 41,238 5,555 Fayetteville, North Carolina February 1995 First Investors Savings Bank, Inc., SSB 44,426 40,846 4,325 Whiteville, North Carolina February 1995 Pace American Bank 58,660 53,303 6,954 Lawrenceville, Virginia December 1994 First Republic Savings Bank, FSB 53,661 42,998 6,250 Roanoke Rapids, North Carolina September 1994 Bank of Marlinton 51,646 46,647 4,605 Marlinton, West Virginia August 1994 Edgecombe Homestead Savings Bank 39,181 30,195 4,547 Tarboro, North Carolina March 1994 Bank of Bladenboro 21,316 19,515 1,607 Bladenboro, North Carolina
NOTE P -- REGULATORY REQUIREMENTS BancShares and its banking subsidiaries are subject to certain requirements imposed by state and federal banking statutes and regulations. These regulations establish guidelines for minimum capital levels, restrict certain dividend payments and require the maintenance of noninterest-bearing reserve balances at the Federal Reserve Bank. Such reserves averaged $128,441 during 1996, of which $95,931 was satisfied by vault cash and the remainder by amounts held in the Federal Reserve Bank. Various regulatory agencies have implemented guidelines that evaluate capital based on risk adjusted assets. An additional capital computation evaluates tangible capital based on tangible assets. Minimum capital requirements set forth by the regulators require a Tier 1 capital ratio of no less than 4 percent, a total capital ratio of no less than 8 percent of risk- adjusted assets, and a leverage capital ratio of no less than 4 percent of tangible assets. To meet the FDIC's well capitalized standards, the Tier 1 and total capital ratios must be at least 6 percent and 10 percent, respectively. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements. 56 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE P -- REGULATORY REQUIREMENTS -- Continued The Bank's capital components ratios as of December 31, 1996 and 1995 are set forth below:
1996 1995 Risk-based capital: Tier 1 capital.................................................................................... $ 476,580 $ 417,927 Total capital..................................................................................... 539,308 477,489 Risk-adjusted assets.............................................................................. 5,018,215 4,540,995 Tier 1 capital ratio.............................................................................. 9.50% 9.20% Total capital ratio............................................................................... 10.75 10.52 Leverage capital ratio............................................................................ 6.09 6.02
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 FDIC and the General Statutes of North Carolina, without prior approval from the requisite regulatory authorities. As of December 31, 1996, this amount was approximately $371,749. Dividends declared by the Bank amounted to $33,940 in 1996, $39,273 in 1995 and $10,667 in 1994. NOTE Q -- COMMITMENTS AND CONTINGENCIES In the normal course of business, BancShares and its subsidiaries have financial instruments with off-balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and forward commitments to sell loans. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk. Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established 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, 1996 and 1995, BancShares had unused commitments totaling $1,596,468 and $1,403,938, respectively. Standby letters of credit are conditional commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, BancShares' credit policies also govern the issuance of standby letters of credit. At December 31, 1996 and 1995, BancShares had standby letters of credit amounting to $14,178 and $12,188, 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 $18,000 and $16,000 at December 31, 1996 and 1995, respectively, were at fixed prices and were scheduled to settle within 60 days of that date. At December 31, 1996 and 1995, these forward commitments had no carrying value and unrealized losses of $39 and $20 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. 57 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE R -- FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY) First Citizens BancShares, Inc.'s principal assets are its investments in and receivables from its banking subsidiaries. Its sources of income are dividends and interest income on funds borrowed by the Bank. The Parent Company's condensed balance sheets as of December 31, 1996 and 1995, and the related condensed statements of income and cash flows for the years ended December 31, 1996, 1995, and 1994 are as follows: CONDENSED BALANCE SHEETS
DECEMBER 31 1996 1995 ASSETS Cash.................................................................................................. $ 4,002 $ 752 Investment in bank subsidiaries....................................................................... 521,208 482,018 Due from bank subsidiaries............................................................................ 313,515 261,959 Other assets.......................................................................................... 81,745 39,783 Total assets.......................................................................................... $ 920,470 $ 784,512 LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings................................................................................. $ 295,428 $ 257,178 Other liabilities..................................................................................... 9,535 6,497 Common stock: Class A............................................................................................. 9,652 8,950 Class B............................................................................................. 1,759 1,766 Surplus............................................................................................... 143,760 106,954 Retained earnings..................................................................................... 453,640 403,167 Unrealized gains on marketable equity securities, net of taxes........................................ 6,696 -- Total liabilities and shareholders' equity.......................................................... $ 920,470 $ 784,512
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994 Interest income.............................................................................. $ 12,445 $ 10,562 $ 6,135 Interest expense............................................................................. 12,164 10,081 5,470 Net interest income.......................................................................... 281 481 665 Dividends from bank subsidiary............................................................... 33,940 39,273 10,667 Other income................................................................................. 1,487 39 56 Other operating expense...................................................................... 6,162 3,472 2,559 Income before income tax benefit and equity in undistributed net income of subsidiaries...... 29,546 36,321 8,829 Income tax expense (benefit)................................................................. 11 (75) (14) Income before equity in undistributed income of subsidiaries................................. 29,535 36,396 8,843 Equity in undistributed net income of subsidiaries........................................... 35,932 20,510 42,126 Net income................................................................................. $ 65,467 $ 56,906 $50,969
58 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE R -- FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY) -- Continued CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1996 1995 1994 OPERATING ACTIVITIES Net Income................................................................................. $ 65,467 $56,906 $ 50,969 Adjustments: Undistributed net income of subsidiaries................................................. (35,932) (20,510) (42,126) Change in other assets................................................................... (9,447) (96,128) 6,609 Change in other liabilities.............................................................. 3,038 3,387 (3,739) Net cash provided (used) by operating activities........................................... 23,126 (56,345) 11,713 INVESTING ACTIVITIES: Net change in due from subsidiaries...................................................... (51,556) (83,223) (17,736) Investment in subsidiaries............................................................... (3,258) (43,099) -- Purchase of institutions, net of cash acquired........................................... 7,584 106,092 (6,533) Net cash used by investing activities...................................................... (47,230) (20,230) (24,269) FINANCING ACTIVITIES: Net change in short-term borrowings...................................................... 38,250 83,928 19,705 Repurchase of common stock............................................................... (4,506) (1,545) (4,228) Proceeds from stock issuance, net of related costs....................................... 4,169 3,036 2,948 Cash dividends paid...................................................................... (10,559) (8,817) (7,311) Net cash provided by financing activities.................................................. 27,354 76,602 11,114 Increase (decrease) in cash................................................................ 3,250 27 (1,442) Cash balance at beginning of year.......................................................... 752 725 2,167 Cash balance at end of year................................................................ $ 4,002 $ 752 $ 725 Cash payments for: Interest................................................................................. $ 12,164 $10,081 $ 5,470 Income taxes............................................................................. 35,554 27,454 27,667 Supplemental disclosure of noncash investing and financing activities Common stock issued for acquisitions..................................................... $ 33,403 $21,846 $ 18,485 Unrealized gain on marketable equity securities.......................................... 11,167 -- --
59 ******************************************************************************* APPENDIX FIRST CITIZENS BANCSHARES, INC. POST OFFICE BOX 27131 RALEIGH, NORTH CAROLINA 27611-7131 PROXY SOLICITED BY BOARD OF DIRECTORS The undersigned hereby appoints George H. Broadrick, Lewis R. Holding, Frank B. Holding, James B. Hyler, Jr., Frank B. Holding, Jr., Carmen P. Holding, 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 6, 1997, at the Annual Meeting of Shareholders of BancShares to be held in Conference Room A at the Raleigh Civic Center (Raleigh Convention and Conference Center Complex), 500 Fayetteville Street Mall, Raleigh, North Carolina, at 1 o'clock p.m. on April 28, 1997, 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; C.P. Holding; 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.; and 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 1997. [ ] FOR [ ] AGAINST [ ] ABSTAIN 3. CONSIDERATION OF AMENDMENT TO THE BYLAWS OF BANCSHARES TO INCREASE THE MAXIMUM AUTHORIZED NUMBER OF DIRECTORS: Proposal to amend the Bylaws of BancShares to increase the maximum authorized number of directors from 26 to 30. [ ] FOR [ ] AGAINST [ ] ABSTAIN 4. 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" PROPOSALS 2 AND 3 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 , 1997 (Signature) (SEAL) (Signature if held jointly) (SEAL) PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE. EX-22 3 EXHIBIT 22 Exhibit 22 Subsidiaries of the Registrant Name State First-Citizens Bank & Trust Company Chartered in North Carolina with branches is North Carolina and Virginia Bank of Marlinton West Virginia Bank of White Sulphur Springs West Virginia (Atlantic States Bank North Carolina in the charter) Delaware 56-1528994 (State or other jurisdiction (I.R.S. Employer) of incorporation) -----END PRIVACY-ENHANCED MESSAGE-----