-----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, DH80SqMuFraueGw3Wm3KYvapUwQQ+XjsTA6qXpMlNeGLlQbfNcszgwkaqLFs2vck lnw1L0vf+W3yTCWJMb3YMQ== 0000950168-98-000948.txt : 19980331 0000950168-98-000948.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950168-98-000948 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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 SEC ACT: SEC FILE NUMBER: 000-16471 FILM NUMBER: 98578890 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 1 FIRST CITIZENS BANCSHARES, INC. 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, 1997 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) 716-7000 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 24, 1998, the aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant as of such date was $635,233,000. On March 24, 1998, there were 9,026,514 outstanding shares of the Registrant's Class A Common Stock and 1,753,854 outstanding shares of the Registrant's Class B Common Stock. Portions of the Registrant's definitive Proxy Statement dated March 24, 1998 are incorporated in Part III of this report, as is information contained in the 1997 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 (the "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, 1997, the Bank operated 329 offices in North Carolina and Virginia. On September 1, 1994, BancShares acquired Bank of Marlinton, a West Virginia-charted bank with headquarters in Marlinton, West Virginia. On June 1, 1995, BancShares acquired Bank of White Sulphur Spring ("WSS"), a West Virginia-charted bank with headquarters in White Sulphur Springs, West Virginia. On August 1, 1997, BancShares merged Marlinton into WSS to form First-Citizens Bank & Trust Company. At December 31, 1997, the West Virginia bank operated four offices and had $122.7 million in assets. On April 28, 1997, BancShares opened Atlantic States Bank, a federally-chartered thrift institution with offices in Raleigh, North Carolina and the metropolitan Atlanta, Georgia area. Later during 1997, ASB announced its intention to extend its branch network into southwestern Florida, specifically in the Fort Myers area. At December 31, 1997, ASB had 7 offices with total assets of $119.6 million. BancShares' executive offices are located at 239 Fayetteville Street, Raleigh, North Carolina, 27601, and its telephone number is (919) 716-7000. At December 31, 1997, BancShares and its subsidiaries employed a full-time staff of 3,722 and a part-time staff of 852 for a total of 4,574 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 its investment securities portfolio and 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, small business 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 many of the facilities in which the Bank operates branches. First Citizens Investor Services, Inc., provides various investment products, including annuities, discount brokerage services and third-party mutual funds to customers. First-Citizens Bank, A Virginia Corporation ("FCB-AVC") is the issuing and processing bank for BancShares' retail credit cards. Various other subsidiaries are either inactive or not material to BancShares' consolidated financial position or to consolidated net income. As of December 31, 1997, BancShares had consolidated assets of $8.95 billion, consolidated deposits of $7.58 billion and shareholders' equity of $601.6 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, 1997. 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. PART I (CONTINUED) - -------------------------------------------------------------------------------- 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 were permitted, beginning June 1, 1997, to merge across state lines, subject to concentration, capital and Community Reinvestment Act requirements and regulatory approval. Some states authorized mergers earlier than June 1, 1997, and states could 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. The banks operate under the jurisdiction of the Federal Deposit Insurance Corporation and the respective state or Federal 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. During 1997, BancShares continued its efforts to address the issues related to ensuring its systems will continue to operate reliably in 2000. BancShares has devoted substantial attention and resources to this issue and continues its efforts to identify and cure potentially-deficient areas. BancShares retained a reputable advisor to help diagnose and make the required revisions to ensure date-sensitive information will retain its integrity after the turn of the century. BancShares has enacted a timetable that will result in its own systems being corrected and tested prior to year 2000. The responsibility for ensuring year 2000 compliance extends to governmental agencies, businesses and customers who exchange information or services with BancShares or are dependent on computer-generated information to meet their contractual obligations with others. To the extent that these unaffiliated organizations and customers are not successful in their compliance efforts and BancShares is dependent on those organizations for information, services, satisfaction of loan repayments or other contractual obligations, there are uncertainties as to the ultimate impact that the year 2000 will have on BancShares. BancShares continues to work with software vendors, suppliers, sources and recipients of data and customers to determine the areas of exposure that require attention. BancShares will continue its efforts to identify and correct problems related to year 2000 and to verify by testing that the solutions enacted will address the consequences of the year 2000 on its own systems, and, to the extent possible, those systems that provide information or are otherwise critical to BancShares' business. Item 2. Properties As of December 31, 1997, BancShares owned land and/or office buildings in which its operates offices at 221 locations. BancShares leases from Neuse 51 locations that have office buildings located thereon in which the BancShares maintains offices. In addition, BancShares leases 173 other locations. Additional information relating to premises, equipment and lease commitments is set forth in Note E of BancShares' consolidated financial statements. PART I (CONTINUED) - -------------------------------------------------------------------------------- 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 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, 1997, is presented in Table 17. The per share cash dividends paid by BancShares during each quarterly period during 1997 and 1996 are set forth in Table 17 of this report. A cash dividend of 25 cents per share was declared by the Board of Directors on January 26, 1998, payable April 6, 1998, to holders of record as of March 16, 1998. 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 1997 Annual Report. Item 6. Selected Financial Data Information is included in Table 1 on page 17 of Registrant's 1997 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 17 through 36 of Registrant's 1997 Annual Report Item 8. Financial Statements and Supplementary Data Information is included on the indicated pages of Registrant's 1997 Annual Report:
Independent Auditors' Report 37 Consolidated Balance Sheets at December 31, 1997 and 1996 38 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997 39 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 40 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 41 Notes to Consolidated Financial Statements 42-58 Quarterly Financial Summary for 1997 and 1996 34
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 24, 1998, 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 11 under the caption "Executive Officers." Item 11. Executive Compensation Information found on pages 8-9 under the caption "Directors' Fees and Compensation;" 9 under the caption "Compensation Committee Interlocks and Insider Participation;" 12-13 under the captions "Executive Compensation" 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" and "Ownership of Securities by Management." Item 13. Certain Relationships and Related Transactions Information found on pages 8 under footnote (4) to the table under the caption "Proposal 1: Election of Directors" and pages 14-15 under the caption "Transactions with Management." 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 September 30, 1997 Report to the SEC on Form 10-Q) 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 Post-Retirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, First-Citizens 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 Post-Retirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, First-Citizens 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 Post-Retirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, First-Citizens 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, First-Citizens 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, First-Citizens 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 Second Death Benefit and Post-Retirement Non-Competition and Consultation Agreement dated April 28, 1997, between Registrant's subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (filed herewith) PART IV (CONTINUED) - -------------------------------------------------------------------------------- *10.7 Consulting Agreement dated February 17, 1988, between Registrant's subsidiary, First-Citizens 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, First-Citizens 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, 1997 (filed herewith) 22 Subsidiaries of the Registrant (filed herewith) 27 Financial Data Schedule (filed herewith) 99 Registrant's definitive Proxy Statement dated March 24, 1998 (filed pursuant to Rule 14a-6(c)) - ------------------ * Denotes a management contract or compensation plan or arrangement in which an executive officer or director of Registrant participates. (b) Reports on Form 8-K. During the fourth quarter of 1997 the Registrant filed no Form 8-K Current Reports. 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 20, 1998 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 20, 1998.
Signature Title Date - --------------------------------------------------------------------------------------------------------- /s/Lewis R. Holding Chairman and Chief March 20, 1998 - ---------------------------------------------- Executive Officer Lewis R. Holding (principal executive officer) /s/Frank B. Holding Executive Vice Chairman March 20, 1998 - ---------------------------------------------- Frank B. Holding /s/James B. Hyler, Jr. Vice Chairman March 20, 1998 - ---------------------------------------------- James B. Hyler, Jr. /s/Frank B. Holding, Jr. President March 20, 1998 - ---------------------------------------------- Frank B. Holding, Jr. /s/Kenneth A. Black Vice President, March 20, 1998 - ---------------------------------------------- Treasurer, and Chief Kenneth A. Black Financial Officer (principal financial and accounting officer) Signature Title Date - --------------------------------------------------------------------------------------------------------- /s/John M. Alexander, Jr. Director March 20, 1998 - ---------------------------------------------- John M. Alexander, Jr. - ---------------------------------------------- Director Ted L. Bissett /s/B. Irvin Boyle Director March 20, 1998 - ---------------------------------------------- B. Irvin Boyle /s/George H. Broadrick Director March 20, 1998 - ---------------------------------------------- George H. Broadrick /s/Betty M. Farnsworth Director March 20, 1998 - ---------------------------------------------- Betty M. Farnsworth /s/Lewis M. Fetterman Director March 20, 1998 - ---------------------------------------------- Lewis M. Fetterman /s/Carmen P. Holding Director March 20, 1998 - ---------------------------------------------- Carmen P. Holding Signature Title Date - ------------------------------------------------------------------------------------------------------- /s/Charles B.C. Holt Director March 20, 1998 - ---------------------------------------------- Charles B.C. Holt /s/Edwin A. Hubbard Director March 20, 1998 - ---------------------------------------------- Edwin A. Hubbard /s/Gale D. Johnson Director March 20, 1998 - ---------------------------------------------- Gale D. Johnson /s/Freeman R. Jones Director March 20, 1998 - ---------------------------------------------- Freeman R. Jones /s/Lucius S. Jones Director March 20, 1998 - ---------------------------------------------- Lucius S. Jones Joseph T. Maloney, Jr. Director March 20, 1998 - ---------------------------------------------- Joseph T. Maloney, Jr. /s/J. Claude Mayo, Jr. Director March 20, 1998 - ---------------------------------------------- J. Claude Mayo, Jr. Signature Title Date - ------------------------------------------------------------------------------------------------------- /s/William McKay Director March 20, 1998 - ---------------------------------------------- William McKay /s/Brent D. Nash Director March 20, 1998 - ---------------------------------------------- Brent D. Nash /s/Lewis T. Nunnelee, II Director March 20, 1998 - ---------------------------------------------- Lewis T. Nunnelee, II /s/Talbert O. Shaw Director March 20, 1998 - ---------------------------------------------- Talbert O. Shaw /s/R. C. Soles, Jr. Director March 20, 1998 - ---------------------------------------------- R. C. Soles, Jr. /s/David L. Ward, Jr. Director March 20, 1998 - ---------------------------------------------- David L. Ward, Jr.
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 September 30, 1997 Report to the SEC on Form 10-Q) - 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 Post-Retirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, First-Citizens 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 Post-Retirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, First-Citizens 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 Post-Retirement Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, First-Citizens 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, First-Citizens 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) - EXHIBIT INDEX (CONTINUED) Exhibit Sequential Number Description of Exhibit Page Number - --------------------------------------------------------------------------------------------------------------- 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 Non-Competition and Consultation Agreement, dated January 24, 1994, between Registrant's subsidiary, First-Citizens 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 Second Death Benefit and Post-Retirement Non-Competition and Consultation Agreement dated April 28, 1997, between Registrant's subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (filed herewith) 16 10.7 Consulting Agreement dated February 17, 1988, between Registrant's subsidiary, First-Citizens 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 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, First-Citizens 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) - EXHIBIT INDEX (CONTINUED) Exhibit Sequential Number Description of Exhibit Page Number - --------------------------------------------------------------------------------------------------------------- 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 1997 Annual Report for the year ended December 31, 1997 (filed herewith) 22 22 Subsidiaries of the Registrant (filed herewith) 64 27 Financial Data Schedule 65 99 Registrant's definitive Proxy Statement dated March 24, 1998 (filed pursuant to Rule 14a-6(c)) -
EX-10 2 EXHIBIT 10.6 EXHIBIT 10.6 SECOND DEATH BENEFIT AND POST-RETIREMENT NON-COMPETITION AND CONSULTATION AGREEMENT DATED APRIL 28, 1997, BETWEEN REGISTRANT'S SUBSIDIARY, FIRST-CITIZENS BANK & TRUST COMPANY, AND GEORGE H. BROADRICK SECOND DEATH BENEFIT AND POST-RETIREMENT NONCOMPETITION AND CONSULTATION AGREEMENT THIS SECOND DEATH BENEFIT AND POST-RETIREMENT NONCOMPETITION AND CONSULTATION AGREEMENT ("Second Agreement"), made and entered into as of the 28th day of April, 1997, by and between FIRST-CITIZENS BANK & TRUST COMPANY, a North Carolina banking corporation with its principal office in Raleigh, Wake County, North Carolina (hereinafter referred to as "Bank"); and GEORGE H. BROADRICK (hereinafter referred to as "Broadrick"); W I T N E S S E T H: WHEREAS, Broadrick and Bank previously entered into an Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement, dated as of the 1st day of January, 1986 (the "1986 Agreement"), which became effective with Broadrick's retirement on June 15, 1987; and, WHEREAS, Broadrick has provided outstanding guidance, leadership and direction in the growth, management and development of Bank, and has continued to serve on the Board of Directors of Bank and its parent, First Citizens BancShares, Inc. ("BancShares"), and has served for a number of years as Chairman of the Executive Committees of the Boards of Directors of Bank and BancShares; and, WHEREAS, Bank desires to continue to have Broadrick's experience and knowledge available to it and to limit his availability to other employers or entities in competition with Bank; and, WHEREAS, Broadrick has served very faithfully under the 1986 Agreement, and Bank has offered to Broadrick a second noncompetition arrangement, together with a limited, when called, independent contractor consultation service arrangement and a death benefit arrangement for Broadrick's designated beneficiary or estate, as applicable, and the parties hereto have reached an agreement concerning the independent contractor consulting relationship, the noncompetition arrangement, the death benefit arrangement, and other matters contained herein, and desire to set forth the terms and conditions thereof by entering into this Second Agreement. NOW, THEREFORE, for and in consideration of the mutual promises and undertakings herein set forth, the parties hereto do agree as follows: 1. EFFECTIVE DATE. The term "Effective Date," as used herein, shall be defined for purposes of this Second Agreement as the last day of the calendar month in which Broadrick receives the final payment due under the 1986 Agreement. 2. CONSULTATION PAYMENTS. Broadrick shall be paid by Bank the sum of One Thousand One Hundred Ninety-Four and 58/100 ($1,194.58) per month, beginning the first calendar month following the calendar month of the Effective Date, for a period of ten (10) consecutive years following the Effective Date or until death, whichever first occurs. Such monthly payments shall be paid for and in consideration of Broadrick's consultation services, as provided herein; such sum to be payable to Broadrick whether or not Broadrick's consultation services have been utilized by Bank. Consultation payments hereunder shall be payable each month without deductions and Broadrick agrees to be solely responsible for the payment of all income and other taxes out of said funds and all Social Security, self-employment and any other taxes or assessments, if any, applicable on said compensation. For and in consideration of said monthly Consultation Payments to Broadrick, Broadrick will provide support, sponsorship, advisory and consultation services as an independent contractor to Bank, as and when Bank may request, which services may be provided with respect to all phases of Bank's business and particularly those phases in which Broadrick has particular expertise and knowledge. Broadrick's services shall be limited to those of an independent consultant, shall not be on a day-to-day regularly scheduled operational basis and shall be provided only when Broadrick is reasonably available and willing. Bank shall make available to Broadrick such office space and equipment as are reasonably necessary for Broadrick to carry out the obligations under this Second Agreement and shall reimburse Broadrick for any extraordinary expenses incurred in carrying out the obligations hereunder. As of the Effective Date, Broadrick and Bank agree that Broadrick shall be, under the terms of this Second Agreement, an independent contractor, and Broadrick agrees that his rights and privileges and his obligations are as provided in this Second Agreement as to matters covered herein. If Broadrick should die during said ten (10) year period, payments under this Paragraph shall terminate. Future payments, if any, to Broadrick's designated beneficiary or Broadrick's estate shall be made in accordance with the provisions of Paragraph 4 of this Second Agreement. 1. NONCOMPETITION PAYMENTS. Following the Effective Date, Broadrick shall be paid by Bank the sum of Three Thousand Five Hundred Eighty-Three and 83/100 Dollars ($3,583.83) per month, beginning the calendar month following the Effective Date, for a period of ten (10) consecutive years following the Effective Date, or until death, whichever first occurs. Such monthly payments shall be paid for and in consideration of Broadrick's Covenant Not to Compete, as provided herein. Noncompetition Payments hereunder shall be payable each month without deductions and Broadrick agrees to be solely responsible for the payment of all income or other taxes or assessments, if any, applicable on said payments. Except for service to the parent, subsidiaries or affiliates of Bank, for and in consideration of said monthly Noncompetition Payments to Broadrick, Broadrick agrees that he will not become an officer or employee of, provide any consultation to nor participate in any manner with any other entity of any type or description involved in any major element of business which Bank is performing at the Effective Date, nor will Broadrick perform or seek to perform any consultation or other type of work or service with any other firm, person or entity, directly or indirectly, in any such business which competes with Bank, whether done directly or indirectly, in ownership, consultation, employment or otherwise. Broadrick agrees not to reveal to outside sources, without the consent of Bank, any matters, the revealing of which could, in any manner, adversely affect or disclose Bank's business or any part thereof, unless required by law to do so. This Covenant Not to Compete by Broadrick is limited to the geographic area of North Carolina, shall exist for and during the term of all payments to be made under this Covenant Not to Compete, whether made directly by Bank or as otherwise provided herein, and shall not prevent Broadrick from carrying out his responsibilities as trustee under any trust of which he is now, or may be a trustee in the future, nor from purchasing or acquiring on his own behalf, as an investor only, a financial interest of less than five percent (5%) in a business or other entity which is in competition with Bank. Broadrick acknowledges that the remedy at law for breach of Broadrick's Covenant Not to Compete will be inadequate and that Bank shall be entitled to injunctive relief as to any violation thereof; however, nothing herein shall be construed as prohibiting Bank from pursuing any other remedies available to it, in addition to injunctive relief, whether at law or in equity, including the recovery of damages. In the event Broadrick shall breach any condition of Broadrick's Covenant Not to Compete, then Broadrick's right to any of the payments becoming due under Paragraphs 2 and 3 of this Second Agreement after the date of such breach shall be forever forfeited and Broadrick's designated beneficiary's or Broadrick's estate's right to any payments under this Second Agreement shall likewise be forever forfeited. This forfeiture is in addition to and not in lieu of any of the above-described remedies of Bank and shall be in addition to any injunctive or other relief as described herein. Broadrick further acknowledges that any breach of Broadrick's Covenant Not to Compete shall be deemed a material breach of this Second Agreement. If Broadrick should die during said ten (10) year period, payments under this Paragraph shall terminate. Future payments, if any, to Broadrick's designated beneficiary or Broadrick's estate shall be made in accordance with the provisions of Paragraph 4 of this Second Agreement. 1. DEATH BENEFITS; CONTINUATION OF PAYMENTS. Upon Broadrick's death during the period between the date of this Agreement and the Effective Date, or during the ten (10) year period of payments hereunder following the Effective Date, the sum of Four Thousand Seven Hundred Seventy-Eight and 41/100 Dollars ($4,778.41) per month shall be paid to Broadrick's designated beneficiary or Broadrick's estate, as applicable, as Death Benefits, beginning the first calendar month following the date of Broadrick's death and continuing thereafter until the expiration of said ten (10) year period. Once the Death Benefits and/or Consultation and Noncompetition Payments are begun, whether paid by Bank or as otherwise provided herein, the maximum payment period under this Second Agreement is ten (10) years. Payments hereunder shall be payable each month without deductions and the recipient shall be solely responsible for all income and other taxes and assessments applicable on said payments. 2. FORFEITURE OF BENEFITS. This Second Agreement is subject to termination by Bank at any time and without stated cause. In the event Bank shall terminate this Second Agreement, Broadrick shall forfeit all rights to receive any payment provided for herein. Broadrick acknowledges and agrees that any benefit provided for herein is merely a contractual benefit and that nothing contained herein shall be construed as conferring upon Broadrick any vested benefits or any vested rights to receive any payment provided for herein and that any and all payments provided for herein shall be subject to a substantial risk of forfeiture until such time as said payments are actually made by Bank. 3. CLAIMS PROCEDURE. If any benefits become payable under the Agreement, Broadrick (or Broadrick's beneficiary or estate, as applicable, in the case of Broadrick's death) shall file a claim for benefits by notifying Bank orally or in writing. If the claim is wholly or partially denied, Bank shall provide a written notice within ninety (90) days specifying the reasons for the denial, any additional material or information necessary to receive benefits, and the steps to be taken if a review of the denial is desired. If a claim is denied and a review is desired, Broadrick (or Broadrick's beneficiary or estate, in the case of Broadrick's death) shall notify Bank in writing within sixty (60) days. In requesting a review, Broadrick or Broadrick's beneficiary or estate, as applicable, may submit any written issues and comments he or she feels are appropriate. Bank shall then review the claim and provide a written decision within sixty (60) days. This decision shall state the specific reasons for the decision and shall include references to specific provisions on which the decision is based and shall be binding. 1. ASSIGNMENT OF RIGHTS. Neither Broadrick nor any designated beneficiary shall have any right to sell, assign, transfer or otherwise convey the right to receive any payment hereunder. 2. PAYMENTS AND FUNDING. Any payments under this Second Agreement shall be independent of, and in addition to, those under any other Plan, program or agreement which may be in effect between the parties hereto, or any other compensation payable to Broadrick or Broadrick's designee by Bank. This Second Agreement shall not restrict payment to Broadrick for service to Bank as a director or in any other capacity. This Second Agreement shall not be construed as a contract of employment. Bank has purchased an insurance policy on the life of Broadrick to fund, or assist in the funding, of the 1986 Agreement. A previously purchased life insurance policy may be used to fund, or assist in the funding of, this Second Agreement. Broadrick agrees to promptly supply to Bank and its selected or prospective insurance carrier, upon request, any and all information requested in order to enable the insurance carrier to evaluate the risks involved in providing any insurance requested by Bank, or the continuation of the outstanding policy. Any and all rights to any and all benefits under such insurance policy on the life of Broadrick shall be solely the property of Bank and all proceeds of such policy shall be payable by the insurer solely to Bank, as owner of such policy. Broadrick specifically waives any rights in any insurance policy on Broadrick's life owned by Bank pursuant to the 1986 Agreement or this Second Agreement. Such policy shall not serve in any way as security to Broadrick for Bank's performance under this Second Agreement. The rights accruing to Broadrick or any designee hereunder shall be solely those of an unsecured creditor of Bank and shall be subordinate to the rights of the depositors of Bank. Bank may, in its sole discretion, discharge its liabilities under this Second Agreement to Broadrick, Broadrick's designated beneficiary or Broadrick's estate at any time by the purchase of an annuity from a reputable insurance or similar company authorized to do, and doing, business in North Carolina and the assignment of the rights under said annuity to the benefit of Broadrick, Broadrick's designated beneficiary or Broadrick's estate. If this option is exercised by Bank, all rights accruing to Broadrick, Broadrick's designated beneficiary or Broadrick's estate hereunder shall be governed solely by the annuity contract and any election made under said annuity contract; and, Bank shall be fully discharged from any further liabilities to Broadrick, Broadrick's designated beneficiary or Broadrick's estate under this Second Agreement. Bank may, in its sole discretion, discharge its liabilities under this Second Agreement to Broadrick, Broadrick's designated beneficiary or Broadrick's estate at any time by determining the present value of the payments due hereunder, said amount to be determined by the use of the U.S. Government bond rate for the nearest year applicable to the time of the payments due hereunder for the present value computation and once determined, by payment of said amount in a lump sum to Broadrick, Broadrick's designated beneficiary or Broadrick's estate, as applicable. 1. BINDING EFFECT. This Second Agreement shall be binding upon Broadrick, his heirs, personal representatives and assigns and upon Bank, its successors and assigns. 2. SATISFACTION OF 1986 AGREEMENT. Broadrick acknowledges that the Bank has made all payments due to date under the 1986 Agreement and that, with the payments made through June 1997, Bank shall have fully performed its obligations under the 1986 Agreement. Upon such payments, Broadrick agrees that he shall have no further rights under the 1986 Agreement. Further, Broadrick's designated beneficiary under the 1986 Agreement shall have no further claims under the 1986 Agreement. 3. AMENDMENT OF AGREEMENT. This Second Agreement may not be altered, amended or revoked except by a written agreement signed by Bank and Broadrick. 4. INTERPRETATION. Where appropriate in this Second Agreement, words used in the singular shall include the plural and words used in the masculine shall include the feminine and neuter genders. 5. INVALID PROVISION. The invalidity or unenforceability of any particular provision of this Second Agreement shall not affect the other provisions hereof, and this Second Agreement shall be construed in all respects as if such invalid or unenforceable provision were not contained herein. 6. GOVERNING LAW. This Second Agreement shall be construed and enforced in accordance with and governed by the laws of the State of North Carolina. IN TESTIMONY WHEREOF, Bank has caused this Second Agreement to be executed in its corporate name by its Vice Chairman, attested by its Secretary and its corporate seal to be hereto affixed, all by the authority of its Board of Directors duly given, and Broadrick has hereunto set his hand and adopted as his seal the typewritten word "SEAL" appearing beside his name, as of the day and year first above written. FIRST-CITIZENS BANK & TRUST COMPANY By: _______________________________ James B. Hyler, Jr., Vice Chairman ATTEST: ______________________________________ Alexander G. MacFadyen, Jr., Secretary ______________________________(SEAL) George H. Broadrick EX-13 3 EXHIBIT 13 EXHIBIT 13 REGISTRANT'S ANNUAL REPORT TO SHAREHOLDER 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 1997, 1996 and 1995. 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), First-Citizens Bank & Trust Company ("FCB-WV"), a West Virginia-chartered bank, and Atlantic States Bank, a federally chartered thrift institution with offices in Raleigh, North Carolina and the metropolitan Atlanta, Georgia area. This discussion and related financial data should be read in conjunction with the audited consolidated financial statements and related footnotes presented on pages 37 through 58 of this report. Table 1 FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
1997 1996 --------------- --------------- (thousands, except share data and ratios) SUMMARY OF OPERATIONS Interest income .......................................... $ 572,276 $ 534,195 Interest expense ......................................... 268,013 248,250 ------------ ------------ Net interest income ...................................... 304,263 285,945 Provision for loan losses ................................ 8,726 8,907 ------------ ------------ Net interest income after provision for loan losses ...... 295,537 277,038 Noninterest income ....................................... 115,307 103,304 Noninterest expense ...................................... 300,794 278,668 ------------ ------------ Income before income taxes ............................... 110,050 101,674 Income taxes ............................................. 39,492 36,207 ------------ ------------ Net income ............................................... $ 70,558 $ 65,467 ============ ============ Net interest income, taxable equivalent .................. $ 306,726 $ 288,251 ============ ============ SELECTED AVERAGE BALANCES Total assets ............................................. $ 8,304,412 $ 7,681,019 Investment securities .................................... 2,300,706 1,998,059 Loans .................................................... 5,086,723 4,842,266 Interest-earning assets .................................. 7,569,075 6,987,659 Deposits ................................................. 7,088,018 6,653,302 Interest-bearing liabilities ............................. 6,521,818 6,044,553 Long-term obligations .................................... 10,472 13,483 Shareholders' equity ..................................... $ 638,825 $ 576,988 Shares outstanding ....................................... 11,341,153 11,340,982 ============ ============ SELECTED PERIOD-END BALANCES Total assets ............................................. $ 8,951,109 $ 8,055,572 Investment securities .................................... 2,483,294 2,161,236 Loans .................................................... 5,445,772 4,930,508 Interest-earning assets .................................. 8,010,841 7,247,744 Deposits ................................................. 7,579,567 6,954,028 Interest-bearing liabilities ............................. 7,052,749 6,265,482 Long-term obligations .................................... 10,856 6,922 Shareholders' equity ..................................... $ 601,640 $ 615,507 Shares outstanding ....................................... 10,627,453 11,410,880 ============ ============ PROFITABILITY RATIOS (AVERAGES) Rate of return on: Total assets ............................................ 0.85% 0.85% Shareholders' equity .................................... 11.04 11.35 Dividend payout ratio .................................... 16.08 16.03 ============ ============ LIQUIDITY AND CAPITAL RATIOS (AVERAGES) Loans to deposits ........................................ 71.77% 72.78% Shareholders' equity to total assets ..................... 7.69 7.51 Time certificates of $100,000 or more .................... to total deposits ....................................... 9.62 8.99 ============ ============ PER SHARE OF STOCK Net income ............................................... $ 6.22 $ 5.77 Cash dividends ........................................... 1.000 0.925 Market price at December 31 (Class A) .................... 104.03 77.00 Book value at December 31 ................................ 56.61 53.94 Tangible book value at December 31 ....................... 47.11 45.42 ============ ============ 1995 1994 1993 --------------- --------------- --------------- (thousands, except share data and ratios) SUMMARY OF OPERATIONS Interest income .......................................... $ 471,109 $ 376,005 $ 364,881 Interest expense ......................................... 224,664 148,126 137,934 ------------ ------------ ----------- Net interest income ...................................... 246,445 227,879 226,947 Provision for loan losses ................................ 5,364 2,786 15,245 ------------ ------------ ----------- Net interest income after provision for loan losses ...... 241,081 225,093 211,702 Noninterest income ....................................... 92,128 83,325 85,737 Noninterest expense ...................................... 245,880 230,582 213,213 ------------ ------------ ----------- Income before income taxes ............................... 87,329 77,836 84,226 Income taxes ............................................. 30,423 26,867 28,641 ------------ ------------ ----------- Net income ............................................... $ 56,906 $ 50,969 $ 55,585 ============ ============ =========== Net interest income, taxable equivalent .................. $ 248,707 $ 229,732 $ 228,445 ============ ============ =========== SELECTED AVERAGE BALANCES Total assets ............................................. $ 6,846,959 $ 6,098,944 $ 5,576,179 Investment securities .................................... 1,611,549 1,599,565 1,522,715 Loans .................................................... 4,433,517 3,800,318 3,401,093 Interest-earning assets .................................. 6,191,422 5,476,690 5,002,144 Deposits ................................................. 5,952,090 5,335,057 4,894,319 Interest-bearing liabilities ............................. 5,410,495 4,838,749 4,445,120 Long-term obligations .................................... 26,307 52,499 29,318 Shareholders' equity ..................................... $ 487,895 $ 416,983 $ 362,733 Shares outstanding ....................................... 10,597,066 9,944,927 9,701,389 ============ ============ =========== SELECTED PERIOD-END BALANCES Total assets ............................................. $ 7,383,950 $ 6,333,324 $ 6,101,016 Investment securities .................................... 1,983,148 1,458,969 1,814,787 Loans .................................................... 4,580,719 4,148,133 3,584,991 Interest-earning assets .................................. 6,604,312 5,613,852 5,419,778 Deposits ................................................. 6,388,082 5,517,589 5,358,187 Interest-bearing liabilities ............................. 5,844,125 4,984,455 4,871,015 Long-term obligations .................................... 22,957 34,542 60,326 Shareholders' equity ..................................... $ 520,837 $ 449,411 $ 389,050 Shares outstanding ....................................... 10,716,167 10,188,840 9,766,137 ============ ============ =========== PROFITABILITY RATIOS (AVERAGES) Rate of return on: Total assets ............................................ 0.83% 0.84% 1.00% Shareholders' equity .................................... 11.66 12.22 15.32 Dividend payout ratio .................................... 15.36 14.13 10.91 ============ ============ =========== LIQUIDITY AND CAPITAL RATIOS (AVERAGES) Loans to deposits ........................................ 74.49% 71.23% 69.49% Shareholders' equity to total assets ..................... 7.13 6.84 6.51 Time certificates of $100,000 or more .................... to total deposits ....................................... 8.33 6.41 6.31 ============ ============ =========== PER SHARE OF STOCK Net income ............................................... $ 5.37 $ 5.13 $ 5.73 Cash dividends ........................................... 0.825 0.725 0.625 Market price at December 31 (Class A) .................... 55.13 43.50 46.50 Book value at December 31 ................................ 48.60 44.11 39.84 Tangible book value at December 31 ....................... 41.75 39.97 36.53 ============ ============ ===========
17 SUMMARY BancShares experienced a 7.8 percent increase in earnings during 1997, compared to 1996. The increase was due to increased levels of net interest income and noninterest income, which more than offset the growth in noninterest expense during 1997. Significant to the comparison of 1997 net income to 1996 net income is the absence during 1997 of the $6.3 million after-tax impact of the 1996 assessment of the Federal Deposit Insurance Corporation's ("FDIC") on certain of BancShares' deposit liabilities. This assessment added $10.0 million to noninterest expense during 1996. Without the FDIC assessment, net income during 1997 would have decreased $1.3 million or 1.7 percent from 1996. Consolidated net income amounted to $70.6 million during 1997, compared to $65.5 million during 1996 and $56.9 million during 1995. Net income per share for the year ended December 31, 1997 totaled $6.22, compared to $5.77 and $5.37 for 1996 and 1995, respectively. Return on average assets was 0.85 percent, 0.85 percent and 0.83 percent during 1997, 1996 and 1995, 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, all of which were accounted for as purchases, with the results of operations included with BancShares' Statements of Income since the respective acquisition dates. Table 2 SIGNIFICANT ACQUISITIONS
Total Total Date Institution and Location Assets Deposits - ---------------------- ------------------------------------------ ----------- ----------- (thousands) September 1997 First Savings Financial Corp. $ 45,431 $ 36,025 Reidsville, North Carolina May 1997 Four Wachovia Bank branches 80,613 86,460 Western North Carolina April 1997 Three First Union National Bank branches 42,171 45,179 Western North Carolina 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 Nine 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
18 INTEREST-EARNING ASSETS Interest-earning assets averaged $7.57 billion during 1997, an increase of $581.4 million or 8.3 percent over 1996 levels, compared to a $796.2 million or 12.9 percent increase in 1996 over 1995 levels. Growth among interest-earning assets during 1997 included increases in loan and investment securities balances. Loans. As of December 31, 1997, gross loans outstanding were $5.45 billion, a 10.5 percent increase over the December 31, 1996 balance of $4.93 billion. Of the $515.3 million in loan growth during 1997, acquisitions contributed a total of $37.8 million; the remaining loan volume resulted from internal growth. Loan balances for the last five years are provided in Table 3. During 1997, average loans were $5.09 billion, an increase of $244.5 million or 5.0 percent over 1996, compared to an increase of $408.7 million or 9.2 percent in 1996 when compared to 1995. Loans secured by real estate averaged $3.14 billion during 1997, compared to $3.04 billion during 1996. Much of the growth in real estate secured loans during 1997 was in home equity loans. These loans experienced robust growth during 1997, as average EquityLine loans increased $93.0 million or 23.0 percent during the year. Average residential mortgage loans declined during 1997, the result of ongoing loan sales. Non-real estate commercial and industrial loans experienced strong growth during 1997, averaging $567.2 million during the current year compared to $500.3 million in 1996, an increase of $66.9 million or 13.4 percent. Commercial and industrial growth during 1997 continued to be especially strong among small business customers. Table 3 LOANS
December 31, --------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- (thousands) Real estate: Construction and land development ..... $ 113,735 $ 109,806 $ 104,540 $ 100,708 $ 117,693 Mortgage: 1-4 family residential ............... 1,411,279 1,542,836 1,438,655 1,296,713 1,138,254 Commercial ........................... 1,055,529 882,067 770,246 720,407 614,018 Equity Line .......................... 603,714 411,856 397,225 349,092 293,200 Other ................................ 136,639 132,954 129,292 109,069 56,029 Commercial and industrial ............... 633,580 514,535 466,462 373,947 408,565 Consumer ................................ 1,402,093 1,251,704 1,199,400 1,119,994 889,260 Lease financing ......................... 74,589 68,694 59,899 60,598 45,398 Other ................................... 14,614 16,056 15,000 17,605 22,574 ---------- ---------- ---------- ---------- ---------- Total ................................ 5,445,772 4,930,508 4,580,719 4,148,133 3,584,991 Less reserve for loan losses ............ 84,360 81,439 78,495 72,017 70,049 ---------- ---------- ---------- ---------- ---------- Net loans ............................ $5,361,412 $4,849,069 $4,502,224 $4,076,116 $3,514,942 ========== ========== ========== ========== ==========
- --------- All information presented in this table relates to domestic loans as BancShares makes no foreign loans. 19 Table 4 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
December 31, 1997 ------------------------------------------------------ Within One to Five After One Year Years Five Years Total ------------- ------------- ------------ ------------- (thousands) Real estate: Construction and land development ....... $ 54,951 $ 55,172 $ 7,773 $ 117,896 Mortgage: 1-4 family residential ................ 303,647 469,221 655,755 1,428,623 Commercial ............................ 479,853 481,784 67,876 1,029,513 Equity Line ........................... 42,260 150,928 410,526 603,714 Other ................................. 65,790 66,054 9,306 141,150 Commercial and industrial ................ 307,357 285,837 40,386 633,580 Consumer ................................. 471,668 905,390 25,035 1,402,093 Lease financing .......................... 18,647 55,942 -- 74,589 Other .................................... 7,037 6,538 1,039 14,614 ---------- ---------- ---------- ---------- Total ................................. $1,751,210 $2,476,866 $1,217,696 $5,445,772 ========== ========== ========== ========== Loans maturing after one year with: Fixed interest rates .................... $1,966,545 $ 629,044 $2,595,589 Floating or adjustable rates ............ 510,321 588,652 1,098,973 ---------- ---------- ---------- Total ................................. $2,476,866 $1,217,696 $3,694,562 ========== ========== ==========
Consumer loans averaged $1.30 billion during 1997 compared to $1.22 billion during 1996. Demand for retail installment financing was mixed during 1997. Indirect automobile lending experienced strong growth, averaging $782.8 million during 1997, an increase of 10.0 percent. Direct installment financing experienced some run-off during 1997, as customer preference for home equity loans becomes stronger. During 1997, credit card loans averaged $155.9 million, compared to $141.8 million during 1996, an increase of 9.9 percent. During 1998, management anticipates continued growth among small business loans. Among retail products, management anticipates continued expansion of EquityLine and indirect installment lending. To minimize the potential adverse impact of interest rate fluctuations, management continuously monitors the maturity and repricing distribution of the loan portfolio. BancShares also offers variable rate loan products and fixed rate callable loans to ease the interest rate risk. Table 4 details the maturity and repricing distribution as of December 31, 1997. Of the gross loans outstanding on December 31, 1997, 32.2 percent have scheduled maturities within one year, 45.5 percent have scheduled maturities between one and five years, while the remaining 22.3 percent have scheduled maturities extending beyond five years. Investment Securities. At December 31, 1997, and 1996, the investment portfolio totaled $2.48 billion and $2.16 billion, respectively. In each period, U.S. Treasury securities represented substantially all of the portfolio. Investment securities averaged $2.30 billion during 1997, $2.00 billion during 1996 and $1.61 billion during 1995. The $302.6 million or 15.1 percent increase in the average investment security portfolio during 1997 was the result of enhanced liquidity resulting from sustained deposit growth. The weighted-average maturity of the investment portfolio was 14 months at December 31, 1997, compared to 17 months at December 31, 1996. Management continues to maintain a portfolio of securities with short maturities, consistent with BancShares' focus on liquidity. At December 31, 1997, the fair value of the Bank's investment portfolio was $5.4 million above book value. The net unrealized loss existing as of December 31, 1996, was $800,000. The investment portfolio's fair value premium at December 31, 1997 resulted from the market rate reductions during late 1997, which caused current fair values to improve. Table 5 presents detailed information relating to the investment portfolio. 20 Table 5 INVESTMENT SECURITIES
December 31, ------------------------------------------------------ 1997 ------------------------------------------------------ Average Taxable Fair Maturity Equivalent Cost Value (Yrs./Mos.) Yield ------------- ------------- ------------- ------------ (thousands) Securities held to maturity: U.S. Government: Within one year ........... $1,055,289 $1,055,725 0/6 5.80% One to five years ......... 1,388,079 1,392,567 1/8 5.98 Five to ten years ......... 2,747 2,792 5/10 5.42 Over ten years ............ 4,519 4,629 19/10 7.47 ---------- ---------- ----- ---- Total ................... 2,450,634 2,455,713 1/2 5.90 ---------- ---------- ----- ---- State, county and municipal: Within one year ........... 1,549 1,761 0/8 6.40 One to five years ......... 3,197 3,298 3/4 7.16 Five to ten years ......... 175 175 19/8 9.14 ---------- ---------- ----- ---- Total ................... 4,921 5,234 3/1 6.99 ---------- ---------- ----- ---- Other: Within one year ........... 1,102 1,099 0/4 7.30 One to five years ......... 55 55 1/2 5.47 Five to ten years ......... 10 10 5/1 5.63 ---------- ---------- ----- ---- Total ................... 1,167 1,164 1/0 4.91 ---------- ---------- ----- ---- Marketable equity securities ................. 10,817 26,572 -- -- ---------- ---------- ----- ---- Total investment securities .................. $2,467,539 $2,488,683 1/2 5.90% ========== ========== ===== ==== December 31, ------------------------------------------------------- 1996 1995 --------------------------- --------------------------- Fair Fair Cost Value Cost Value ------------- ------------- ------------- ------------- (thousands) Securities held to maturity: U.S. Government: Within one year ........... $ 778,908 $ 779,668 $ 927,931 $ 930,120 One to five years ......... 1,340,399 1,338,453 1,034,722 1,040,954 Five to ten years ......... 3,312 3,301 2,305 2,258 Over ten years ............ 7,418 7,501 7,171 7,198 ---------- ---------- ---------- ---------- Total ................... 2,130,037 2,128,923 1,972,129 1,980,530 ---------- ---------- ---------- ---------- State, county and municipal: Within one year ........... 1,128 1,135 1,324 1,328 One to five years ......... 3,717 3,997 4,287 4,355 Five to ten years ......... 1,456 1,493 2,422 2,518 ---------- ---------- ---------- ---------- Total ................... 6,301 6,625 8,033 8,201 ---------- ---------- ---------- ---------- Other: Within one year ........... 1,300 1,299 506 506 One to five years ......... 1,158 1,149 2,425 2,424 Five to ten years ......... 35 35 55 55 ---------- ---------- ---------- ---------- Total ................... 2,493 2,483 2,986 2,985 ---------- ---------- ---------- ---------- Marketable equity securities ................. 11,238 22,405 -- -- ---------- ---------- ---------- ---------- Total investment securities .................. $2,150,069 $2,160,436 $1,938,148 $1,991,716 ========== ========== ========== ==========
- --------- Yields are based on amortized cost; yields related to securities that are exempt from federal and/or state income taxes are stated on a taxable-equivalent basis assuming statutory rates of 35% for federal taxes for all periods and 7.50%, 7.75% and 7.75% for state income taxes for 1997, 1996 and 1995, respectively. Investment securities available for sale includes marketable equity securities that are recorded at their fair value, with the unrealized gain included as a component of shareholders' equity. Income on Interest-Earning Assets. Table 6 analyzes the interest-earning assets and interest-bearing liabilities for the five years ending December 31, 1997. Table 9 identifies the causes for changes in interest income and interest expense for 1997 and 1996. Interest income amounted to $572.3 million during 1997, a $38.1 million increase from 1996 levels, compared to a $63.1 million increase from 1995 to 1996. Interest income growth during 1997 resulted from a higher volume of earning assets, as the blended yield on all earning assets declined during 1997. During 1996, volume growth and higher yields both contributed to the increase in interest income over 1995. 21 Table 6 AVERAGE BALANCE SHEETS
1997 1996 ----------------------------------- ------------------------------------ Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------- ---------- ---------- ------------- ----------- ---------- (thousands, taxable equivalent) ASSETS Loans: Secured by real estate ........................... $3,136,005 $257,764 8.22% $3,037,689 $250,356 8.24% Commercial and industrial ........................ 567,182 50,501 8.90 500,313 44,911 8.98 Consumer ......................................... 1,295,805 115,350 8.90 1,221,063 110,838 9.08 Lease financing .................................. 72,585 6,256 8.62 66,557 5,398 8.11 Other ............................................ 15,146 1,062 7.01 16,644 1,329 7.98 ---------- -------- ---- ---------- -------- ---- Total loans .................................... 5,086,723 430,933 8.47 4,842,266 412,832 8.53 Investment securities: U. S. Government ................................. 2,267,652 133,007 5.87 1,988,518 114,831 5.77 State, county and municipal ...................... 5,560 421 7.57 6,607 507 7.67 Other ............................................ 27,494 481 1.75 2,934 172 5.86 ---------- -------- ---- ---------- -------- ---- Total investment securities .................... 2,300,706 133,909 5.82 1,998,059 115,510 5.78 Federal funds sold ................................ 181,646 9,897 5.45 147,334 8,159 5.54 ---------- -------- ---- ---------- -------- ---- Total interest-earning assets .................. 7,569,075 $574,739 7.59% 6,987,659 $536,501 7.68% Cash and due from banks ........................... 345,578 324,353 Premises and equipment ............................ 251,163 218,434 Other assets ...................................... 220,828 231,140 Reserve for loan losses ........................... (82,232) (80,567) ---------- ---------- Total assets ................................... $8,304,412 $7,681,019 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking With Interest ........................... $ 928,122 $ 9,909 1.07% $ 878,878 $ 10,791 1.23% Savings .......................................... 704,531 14,121 2.00 719,962 15,059 2.09 Money market accounts ............................ 919,049 34,062 3.71 825,139 29,217 3.54 Time deposits .................................... 3,489,614 185,657 5.32 3,258,713 175,838 5.40 ---------- -------- ---- ---------- -------- ---- Total interest-bearing deposits ................ 6,041,316 243,749 4.03 5,682,692 230,905 4.06 Short-term borrowings ............................. 470,030 23,420 4.98 348,378 16,388 4.70 Long-term obligations ............................. 10,472 844 8.06 13,483 957 7.10 ---------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities ............. 6,521,818 $268,013 4.11% 6,044,553 $248,250 4.11% Demand deposits ................................... 1,046,703 970,610 Other liabilities ................................. 97,066 88,868 Shareholders' equity .............................. 638,825 576,988 ---------- ---------- Total liabilities and shareholders' equity ..... $8,304,412 $7,681,019 ========== ========== Interest rate spread .............................. 3.48% 3.57% ==== ==== Net interest income and net yield on interest-earning assets ....................... $306,726 4.05% $288,251 4.13% ======== ==== ======== ====
- --------- Average loan balances include nonaccrual loans. BancShares earns tax-exempt interest on certain loans and investment securities due to the borrower or issuer being either a governmental agency or a quasi-governmental agency. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% for all periods, and state income tax rates of 7.5%, 7.75%, and 7.75% for 1997, 1996 and 1995, respectively. The taxable equivalent adjustment was $2,463, $2,306, and $2,262 for the years 1997, 1996 and 1995, respectively. Total interest-earning assets yielded 7.59 percent during 1997, a nine basis point reduction from the 7.68 percent reported in 1996. The average taxable-equivalent yield on the loan portfolio fell from 8.53 percent in 1996 to 8.47 percent in 1997. The lower loan yield during 1997 reflects general market conditions and the competitive loan pricing that exists in BancShares' market areas. Loan interest income increased $18.3 million or 4.5 percent from 1996, the result of loan growth that more than offset the impact of the lower loan yields. This followed an increase of 7.9 percent in loan interest income in 1996 from 1995. 22 Table 6 AVERAGE BALANCE SHEETS (continued)
1995 1994 1993 - ---------------------------------------- --------------------------------------- ---------------------------------------- Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate - -------------- ---------- ---------- ------------- ---------- ---------- ------------- ----------- ---------- (thousands, taxable equivalent) $ 2,752,463 $233,055 8.47% $2,265,054 $177,494 7.84% $2,173,262 $170,150 7.83% 437,970 41,099 9.38 440,566 34,165 7.75 381,722 27,596 7.23 1,167,923 102,666 8.79 1,012,359 85,523 8.45 789,374 71,112 9.01 58,332 4,499 7.71 51,160 3,861 7.55 40,576 3,433 8.46 16,829 1,402 8.33 31,179 1,741 5.58 16,159 985 6.10 ----------- -------- ---- ---------- -------- ---- ---------- -------- ---- 4,433,517 382,721 8.63 3,800,318 302,784 7.97 3,401,093 273,276 8.03 1,600,713 81,219 5.07 1,597,051 71,573 4.48 1,521,949 90,655 5.96 8,016 622 7.76 2,192 176 8.03 451 43 9.53 2,820 184 6.52 322 28 8.70 315 20 6.35 ----------- -------- ---- ---------- -------- ---- ---------- -------- ---- 1,611,549 82,025 5.09 1,599,565 71,777 4.49 1,522,715 90,718 5.96 146,356 8,625 5.89 76,807 3,297 4.29 78,336 2,385 3.04 ----------- -------- ---- ---------- -------- ---- ---------- -------- ---- 6,191,422 $473,371 7.65% 5,476,690 $377,858 6.90% 5,002,144 $366,379 7.32% 349,998 354,875 320,688 200,674 189,421 169,062 180,675 148,932 147,422 (75,810) (70,974) (63,117) ----------- ---------- ---------- $ 6,846,959 $6,098,944 $5,576,179 =========== ========== ========== $ 816,391 $ 13,555 1.66% $ 788,673 $ 13,495 1.71% $ 704,614 $ 13,271 1.88% 693,187 15,728 2.27 687,322 15,390 2.24 571,559 14,413 2.52 742,537 25,167 3.39 788,063 19,280 2.45 797,260 19,017 2.39 2,824,074 152,784 5.41 2,279,639 89,127 3.91 2,116,104 83,653 3.95 ----------- -------- ---- ---------- -------- ---- ---------- -------- ---- 5,076,189 207,234 4.08 4,543,697 137,292 3.02 4,189,537 130,354 3.11 307,999 15,773 5.12 242,553 8,314 3.43 226,265 6,118 2.70 26,307 1,657 6.30 52,499 2,520 4.80 29,318 1,462 4.99 ----------- -------- ---- ---------- -------- ---- ---------- -------- ---- 5,410,495 $224,664 4.15% 4,838,749 $148,126 3.06% 4,445,120 $137,934 3.10% 875,901 791,360 704,782 72,668 51,852 63,544 487,895 416,983 362,733 ----------- ---------- ---------- $ 6,846,959 $6,098,944 $5,576,179 =========== ========== ========== 3.50% 3.84% 4.22% ==== ==== ==== $248,707 4.02% $229,732 4.19% $228,445 4.57% ======== ==== ======== ==== ======== ====
Interest income earned on the investment portfolio amounted to $133.4 million, $115.3 million and $81.8 million during the years ended December 31, 1997, 1996 and 1995, respectively. The average taxable-equivalent yield on the portfolio for these years was 5.82 percent, 5.78 percent and 5.09 percent, respectively. The $18.0 million increase in investment interest income during 1997 reflected the benefit of the portfolio growth as well as a four basis point yield improvement. The $33.5 million increase in investment interest income from 1995 to 1996 was the result of growth in the investment securities portfolio as well as more favorable yields on the portfolio during 1996. 23 INTEREST-BEARING LIABILITIES At December 31, 1997, and 1996 interest-bearing liabilities totaled $7.05 billion and $6.27 billion, respectively. Interest-bearing liabilities averaged $6.52 billion during 1997, an increase of $477.3 million or 7.9 percent over 1996 levels, with most of the growth occurring in interest-bearing deposits. During 1996, interest-bearing liabilities averaged $6.04 billion, an increase of 11.7 percent over 1995. Deposits. At December 31, 1997, deposits totaled $7.58 billion, an increase of $625.5 million or 9.0 percent from December 31, 1996. Acquisitions contributed to $167.5 million of the increase, with the remaining growth coming from the existing branch network. Total deposits averaged $7.09 billion in 1997, an increase of $434.7 million or 6.5 percent over 1996. Average interest-bearing deposits were $6.04 billion during 1997, an increase of $358.6 million or 6.3 percent. Time deposits averaged $3.49 billion during 1997, an increase of $230.9 million or 7.1 percent over 1996. Average time deposits increased $434.6 million or 15.4 percent from 1995 to 1996. The average rate on time deposits decreased from 5.41 percent in 1995 to 5.40 percent in 1996 and 5.32 percent in 1997, the result of market rate changes. BancShares has historically avoided excessive reliance on time deposits with balances exceeding $100,000. During 1997, these funds averaged 9.62 percent of total average deposits, compared to 8.99 percent in 1996. Table 7 provides a maturity distribution for these deposits. Table 7 MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 1997 ------------------ (thousands) Less than three months ...... $331,689 Three to six months ......... 191,298 Six to 12 months ............ 157,962 More than 12 months ......... 70,102 -------- Total ...................... $751,051 ========
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, 1997, short-term borrowings totaled $593.8 million, compared to $392 million one year earlier. For the year ended December 31, 1997, short-term borrowings averaged $470.0 million, compared to $348.4 million during 1996 and $308 million during 1995. The increase from 1996 to 1997 resulted from higher levels of short-term borrowings by the holding company and by growth in an overnight borrowing arrangement between BancShares and commercial depositors. The increase from 1995 to 1996 resulted from growth in the overnight borrowing between BancShares and commercial customers. Table 8 provides additional information regarding short-term borrowed funds. 24 Table 8 SHORT-TERM BORROWINGS
1997 1996 1995 ---------------------- ---------------------- ---------------------- Amount Rate Amount Rate Amount Rate ----------- ---------- ----------- ---------- ----------- ---------- (thousands) Master notes At December 31 ....................... $315,529 4.40% $295,428 4.23% $257,178 4.74% Average during year .................. 301,558 4.63 266,476 4.46 203,114 4.96 Maximum month-end balance during year 332,055 -- 316,628 -- 257,178 -- Federal funds purchased At December 31 ....................... 45,380 5.72 45,075 6.27 64,085 5.44 Average during year .................. 28,752 5.30 32,948 6.24 49,226 5.83 Maximum month-end balance during year 45,420 -- 57,740 -- 72,165 -- Repurchase agreements At December 31 ....................... 54,796 4.15 21,816 3.98 25,022 4.46 Average during year .................. 34,848 4.32 21,633 4.30 23,784 4.86 Maximum month-end balance during year 56,942 -- 22,497 -- 25,337 -- U.S. Treasury tax and loan accounts At December 31 ....................... 19,989 4.92 20,356 4.38 17,581 5.49 Average during year .................. 12,374 7.56 15,318 5.09 17,070 5.71 Maximum month-end balance during year 54,583 -- 27,248 -- 22,410 -- Other At December 31 ....................... 158,130 5.95 9,331 6.02 12,665 4.50 Average during year .................. 92,498 5.93 12,003 6.14 14,805 4.69 Maximum month-end balance during year 158,764 -- 19,901 -- 16,666 --
At December 31, 1997 and 1996, long-term obligations totaled $10.9 million and $6.9 million, respectively. During 1997, long-term obligations averaged $10.5 million, compared to $13.5 million during 1996 and $26.3 million during 1995. The reduction from 1995 to 1996 and from 1996 to 1997 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 $268.0 million in 1997, a $19.8 million or 8.0 percent increase from 1996. This followed a 10.5 percent increase in interest expense during 1996 compared to 1995. The increased interest expense during 1997 and 1996 was the result of growth in interest-bearing liabilities as interest rates declined during both periods. The aggregate rate on interest-bearing deposits was 4.03 percent during 1997, compared to 4.06 percent during 1996 and 4.08 percent during 1995. Despite these rate reductions, interest expense on total interest-bearing deposits amounted to $243.7 million during 1997, an increase from the $230.9 million recorded during 1996 and $207.2 million recorded during 1995. The growth in interest expense in each period resulted from deposit growth. Interest expense on short-term borrowings amounted to $23.4 million in 1997, an increase of $7.0 million or 42.9 percent from 1996. Interest expense related to short-term borrowings totaled $16.4 million and $15.8 million, respectively, in 1996 and 1995. The increase was attributable to the growth in short-term borrowings and higher interest rates during 1997. Interest expense associated with long-term obligations decreased during 1997 to $844,000 from $957,000 recorded during 1996. The decrease results from a reduction in average long-term obligations. 25 Table 9 CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
1997 1996 ------------------------------------- --------------------------------------- Change from previous Change from previous year due to: year due to: ------------------------------------- --------------------------------------- Yield/ Total Yield/ Total Volume Rate Change Volume Rate Change ----------- ------------- ----------- ----------- -------------- ------------ (thousands) ASSETS: Loans: Secured by real estate .................. $ 8,058 $ (650) $ 7,408 $23,895 $(6,594) $ 17,301 Commercial and industrial ............... 5,998 (408) 5,590 5,706 (1,894) 3,812 Consumer ................................ 6,748 (2,236) 4,512 4,484 3,688 8,172 Lease financing ......................... 504 354 858 650 249 899 Other ................................... (113) (154) (267) (15) (58) (73) ------- ------- ------- ------- ------- -------- Total loans ............................ 21,195 (3,094) 18,101 34,720 (4,609) 30,111 Investment securities: U.S. Government ......................... 16,147 2,029 18,176 21,034 12,578 33,612 State, county and municipal ............. (80) (6) (86) (109) (6) (115) Other ................................... 934 (625) 309 7 (19) (12) ------- --------- ------- ------- --------- -------- Total investment securities ............ 17,001 1,398 18,399 20,932 12,553 33,485 Federal funds sold ........................ 1,886 (148) 1,738 52 (518) (466) ------- --------- ------- ------- --------- -------- Total interest-earning assets .......... $40,082 $(1,844) $38,238 $55,704 $ 7,426 $ 63,130 ======= ========= ======= ======= ========= ======== LIABILITIES: Deposits: Checking With Interest .................. $ 565 $(1,447) $ (882) $ 892 $(3,656) $ (2,764) Savings ................................. (306) (632) (938) 593 (1,262) (669) Money market accounts ................... 3,383 1,462 4,845 2,868 1,182 4,050 Time .................................... 12,447 (2,628) 9,819 23,425 (371) 23,054 ------- --------- ------- ------- --------- -------- Total interest-bearing deposits ........ 16,089 (3,245) 12,844 27,778 (4,107) 23,671 Short-term borrowings ..................... 5,887 1,145 7,032 1,988 (1,373) 615 Long-term obligations ..................... (228) 115 (113) (859) 159 (700) ------- --------- ------- ------- --------- -------- Total interest-bearing liabilities ..... $21,748 $(1,985) $19,763 $28,907 $(5,321) $ 23,586 ======= ========= ======= ======= ========= ======== Change in net interest income .......... $18,334 $ 141 $18,475 $26,797 $12,747 $ 39,544 ======= ========= ======= ======= ========= ========
- --------- 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. Table 6 provides detailed information on average balances, income/expense and yield/rate by category. The rate/volume variance is allocated equally between the changes in volume and rate. NET INTEREST INCOME Taxable-equivalent net interest income totaled $306.7 million during 1997, an increase of 6.4 percent over 1996. This followed an increase of 15.9 percent during 1996. 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. 26 The interest rate spread was 3.48 percent during 1997 compared to 3.57 percent during 1996 and 3.50 percent achieved in 1995. The net yield on interest-earning assets was 4.05 percent in 1997, 4.13 percent during 1996, and 4.02 percent during 1995. Rate Sensitivity. A principal objective of BancShares' asset/liability function is to manage interest rate risk or the exposure to changes in interest rate. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. Table 10 provides BancShares' interest-sensitivity position as of December 31, 1997, which reflected a one year interest-sensitivity gap of $2.32 billion. 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, 1997 --------------------------------------------- 1-30 31-90 91-180 Days Days Days Sensitive Sensitive Sensitive ---------------- -------------- ------------- (thousands) ASSETS: Loans ........................ $ 1,488,015 $ 152,164 $ 234,318 Investment securities ........ 104,248 327,339 198,314 Federal funds sold ........... 81,775 -- -- ------------ ---------- ---------- Total interest- earning assets ........... $ 1,674,038 $ 479,503 $ 432,632 ============ ========== ========== LIABILITIES: Checking With Interest ....... $ 1,009,577 -- -- Savings and money market accounts ............. 1,034,527 -- -- Time deposits ................ 577,829 $ 822,601 $1,009,970 Short-term borrowings ........ 451,283 $ 564 140,564 Long-term obligations ........ -- -- -- ------------ ---------- ---------- Total interest- bearing liabilities ...... $ 3,073,216 $ 823,165 $1,150,534 ============ ========== ========== Interest-sensitivity gap ..... $ (1,399,178) $ (343,662) $ (717,902) ============ ========== ========== December 31, 1997 --------------------------------------------------------- 181-365 Total Days One Year Total Sensitive Sensitive Nonsensitive Total ----------- ---------------- -------------- ------------- (thousands) ASSETS: Loans ........................ $507,834 $ 2,382,331 $3,063,441 $5,445,772 Investment securities ........ 429,042 1,058,943 1,424,351 2,483,294 Federal funds sold ........... -- 81,775 -- 81,775 -------- ------------ ---------- ---------- Total interest- earning assets ........... $936,876 $ 3,523,049 $4,487,792 $8,010,841 ======== ============ ========== ========== LIABILITIES: Checking With Interest ....... -- $ 1,009,577 -- $1,009,577 Savings and money market accounts ............. -- 1,034,527 $ 679,165 1,713,692 Time deposits ................ $791,131 3,201,531 523,269 3,724,800 Short-term borrowings ........ $ 1,413 593,824 -- 593,824 Long-term obligations ........ -- -- 10,856 10,856 -------- ------------ ---------- ---------- Total interest- bearing liabilities ...... $792,544 $ 5,839,459 $1,213,290 $7,052,749 ======== ============ ========== ========== Interest-sensitivity gap ..... $144,332 $ (2,316,410) $3,274,502 $ 958,092 ======== ============ ========== ==========
- --------- 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, 1997, BancShares had $127.6 million in residential mortgage loans available for sale that were reported at the lower of aggregate cost or market. Additionally, BancShares attempts to reduce exposure resulting from changes in market rates by entering into forward commitments to sell portions of its current production of residential mortgage loans. Table 11 provides information regarding the market risk profile of BancShares at December 31, 1997. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values or reduced net interest income in future periods. ASSET QUALITY Nonperforming Assets. Nonperforming asset balances for the past five years are presented in Table 11. BancShares' nonperforming assets at December 31, 1997 included nonaccrual loans totaling $12.7 million and $1.5 million in foreclosed property. Nonperforming assets as of December 31, 1997 represent 0.26 percent of loans outstanding. Total nonperforming assets totaled $14.0 million and $15.4 million, respectively, as of December 31, 1996, and 1995. Of the $12.7 million in nonaccrual loans at December 31, 1997, $6.9 million was classified as impaired. At December 31, 1996, BancShares reported $12.8 million in nonaccrual loans, of which $9.9 million were impaired. 27 Table 11 MARKET RISK DATA
Maturing in Years ended December 31, ------------------------------------------- 1998 1999 2000 --------------- ------------- ------------- (thousands) ASSETS: Loans: Fixed rate ............... $ 1,115,085 $ 701,195 $ 525,991 Average rate (%) ......... 8.01% 8.09% 8.07% Variable rate ............ 636,125 181,961 136,495 Average rate (%) ......... 8.51% 8.32% 8.15% Investment securities: Fixed rate ............... 1,057,940 1,228,894 159,142 Average rate (%) ......... 5.80% 5.96% 6.04% LIABILITIES: Savings and interest- bearing checking Fixed rate ............... 2,723,270 Average rate (%) ......... 2.03% Certificates of deposit: Fixed rate ............... 3,177,303 165,155 181,524 Average rate (%) ......... 5.29% 5.43% 5.70% Variable rate ............ 36,305 14,814 Average rate (%) ......... 4.95% 4.95% Long-term obligations: Fixed rate ............... 190 341 392 Average rate (%) ......... 8.00% 7.60% 7.78% Variable rate ............ -- 2,255 2,255 Average rate (%) ......... -- 6.49% 6.49% Maturing in Years ended December 31, ---------------------------------------------------------------------- 2001 2002 Thereafter Total Fair value ------------- ------------- ------------ --------------- ------------- (thousands) ASSETS: Loans: Fixed rate ............... $ 417,921 $ 321,439 $ 629,044 $ 3,710,674 $3,593,779 Average rate (%) ......... 8.06% 8.19% 8.96% 8.22% Variable rate ............ 108,451 83,414 588,652 1,735,098 1,735,098 Average rate (%) ......... 8.02% 7.88% 7.40% 8.02% Investment securities: Fixed rate ............... 28,333 1,538 7,447 2,483,294 2,488,683 Average rate (%) ......... 5.97% 5.57% 5.24% 5.90% LIABILITIES: Savings and interest- bearing checking Fixed rate ............... 2,723,270 2,723,270 Average rate (%) ......... 2.03% Certificates of deposit: Fixed rate ............... 85,685 63,896 317 3,673,880 3,674,291 Average rate (%) ......... 5.78% 5.80% 5.85% 5.33% Variable rate ............ 50,919 50,919 Average rate (%) ......... 4.95% Long-term obligations: Fixed rate ............... 1,573 259 3,027 5,782 6,417 Average rate (%) ......... 7.36% 8.00% 7.58% 7.57% Variable rate ............ 564 -- -- 5,074 5,074 Average rate (%) ......... 6.49% 6.49%
Table 12 RISK ELEMENTS
December 31 ------------------------------- 1997 1996 --------------- --------------- (thousands, except ratios) Nonaccrual loans .................................... $ 12,681 $ 12,810 Restructured loans .................................. -- -- Other real estate ................................... 1,462 1,160 ----------- ----------- Total nonperforming assets ........................ $ 14,143 $ 13,970 =========== =========== Accruing loans 90 days or more past due ............. $ 3,953 $ 4,983 Loans at December 31 ................................ $ 5,445,772 $ 4,930,508 Ratio of nonperforming assets to total loans plus other real estate ................................. 0.26% 0.28% ----------- ----------- Interest income that would have been earned on nonperforming loans had they been performing ....... $ 1,156 $ 1,162 Interest income earned on nonperforming loans ....... 349 259 =========== =========== December 31 ----------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- (thousands, except ratios) Nonaccrual loans .................................... $ 13,208 $ 21,069 $ 33,726 Restructured loans .................................. -- -- 571 Other real estate ................................... 2,154 5,926 15,879 ----------- ----------- ----------- Total nonperforming assets ........................ $ 15,362 $ 26,995 $ 50,176 =========== =========== =========== Accruing loans 90 days or more past due ............. $ 4,230 $ 5,326 $ 9,202 Loans at December 31 ................................ $ 4,580,719 $ 4,148,133 $ 3,584,991 Ratio of nonperforming assets to total loans plus other real estate ................................. 0.34% 0.65% 1.39% ----------- ----------- ----------- Interest income that would have been earned on nonperforming loans had they been performing ....... $ 1,556 $ 1,430 $ 2,354 Interest income earned on nonperforming loans ....... 595 693 1,083 =========== =========== ===========
- --------- 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, 1997. 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 having or potentially having credit weaknesses 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 loans. 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. 28 At December 31, 1997, BancShares' reserve for loan losses was $84.4 million or 1.55 percent of loans outstanding. This compares to $81.4 million or 1.65 percent at December 31, 1996, and $78.5 million or 1.71 percent at December 31, 1995. The reduction in the reserve ratio over the two year period reflects the reduced level of nonperforming loans. Table 13 SUMMARY OF LOAN LOSS EXPERIENCE
1997 1996 1995 1994 1993 ---------------- -------------- -------------- -------------- ---------------- (thousands, except ratios) Balance at beginning of year ................. $ 81,439 $ 78,495 $ 72,017 $ 70,049 $ 58,380 Reserve of acquired institutions ............. 481 1,387 3,231 1,009 8,269 Provision for loan losses .................... 8,726 8,907 5,364 2,786 15,245 Charge-offs: Real estate: Construction and land development ......... (7) (40) (118) (334) (786) Mortgage: 1-4 family residential ................... (1,350) (1,604) (994) (1,048) (1,349) Commercial ............................... (245) (248) (255) (1,502) (2,013) Equity Line .............................. (90) (58) (47) (192) (250) Other .................................... -- (52) (34) -- (3) Commercial and industrial .................. (1,061) (1,076) (826) (1,302) (7,331) Consumer ................................... (11,540) (8,515) (4,988) (4,085) (3,860) Lease financing ............................ (38) (60) -- (17) (51) ----------- ---------- ---------- ---------- ----------- Total charge-offs ......................... (14,331) (11,653) (7,262) (8,480) (15,643) ----------- ---------- ---------- ---------- ----------- Recoveries: Real estate: Construction and land development ......... 1,723 307 440 920 230 Mortgage: 1-4 family residential ................... 2,505 1,534 1,160 834 286 Commercial ............................... 1,502 530 1,476 2,765 856 Equity Line .............................. 3 19 28 28 85 Other .................................... -- -- -- -- 3 Commercial and industrial .................. 698 493 761 689 1,240 Consumer ................................... 1,614 1,420 1,233 1,396 1,085 Lease financing ............................ -- -- 47 21 13 ----------- ---------- ---------- ---------- ----------- Total recoveries .......................... 8,045 4,303 5,145 6,653 3,798 ----------- ---------- ---------- ---------- ----------- Net charge-offs ........................... (6,286) (7,350) (2,117) (1,827) (11,845) ----------- ---------- ---------- ---------- ----------- Balance at end of year ....................... $ 84,360 $ 81,439 $ 78,495 $ 72,017 $ 70,049 =========== ========== ========== ========== =========== HISTORICAL STATISTICS Balances Average total loans ........................ $5,086,723 $4,842,266 $4,433,517 $3,800,318 $3,401,093 Total loans at year-end .................... 5,445,772 4,930,508 4,580,719 4,148,133 3,584,991 Ratios Net charge-offs to average total loans ..... 0.12% 0.15% 0.05% 0.05% 0.35% Reserve for loan losses to total loans at year-end ............................... 1.55 1.65 1.71 1.74 1.95
- --------- 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 $8.7 million during 1997 compared to $8.9 million during 1996 and $5.4 million during 1995. Net charge-offs for 1997 totaled $6.3 million, compared to $7.4 million during 1996 and $2.1 million during 1995. During 1997, net charge-offs of consumer purpose loans were $9.9 million, compared to $7.1 million during 1996 and $3.8 million during 1995. The increase in net consumer-purpose charge-offs primarily resulted from higher losses on credit cards. Net credit card losses totaled $4.6 million during 1997, compared to $2.6 million during 1996 and $1.2 million during 1995. The trend of higher losses related to consumer loans results from the continuing high level of personal bankruptcies. 29 During 1997, BancShares continued to report net recoveries among real-estate secured loans. During 1997, net recoveries of $2.3 million were recorded, compared to net recoveries of $388,000 during 1996 and $1.7 million during 1995. Commercial and industrial loans experienced net charge-offs of $363,000 during 1997, compared to net charge-offs of $583,000 in 1996 and $65,000 during 1995. Stringent underwriting standards continue to result in minimal losses among the real-estate secured and commercial and industrial portfolios. The ratio of net charge-offs to average loans equaled 0.12 percent during 1997, 0.15 percent during 1996 and 0.05 percent during 1995. These loss ratios reflect the quality of BancShares' balance sheet, as these ratios remain low by industry standards. Table 13 provides details concerning the reserve and provision for loan losses for the past five years. Management considers the established reserve adequate to absorb future losses that relate to loans outstanding at December 31, 1997, 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 14 details management's allocation of the reserve among the various loan types. During 1997, as BancShares recorded longer-term retail installment loans and charge-offs among retail loan products continued to grow, BancShares allocated a larger portion of its reserve for loan losses to the consumer portfolio. This resulted in a reduction in the unallocated reserve at December 31, 1997. At December 31, 1997, 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 14 ALLOCATION OF RESERVE FOR LOAN LOSSES
December 31 -------------------------------------------------------------- 1997 1996 1995 -------------------- -------------------- -------------------- Percent Percent Percent of Loans of Loans of Loans to Total to Total to Total Reserve Loans Reserve Loans Reserve Loans --------- ---------- --------- ---------- --------- ---------- (thousands) Real estate: Construction and land development ...... $ 3,235 2.09% $ 3,234 2.23% $ 3,090 2.28% Mortgage: 1-4 family residential ................ 14,779 25.92 13,127 31.29 13,125 31.41 Commercial ............................ 16,388 19.38 16,514 17.89 15,305 16.81 Equity Line ........................... 4,257 11.09 2,898 8.35 2,788 8.67 Other ................................. 1,712 2.51 1,798 2.70 1,318 2.82 Commercial and industrial ............... 9,533 11.63 9,243 10.44 8,384 10.18 Consumer ................................ 31,025 25.74 24,890 25.38 21,587 26.18 Lease financing ......................... 992 1.37 985 1.39 639 1.31 Other ................................... 324 0.27 324 0.33 -- 0.33 Unallocated ............................. 2,115 -- 8,426 -- 12,259 -- ------- ------ ------- ------ ------- ------ Total ................................. $84,360 100.00% $81,439 100.00% $78,495 100.00% ======= ====== ======= ====== ======= ====== December 31 ------------------------------------------ 1994 1993 -------------------- --------------------- Percent Percent of Loans of Loans to Total to Total Reserve Loans Reserve Loans --------- ---------- --------- ----------- (thousands) Real estate: Construction and land development ...... $ 2,919 2.43% $ 3,135 3.28% Mortgage: 1-4 family residential ................ 13,459 31.26 15,175 31.74 Commercial ............................ 13,636 17.37 13,997 17.13 Equity Line ........................... 2,585 8.42 2,112 8.18 Other ................................. 1,581 2.63 1,493 1.56 Commercial and industrial ............... 10,029 9.01 11,650 11.40 Consumer ................................ 20,373 27.00 17,079 24.81 Lease financing ......................... 197 1.46 454 1.27 Other ................................... -- 0.42 -- 0.63 Unallocated ............................. 7,238 -- 4,954 -- ------- ------ ------- ------ Total ................................. $72,017 100.00% $70,049 100.00% ======= ====== ======= ======
NONINTEREST INCOME Total noninterest income was $115.3 million during 1997, an increase of 11.6 percent. This compares to $103.3 million during 1996 and $92.1 million during 1995. Table 14 presents the major components of noninterest income for the past five years. Trust income was $11.3 million in 1997, up 12.7 percent from 1996 principally due to growth in retirement plan services. Income from service charges on deposit accounts was $41.7 million during 1997, an increase of 2.5 percent. This increase was the result of higher bad check charge income. Deposit service charge income amounted to $40.7 million and $39.9 million for the years ended December 31, 1996 and 1995, respectively. 30 Table 15 NONINTEREST INCOME
Year ended December 31 ----------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- --------- ----------- --------- (thousands) Trust income .............................. $ 11,284 $ 10,008 $ 8,886 $ 8,228 $ 7,197 Service charges on deposit accounts ....... 41,748 40,710 39,909 38,567 43,277 Credit card income ........................ 20,053 16,147 13,561 12,390 10,618 Other service charges and fees ............ 27,788 23,878 21,227 16,672 8,564 Gain (loss) on sale of mortgage loans ..... 219 502 809 (862) 8,010 Other ..................................... 14,215 12,059 7,736 8,330 8,071 -------- -------- ------- ------- ------- Total .................................... $115,307 $103,304 $92,128 $83,325 $85,737 ======== ======== ======= ======= =======
Credit card income was $20.1 million during 1997, a $3.9 million or 24.2 percent increase over 1996. The $16.1 million earned by the credit card operation during 1996 represented an increase of $2.6 million or 19.1 percent over 1995. During 1997, in an effort to optimize credit card profitability, BancShares relocated the credit card function to Roanoke, Virginia. Virginia banking laws are less restrictive to lenders and allow more favorable terms than North Carolina laws. Other service charge and fee income amounted to $27.8 million in 1997, $23.9 million in 1996 and $21.2 million in 1995. Fees generated by First Citizens Investor Services contributed $6.4 million during 1997, compared to $4.5 million during 1996 and $2.8 million during 1995. These fees primarily result from the sale of mutual fund and annuity products. Fees earned for data processing services provided to other banks also experienced growth during 1997, contributing $10.5 million during 1997, $9.7 million during 1996 and $8.9 million during 1995. These fees are collected from banks that use BancShares' check processing centers and other technical support services. During 1997, BancShares collected $5.0 million from ATM convenience fees, a fee paid by non-customers who access their accounts at other banks through BancShares' ATM network. Such fees generated $2.8 million during 1996, when they were first introduced. NONINTEREST EXPENSE Total noninterest expense for 1997 amounted to $300.8 million. This was a 7.9 percent increase over 1996, following an 13.3 percent increase of 1996 noninterest expenses over 1995. Table 15 presents the major components of noninterest expense for the past five years. Salary expense was $126.4 million during 1997, compared to $115.5 million during 1996, an increase of $11.0 million or 9.5 percent, following an $8.9 million or 8.3 percent increase in 1996 over 1995. Increases during each period resulted from merit increases and new positions. 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. Also, during 1997, the expansions in Georgia and Virginia resulted in growth in employee headcount. Employee benefits expense was $23.7 million during 1997, an increase of $3.3 million or 16.1 percent from 1996. The $20.4 million in benefits expense recorded during 1996 represented an increase of $3.3 million or 19.6 percent over 1995. During 1997, expenses related to BancShares' health and life plans totaled $8.5 million, compared to $7.2 million during 1996. Higher pension and FICA expenses also contributed to the increase in total employee benefits expense during 1997 and 1996. 31 Table 16 NONINTEREST EXPENSE
Year ended December 31 --------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ---------- ---------- (thousands) Salaries and wages .................. $126,474 $115,461 $106,607 $ 99,282 $ 92,579 Employee benefits ................... 23,718 20,425 17,080 14,535 13,500 Occupancy expense ................... 23,338 22,023 20,446 18,691 16,972 Equipment expense ................... 32,035 27,068 24,504 23,839 21,231 Credit card expense ................. 11,723 10,097 9,106 8,587 6,814 Amortization of intangibles ......... 9,034 8,197 5,877 3,993 3,157 Telecommunication expense ........... 8,032 7,711 6,790 6,743 6,528 Postage ............................. 6,623 6,383 5,701 4,907 3,996 FDIC insurance ...................... 1,818 13,586 8,418 11,831 10,496 Other ............................... 57,999 47,717 41,351 38,174 37,940 -------- -------- -------- -------- -------- Total ............................. $300,794 $278,668 $245,880 $230,582 $213,213 ======== ======== ======== ======== ========
BancShares recorded occupancy expense of $23.3 million during 1997, an increase of $1.3 million or 6.0 percent during 1997 due to higher depreciation expense on newly constructed and recently renovated facilities. Occupancy expense during 1996 was $22.0 million, an increase of $1.6 million or 7.7 percent over 1995, the result of higher local property tax expense and higher depreciation expense. Equipment expense for 1997 was $32.0 million, an increase of $5.0 million or 18.4 percent over 1996, when total equipment expenses were $27.1 million. The increase during 1997 and 1996 resulted from the rapid expansion of the ATM network during late 1996 and 1997 and higher levels of hardware and software depreciation related to mainframe and branch automation applications installed during 1995 and 1996. The cost of FDIC insurance was $1.8 million during 1997, a reduction of $11.8 million from 1996. The higher 1996 expense was due to a special one-time assessment on deposit liabilities insured by the FDIC's Savings Association Insurance Fund ("SAIF"). The Bank paid $10 million for the assessment, which was to establish sufficient reserves for the SAIF. Total cost of FDIC insurance was $13.6 million in 1996 and $8.4 million during 1995. Expenses related to the amortization of intangibles were $9.0 million during 1997, an increase of $837,000 or 10.2 percent. The increase reflects the impact of the goodwill and deposit intangibles that were recorded during 1997. Intangible amortization totaled $8.2 million during 1996 and $5.9 million during 1995, the increase resulting from intervening acquisitions that generated incremental capitalized intangible assets. Telecommunications expense was $8.0 million during 1997, an increase of $321,000 during 1997 due to the expansion of FCDirect, the network of alternative delivery channels that includes telephone banking and PC banking. Telecommunications expense was $7.7 million during 1996 and $6.8 million during 1995, also due to expansion of alternative delivery channels. During 1997, BancShares recognized $5.6 million in consulting expense, compared to $3.4 million during 1996. The $2.2 million or 64.2 percent increase is due to expenses incurred related to the year 2000 compliance project. BancShares has established a plan to modify and test all internal systems prior to the turn of the century. All costs related to that project are expensed as incurred. During 1997, BancShares recognized $2.2 million in expense related to year 2000 remediation, with an additional $2 million to $3 million to be incurred prior to achieving compliance. The responsibility for ensuring year 2000 compliance extends to governmental agencies, businesses and customers who exchange information or services with BancShares or are dependent on computer-generated information to meet their contractual obligations with others. To the extent that these unaffiliated organizations and customers are not successful in their compliance efforts and BancShares is dependent on those organizations for information, services, satisfaction of loan repayments or other contractual obligations, there are uncertainties as to the ultimate impact that the year 2000 will have on BancShares. For further discussion of year 2000 issues, refer to Business in BancShares 1997 Annual Report on Form 10-K. 32 INCOME TAXES During 1997, BancShares recorded total income tax expense of $39.5 million, compared to $36.2 million in income tax expense during 1996, the increase resulting from higher pre-tax income. BancShares' effective tax rate was 35.9 percent in 1997, 35.6 percent in 1996 and 34.8 percent in 1995. Total effective tax rates were less than the combined statutory federal and state income tax rates primarily due to tax-exempt interest income. LIQUIDITY Management places great importance on the maintenance of a highly liquid investment portfolio with varying maturities to provide needed cash flows to meet liquidity requirements. At December 31, 1997, the investment portfolio totaled $2.48 billion or 27.7 percent of total assets. This compares to $2.16 billion or 26.8 percent in 1996. The ability to generate retail deposits is an additional source of liquidity. The rate of growth in average deposits was 6.5 percent during 1997, 11.8 percent during 1996 and 11.6 percent during 1995. The deposit growth 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 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 9.87 percent, 11.5 percent and 10.9 percent, respectively, at December 31, 1997, 1996 and 1995. BancShares' Tier 1 capital ratios for December 31, 1997, 1996 and 1995 were 8.63 percent, 10.2 percent, and 9.6 percent respectively. The minimum capital ratios established by Federal Reserve guidelines are 8 percent for total capital and 4 percent for Tier 1 capital. The reduction in the total and Tier 1 capital ratios at December 31, 1997 resulted from two capital stock transactions that occurred during the fourth quarter of 1997. First, the Board of Directors of BancShares agreed to repurchase 600,000 shares of Class A common stock. BancShares recorded the redemption of the stock during December 1997, when the commitment was made to repurchase the shares. The commitment was funded during January 1998. The other material transaction was the reclassification of 126,000 shares of Class A common stock and 31,600 shares of Class B common stock that are held by the Bank's pension plan. These shares are subject to a put option that would allow the independent investment manager to require BancShares to repurchase those shares at any time. At December 31, 1997, BancShares reclassified those shares from shareholders' equity to other liabilities. See Note I of the notes to the consolidated financial statements. At December 31, 1997, BancShares' leverage capital ratio was 5.83 percent, compared to 6.4 percent and 6.1 percent at December 31, 1996 and 1995, 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. In addition to the previously discussed capital stock transactions, during the fourth quarter of 1997 the Board of Directors of BancShares reauthorized the purchase of its Class A and Class B common stock. 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. FOURTH QUARTER ANALYSIS BancShares' net income for the fourth quarter of 1997 totaled $17.4 million, compared to $19.8 million during the same period of 1996. The reduction in net income was primarily due to a $9.8 million increase in noninterest expense, partially offset by higher net interest income and noninterest income. As shown in Table 17, during the fourth quarter of 1997 and 1996, total assets averaged $8.79 billion and $7.94 billion, respectively. Average interest-earning assets increased 10.9 percent during the fourth quarter of 1997, compared to the same period of 1996. Average loans outstanding during the fourth quarter increased $428.5 million during 1997 over 1996. Average investment securities increased $405.8 million between the two periods, the result of deposit growth that exceeded loan demand. Interest income on interest-earning assets increased $12.6 million or 9.1 percent in the fourth quarter of 1997 when compared to the same period of 1996. The improved interest income during 1997 resulted from a $7.3 million increase in loan interest income and a $6.2 million increase in investment securities interest income. These increases resulted from 33 average volume growth among loans and investments and, in the case of investments, a slight yield increase. Interest-earning assets yielded 7.52 percent during the fourth quarter of 1997, a reduction from the 7.63 percent yield recorded during the fourth quarter of 1996. Table 17 SELECTED QUARTERLY DATA
1997 --------------------------------------------------------------- Fourth Third Second First --------------- --------------- --------------- --------------- (thousands, except per share data and ratios) SUMMARY OF OPERATIONS Interest income ......................................... $ 150,225 $ 145,494 $ 140,118 $ 136,439 Interest expense ........................................ 72,818 68,947 64,542 61,706 ------------ ------------ ------------ ------------ Net interest income ..................................... 77,407 76,547 75,576 74,733 Provision for loan losses ............................... 3,753 1,309 2,097 1,567 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses ..... 73,654 75,238 73,479 73,166 Noninterest income ...................................... 31,912 31,087 28,894 23,414 Noninterest expense ..................................... 78,832 76,561 74,817 70,584 ------------ ------------ ------------ ------------ Income before income taxes .............................. 26,734 29,764 27,556 25,996 Income taxes ............................................ 9,370 10,746 9,972 9,404 Net income .............................................. 17,364 19,018 17,584 16,592 ------------ ------------ ------------ ------------ Net interest income -- taxable equivalent ............... $ 78,327 $ 77,052 $ 76,092 $ 75,255 ============ ============ ============ ============ SELECTED QUARTERLY AVERAGES Total assets ............................................ $ 8,794,596 $ 8,411,774 $ 8,099,236 $ 7,903,566 Investment securities ................................... 2,503,443 2,359,115 2,166,362 2,094,376 Loans ................................................... 5,324,286 5,073,404 5,023,409 4,921,346 Interest-earning assets ................................. 7,994,728 7,632,755 7,368,645 7,196,138 Deposits ................................................ 7,427,881 7,144,502 6,952,848 6,823,697 Interest-bearing liabilities ............................ 6,924,776 6,608,892 6,341,125 6,203,598 Long-term obligations ................................... 11,450 12,017 11,545 6,809 Shareholders' equity .................................... $ 649,214 $ 651,923 $ 635,680 $ 619,956 Shares outstanding ...................................... 11,378,368 11,389,472 11,394,965 11,398,246 ============ ============ ============ ============ SELECTED QUARTER-END BALANCES Total assets ............................................ $ 8,951,109 $ 8,595,591 $ 8,351,978 $ 7,975,617 Investment securities ................................... 2,483,294 2,432,424 2,271,282 2,063,526 Loans ................................................... 5,445,772 5,208,195 4,996,770 4,955,135 Interest-earning assets ................................. 8,010,841 7,710,619 7,467,252 7,225,661 Deposits ................................................ 7,579,567 7,297,884 7,127,282 6,911,806 Interest-bearing liabilities ............................ 7,052,749 6,744,133 6,501,771 6,217,905 Long-term obligations ................................... 10,856 11,482 12,150 6,827 Shareholders' equity .................................... $ 601,640 $ 662,490 $ 644,210 $ 629,265 Shares outstanding ...................................... 10,627,453 11,389,928 11,392,085 11,395,656 ============ ============ ============ ============ PROFITABILITY RATIOS (averages) Rate of return (annualized) on: Total assets ........................................... 0.78% 0.90% 0.87% 0.85% Shareholders' equity ................................... 10.61 11.57 11.10 10.85 Dividend payout ratio ................................... 16.13 14.97 16.23 17.12 ============ ============ ============ ============ LIQUIDITY AND CAPITAL RATIOS (averages) Loans to deposits ....................................... 71.68% 71.01% 72.25% 72.12% Shareholders' equity to total assets .................... 7.38 7.75 7.85 7.84 Time certificates of $100,000 or more to total deposits ............................................... 10.05 9.68 9.36 9.30 ============ ============ ============ ============ PER SHARE OF STOCK Net income .............................................. $ 1.55 $ 1.67 $ 1.54 $ 1.46 Cash dividends .......................................... 0.250 0.250 0.250 0.250 Class A sales price High ................................................... 121.00 101.00 95.50 88.00 Low .................................................... 94.50 83.50 79.00 73.00 Class B sales price High ................................................... 109.50 86.50 80.75 77.00 Low .................................................... 91.00 86.50 77.00 73.00 ============ ============ ============ ============ 1996 --------------------------------------------------------------- Fourth Third Second First --------------- --------------- --------------- --------------- (thousands, except per share data and ratios) SUMMARY OF OPERATIONS Interest income ......................................... $ 137,655 $ 134,270 $ 132,702 $ 129,568 Interest expense ........................................ 62,964 61,378 61,484 62,424 ------------ ------------ ------------ ------------ Net interest income ..................................... 74,691 72,892 71,218 67,144 Provision for loan losses ............................... 3,321 1,787 2,255 1,544 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses ..... 71,370 71,105 68,963 65,600 Noninterest income ...................................... 28,082 26,077 25,260 23,885 Noninterest expense ..................................... 69,023 78,097 68,263 63,285 ------------ ------------ ------------ ------------ Income before income taxes .............................. 30,429 19,085 25,960 26,200 Income taxes ............................................ 10,611 6,647 9,575 9,374 Net income .............................................. 19,818 12,438 16,385 16,826 ------------ ------------ ------------ ------------ Net interest income -- taxable equivalent ............... $ 75,258 $ 73,459 $ 71,799 $ 67,735 ============ ============ ============ ============ SELECTED QUARTERLY AVERAGES Total assets ............................................ $ 7,935,197 $ 7,670,538 $ 7,658,682 $ 7,462,756 Investment securities ................................... 2,097,690 1,919,935 1,990,346 1,984,027 Loans ................................................... 4,895,815 4,907,435 4,884,818 4,679,692 Interest-earning assets ................................. 7,209,982 6,989,109 6,975,341 6,779,461 Deposits ................................................ 6,831,926 6,641,427 6,660,204 6,477,795 Interest-bearing liabilities ............................ 6,185,161 6,017,476 6,043,119 5,934,180 Long-term obligations ................................... 6,866 7,762 15,676 23,763 Shareholders' equity .................................... $ 599,953 $ 589,618 $ 576,742 $ 546,603 Shares outstanding ...................................... 11,415,943 11,441,007 11,432,661 11,072,395 ============ ============ ============ ============ SELECTED QUARTER-END BALANCES Total assets ............................................ $ 8,055,572 $ 7,826,118 $ 7,631,287 $ 7,736,162 Investment securities ................................... 2,160,914 1,912,448 1,888,476 2,005,645 Loans ................................................... 4,930,508 4,914,748 4,921,774 4,837,073 Interest-earning assets ................................. 7,247,422 7,030,796 6,860,260 6,932,878 Deposits ................................................ 6,954,028 6,808,365 6,632,271 6,743,913 Interest-bearing liabilities ............................ 6,265,482 6,063,362 5,991,901 6,129,508 Long-term obligations ................................... 6,922 6,715 7,893 15,608 Shareholders' equity .................................... $ 615,507 $ 592,964 $ 584,283 $ 570,258 Shares outstanding ...................................... 11,410,880 11,427,980 11,449,278 11,427,981 ============ ============ ============ ============ PROFITABILITY RATIOS (averages) Rate of return (annualized) on: Total assets ........................................... 0.99% 0.65% 0.86% 0.91 Shareholders' equity ................................... 13.14 8.39 11.43 12.38 Dividend payout ratio ................................... 14.37 20.83 15.73 14.80 ============ ============ ============ ============ LIQUIDITY AND CAPITAL RATIOS (averages) Loans to deposits ....................................... 71.66% 73.89% 73.34% 72.24 Shareholders' equity to total assets .................... 7.56 7.69 7.53 7.32 Time certificates of $100,000 or more to total deposits ............................................... 8.79 8.56 8.98 9.59 ============ ============ ============ ============ PER SHARE OF STOCK Net income .............................................. $ 1.74 $ 1.08 $ 1.43 $ 1.52 Cash dividends .......................................... 0.250 0.225 0.225 0.225 Class A sales price High ................................................... 83.00 67.00 67.00 66.25 Low .................................................... 64.50 59.50 59.00 53.75 Class B sales price High ................................................... 71.00 63.50 64.25 55.00 Low .................................................... 71.00 60.00 55.00 48.06 ============ ============ ============ =============
- --------- Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% for all periods, and state income tax rates of 7.5%, 7.75% and 7.75% for 1997, 1996, and 1995, respectively. 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, 1997, there were 3,746 holders of record of the Class A common stock and 677 holders of record of the Class B common stock. Interest expense increased $9.8 million during the fourth quarter of 1997 compared to the fourth quarter of 1996. Average interest-bearing liabilities experienced a $739.6 million increase from the fourth quarter of 1996 to the same period of 34 1997, the result of increases in average deposits and short-term borrowings. The rate on these interest-bearing liabilities increased from 4.04 percent to 4.17 percent between the two periods. Net interest income increased $2.7 million from the fourth quarter of 1996 to the fourth quarter of 1997, the increase resulting from growth among interest-earning assets that exceeded the growth among interest-bearing liabilities. Noninterest income for the fourth quarter of 1997 was $31.9 million, an increase of $3.8 million or 13.6 percent. Much of the increase resulted from higher credit card income and an increase in other service charges and fees. Noninterest expense amounted to $78.8 million for the quarter ended December 31, 1997, compared to $69.0 million for the quarter ended December 31, 1996. Most of the 14.2 percent increase was in salary expense, equipment expense and consulting expense. Much of the increase in consulting expense relates to year 2000 compliance and those costs are projected to remain at current levels through 1998. Tables 17 and 18 are useful when making quarterly comparisons. Table 18 CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS -- Fourth Quarter
1997 1996 ----------------------------------- ------------------------------------ Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------- ---------- ---------- ------------- ----------- ---------- (thousands) ASSETS Loans: Secured by real estate .................. $3,240,498 $ 66,119 8.12% $3,056,155 $ 63,112 8.22% Commercial and industrial ............... 607,095 13,734 8.99 514,554 11,205 8.65 Consumer ................................ 1,386,990 30,074 8.66 1,238,383 28,325 9.13 Lease financing ......................... 74,812 1,640 8.77 70,192 1,492 8.50 Other ................................... 14,891 184 4.90 16,531 316 7.58 ---------- -------- ---- ---------- -------- ---- Total loans ............................ 5,324,286 111,751 8.36 4,895,815 104,450 8.50 Investment securities: U. S. Government ........................ 2,468,535 36,546 5.87 2,088,697 30,647 5.82 State, county and municipal ............. 4,920 109 8.79 6,188 119 7.63 Other ................................... 29,988 397 5.25 2,805 41 5.80 ---------- -------- ---- ---------- -------- ---- Total investment securities ............ 2,503,443 37,052 5.87 2,097,690 30,807 5.83 Federal funds sold ....................... 166,999 2,342 5.56 216,477 2,965 5.43 ---------- -------- ---- ---------- -------- ---- Total interest-earning assets .......... $7,994,728 $151,145 7.52% $7,209,982 $138,222 7.63% ========== ======== ==== ========== ======== ==== LIABILITIES Deposits: Checking With Interest .................. $ 968,305 $ 2,586 1.06% $ 917,915 $ 2,584 1.12% Savings ................................. 689,246 3,246 1.87 722,281 3,750 2.06 Money market accounts ................... 974,343 9,187 3.74 855,950 7,693 3.57 Time deposits ........................... 3,697,101 49,952 5.36 3,293,064 44,166 5.32 ---------- -------- ---- ---------- -------- ---- Total interest-bearing deposits ........ 6,328,995 64,971 4.07 5,789,210 58,193 3.99 Short-term borrowings .................... 584,331 7,614 5.17 389,085 4,627 4.72 Long-term obligations .................... 11,450 233 8.07 6,866 144 8.32 ---------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities ..... $6,924,776 $ 72,818 4.17% $6,185,161 $ 62,964 4.04% ========== ======== ==== ========== ======== ==== Interest rate spread ..................... 3.35% 3.59% ==== ==== Net interest income and net yield ........ on interest-earning assets .............. $ 78,327 3.89% $ 75,258 4.14% ======== ==== ======== ==== Increase (decrease) due to: -------------------------------------- Yield/ Total Volume Rate Change ----------- -------------- ----------- (thousands) ASSETS Loans: Secured by real estate .................. $ 4,077 $(1,070) $ 3,007 Commercial and industrial ............... 2,062 467 2,529 Consumer ................................ 3,268 (1,519) 1,749 Lease financing ......................... 99 49 148 Other ................................... (25) (107) (132) ------- ------- ------- Total loans ............................ 9,481 (2,180) 7,301 Investment securities: U. S. Government ........................ 5,604 295 5,899 State, county and municipal ............. (26) 16 (10) Other ................................... 379 (23) 356 ------- ------- ------- Total investment securities ............ 5,957 288 6,245 Federal funds sold ....................... (686) 63 (623) ------- ------- ------- Total interest-earning assets .......... $14,752 $(1,829) $12,923 ======= ======= ======= LIABILITIES Deposits: Checking With Interest .................. 142 $ (140) $ 2 Savings ................................. (165) (339) (504) Money market accounts ................... 1,096 398 1,494 Time deposits ........................... 5,436 350 5,786 ------- ------- ------- Total interest-bearing deposits ........ 6,509 269 6,778 Short-term borrowings .................... 2,434 553 2,987 Long-term obligations .................... 95 (6) 89 ------- ---------- ------- Total interest-bearing liabilities ..... $ 9,038 $ 816 $ 9,854 ======= ========= ======= Interest rate spread ..................... Net interest income and net yield ........ on interest-earning assets .............. $ 5,714 $(2,645) $ 3,069 ======= ========= =======
- --------- Average loan balances include nonaccrual loans. 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. 35 ACCOUNTING AND REGULATORY ISSUES The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting comprehensive income. It does not address issues of recognition or measurement for comprehensive income and its components. SFAS 130 is effective for BancShares in fiscal 1998. SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements, as well as information about products, services, geographic areas in which they operate and their major customers. The provisions of SFAS 131, which is effective in 1998, are not expected to have a material effect on BancShares' consolidated financial statements. In February 1998, the FASB issued SFAS No. 132 "Employers Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the disclosure requirements of pensions and other postretirement benefits and does not change any measurement or recognition provisions. The adoption of SFAS No. 132 during 1998 will not have a material impact on BancShares' consolidated financial statements. FORWARD LOOKING STATEMENTS Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations. The foregoing discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of BancShares and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of BancShares' customers, actions of government regulators, the level of market interest rates, and general economic conditions. 36 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Raleigh, North Carolina January 26, 1998 37 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 --------------------------- 1997 1996 ------------- ------------- (thousands, except share data) ASSETS Cash and due from banks .................................................................. $ 506,771 $ 437,029 Investment securities held to maturity (fair value of $2,462,111 in 1997 and $2,138,031 in 1996).................................................................. 2,456,722 2,138,831 Investment securities available for sale (cost of $10,817 in 1997 and $11,238 in 1996)..................................................................... 26,572 22,405 Federal funds sold ....................................................................... 81,775 156,000 Loans .................................................................................... 5,445,772 4,930,508 Less reserve for loan losses ............................................................. 84,360 81,439 ---------- ---------- Net loans ............................................................................. 5,361,412 4,849,069 Premises and equipment ................................................................... 278,473 229,496 Income earned not collected .............................................................. 66,631 60,175 Other assets ............................................................................. 172,753 162,567 ---------- ---------- Total assets .......................................................................... $8,951,109 $8,055,572 ========== ========== LIABILITIES Deposits: Noninterest-bearing ..................................................................... $1,131,498 $1,087,474 Interest-bearing ........................................................................ 6,448,069 5,866,554 ---------- ---------- Total deposits ........................................................................ 7,579,567 6,954,028 Short-term borrowings .................................................................... 593,824 392,006 Long-term obligations .................................................................... 10,856 6,922 Other liabilities ........................................................................ 165,222 87,109 ---------- ---------- Total liabilities ..................................................................... 8,349,469 7,440,065 SHAREHOLDERS' EQUITY Common stock: Class A -- $1 par value (11,000,000 shares authorized; 8,905,199 shares issued for 1997; 9,651,900 shares issued for 1996) ..................................................... 8,906 9,652 Class B -- $1 par value (2,000,000 shares authorized; 1,722,254 shares issued for 1997; 1,758,980 shares issued for 1996) ..................................................... 1,722 1,759 Surplus .................................................................................. 143,760 143,760 Retained earnings ........................................................................ 437,794 453,640 Unrealized securities gains, net of taxes ................................................ 9,458 6,696 ---------- ---------- Total shareholders' equity ............................................................ 601,640 615,507 ---------- ---------- Total liabilities and shareholders' equity ............................................ $8,951,109 $8,055,572 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 38 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 ----------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (thousands, except share and per share data) INTEREST INCOME Loans ................................................... $ 428,997 $ 410,703 $ 380,676 Investment securities: U. S. Government ....................................... 133,007 114,831 81,219 State, county and municipal ............................ 273 330 405 Other .................................................. 102 172 184 ----------- ----------- ----------- Total investment securities interest income .......... 133,382 115,333 81,808 Federal funds sold ...................................... 9,897 8,159 8,625 ----------- ----------- ----------- Total interest income ................................ 572,276 534,195 471,109 INTEREST EXPENSE Deposits ................................................ 243,749 230,905 207,234 Short-term borrowings ................................... 23,420 16,388 15,773 Long-term obligations ................................... 844 957 1,657 ----------- ----------- ----------- Total interest expense ............................... 268,013 248,250 224,664 ----------- ----------- ----------- Net interest income .................................. 304,263 285,945 246,445 Provision for loan losses ............................... 8,726 8,907 5,364 ----------- ----------- ----------- Net interest income after provision for loan losses .. 295,537 277,038 241,081 NONINTEREST INCOME Trust income ............................................ 11,284 10,008 8,886 Service charges on deposit accounts ..................... 41,748 40,710 39,909 Credit card income ...................................... 20,053 16,147 13,561 Other service charges and fees .......................... 27,788 23,878 21,227 Other ................................................... 14,434 12,561 8,545 ----------- ----------- ----------- Total noninterest income ............................. 115,307 103,304 92,128 ----------- ----------- ----------- NONINTEREST EXPENSE Salaries and wages ...................................... 126,474 115,461 106,607 Employee benefits ....................................... 23,718 20,425 17,080 Occupancy expense ....................................... 23,338 22,023 20,446 Equipment expense ....................................... 32,035 27,068 24,504 Other ................................................... 95,229 93,691 77,243 ----------- ----------- ----------- Total noninterest expense ............................ 300,794 278,668 245,880 ----------- ----------- ----------- Income before income taxes .............................. 110,050 101,674 87,329 Income taxes ............................................ 39,492 36,207 30,423 ----------- ----------- ----------- Net income ........................................... $ 70,558 $ 65,467 $ 56,906 =========== =========== =========== PER SHARE INFORMATION Net income ............................................. $ 6.22 $ 5.77 $ 5.37 Cash dividends ......................................... 1.00 0.925 0.825 Weighted average shares outstanding ..................... 11,341,153 11,340,892 10,597,066 =========== ============ ============
See accompanying Notes to Consolidated Financial Statements. 39 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized Class A Class B Securities Total Common Common Retained Gains, Shareholders' Stock Stock Surplus Earnings Net of Taxes Equity --------- ------------- ----------- ------------ -------------- -------------- (thousands, except share data) 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 securities gains, 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 Redemption of 20,301 shares of Class A common stock and 5,126 shares of Class B common stock ............................... (20) (5) (2,086) (2,111) Obligations to repurchase common stock ...... (726) (32) (72,934) (73,692) Net income .................................. 70,558 70,558 Unrealized securities gains, net of taxes ... 2,762 2,762 Cash dividends .............................. (11,384) (11,384) --------- --------- Balance at December 31, 1997 ................ $8,906 $1,722 $143,760 $ 437,794 $9,458 $ 601,640 ====== ======= ======== ========= ====== =========
See accompanying Notes to Consolidated Financial Statements. 40 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended December 31, --------------------------------------------- 1997 1996 1995 ------------- --------------- --------------- (thousands) OPERATING ACTIVITIES Net income ...................................................................... $ 70,558 $ 65,467 $ 56,906 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles .................................................... 9,034 8,197 5,877 Provision for loan losses ...................................................... 8,726 8,907 5,364 Deferred tax expense (benefit) ................................................. 1,475 (1,833) (1,454) Change in current taxes payable ................................................ (71) (88) 3,241 Depreciation ................................................................... 19,273 16,932 16,882 Change in accrued interest payable ............................................. 4,805 1,807 26,696 Change in income earned not collected .......................................... (6,573) (862) (11,746) Origination of loans held for sale ............................................. (434,471) (149,146) (85,148) Proceeds from sale of loans .................................................... 334,762 137,314 75,964 Gain on sale of mortgage loans ................................................. (219) (502) (809) Net amortization of premiums and discounts ..................................... 8,277 11,658 19,634 Net change in other assets ..................................................... 19,102 (4,301) (15,383) Net change in other liabilities ................................................ (3,100) (1,225) 4,798 ---------- ------------ ------------ Net cash provided by operating activities ...................................... 31,578 92,325 100,822 ---------- ------------ ------------ INVESTING ACTIVITIES Net increase in loans outstanding .............................................. (383,839) (139,670) (254,326) Purchases of investment securities ............................................. (817,725) (1,039,460) (1,328,178) Proceeds from maturities and issuer calls of investment securities ............. 476,114 890,363 826,129 Net change in federal funds sold ............................................... 74,225 (115,555) (25,023) Dispositions of premises and equipment ......................................... 2,051 5,983 3,445 Additions to premises and equipment ............................................ (69,011) (42,184) (31,147) Purchase of institutions, net of cash acquired ................................. 106,016 7,584 106,092 ---------- ------------ ------------ Net cash used by investing activities .......................................... (612,169) (432,939) (703,008) ---------- ------------ ------------ FINANCING ACTIVITIES Net change in time deposits .................................................... 299,926 99,448 536,251 Net change in demand and other interest-bearing deposits ....................... 158,150 258,104 (3,811) Net change in short-term borrowings ............................................ 205,752 (17,643) 69,992 Repurchases of common stock .................................................... (2,111) (4,506) (1,545) Proceeds from issuance of stock ................................................ -- 4,169 3,036 Cash dividends paid ............................................................ (11,384) (10,559) (8,817) ---------- ------------ ------------ Net cash provided by financing activities ...................................... 650,333 329,013 595,106 ---------- ------------ ------------ Change in cash and due from banks .............................................. 69,742 (11,601) (7,080) Cash and due from banks at beginning of period ................................. 437,029 448,630 455,710 ---------- ------------ ------------ Cash and due from banks at end of period ....................................... $ 506,771 $ 437,029 $ 448,630 ========== ============ ============ CASH PAYMENTS FOR: Interest ....................................................................... $ 263,722 $ 246,443 $ 197,334 Income taxes ................................................................... 37,984 35,554 27,454 ---------- ------------ ------------ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for acquisitions ........................................... $ -- $ 33,403 $ 21,846 Long-term obligations issued for acquisitions .................................. -- 1,468 2,494 Unrealized securities gains .................................................... 4,588 11,167 -- Obligations to repurchase common stock ......................................... 73,692 -- -- ========== ============ ============
See accompanying Notes to Consolidated Financial Statements. 41 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, headquartered in Raleigh, North Carolina ("FCB-NC"), which operates branches in North Carolina and Virginia; First-Citizens Bank & Trust Company, headquartered in White Sulphur Springs, West Virginia ("FCB-WV"), which operates branches in West Virginia; and Atlantic States Bank ("ASB"), a federally-chartered thrift institution with branch offices in Raleigh, North Carolina and the metropolitan Atlanta, Georgia area. FCB-NC, FCB-WV and ASB offer full-service banking services 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. FCB-NC has eight wholly-owned subsidiaries. Neuse, Incorporated owns a number of the facilities in which FCB-NC operates branches. 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 and discount brokerage services. First Citizens Bank, A Virginia Corporation, is the issuing and processing bank for BancShares' retail credit cards. Other subsidiaries are either inactive or are not material to the consolidated financial statements. Nontraditional banking segments within BancShares' operations 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 consolidated 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 consolidated 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 1997. However, the reclassifications have no effect on shareholders' equity or net income as previously reported. Investment Securities For investment securities classified as held to maturity, BancShares has the ability and the positive intent to hold those investments 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. Marketable equity securities classified as available for sale 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, 1997 and 1996, BancShares had no investment securities classified as held for trading purposes. Loans Loans that are held for investment purposes are carried at their principal amount outstanding. Those loans that are available for sale are included in residential mortgage loans in Note C and carried at the lower of aggregate cost or fair value. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding. 42 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 The estimated value of the right to service mortgage loans for others ("MSRs") is included in other assets on BancShares' consolidated balance sheet. Capitalization of the MSRs occurs when the underlying loans are sold or securitized. Capitalized MSRs are amortized into income over the projected life of the servicing life of the underlying loans. Capitalized MSRs are periodically reviewed for impairment. At December 31, 1997 and 1996, the carrying values of capitalized mortgage servicing rights were $2,527 and $1,430, respectively. BancShares adopted Statement of Financial Accounting Standards No. 125 ("Statement 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" effective January 1, 1997. Statement 125 superseded Statement 122 "Accounting for Mortgage Servicing Rights" and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Adoption of Statement 125 did not have a material effect on BancShares' financial condition or results of operations. 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 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, 1997, 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 BancShares' 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 using the loan's original effective interest rate 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. 43 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued 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 intangibles are amortized using the straight-line method over a 15 year period. Intangible assets are subject to periodic review and are adjusted for any impairment of value. 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 income before income taxes 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 BancShares adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("Statement 128"), during December 1997. Statement 128 replaces the presentation of primary earnings per share ("EPS") with a presentation of basic EPS and replaces the presentation of fully diluted EPS with a presentation of diluted EPS. However, since BancShares does not have any potential dilutive securities, adoption of Statement 128 did not have any impact on BancShares' consolidated financial statements. 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 1997, 1996 and 1995 was 11,341,153; 11,340,982; and 10,597,066, respectively. Cash dividends per share apply to both Class A and Class B common stock. Class A common stock carries one vote per share, while shares of Class B common stock carry 16 votes per share. 44 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE B -- INVESTMENT SECURITIES The cost and fair values of investment securities at December 31 with unrealized gains and losses determined on an individual security basis are as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------ -------------- ------------- Investment securities held to maturity at December 31, 1997 U. S. Government treasury securities ................. $2,450,634 $ 6,664 $(1,585) $2,455,713 State, county and municipal .......................... 4,921 313 -- 5,234 Other ................................................ 1,167 -- (3) 1,164 ---------- ------- ---------- ---------- Total investment securities held to maturity ........ $2,456,722 $ 6,977 $(1,588) $2,462,111 ========== ======= ========= ========== 1996 U. S. Government treasury securities ................. $2,130,037 $ 855 $(1,969) $2,128,923 State, county and municipal .......................... 6,301 324 -- 6,625 Other ................................................ 2,493 -- (10) 2,483 ---------- ------- --------- ---------- Total investment securities held to maturity ........ $2,138,831 $ 1,179 $(1,979) $2,138,031 ========== ======= ========= ========== Investment securities available for sale at December 31, 1997 Marketable equity securities ......................... $ 10,817 $15,755 -- $ 26,572 ========== ======= ========= ========== 1996 Marketable equity securities ......................... $ 11,238 $11,167 -- $ 22,405 ========== ======= ========= ==========
The maturities of investment securities held to maturity at December 31 are as follows:
1997 1996 --------------------------- --------------------------- Fair Fair Cost Value Cost Value ------------- ------------- ------------- ------------- Within one year ................................ $1,057,940 $1,058,585 $ 781,336 $ 782,102 One through five years ......................... 1,391,331 1,395,920 1,345,274 1,343,599 Five to 10 years ............................... 2,932 2,977 4,803 4,829 Over 10 years .................................. 4,519 4,629 7,418 7,501 ---------- ---------- ---------- ---------- Total investment securities held to maturity $2,456,722 $2,462,111 $2,138,831 $2,138,031 ========== ========== ========== ==========
Investment securities having an aggregate par value of $1,094,261 at December 31, 1997, and $1,025,145 at December 31, 1996, were pledged as collateral to secure public funds on deposit and for other purposes as required by law. 45 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE C -- LOANS Loans at December 31 include the following:
1997 1996 ------------- ------------- Loans secured by real estate: Construction and land development ... $ 113,735 $ 109,806 Residential ......................... 1,411,279 1,954,692 Other ............................... 1,795,882 1,015,021 ---------- ---------- Total loans secured by real estate ... 3,320,896 3,079,519 Commercial and industrial ............ 633,580 514,535 Consumer ............................. 1,402,093 1,251,704 Lease financing ...................... 74,589 68,694 All other loans ...................... 14,614 16,056 ---------- ---------- Total loans ......................... $5,445,772 $4,930,508 ========== ==========
There were no foreign loans outstanding during either period, nor were there any highly leveraged transactions. There are no loan concentrations exceeding ten percent of loans outstanding involving multiple borrowers in similar activities or industries at December 31, 1997. Substantially all loans are to customers domiciled within BancShares' principal market areas. At December 31, 1997 and 1996 nonperforming loans consisted of nonaccrual loans and amounted to $12,681 and $12,810, respectively. Gross interest income on nonperforming loans that would have been recorded had these loans been performing was $1,156; $1,162, and $1,556, respectively, during 1997, 1996 and 1995. Interest income recognized on nonperforming loans was $349, $259 and $595 during the respective periods. As of December 31, 1997 and 1996, other real estate acquired through foreclosure was $1,462 and $1,160, respectively. Loans transferred to other real estate totaled $1,683, $1,649 and $2,110 during 1997, 1996 and 1995, respectively.
1997 1996 1995 ----------- ---------- ---------- Loans held for sale at December 31 .......... $127,650 $ 27,722 $15,388 For the year ended December 31: Loans sold ................................. 334,543 136,812 75,155 Net gain on sale of loans .................. 219 502 809
The Bank services mortgage loans for itself and others. The carrying value of loans serviced for others as of December 31, 1997 and 1996 was $970,842 and $657,520, respectively. NOTE D -- RESERVE FOR LOAN LOSSES Activity in the reserve for loan losses is summarized as follows:
1997 1996 1995 ------------ ------------ ---------- Balance at the beginning of year ........... $ 81,439 $ 78,495 $ 72,017 Reserves of acquired institutions .......... 481 1,387 3,231 Provision for loan losses .................. 8,726 8,907 5,364 Loans charged off .......................... (14,331) (11,653) (7,262) Loans recovered ............................ 8,045 4,303 5,145 --------- --------- -------- Net charge-offs ............................ (6,286) (7,350) (2,117) --------- --------- -------- Balance at the end of year ................. $ 84,360 $ 81,439 $ 78,495 ========= ========= ========
46 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE D -- RESERVE FOR LOAN LOSSES -- Continued At December 31, 1997 and 1996, the recorded investment in loans that are considered to be impaired was $9,132 and $9,880, respectively, all of which were classified as nonaccrual. Specific reserves of $1,033 and $833 have been established for impaired loans outstanding as December 31, 1997 and 1996, respectively. The average recorded investment in impaired loans during the years ended December 31, 1997, 1996 and 1995, was $6,779, $11,463 and $14,326, respectively. For the years ended December 31, 1997, 1996 and 1995, BancShares recognized cash basis interest income on those impaired loans of $212, $57 and $543, respectively. NOTE E -- PREMISES AND EQUIPMENT Major classifications of premises and equipment at December 31 are summarized as follows:
1997 1996 ---------- ---------- Land ............................................ $ 46,609 $ 44,254 Premises and leasehold improvements ............. 185,956 184,970 Furniture and equipment ......................... 174,229 116,643 -------- -------- Total .......................................... 406,794 345,867 Less accumulated depreciation and amortization .. 128,321 116,371 -------- -------- Net book value ................................. $278,473 $229,496 ======== ========
Premises with a book value of $4,600 at December 31, 1997, and $2,887 at December 31, 1996, 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, 1997:
Year Ending December 31: Amount - ------------------------------------------- --------- 1998 ............................. $ 8,910 1999 ............................. 8,287 2000 ............................. 6,061 2001 ............................. 4,444 2002 ............................. 3,868 Thereafter ....................... 47,487 ------- Total minimum payments .......... $79,057 =======
Total rent expense for all operating leases amounted to $14,700 in 1997, $13,501 in 1996 and $11,998 in 1995. 47 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE F -- DEPOSITS Deposits at December 31 are summarized as follows:
1997 1996 ------------- ------------- Demand, non-interest bearing .... $1,131,498 $1,087,474 Checking With Interest .......... 1,009,577 943,900 Money market accounts ........... 1,034,528 892,953 Savings ......................... 679,165 712,525 Time ............................ 3,724,799 3,317,176 ---------- ---------- Total deposits ................ $7,579,567 $6,954,028 ========== ==========
Total time deposits with a minimum denomination of $100 were $751,051 and $617,076 at December 31, 1997 and 1996, respectively. At December 31, 1997, the scheduled maturities of time deposits were: 1998 ......................... $3,213,608 1999 ......................... 179,769 2000 ......................... 181,524 2001 ......................... 85,685 2002 ......................... 63,896 Thereafter ................... 317 ---------- Total time deposits ......... $3,724,799 ==========
NOTE G -- SHORT-TERM BORROWINGS Short-term borrowings at December 31 are as follows:
1997 1996 ----------- ----------- Master notes ............................. $315,529 $295,428 Notes payable ............................ 158,130 9,331 Repurchase agreements .................... 54,796 21,816 Federal funds purchased .................. 45,380 45,075 U. S. Treasury tax and loan accounts ..... 19,989 20,356 -------- -------- Total short-term borrowings ............ $593,824 $392,006 ======== ========
Master notes are overnight unsecured borrowings by BancShares from Bank customers. The rate on Master notes was 4.40 percent as of December 31, 1997. During 1997, the weighted average rate on Master note borrowings was 4.63 percent, and the average amount outstanding was $301,558. The largest amount outstanding at any month-end during 1997 was $332,055. During 1996, the average rate on Master note borrowings was 4.46 percent, while the average amount outstanding was $266,476. The rate at December 31, 1996 was 4.23 percent, and the largest amount outstanding at any month-end was $316,628. At December 31, 1997, notes payable represent various borrowings, including $155,000 borrowed from other banks, with maturities extending to May 1998. During 1997,these borrowings averaged $92,498 and the rate on these borrowings averaged 5.93 percent The weighted-average rate on these borrowings at December 31, 1997 was 5.95 percent, and the largest amount outstanding at any month end was $158,764. During 1996, the average rate for notes payable was 6.14 percent and the average amount outstanding was $12,003. The largest amount outstanding at any month end during 1996 was $19,901, and the weighted-average rate at December 31, 1996 was 6.02 percent. 48 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE H -- LONG-TERM OBLIGATIONS Long-term obligations at December 31 are as follows:
1997 1996 ---------- --------- Subordinated notes payable: 7 percent maturing June 18, 1998 ................................................ $ -- $ 849 7 percent maturing February 22, 1999 ............................................ 135 135 7.5 percent maturing February 23, 2000 .......................................... 170 170 7.25 percent maturing February 22, 2001 ......................................... 1,332 1,332 8 percent maturing February 23, 2005 ............................................ 2,277 2,278 Unsecured variable rate note at 6.49 percent payable in quarterly installments 5,074 -- 8 percent mortgage notes, due in periodic payments through 2004, secured by premises ........................................................................ 1,493 1,659 Other ............................................................................. 375 499 ------- ------ Total long-term obligations ..................................................... $10,856 $6,922 ======= ======
Long-term obligations maturing in each of the five years subsequent to December 31, 1997, are as follows: 1998 ............... $ 190 1999 ............... 2,596 2000 ............... 2,647 2001 ............... 2,137 2002 ............... 259 Thereafter ......... 3,027 ------- $10,856 =======
NOTE I -- COMMON STOCK On October 27, 1997 the Board of Directors of BancShares authorized the purchase in the open market or in private transactions of 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:
1997 1996 1995 --------- --------- --------- Class A Number of shares purchased ........ 20,301 63,195 28,386 Cash disbursed .................... $ 1,643 $ 4,027 $ 1,394 Class B Number of shares purchased ........ 5,126 7,484 2,987 Cash disbursed .................... $ 468 $ 479 $ 151
Stock purchases 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. On December 2, 1997, the Board of Directors of BancShares authorized the purchase of 600,000 shares of BancShares Class A common stock from a related party. The purchase price was established based on an independent valuation of the shares. The shares were repurchased by BancShares and retired on January 27, 1998. In connection with this commitment, BancShares has recorded a reduction in shareholders' equity and an obligation of $58,077 in the accompanying consolidated balance sheet as of December 31, 1997. The obligation is included in other liabilities. 49 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE I -- COMMON STOCK -- Continued On December 31, 1997, BancShares adjusted its equity balances to reclassify 126,400 shares of Class A common stock and 31,600 shares of Class B common stock that are owned by a related defined benefit pension plan. The plan's interests for all purposes with respect to the shares are represented by an independent investment manager, in accordance with an agreement with the Department of Labor. BancShares has executed an agreement to purchase any or all of the shares held by the plan if the investment manager determines that is in the best interests of the plan. The estimated fair value of those shares at December 31, 1997, was $15,615, which is included in other liabilities. Subsequent changes in fair value for these shares will be reflected in BancShares' Consolidated Statement of Income. NOTE J -- ESTIMATED FAIR VALUES Fair value estimates are made at a specific point in time based on relevant market data and information about each financial instrument. Where information regarding the fair 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 or financial instruments payable upon demand or within 90 days equals the carrying value. The carrying values and estimated fair values for financial instruments at December 31 are as follows:
1997 1996 ------------------------- ------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------ ------------ ------------ ------------ Cash and due from banks ................. $ 506,771 $ 506,771 $ 437,029 $ 437,029 Investment securities held to maturity .. 2,456,722 2,462,111 2,138,831 2,138,031 Investment securities available for sale 26,572 26,572 22,405 22,405 Federal funds sold ...................... 81,775 81,775 156,000 156,000 Loans, net of reserve for loan losses ... 5,361,412 5,328,877 4,849,069 4,852,568 Income earned not collected ............. 66,631 66,631 60,175 60,175 Deposits ................................ 7,579,567 7,579,978 6,954,028 6,957,475 Short-term borrowings ................... 593,824 593,824 392,006 392,006 Long-term obligations ................... 10,856 11,491 6,922 7,267 Accrued interest payable ................ 53,819 53,819 49,528 49,528
Forward commitments to sell loans as of December 31, 1997, and 1996 had no carrying value and unrealized losses of $829 and $39, 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 50 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE K -- EMPLOYEE BENEFIT PLANS -- Continued fund the maximum amount that is deductible for federal income tax purposes. No contributions were made during the three-year period ending December 31, 1997. 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, 1997, the plan's assets also included BancShares common stock with an appraised value of $15,615. See Note I for additional information regarding these shares. The following table sets forth the plan's funded status at December 31:
1997 1996 ------------- ------------- Pension benefit obligation: Vested ...................................................................... $ (95,833) $ (86,838) Nonvested ................................................................... (3,463) (1,653) ---------- ---------- Accumulated benefit obligation ............................................... (99,296) (88,491) Effect of projected future compensation levels ............................... (25,998) (20,893) ---------- ---------- Projected benefit obligation ................................................. (125,294) (109,384) Fair value of plan assets .................................................... 159,197 137,758 ---------- ---------- Plan's assets in excess of projected benefit obligation ...................... 33,903 28,374 Unrecognized net transition asset ............................................ (6,076) (7,303) Unrecognized net gain due to diference in past experience and assumptions .... (30,195) (21,769) Unrecognized prior service cost .............................................. 1,198 1,352 ---------- ---------- Prepaid (accrued) pension expense ............................................ $ (1,170) $ 654 ========== ==========
The net periodic pension cost for the years ended December 31 included the following:
1997 1996 1995 ------------ ------------ ------------ Service costs .......................... $ 3,975 $ 3,596 $ 3,139 Interest costs ......................... 8,131 7,565 7,073 Actual return on plan assets ........... (26,182) (13,491) (26,745) Net amortization and deferral .......... 15,899 3,475 16,842 --------- --------- --------- Net periodic pension cost .............. $ 1,823 $ 1,145 $ 309 ========= ========= =========
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, 1997, 1996 and 1995, the following assumptions were used:
1997 1996 1995 ---------- ---------- ---------- Weighted average discount rate ................. 7.25% 7.25% 7.25% Rate of future compensation increases .......... 4.50 4.25 4.25 Long-term rate of return on plan assets ........ 8.25 8.25 8.25
Employees are also eligible to participate in a matching savings plan after one year of service. During 1997 BancShares made participating contributions to this plan of $3,758 compared to $3,473 in 1996 and $3,155 during 1995. Under the 1994 Employee Stock Purchase Plan, certain employees received options to purchase shares of BancShares' Class A common stock. All options expired on June 30, 1996. No options were outstanding at December 31, 1997 or 1996. 51 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE L -- OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE Other noninterest income for the years ended December 31 consisted of the following:
1997 1996 1995 --------- --------- --------- ATM income ................................ $ 7,329 $ 5,289 $2,729 Net premium income ........................ 3,584 3,364 3,964 Other ..................................... 3,521 3,908 1,852 ------- ------- ------ Total other noninterest income .......... $14,434 $12,561 $8,545 ======= ======= ======
Other noninterest expense for the years ended December 31 consisted of the following:
1997 1996 1995 ---------- ---------- --------- Credit card expense ........................ $11,722 $10,097 $ 9,106 Amortization of intangibles ................ 9,034 8,197 5,877 Telecommunications ......................... 8,032 7,711 6,790 Postage .................................... 6,623 6,383 5,701 FDIC insurance ............................. 1,818 13,586 8,418 Other ...................................... 58,000 47,717 41,351 ------- ------- ------- Total other noninterest expense .......... $95,229 $93,691 $77,243 ======= ======= =======
During 1996, FDIC insurance expense included a special assessment of deposit liabilities insured by the FDIC's Savings Association Insurance Fund. The gross amount of the assessment was $10,007. NOTE M -- INCOME TAXES At December 31, income tax expense consisted of the following:
1997 1996 1995 ---------- ---------- ---------- Current tax expense Federal ....................................... $37,937 $ 37,923 $ 30,757 State ......................................... 80 117 1,120 ------- -------- -------- Total current tax expense .................... 38,017 38,040 31,877 ------- -------- -------- Deferred tax expense (benefit) Federal ....................................... 1,179 (1,255) (111) State ......................................... 296 (578) (1,343) ------- -------- -------- Total deferred tax expense (benefit) ......... 1,475 (1,833) (1,454) ------- -------- -------- Total income tax expense ..................... $39,492 $ 36,207 $ 30,423 ======= ======== ========
52 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE M -- INCOME TAXES -- Continued Income tax expense differed from the amounts computed by applying the federal income tax rate of 35 percent in each period to pretax income as a result of the following:
1997 1996 1995 ---------- ---------- ---------- Income tax at statutory rate ............................................................ $ 38,518 $ 35,586 $ 30,565 Increase (reduction) in income taxes resulting from: Amortization of goodwill .............................................................. 2,099 1,991 1,280 Nontaxable income on loans and investments, net of nondeductible expenses ............. (1,295) (1,387) (1,378) State and local income taxes (benefit), including change in valuation allowance, net of federal income tax benefit ........................................................... 244 (300) (145) Other, net ............................................................................ (74) 317 101 -------- -------- -------- Total tax expense .................................................................... $ 39,492 $ 36,207 $ 30,423 ======== ======== ========
The net deferred tax asset included the following components at December 31:
1997 1996 ---------- ---------- Reserve for loan losses ............................... $ 32,930 $ 32,553 Net deferred loan fees and costs ...................... -- 2,292 Losses on other real estate ........................... 1,500 1,512 Net operating loss carryforwards ...................... 710 871 Accrued pension expense ............................... 466 -- Other ................................................. 6,750 6,580 -------- -------- Gross deferred tax asset ............................. 42,356 43,808 Less: valuation allowance ............................. (2,547) (2,617) -------- -------- Deferred tax asset less valuation allowance .......... 39,809 41,191 -------- -------- Accelerated depreciation .............................. 4,386 4,692 Accretion of bond discount ............................ 2,015 1,094 Prepaid pension expense ............................... -- 160 Tax reserve for loan losses reversal .................. 797 1,424 Unrealized securities gains ........................... 6,297 4,471 Net deferred loan fees and costs ...................... 502 -- Other ................................................. 5,625 6,089 -------- -------- Deferred tax liability ............................... 19,622 17,930 -------- -------- Net deferred tax asset ............................... $ 20,187 $ 23,261 ======== ========
BancShares has historically incurred immaterial amounts of state income tax expense. The valuation allowance of $2,547 and $2,617 at December 31, 1997 and 1996, respectively, is the amount necessary to reduce BancShares' gross state deferred tax asset to the amount which will more likely than not 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. 53 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE N -- RELATED PARTY TRANSACTIONS -- Continued An analysis of changes in the aggregate amounts of related party loans for the year ended December 31, 1997, is as follows: Balance at beginning of year .... $12,496 New loans ....................... 14,559 Repayments ...................... 3,025 ------- Balance at end of year .......... $24,030 =======
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 1997, 1996 and 1995, BancShares received $10,558, $9,953 and $9,031, 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. See Note I for information regarding a commitment to purchase 600,000 shares of Class A common stock from a related party. 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, 1997 and 1996, BancShares had goodwill of $68,909 and $72,910, respectively. Deposit intangibles totaled $32,039 and $24,344, respectively. The following table provides information regarding the acquisitions that have been consummated during the three-year period ended December 31, 1997:
Assets Deposits Resulting Date Institution and Location Acquired Assumed Intangible - ---------------- ------------------------------------------ ---------- ---------- ----------- September 1997 First Savings Financial Corp. $ 45,431 $ 36,025 $ 1,826 Reidsville, North Carolina May 1997 Four Wachovia Bank branches 80,613 86,460 7,250 Western North Carolina April 1997 Three First Union National Bank branches 42,171 45,179 3,010 Western North Carolina 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 Nine 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 Pace American Bank 58,660 53,303 6,954 Lawrenceville, Virginia February 1995 First Investors Savings Bank, Inc., SSB 44,426 40,846 4,325 Whiteville, North Carolina
54 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) 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 $125,981 during 1997, of which $107,390 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. FCB-NC's capital components and ratios as of December 31, 1997 and 1996 are set forth below:
1997 1996 -------------- -------------- Risk-based capital: Tier 1 capital ................. $ 526,411 $ 476,580 Total capital .................. 598,576 539,308 Risk-adjusted assets ........... 5,762,939 5,018,215 Tangible assets ................ 8,410,057 7,823,101 Tier 1 capital ratio ........... 9.13% 9.50% Total capital ratio ............ 10.39 10.75 Leverage capital ratio ......... 6.26 6.09
At December 31, 1997 and 1996, BancShares, FCB-WV and ASB met their respective minimum capital requirements. The Board of Directors of FCB-NC 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, 1997, this amount was approximately $422,804. Dividends declared by FCB-NC amounted to $24,727 in 1997, $33,940 in 1996 and $39,273 in 1995. 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 lending standards control the potential credit-risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment. At December 31, 1997 and 1996, BancShares has unused commitments totaling $2,006,327 and $1,596,468, 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, 1997 and 1996, BancShares had standby letters of credit amounting to $12,885 and $14,178, respectively. 55 FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Dollars in thousands) NOTE Q -- COMMITMENTS AND CONTINGENCIES -- Continued Management has elected to enter into forward commitments to sell loans to protect BancShares' commitments to originate residential mortgage loans from the potential negative effects of fluctuating market prices. These forward sales commitments, which totaled $60,000 and $18,000 at December 31, 1997 and 1996, respectively, were at fixed prices and were scheduled to settle within 60 days of that date. At December 31, 1997 and 1996, these forward sales commitments had no carrying value and unrealized losses of $829 and $39 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 mortgage loans held for sale and commitments to originate mortgage loans held for sale 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 statements. See Note I for information concerning BancShares' commitment to purchase shares of its common stock. 56 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, 1997 and 1996, and the related condensed statements of income and cash flows for the years ended December 31, 1997, 1996 and 1995 are as follows: Condensed Balance Sheets
December 31, ------------------------- 1997 1996 ------------- ----------- ASSETS Cash ................................................. $ 7,290 $ 4,002 Investment securities held to maturity ............... 204,126 -- Investment securities available for sale ............. 26,206 22,083 Investment in bank subsidiaries ...................... 615,416 521,208 Due from subsidiaries ................................ 111,108 313,515 Other assets ......................................... 67,001 59,662 ---------- -------- Total assets ....................................... $1,031,147 $920,470 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings ................................ $ 345,529 $295,428 Other liabilities .................................... 83,978 9,535 Common Stock: Class A ............................................ 8,906 9,652 Class B ............................................ 1,722 1,759 Surplus .............................................. 143,760 143,760 Retained Earnings .................................... 437,794 453,640 Unrealized securities gains, net of taxes ............ 9,458 6,696 ---------- -------- Total liabilities and shareholders' equity ......... $1,031,147 $920,470 ========== ========
Condensed Statements of Income
Year Ended December 31, -------------------------------- 1997 1996 1995 ---------- ---------- ---------- Interest income .......................................................... $15,276 $12,445 $10,562 Interest expense ......................................................... 14,484 12,164 10,081 ------- ------- ------- Net interest income ...................................................... 792 281 481 Dividends from bank subsidiary ........................................... 32,814 33,940 39,273 Noninterest income ....................................................... 437 1,487 39 Noninterest operating expense ............................................ 6,531 6,162 3,472 ------- ------- ------- Income before income tax benefit and equity in undistributed net income of subsidiaries ........................................................... 27,512 29,546 36,321 Income tax (benefit) expense ............................................. (37) 11 (75) ------- ------- ------- Income before equity in undistributed income of subsidiaries ............. 27,549 29,535 36,396 Equity in undistributed net income of subsidiaries ....................... 43,009 35,932 20,510 ------- ------- ------- Net income ............................................................. $70,558 $65,467 $56,906 ======= ======= =======
57 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, -------------------------------------- 1997 1996 1995 ------------ ------------ ------------ OPERATING ACTIVITIES Net income ............................................................... $ 70,558 $ 65,467 $ 56,906 Adjustments .............................................................. Undistributed net income of subsidiaries ............................... (43,009) (35,932) (20,510) Change in other assets ................................................. (8,699) (9,447) (96,128) Change in other liabilities ............................................ 751 3,038 3,387 ---------- --------- --------- Net cash provided (used) by operating activities ......................... 19,601 23,126 (56,345) ---------- --------- --------- INVESTING ACTIVITIES Net change in due from subsidiaries .................................... 202,407 (51,556) (83,223) Purchase of investment securities ...................................... (204,126) (3,258) (43,099) Investment in subsidiaries ............................................. (51,200) -- -- Purchase of institutions, net of cash acquired ......................... -- 7,584 106,092 ---------- --------- --------- Net cash used by investing activities .................................... (52,919) (47,230) (20,230) ---------- --------- --------- FINANCING ACTIVITIES Net change in short-term borrowings .................................... 50,101 38,250 83,928 Repurchase of common stock ............................................. (2,112) (4,506) (1,545) Proceeds from issuance of common stock ................................. -- 4,169 3,036 Cash dividends paid .................................................... (11,383) (10,559) (8,817) ---------- --------- --------- Net cash provided by financing activities ................................ 36,606 27,354 76,602 ---------- --------- --------- Net change in cash ....................................................... 3,288 3,250 27 Cash balance at beginning of year ........................................ 4,002 752 725 ---------- --------- --------- Cash balance at end of year .............................................. $ 7,290 $ 4,002 $ 752 ---------- --------- --------- Cash payments for Interest ............................................................... $ 14,484 $ 12,164 $ 10,081 Income taxes ........................................................... 37,984 35,554 27,454 ---------- --------- --------- Supplemental disclosure of noncash investing and financing activities: Common stock issued for acquisitions ................................... -- $ 33,403 $ 21,846 Unrealized gain on marketable equity securities ........................ $ 4,588 11,167 -- Obligations to repurchase common stock ................................. 73,692 -- --
58 EX-22 4 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 First-Citizens Bank & Trust Company Chartered in West Virginia Atlantic States Bank Chartered under the laws of the United States of America with branches in Georgia and North Carolina
EX-27 5 EXHIBIT 27 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1997 DEC-31-1997 506,771 0 81,775 0 26,572 2,456,722 2,462,111 5,445,772 84,360 8,951,109 7,579,567 593,824 165,222 10,856 0 0 10,628 591,012 8,951,109 428,997 133,382 9,897 572,276 243,749 24,264 304,263 8,726 0 300,794 110,050 70,558 0 0 70,558 6.22 6.22 4.05 12,681 3,953 0 0 81,439 14,331 8,045 84,360 84,360 0 0
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