UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2004
or
Commission File Number: 0-16471
First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
(919) 716-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes x No ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes x No ¨
Class A Common Stock—$1 Par Value—8,756,778 shares
Class B Common Stock—$1 Par Value—1,677,675 shares
(Number of shares outstanding, by class, as of November 5, 2004)
INDEX
Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2004, and September 30, 2003
Consolidated Statements of Changes in Shareholders’ Equity for the nine-month periods ended September 30, 2004, and September 30, 2003
Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2004, and September 30, 2003
2
PART II. OTHER INFORMATION
Item 6. Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Kenneth A. Black
3
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
(thousands, except share data)
Assets
Cash and due from banks
Overnight investments
Investment securities held to maturity
Investment securities available for sale
Loans
Less reserve for loan losses
Net loans
Premises and equipment
Income earned not collected
Other assets
Total assets
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term obligations
Other liabilities
Total liabilities
Shareholders’ Equity
Common stock:
Class A - $1 par value (8,756,778; 8,758,670 and 8,758,670 shares issued, respectively)
Class B - $1 par value (1,677,675 shares issued during all periods)
Surplus
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
4
Consolidated Statements of Income
(thousands, except per share data; unaudited)
Interest income
Investment securities:
U. S. Government
State, county and municipal
Dividends
Total investment securities interest and dividend income
Total interest income
Interest expense
Deposits
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges on deposit accounts
Cardholder and merchant services income
Trust income
Fees from processing services
Commission income
ATM income
Mortgage income
Gain on sale of branches to a related party
Other service charges and fees
Securities gains
Other
Total noninterest income
Noninterest expense
Salaries and wages
Employee benefits
Occupancy expense
Equipment expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
Other comprehensive income (loss) net of taxes
Unrealized securities gains (losses) arising during period
Less: reclassified adjustment for gains included in net income
Other comprehensive income (loss)
Comprehensive income
Average shares outstanding
Net income per share
5
Consolidated Statements of Changes in Shareholders’ Equity
(thousands, except share data, unaudited)
Balance at December 31, 2002
Redemption of 35,999 shares of Class A common stock
Redemption of 950 shares of Class B common stock
Unrealized securities gains, net of deferred taxes
Cash dividends
Balance at September 30, 2003
Balance at December 31, 2003
Redemption of 1,892 shares of Class A common stock
Unrealized securities losses, net of deferred taxes
Balance at September 30, 2004
6
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles
Deferred tax expense
Change in current taxes payable
Depreciation
Change in accrued interest payable
Change in income earned not collected
Origination of loans held for sale
Proceeds from sale of loans held for sale
Gain on loans held for sale
Net amortization of premiums and discounts
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Net change in loans outstanding
Purchases of investment securities held to maturity
Purchases of investment securities available for sale
Proceeds from maturities of investment securities held to maturity
Proceeds from maturities and sales of investment securities available for sale
Net change in overnight investments
Dispositions of premises and equipment
Additions to premises and equipment
Purchase and sale of branches, net of cash transferred
Net cash used by investing activities
FINANCING ACTIVITIES
Net change in time deposits
Net change in demand and other interest-bearing deposits
Net change in short-term borrowings
Originations of long-term obligations
Repurchases of common stock
Cash dividends paid
Net cash provided by financing activities
Change in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
CASH PAYMENTS FOR:
Interest
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Net change in unrealized securities gains (losses)
7
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, the consolidated financial statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the 2003 First Citizens BancShares, Inc. Annual Report, which is incorporated by reference on Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2004. However, the reclassifications have no effect on shareholders’ equity or net income as previously reported.
8
Note B
Operating Segments
BancShares conducts its banking operations through its two wholly-owned subsidiaries, First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB). Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity operates under a separate charter. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth.
FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia and West Virginia. ISB began operations in 1997 and currently operates in Georgia, Florida, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington under a federal thrift charter.
In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ISB account for more than 90 percent of consolidated assets, revenues and net income. Other includes activities of the parent company, Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company.
The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments to interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other services fees paid by one company to another within BancShares’ consolidated group.
Income (loss) before income taxes
Net income (loss)
Period-end assets
9
Note C
Employee Benefits
BancShares recognized pension expense totaling $9,290 and $7,955, respectively, in the nine-month periods ended September 30, 2004 and 2003. Pension expense is included as a component of employee benefits expense.
Nine months ended
September 30,
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial loss
Net periodic benefit cost
The expected long-term rate of return on plan assets for 2004 is 8.50 percent.
Note D
Income Taxes
Income tax expense consisted of the following:
Current tax expense
Federal
State
Total current tax expense
Deferred tax expense (benefit)
Total deferred tax expense
Total tax expense
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:
Income at statutory rates
Increase (reduction) in income taxes resulting from:
Nontaxable income on loans and investments, net of nondeductible expenses
State and local income taxes, including change in valuation allowance, net of federal income tax benefit
Other, net
10
INTRODUCTION
Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. This discussion primarily focuses on our two banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank that operates branches in North Carolina, Virginia and West Virginia, and IronStone Bank (ISB), a federally-chartered thrift institution that operates offices in Georgia, Florida, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington.
SUMMARY
BancShares’ earnings and cash flows are derived primarily from the commercial banking activities conducted by its banking subsidiaries, which include commercial and consumer lending, deposit and cash management products, cardholder and merchant services, trust and wealth management services as well as various other products and services typically associated with commercial banking. FCB and ISB gather interest-bearing and noninterest-bearing deposits from retail and commercial customers. BancShares and its subsidiaries also provide supplemental short-term and long-term funding through various non-deposit sources. The liquidity generated from these funding sources is invested in various interest-earning assets including loans, investment securities and overnight investments. In addition, funds are invested in bank premises as well as furniture and equipment used in the subsidiaries’ commercial banking business.
External factors influence customer demand for our deposit and loan products. During 2003, economic uncertainty in our primary market areas restrained customer demand for loan products. However, since early 2004, economic conditions have improved, causing robust demand for loan products.
The general strength of the economy also influences the quality and collectibility of the loan portfolio, as consumer bankruptcy rates and business debt service levels tend to reflect the general economic cycle. Utilizing various asset–liability management and asset quality tools, we strive to minimize the potentially adverse financial impact of unforeseen and unfavorable economic trends and to take advantage of favorable economic conditions where appropriate.
Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability, and therefore measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ return on average assets and return on average equity historically compare unfavorably to the returns of similarly sized financial holding companies. We have typically placed significant emphasis upon asset quality, balance sheet liquidity and capital conservation, even when those priorities may be detrimental to current earnings.
Our strategic analysis and the competitive position of BancShares within the financial services industry indicate continued opportunities for growth and expansion. We operate in diverse and growing geographic markets and believe that through superior customer service and focused strategic emphasis, opportunities exist to increase earnings by attracting customers of other financial institutions. Specifically, we seek opportunities to increase fee income in areas such as merchant processing, client bank services, factoring, insurance, cash management, wealth management and private banking services.
We focus substantial attention on the risks that can endanger our profitability and growth prospects. Such risks fall generally into categories of economic, industry systemic, competitive and regulatory. We view economic risk as the greatest exposure since the potential impact is so significant. Specific economic risks include recession, rapid movements in interest rates and significant increases in inflation expectations. Compared to our larger competitors, our relatively small asset size and our limited capital resources require significant management focus on economic risk.
Detailed information regarding the components of net income and other key financial data over the most recent five quarters is provided in Table 1. Tables 4 and 5 provide information on net interest income. Table 6 provides information related to asset quality.
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Financial Summary
Nine Months Ended
September 30
(thousands, except per share data and ratios)
Third
Quarter
First
Summary of Operations
Net interest income-taxable equivalent
Selected Averages
Investment securities
Interest-earning assets
Interest-bearing liabilities
Shareholders’ equity
Shares outstanding
Selected Period-End Balances
Profitability Ratios (averages)
Rate of return (annualized) on:
Dividend payout ratio
Liquidity and Capital Ratios (averages)
Loans to deposits
Shareholders’ equity to total assets
Time certificates of $100,000 or more to total deposits
Per Share of Stock
Book value at period end
Tangible book value at period end
12
Net Income. BancShares realized a decrease in earnings during the third quarter of 2004 compared to the third quarter of 2003. Consolidated net income during the third quarter of 2004 was $16.9 million, compared to $19.5 million earned during the corresponding period of 2003. The $2.7 million or 13.7 percent reduction resulted from higher income taxes and noninterest expense, which were partially offset by improved levels of net interest income and noninterest income. Net income per share during the third quarter of 2004 totaled $1.62, compared to $1.87 during the third quarter of 2003, a 13.4 percent reduction. Return on average assets was 0.52 percent for the third quarter of 2004 and 0.63 percent for the third quarter of 2003. Return on average equity for the third quarter of 2004 was 6.34 percent compared to 7.74 percent during the third quarter of 2003.
For the first nine months of 2004, BancShares recorded net income of $50.1 million, compared to $58.6 million earned during the first nine months of 2003. The $8.5 million or 14.6 percent decrease was the result of higher noninterest expense, increased provision for loan losses and higher income taxes, partially offset by increases in net interest income and noninterest income. Net income per share for the first nine months of 2004 was $4.80, compared to $5.60 recorded during the same period of 2003. BancShares returned 0.53 percent on average assets during the first nine months of 2004 compared to 0.64 percent during the corresponding period of 2003. Return on average equity for the first nine months of 2004 was 6.39 percent compared to 7.92 percent during the same period of 2003.
Various profitability, liquidity and capital ratios are presented in Table 1. To understand the changes and trends in interest-earning assets and interest-bearing liabilities, refer to the average balances presented in Table 4 for the third quarter and Table 5 for the first nine months of 2004 and 2003.
Primarily as a result of an assessment arising from an audit of BancShares’ North Carolina income tax returns for 2000, 2001 and 2002, we recorded additional income tax expense of $4 million during the third quarter of 2004. This adjustment contributed to a $7.8 million increase in income tax expense for the third quarter and a $4.2 million increase for the nine-month period.
For both the three- and nine-month periods, much of the growth in noninterest expense results from the expansion of ISB into new markets through de novo branching and the establishment of loan production offices. This expansion has generated increases in personnel, occupancy and equipment expenses. For the nine-month period ended September 30, 2004, ISB’s noninterest expense increased $5.4 million or 16.7 percent over the same period of 2003. This increase represents 34.8 percent of the increase in consolidated noninterest expense.
After several quarters with negligible growth in net interest income, loan growth and the effect of recent rate increases by the Federal Reserve Bank have been sufficient to increase net interest income for both the three- and nine-month periods ended September 30, 2004. The provision for loan losses increased due to higher net charge-offs and the rapid rate of loan growth. Noninterest income continues to benefit from increased cardholder and merchant services income, service charge income and trust income.
ISB reported a net loss of $2.2 million during the first nine months of 2004, compared to a net loss of $1.2 million reported during the same period of 2003. The unfavorable trend in net loss resulted from costs associated with both planned and actual new branch openings. Since its inception in 1997 ISB has generated a net loss of $25.6 million. Based on the magnitude of recent and projected branch growth, ISB’s net losses will likely extend into the foreseeable future.
Shareholders’ Equity. BancShares and its banking subsidiaries continue to exceed all minimum regulatory capital requirements, and the financial institutions remain well-capitalized. In recent years, the de novo growth and expansion of ISB has consumed significant amounts of capital. BancShares infused $25.0 million into ISB during the first nine months of 2004 to support its rapidly expanding balance sheet. We expect an additional $5.0 million will be infused into ISB prior to December 31, 2004. Through September 30, 2004, BancShares has provided $225.0 million in capitalization for ISB. BancShares’ prospective capacity to provide additional capital to support the growth and expansion of ISB is dependent upon FCB’s ability to return capital through dividends to BancShares. Until the profitability of FCB improves, it is possible that the capital infusions by BancShares into ISB will be reduced, which could limit ISB’s expansion plans.
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INTEREST-EARNING ASSETS
Interest-earning assets include loans, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and maturity of the underlying asset. Accordingly, riskier investments typically carry a higher interest rate, but expose the investor to potentially higher levels of default. We have historically focused on maintaining high asset quality, which results in a loan portfolio subjected to strenuous underwriting and monitoring procedures. Our investment securities portfolio includes high-quality assets, primarily United States Treasury and government agency securities. Generally, the investment securities portfolio grows and shrinks based on loan and deposit trends. When deposit growth exceeds loan demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds deposit growth, we use proceeds from maturing securities to fund loan demand. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.
Interest-earning assets for the third quarter of 2004 averaged $11.56 billion, an increase of $567.0 million or 5.2 percent from the third quarter of 2003. For the nine months ended September 30, 2004, interest-earning assets averaged $11.36 billion, an increase of $483.5 million or 4.4 percent over the same period of 2003. These increases primarily resulted from growth in the loan portfolio, partially offset by reductions in the investment securities portfolio.
Loans. At September 30, 2004 and 2003, gross loans totaled $9.15 billion and $8.03 billion, respectively. As of December 31, 2003, gross loans were $8.33 billion. The $1.12 billion growth in loans from September 30, 2003 to September 30, 2004 and the $824.3 million increase from December 31, 2003 through September 30, 2004 primarily result from growth within BancShares’ commercial and revolving real estate lending. Table 2 details outstanding loans by type for the past five quarters.
Commercial real estate loans totaled $2.78 billion at September 30, 2004, representing 30.4 percent of total gross loans. This represents an increase of $562.2 million or 25.3 percent since September 30, 2003. FCB and ISB have both seen continuing demand for commercial real estate loans in recent quarters. A large percentage of our commercial real estate loans are secured by owner-occupied properties and were underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.
Revolving mortgage loans totaled $1.70 billion at September 30, 2004, representing 18.6 percent of total loans outstanding. This component of the loan portfolio has increased $172.9 million since September 30, 2003 and $104.4 million since December 31, 2003, the result of growth of retail Equity Lines. Increases in this portfolio slowed during the third quarter of 2004 as management diverted balance sheet liquidity in order to fund strong demand in the commercial lending sector. In order to generate liquidity, FCB recently initiated an effort to securitize $250 million of its retail Equity Lines. The projected closing date for the securitization is first quarter 2005.
Consumer loans totaled $1.38 billion at September 30, 2004, an increase of $145.1 million or 11.8 percent from September 30, 2003, and an increase of $75.3 million or 5.8 percent from December 31, 2003. This growth results from higher levels of automobile sales finance activity during the first half of 2004.
During the 12-month period ended September 30, 2004, we also experienced a $104.8 million or 12.5 percent increase in construction and land development loans due to a general emphasis on originating loans that are secured by real estate rather than inventory, accounts receivable or other less secure forms of collateral.
At the end of the third quarter, commercial and industrial loans were $987.8 million and $909.3 million in 2004 and 2003, respectively. This $78.5 million or 8.6 percent increase was primarily the result of lending opportunities in ISB’s new markets.
During the third quarter of 2004, loans averaged $9.06 billion, an increase of $1.11 billion or 14.0 percent from the comparable period of 2003. For the year-to-date, gross loans have averaged $8.78 billion for 2004 compared to $7.80 billion for the same period of 2003, an increase of $976.8 million or 12.5 percent increase over the prior year.
14
(thousands)
Real estate:
Construction and land development
Mortgage:
1-4 family residential
Commercial
Revolving
Total real estate
Commercial and industrial
Consumer
Lease financing
Total loans
Our recent growth through ISB has allowed us to mitigate our historic lending exposure to geographic concentration in North Carolina and Virginia. Although these markets have endured economic instability in the past, we are pleased with the diversification that we are beginning to realize by the growth of ISB. We are aware that, in the absence of rigorous underwriting and monitoring controls, rapid loan growth in new markets may present incremental lending risks. However, during the expansion of ISB into new markets, we have endeavored to ensure that such controls are functioning effectively and will continue to place emphasis upon maintaining strong lending standards in new markets.
Investment Securities. At September 30, 2004 and 2003, the investment securities portfolio totaled $2.03 billion and $2.65 billion, respectively. Total investment securities have decreased 23.4 percent since September 30, 2003. At December 31, 2003, the investment securities portfolio was $2.47 billion. Table 3 presents detailed information relating to the investment securities portfolio.
Investment securities held to maturity totaled $843.4 million at September 30, 2004, compared to $1.47 billion at September 30, 2003. The $631.4 million reduction in investment securities held to maturity during 2004 resulted from the use of proceeds from maturing securities to fund liquidity demands prompted by loan growth. The average maturity of the held-to-maturity portfolio declined from twelve months at September 30, 2003 to ten months at September 30, 2004. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.
Investment securities available for sale totaled $1.18 billion at September 30, 2004, compared to $1.17 billion at September 30, 2003. Available-for-sale securities are reported at their aggregate fair value.
Investment securities averaged $2.02 billion during the third quarter of 2004, compared to $2.67 billion during the third quarter of 2003, a reduction of $642.8 million or 24.1 percent. Investment securities averaged $2.17 billion during the first nine months of 2004, a $408.1 million or 15.8 percent reduction from the same period of 2003. For both the quarter and the nine-month period ended September 30, the change in average investment securities resulted from liquidity needs arising from loan demand that exceeded deposit growth.
15
Investment securities held to maturity:
U. S. Government:
Within one year
One to five years
Five to ten years
Ten to twenty years
Over twenty years
Total
State, county and municipal:
Total investment securities held to maturity
Investment securities available for sale:
Marketable equity securities
Total investment securities available for sale
Total investment securities
Average maturity assumes callable securities mature on their earliest call date; 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 income tax purposes and 7% for state income taxes for all periods.
16
Overnight investments. Overnight investments totaled $468.5 million at September 30, 2004, compared to $294.4 million at December 31, 2003 and $268.6 million at September 30, 2003. Overnight investments averaged $480.3 million during the third quarter of 2004, an increase of $97.7 million or 25.5 percent from the third quarter of 2003. For the nine-month periods ended September 30, overnight investments averaged $410.1 million and $495.2 million, respectively, for 2004 and 2003. The changes in overnight investments resulted from liquidity management decisions.
Income on Interest-Earning Assets. Interest income amounted to $131.4 million during the third quarter of 2004, a $6.5 million or 5.2 percent increase from the third quarter of 2003. This increase resulted from the growth in interest-earning assets. Although the taxable-equivalent yield on interest-earning assets increased 2 basis points from 4.51 percent in the third quarter of 2003 to 4.53 percent in the third quarter of 2004, changes in interest rates had an adverse impact on interest income during the third quarter. The taxable-equivalent yield on loans declined 26 basis points, creating a significant unfavorable yield variance that was more than offset by a favorable volume variance arising from substantial growth in the loan portfolio. The taxable-equivalent yield on investment securities increased 8 basis points in the third quarter of 2004 while the yield on overnight investments increased 43 basis points. These yield improvements offset a portion of the unfavorable yield variance in the loan portfolio.
Loan interest income for the third quarter of 2004 was $118.3 million, an increase of $8.9 million or 8.1 percent from the third quarter of 2003, due to higher average loan balances that offset the reduction in loan yields. The taxable-equivalent yield on average loans declined from 5.47 percent to 5.21 percent from the third quarter of 2003 to the third quarter of 2004 due to competitive pricing for loan products in our market areas and rate-induced refinance activity among fixed rate loans.
Within the investment securities portfolio, interest income was $11.4 million during the third quarter of 2004 compared to $14.6 million during the third quarter of 2003, a reduction of $3.1 million or 21.6 percent. The reduction in interest income resulted from the reduction in average investment securities. Partially offsetting the decline in securities income, the taxable-equivalent yield increased 8 basis points to 2.25 percent.
Overnight investments generated interest income of $1.7 million during the third quarter of 2004, compared to $912,000 during the same period of 2003. The higher income is the combined result of higher average investments and a 43 basis point yield increase. Overnight investments returned 1.38 percent during the third quarter of 2004 compared to 0.95 percent during the same period of 2003.
Interest income amounted to $379.8 million during the first nine months of 2004, a $5.4 million or 1.4 percent decrease from the same period of 2003, the net result of an unfavorable rate variance and a favorable volume variance. The taxable-equivalent yield on interest-earning assets declined 26 basis points from 4.74 percent for the first nine months of 2003 to 4.48 percent during the same period of 2004. Lower market interest rates during 2004 contributed to the unfavorable rate variance.
For the nine months ended September 30, 2004, loan interest income was $339.7 million, an increase of $4.7 million or 1.4 percent from the same period of 2003. The increase in interest income reflects the growth in the loan portfolio, partially offset by the unfavorable impact of lower interest rates. For the first nine months, the taxable-equivalent loan yield was 5.18 percent during 2004, compared to 5.75 percent during the same period of 2003, a 57 basis point reduction.
For the nine months ended September 30, 2004, income earned on the investment securities portfolio amounted to $36.6 million, compared to $46.0 million during the same period of 2003, a decrease of $9.4 million or 20.4 percent. This decrease is the combined result of a $408.1 million reduction in average investment securities and a 13 basis point yield reduction. The taxable-equivalent yield on investment securities was 2.26 percent during the first nine months of 2004, compared to 2.39 percent during the first nine months of 2003.
Interest earned on overnight investments totaled $3.5 million during the first nine months of 2004 compared to $4.1 million during the same period of 2003, a $659,000 or 16.0 percent reduction. This was the result of lower average overnight investments, which decreased $85.2 million or 17.2 percent in 2004.
17
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third Quarter
Table 4
Change
Total interest-earning assets
Checking With Interest
Savings
Money market accounts
Time deposits
Total interest-bearing deposits
Federal funds purchased
Repurchase agreements
Master notes
Other short-term borrowings
Total interest-bearing liabilities
Interest rate spread
Net interest income and net yield on interest-earning assets
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% and state income tax rate of 7% for each period. The taxable-equivalent adjustment was $281 for 2004 and $254 for 2003.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits are our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and, in some cases, to fulfill commercial customer requirements for cash management services. Certain of our long-term borrowings also provide capital strength under existing guidelines established by the Federal Reserve.
18
At September 30, 2004 and 2003, interest-bearing liabilities totaled $9.43 billion and $9.17 billion, respectively, compared to $9.25 billion as of December 31, 2003. During the third quarter of 2004, interest-bearing liabilities averaged $9.33 billion, an increase of $204.2 million or 2.2 percent from the third quarter of 2003. This increase primarily resulted from higher levels of interest-bearing deposits.
Deposits. At September 30, 2004, total deposits were $11.12 billion, an increase of $561.9 million or 5.3 percent over September 30, 2003. Compared to the December 31, 2003 balance of $10.71 billion, total deposits have increased $413.7 million or 3.9 percent. Competition for deposits from both larger banks and smaller community banks in our market areas is intense as financial institutions seek inexpensive sources of funding and liquidity for healthy loan demand.
Interest-bearing deposits averaged $8.60 billion during the third quarter of 2004 compared to $8.37 billion during the third quarter of 2003, an increase of $223.3 million or 2.7 percent. Average Checking With Interest increased $114.1 million or 8.2 percent to $1.50 billion. Average savings increased $57.1 million or 8.2 percent to $757.1 million from the third quarter of 2003 to the third quarter of 2004. Average time deposits increased $43.1 million or 1.2 percent during the third quarter of 2004, reversing ten successive quarters of time deposit runoff when compared to the same quarter of the prior year. Both FCB and ISB utilized special promotions during the third quarter of 2004 to secure incremental levels of time deposits.
For the first nine months of 2004, interest-bearing deposits averaged $8.53 billion compared to $8.44 billion during the same period of 2003. This $89.1 million or 1.1 percent increase results from continued growth among Checking With Interest and savings, offset by lower average time deposits, which declined $107.9 million or 2.8 percent.
Short-term borrowings. At September 30, 2004, short-term borrowings totaled $457.6 million compared to $430.2 million at December 31, 2003 and $472.6 million at September 30, 2003. For the quarters ended September 30, 2004 and 2003, short-term borrowings averaged $446.5 million and $498.9 million, respectively. The $52.4 million or 10.5 percent decline in average short-term borrowings is the result of reductions in master notes and overnight repurchase obligations. Customer interest in these commercial cash management products diminished during 2003 and early-2004 due to the very low interest rates.
For the nine-month periods ended September 30, 2004 and 2003, short-term borrowings averaged $439.5 million and $463.2 million, respectively, a reduction of 5.1 percent primarily due to reduced demand for master notes and overnight repurchase obligations from commercial cash management customers.
Long-term obligations. At September 30, 2004 and 2003, long-term obligations totaled $286.4 million and $256.8 million, respectively. During the third quarter of 2004, long-term obligations averaged $286.5 million, compared to $253.4 million during the same period of 2003. For the nine-month periods ended September 30, 2004 and 2003, long-term obligations averaged $287.8 million and $253.4 million, respectively.
Expense on Interest-Bearing Liabilities. BancShares’ interest expense amounted to $33.3 million during the third quarter of 2004, a $1.3 million or 3.6 percent decrease from the third quarter of 2003. The lower interest expense was primarily the result of lower deposit funding costs. The rate on interest-bearing liabilities was 1.42 percent during the third quarter of 2004 compared to 1.50 percent during the same period of 2003.
For the year-to-date, interest expense was $95.7 million, compared to $116.2 million for the same period of 2003. The $20.6 million or 17.7 percent decrease results primarily from lower interest rates. The rate on interest-bearing liabilities declined from 1.70 percent during the first nine months of 2003 to 1.38 percent for the same period of 2004, a 32 basis point reduction. In addition to a 35 basis point reduction in interest-bearing deposits, the rate on average long-term obligations fell 72 basis points to 7.58 percent due to the impact of incremental borrowings at a lower rate.
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Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine Months
Table 5
Checking with Interest
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% and state income tax rate of 7% for each period. The taxable-equivalent adjustment was $848 for 2004 and $796 for 2003.
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NET INTEREST INCOME
Net interest income totaled $98.1 million during the third quarter of 2004, an increase of $7.8 million or 8.6 percent from the $90.3 million recorded during the third quarter of 2003. The taxable-equivalent net yield on interest-earning assets was 3.38 percent for the third quarter of 2004, an increase of 10 basis points from the 3.28 percent reported for the third quarter of 2003.
The growth in interest-earning assets combined with the rate decline in average interest-bearing liabilities caused the net yield to improve.
Net interest income was $284.1 million and $268.9 million for the nine-month periods ended September 30, 2004 and 2003, respectively. This represents an increase of $15.2 million or 5.7 percent. As with the third quarter comparison, net interest income benefited from the rate reduction in interest-bearing liabilities. The year-to-date results demonstrate the impact of lower interest rates and the resulting favorable effect on interest-bearing liability rates. Due to recent increases in market interest rates, we expect that interest-bearing liability rates will escalate during the fourth quarter of 2004. Net interest income also benefited from the higher rate of growth of interest-earning assets, particularly loans, compared to the growth rate of interest-bearing liabilities. The taxable-equivalent net yield on interest-earning assets increased 3 basis points from 3.32 percent during the first nine months of 2003 to 3.35 percent during the same period of 2004.
Despite the relatively low current levels of net interest income and net yield on interest-earning assets, our asset/liability management strategy continues to focus on maintaining high levels of balance sheet liquidity and managing our interest rate risk. We maintain 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. Interest rate derivative contracts are not used in managing interest rate risk. Management is aware of the potential negative impact that movements in market interest rates may have on net interest income. However, given our asset-sensitive balance sheet, the general expectation that interest rates will gradually increase in the coming quarters should reduce pressure on net interest income.
Market risk. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values or reduced net interest income in future periods. As of September 30, 2004, BancShares’ market risk profile has not changed significantly from December 31, 2003. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.
ASSET QUALITY
The maintenance of excellent asset quality is one of our primary areas of operational focus. Historically, we have dedicated significant resources to ensuring that we are prudent in our lending practices. Accordingly, we have focused on asset quality as a key performance measure.
Nonperforming assets. At September 30, 2004, BancShares’ nonperforming assets, consisting of nonaccrual loans and other real estate, amounted to $23.8 million or 0.26 percent of gross loans plus foreclosed properties, compared to $24.1 million at December 31, 2003, and $20.3 million at September 30, 2003. Nonaccrual loans totaled $16.1 million at September 30, 2004, compared to $18.2 million at December 31, 2003 and $13.5 million at September 30, 2003. Other real estate totaled $7.7 million at September 30, 2004, compared to $5.9 million at December 31, 2003 and $6.8 million at September 30, 2003. Management continues to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure.
Reserve for loan losses. Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the reserve for loan losses. Such factors as the financial condition of the borrower, fair market value of collateral and other considerations are recognized in estimating probable credit losses. At September 30, 2004, the reserve for loan losses amounted to $127.9 million or 1.40 percent of loans outstanding. This compares to $119.4 million or 1.43 percent at December 31, 2003, and $117.7 million or 1.47 percent at September 30, 2003. Adjustments to the reserve are offset by entries to the provision for loan losses, which is a component of net income.
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Summary of Loan Loss Experience and Risk Elements
Table 6
(thousands, except ratios)
Reserve balance at beginning of period
Acquired reserve
Net charge-offs:
Charge-offs
Recoveries
Net charge-offs
Reserve balance at end of period
Historical Statistics
Average loans
Loans at period-end
Risk Elements
Nonaccrual loans
Other real estate
Total nonperforming assets
Accruing loans 90 days or more past due
Ratios
Net charge-offs (annualized) to average total loans
Reserve for loan losses to total loans at period-end
Nonperforming assets to total loans plus other real estate at period-end
The provision for loan losses charged to operations during the third quarter of 2004 was $8.0 million, compared to $6.4 million during the third quarter of 2003, an increase of $1.6 million or 25.5 percent. For the nine-month periods ended September 30, total provision for loan losses was $25.7 million for 2004 and $19.1 million for 2003, an increase of $6.6 million or 34.7 percent.
Net charge-offs for the three months ended September 30, 2004 totaled $5.5 million, compared to net charge-offs of $4.0 million during the same period of 2003. On an annualized basis, these net charge-offs represent 0.24 percent and 0.20 percent of average loans outstanding during the respective periods. Net charge-offs for the nine-month period ended September 30, 2004 totaled $17.2 million, compared to $13.9 million during the same period of 2003. As a percentage of average loans outstanding, these losses represent 0.26 percent for 2004 and 0.24 for 2003 on an annualized basis. The increase in net charge-offs during 2004 has resulted from losses sustained among commercial and industrial loans, which increased $2.4 million during the nine-month period ended September 30, 2004, and consumer loans, which increased $1.3 million over the same period of 2003. Net charge-offs declined among lease financing, commercial real estate loans and agricultural loans.
Management considers the established reserve adequate to absorb losses inherent in the loan portfolio at September 30, 2004. While management uses available information to establish provisions for loan losses, future additions to the reserve may be necessary based on changes in economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserve for loan losses. Such agencies may require the recognition of adjustments to the reserve based on their judgments of information available to them at the time of their examination.
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Management remains committed to maintaining high levels of credit quality. Table 6 provides details concerning the reserve and provision for loan losses over the past five quarters and for the year-to-date for 2004 and 2003.
NONINTEREST INCOME
The growth of noninterest income is essential to our ability to sustain adequate levels of profitability. The primary sources of noninterest income are service charges on deposit accounts, cardholder and merchant services income, various types of commission-based income including the sale of investments by our broker-dealer subsidiaries, fees from processing services for client banks, mortgage income and various types of revenues derived from wealth management services. Noninterest income also includes gains and losses resulting from securities transactions as well as gains recognized from the sale of branch offices.
During the first nine months of 2004, noninterest income was $188.1 million, compared to $185.3 million during the same period of 2003. The $2.7 million or 1.5 percent increase resulted from higher cardholder and merchant services income, service charge income and fees from processing services. The favorable variances in these areas more than offset the impact of a reduction in mortgage income and the absence of a $5.7 million gain recognized on the sale of branch offices during 2003. Securities transactions generated gains of $1.9 million during the first nine months of 2004, compared to gains of $309,000 recorded during the same period of 2003.
Cardholder and merchant services income increased $6.0 million from $41.3 million earned in the first nine months of 2003 to $47.3 million in the first nine months of 2004. This 14.6 percent increase in cardholder income was due to higher merchant discount and interchange fees for debit and credit card transactions.
Service charge income increased $3.2 million or 5.5 percent over the $58.0 million earned during the first nine months of 2003. The higher service charge income benefited from increased bad check and overdraft charges. Fees from processing services increased $2.4 million from $15.4 million during the first nine months of 2003 to $17.8 million earned during the first nine months of 2004 due to higher transaction volume for processed banks and a new fee schedule that was effective January 1, 2004.
Trust income contributed an additional $1.6 million during the first nine months of 2004 compared to the same period of 2003. This increase represents a 14.7 percent increase over the same period of 2003, the result of higher fees earned for various trust and fiduciary services.
Partially offsetting these increases, mortgage income declined $6.8 million from $13.2 million earned during the first nine months of 2003 to $6.4 million earning during the first nine months of 2004. This 51.3 percent reduction was prompted by lower loan origination fees and servicing income caused by a substantial reduction in refinance activity.
During the third quarter of 2004, noninterest income was $63.6 million, an $898,000 or 1.4 percent increase over the $62.7 million earned during the third quarter of 2003. Cardholder and merchant services income increased $2.1 million or 14.3 percent during 2004 due to higher interchange income for debit and credit transactions. Service charges on deposits increased $1.1 million or 5.6 percent during the third quarter of 2004 due to increased bad check and overdraft activity. Other increases were noted in fees from processing services, ATM income and commission income. Partially offsetting these increases was a reduction in mortgage income, which fell $2.9 million or 59.9 percent from the third quarter of 2003 to the third quarter of 2004. Reduced loan origination activity has resulted in lower fees and service release income during 2004.
NONINTEREST EXPENSE
The primary components of noninterest expense are salaries and related employee benefit costs, occupancy costs related to branch offices and support facilities, and equipment costs related to branch offices and technology.
Noninterest expense was $360.6 million for the first nine months of 2004, a 4.5 percent increase over the $345.0 million recorded during the same period of 2003. The $15.6 million increase in noninterest expense results from higher personnel and general operating costs. Salary expense increased $7.0 million during 2004 when compared to the same period of 2003. This 4.7 percent increase is primarily due to the growth in employee population required to staff new branch and loan production offices of ISB. Employee benefits expense increased $2.2 million or 6.3 percent during the first nine months of 2004, compared to the corresponding period of 2003 due to higher pension expense and increased health insurance costs.
Occupancy expense increased $1.7 million to $33.3 million during the first nine months of 2004. This 5.5 percent increase resulted from higher net rent expense and depreciation expense for branch facilities and
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local taxes. Equipment expense decreased $383,000 or 1.0 percent during the first nine months of 2004, as increases in hardware and software depreciation were more than offset by reductions in rent and maintenance expenses.
The $5.1 million or 5.5 percent increase in other expense resulted from higher cardholder processing costs due to transaction volume growth and increased legal expense, partially offset by a favorable variance for losses sustained on the sale of property.
For the third quarter of 2004, noninterest expense totaled $120.4 million, a $1.9 million or 1.6 percent increase over the same period of 2003. Salary expense totaled $52.7 million during the third quarter of 2004, an increase of $1.8 million or 3.5 percent due costs for new associates hired to support the ISB expansion. Employee benefits expense increased $434,000 due to higher pension and health care costs. Occupancy expense increased $357,000 or 3.3 percent due to the ISB expansion.
INCOME TAXES
For the third quarters of 2004 and 2003, income tax expense was $16.5 million and $8.7 million, respectively, an increase of $7.8 million or 90.3 percent. The effective tax rates were 49.5 percent and 30.7 percent for the respective periods. Income tax expense was $35.7 million during the first nine months of 2004, compared to $31.5 million during the same period of 2003, a 13.4 percent increase. The effective tax rates for these periods were 41.7 percent and 35.0 percent, respectively.
BancShares continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, BancShares evaluates its income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors.
During the third quarter of 2004, in conjunction with our ongoing review of the adequacy of our income tax obligations, we identified unallocated income tax liabilities that were no longer needed and were therefore reversed. During the third quarter of 2004, the North Carolina Department of Revenue commenced an examination of BancShares’ North Carolina tax returns for 2000, 2001 and 2002. Primarily as a result of this audit, we believe it is probable that BancShares will be liable for additional state income taxes. Including estimated interest and net of federal benefit, the additional amount of tax expense recorded during the third quarter for these items amounted to $4 million.
During the third quarter of 2003, income tax expense and the effective tax rate benefited from a favorable reduction in the valuation reserve for deferred state tax assets that resulted from a determination that the ultimate recoverability of these assets had improved.
LIQUIDITY
The investment portfolio is a primary source of liquidity, with available for sale securities and maturities of held-to-maturity securities structured to provide projected cash flows. Additionally, deposit liabilities generated throughout the branch network have provided liquidity to enable us to fund asset growth and maintain adequate levels of liquidity. In the event additional liquidity is needed, BancShares maintains sources for borrowed funds through federal funds lines of credit and other borrowing facilities including the Federal Home Loan Bank of Atlanta. Loan growth during the third quarter was funded primarily by deposit growth. Deposits are expected to display seasonal patterns through the remainder of 2004, providing substantially all of the required funding for anticipated loan growth.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. At September 30, 2004 and 2003, the leverage capital ratio of BancShares was 9.32 percent and 9.42 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares’ Tier 1 capital ratio was 12.16 percent at September 30, 2004, and 13.31 percent as of September 30, 2003. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratio was 13.50 percent at September 30, 2004 and 14.65 percent as of September 30, 2003. The minimum total capital ratio is 8 percent. BancShares and its subsidiary banks exceed the capital standards established by their respective regulatory agencies.
SEGMENT REPORTING
BancShares conducts its banking operations through two wholly owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has separate management groups. Additionally, the financial results and trends of ISB reflect the de novo nature of the majority of its operation.
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IronStone Bank. ISB’s total assets increased from $1.13 billion at September 30, 2003 to $1.39 billion at September 30, 2004, an increase of $265.6 million or 23.6 percent. This growth was generated by the expanding branch network. ISB’s net interest income increased $5.1 million or 17.6 percent during the first nine months of 2004, when compared to the same period of 2003, the result of loan growth. Provision for loan losses increased $1.5 million or 94.3 percent due to growth in the loan portfolio during the current year.
ISB’s noninterest income was unchanged during the first nine months of 2004, as higher service charge income and cardholder and merchant services income was offset by a reduction in mortgage income. Noninterest expense increased $5.4 million or 16.7 percent during 2004, the net impact of higher operating costs and a $2.0 million gain recognized on the sale of a parcel of land in early 2004. Higher personnel, occupancy and service fee costs reflect the impact of the expanded branch network, much of which relates to the expansion of ISB into California, Colorado, Oregon and Washington. Salary expense increased $2.3 million or 16.3 percent, while benefits expense increased $919,000 or 37.9 percent. Both of these increases reflect the increased employee population supporting the growing ISB branch network. Occupancy expense increased $1.1 million or 17.0 percent, and equipment expense increased $287,000 or 13.3 percent, evidence of the growth in the number of ISB locations.
ISB recorded a net loss of $2.2 million during the first nine months of 2004 compared to a net loss of $1.2 million during the same period of 2003. This represents an unfavorable variance of $1.1 million, primarily the result of higher noninterest expense due to ISB’s continued branch expansion. Substantially all of ISB’s growth has been on a de novo basis, and ISB continues its efforts to build a customer base in its highly competitive markets. We continue to seek new growth opportunities for ISB in new and existing markets. Our investments in these markets will result in higher levels of noninterest expense in subsequent quarters.
First-Citizens Bank & Trust Company. FCB’s total assets increased from $11.13 billion at September 30, 2003 to $11.54 billion at September 30, 2004, an increase of $417.5 million or 3.8 percent. FCB’s net interest income increased $11.1 million or 4.4 percent during the first nine months of 2004, the result of loan growth. Coupled with higher net charge-offs, that loan growth also contributed to a $5.2 million or 29.4 percent increase in the provision for loan losses.
FCB’s noninterest income increased $3.6 million or 2.0 percent during the first nine months of 2004, primarily the result of higher deposit service charges, cardholder and merchant income and fees from processing services. Noninterest expense increased $13.0 million or 4.2 percent during the first nine months of 2004, primarily due to higher personnel and ATM costs.
FCB recorded net income of $60.8 million during the first nine months of 2004 compared to $69.0 million during the same period of 2003. This represents an $8.2 million or 11.9 percent reduction in net income, resulting from the higher effective tax rate in 2004, reductions in mortgage income and the absence in 2004 of a gain on the sale of branches.
CURRENT ACCOUNTING AND REGULATORY ISSUES
During March 2004, the SEC issued Staff Accounting Bulletin 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 addresses the accounting for loan commitments and provides that the required fair value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 applies to mortgage loan commitments accounted for as derivatives and entered into after March 31, 2004. Substantially all of our mortgage loan commitments are based on rates provided by third party correspondents, who have agreed to purchase resulting loans at those rates. As a result, we are protected from interest rate risk, and the adoption of SAB 105 did not have a material impact on our consolidated financial statements.
In December 2003, the American Institute of Certificate Public Accountants (AICPA) issued Statement of Position 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investment in loans or debt securities acquired in a transfer if these differences relate to a deterioration of credit quality. SOP 03-3 also prohibits companies from carrying over or creating a valuation allowance in the initial accounting for loans acquired. SOP 03-3 is effective for loans acquired in years beginning after December 15, 2004. The adoption of SOP 03-3 is not expected to have a material impact on our consolidated financial statements.
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Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us with the Securities and Exchange Commission from time to time.
Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of the Company’s management about future events.
Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions (especially changes that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of loan collateral), and other developments or changes in our business that we do not expect.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.
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