UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the period ended June 30, 2001
Commission File Number: 0-16471
First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)
Delaware 56-1528994
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
239 Fayetteville Street, Raleigh, North Carolina 27601
(Address of principal executive offices) (zip code)
(919) 716-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No _____
Class A Common Stock--$1 Par Value-- 8,813,454 shares
Class B Common Stock--$1 Par Value-- 1,696,136 shares
(Number of shares outstanding, by class, as of August 13, 2001)
<page>
INDEX
PART I. FINANCIAL INFORMATION PAGES
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2001,
December 31, 2000,and June 30, 2000 5
Consolidated Statements of Income for the three-month
and six-month periods ended June 30, 2001 and
June 30, 2000 6
Consolidated Statements of Changes in Shareholders'
Equity for the six-month periods ended June 30, 2001, and
June 30, 2000 7
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2001, and June 30, 2000 8
Note to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-21
Item 3. Market Risk Disclosure 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
On April 23, 2001 at the Annual Meeting of Shareholders of
Registrant two matters were considered by the shareholders:
(a) Election of Directors - The shareholder vote regarding
the election of the nominees for Board of Directors was:
Nominee For Withheld
-----------------------------------------------------------
J.M. Alexander, Jr. 32,212,470 253,938
C.H. Ames 32,212,024 254,384
B.I. Boyle 31,880,616 585,792
G.H. Broadrick 31,895,579 570,829
H.M. Craig, III 32,212,470 253,938
B.M. Farnsworth 31,889,204 577,204
L.M. Fetterman 31,894,653 571,755
F.B. Holding 31,816,978 649,430
F.B. Holding, Jr. 31,817,577 648,831
L.R. Holding 31,816,978 649,430
C.B.C. Holt 32,209,203 257,205
J.B. Hyler, Jr. 31,815,838 650,570
G.D. Johnson 31,885,258 581,150
F.R. Jones 31,894,410 571,998
L.S. Jones 32,208,445 257,963
J.T. Maloney, Jr. 32,211,810 254,598
J.C. Mayo, Jr. 31,889,567 576,841
L.T. Nunnellee, II 31,891,385 575,023
T.O. Shaw 31,391,899 1,074,509
R.C. Soles, Jr. 32,208,997 257,411
D.L. Ward, Jr. 32,187,075 279,333
(b) Appointment of Independent Public Accountants - The
shareholder vote regarding the appointment of KPMG
LLP as BancShares' independent public accountant
for 2001 was:
For: 32,415,618
Against: 20,243
Withheld: 30,547
<Page>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. During the quarter ended June 30, 2001,
Registrant filed one Current Report on Form 8-K filing a press
release that was issued addressing merger speculation. The
Form 8-K was filed on March 1, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS BANCSHARES, INC.
(Registrant)
Dated: August 13, 2001 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
June 30* December 31# June 30*
(thousands, except share data) 2001 2000 2000
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 709,362 $ 755,930 $ 528,498
Overnight investments 936,394 431,382 321,665
Investment securities held to maturity 1,945,116 1,778,166 1,524,943
Investment securities available for sale 41,969 38,554 18,090
Loans 7,058,069 7,109,692 7,006,824
Less reserve for loan losses 105,025 102,655 100,515
- -----------------------------------------------------------------------------------------------------------------------------
Net loans 6,953,044 7,007,037 6,906,309
Premises and equipment 466,550 444,731 414,726
Income earned not collected 62,170 62,580 55,332
Other assets 174,561 173,237 174,314
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,289,166 $ 10,691,617 $ 9,943,877
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest-bearing $ 1,504,682 $ 1,373,880 $ 1,456,240
Interest-bearing 7,975,426 7,597,988 6,910,124
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 9,480,108 8,971,868 8,366,364
Short-term borrowings 677,154 632,372 562,920
Long-term obligations 154,829 154,332 153,761
Other liabilities 127,778 122,317 101,847
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,439,869 9,880,889 9,184,892
Shareholders' Equity
Common stock:
Class A - $1 par value (8,813,454; 8,813,454;
and 8,814,254 shares issued, respectively) 8,813 8,813 8,814
Class B - $1 par value (1,696,502; 1,709,382;
and 1,720,360 shares issued, respectively) 1,697 1,709 1,720
Surplus 143,766 143,766 143,766
Retained earnings 688,624 650,148 598,871
Accumulated other comprehensive income 6,397 6,292 5,814
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 849,297 810,728 758,985
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,289,166 $ 10,691,617 $ 9,943,877
- -----------------------------------------------------------------------------------------------------------------------------
* Unaudited
# Derived from the Consolidated Balance Sheets included in the 2000 Annual Report on Form 10-K.
See accompanying Note to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended June 30 Six Months Ended June 30
(thousands, except per share data; unaudited) 2001 2000 2001 2000
Interest income
Loans $ 145,104 $ 143,382 $ 296,126 $ 281,293
Investment securities:
U. S. Government 29,023 23,324 57,421 44,239
State, county and municipal 65 55 136 103
Other 121 133 633 255
- --------------------------------------------------------------------------------------------------------------------------
Total investment securities interest income 29,209 23,512 58,190 44,597
Overnight investments 8,347 4,996 17,370 9,986
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 182,660 171,890 371,686 335,876
Interest expense
Deposits 82,402 69,670 167,898 134,470
Short-term borrowings 5,895 7,356 13,671 13,787
Long-term obligations 3,175 3,158 6,346 6,308
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 91,472 80,184 187,915 154,565
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 91,188 91,706 183,771 181,311
Provision for loan losses 5,394 2,975 11,070 6,434
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 85,794 88,731 172,701 174,877
Noninterest income
Service charges on deposit accounts 17,413 14,716 33,344 28,776
Credit card income 10,443 9,084 19,843 16,925
Trust income 3,847 3,660 7,740 7,402
Fees from processing services 4,373 3,675 8,301 6,952
Commission income 4,889 4,290 9,842 8,049
ATM income 2,987 2,832 5,625 5,319
Mortgage income 4,598 1,595 5,876 3,000
Other service charges and fees 3,295 3,101 6,815 6,238
Securities gains 1,587 22 7,038 22
Other 1,209 1,122 3,028 2,765
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 54,641 44,097 107,452 85,448
Noninterest expense
Salaries and wages 44,341 41,596 88,175 82,621
Employee benefits 9,076 8,209 18,016 17,077
Occupancy expense 8,651 8,135 17,661 16,382
Equipment expense 10,338 9,290 20,024 18,459
Other 33,516 30,723 64,846 59,701
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 105,922 97,953 208,722 194,240
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 34,513 34,875 71,431 66,085
Income taxes 12,509 13,421 26,568 25,117
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 22,004 $ 21,454 $ 44,863 $ 40,968
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) net of taxes
Unrealized securities gains (losses) arising during period $ 1,124 $ 978 $ 1,530 $ (752)
Less: reclassified adjustment for gains included in net income 1,012 14 1,425 14
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 112 964 105 (766)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 22,116 $ 22,418 $ 44,968 $ 40,202
- --------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 10,511,028 10,551,766 10,516,109 10,572,072
- --------------------------------------------------------------------------------------------------------------------------
Per Share
Net income $ 2.09 $ 2.03 $ 4.27 $ 3.88
Cash dividends 0.25 0.25 0.50 0.50
- --------------------------------------------------------------------------------------------------------------------------
See accompanying Note to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Statements of Changes in Shareholders' Equity
First Citizens BancShares, Inc. and Subsidiaries
Accumulated
Class A Class B Other
Common Common Retained Comprehensive Total
(thousands, except share data, unaudited) Stock Stock Surplus Earnings Income Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 8,890 $ 1,720 $ 143,766 $ 567,801 $ 6,580 $ 728,757
Redemption of 75,785 shares of Class A
common stock (76) (4,604) (4,680)
Net income 40,968 40,968
Unrealized securities losses, net of tax benefit (766) (766)
Cash dividends (5,294) (5,294)
================================================================================================================================
Balance at June 30, 2000 $ 8,814 $ 1,720 $ 143,766 $ 598,871 $ 5,814 $ 758,985
================================================================================================================================
Balance at December 31, 2000 $ 8,813 $ 1,709 $ 143,766 $ 650,148 $ 6,292 $ 810,728
Redemption of 12,880 shares of Class B
common stock (12) (1,129) (1,141)
Net income 44,863 44,863
Unrealized securities gains, net of tax expense 105 105
Cash dividends (5,258) (5,258)
================================================================================================================================
Balance at June 30, 2001 $ 8,813 $ 1,697 $ 143,766 $ 688,624 $ 6,397 $ 849,297
================================================================================================================================
See accompanying Note to Consolidated Financial Statements
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Six months ended June 30
2001 2000
- ------------------------------------------------------------------------------------------------------------------
(thousands, unaudited)
OPERATING ACTIVITIES
Net income $ 44,863 $ 40,968
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of intangibles 5,768 5,912
Provision for loan losses 11,070 6,434
Deferred tax expense (benefit) 2,172 (1,681)
Change in current taxes payable 5,018 141
Depreciation 16,285 14,876
Change in accrued interest payable (3,678) 5,784
Change in income earned not collected 410 (2,711)
Securities gains (7,038) (22)
Origination of loans held for sale (257,492) (101,566)
Proceeds from sale of loans held for sale 417,789 103,631
Loss (gain) on loans held for sale (1,858) 225
Net amortization (accretion) of premiums and discounts 2,126 894
Net change in other assets (10,060) (293)
Net change in other liabilities 4,121 5,162
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 229,496 77,754
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans outstanding (115,516) (262,684)
Purchases of investment securities held to maturity (945,543) (724,402)
Purchases of investment securities available for sale (2,400) (867)
Proceeds from maturities of investment securities held to maturity 776,467 551,886
Proceeds from sales of investment secruities available for sale 6,924 194
Net change in overnight investments (505,012) 151,728
Dispositions of premises and equipment 3,379 2,114
Additions to premises and equipment (41,483) (34,319)
Purchase and sale of branches, net of cash transferred - -
-----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (823,184) (316,350)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in time deposits 275,610 153,142
Net change in demand and other interest-bearing deposits 232,630 39,624
Net change in short-term borrowings 44,757 (7,303)
Originations of long-term obligations 522 -
Repurchases of common stock (1,141) (4,680)
Cash dividends paid (5,258) (5,294)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 547,120 175,489
- ------------------------------------------------------------------------------------------------------------------
Change in cash and due from banks (46,568) (63,107)
Cash and due from banks at beginning of period 755,930 591,605
==================================================================================================================
Cash and due from banks at end of period $ 709,362 $ 528,498
==================================================================================================================
CASH PAYMENTS FOR:
Interest $ 191,593 $ 148,781
Income taxes 25,419 25,716
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses) 901 (1,178)
Reclassification of loans to available for sale 177,817 -
- ------------------------------------------------------------------------------------------------------------------
See accompanying Note to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
Note to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
statements.
In the opinion of management, the consolidated statements contain all
material adjustments necessary to present fairly the financial position of First
Citizens BancShares, Inc. 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 financial statements should be read in conjunction with the financial
statements and notes included in the 2000 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
2001. However, the reclassifications have no effect on shareholders' equity or
net income as previously reported.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"), which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
BancShares adopted the provisions of Statement 133 on January 1, 2001, but, as a
result of BancShares' limited use of derivative instruments, the adoption of
Statement 133 did not have a material impact on its consolidated financial
statements.
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Financial Summary
Table 1
2001 2000 Six Months Ended
(thousands, except per share data Second First Fourth Third Second June 30
and ratios) Quarter Quarter Quarter Quarter Quarter 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 182,660 $ 189,026 $ 189,328 $ 182,966 $ 171,890 $ 371,686 $335,876
Interest expense 91,472 96,443 96,754 91,509 80,184 187,915 154,565
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 91,188 92,583 92,574 91,457 91,706 183,771 181,311
Provision for loan losses 5,394 5,676 4,857 4,197 2,975 11,070 6,434
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 85,794 86,907 87,717 87,260 88,731 172,701 174,877
Noninterest income 54,641 52,811 49,384 67,358 44,097 107,452 85,448
Noninterest expense 105,922 102,800 99,287 101,257 97,953 208,722 194,240
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 34,513 36,918 37,814 53,361 34,875 71,431 66,085
Income taxes 12,509 14,059 13,826 20,006 13,421 26,568 25,117
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
Net income $ 22,004 $ 22,859 $ 23,988 $ 33,355 $ 21,454 $ 44,863 $ 40,968
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income-taxable equivalent $ 91,678 $ 93,091 $ 93,240 $ 92,162 $ 92,414 $ 184,769 $ 182,788
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Total assets $11,128,229 $10,785,178 $10,420,204 $10,167,665 $9,772,765 $10,957,311 $9,715,508
Investment securities 2,042,987 1,854,401 1,747,536 1,633,653 1,594,291 1,949,215 1,545,784
Loans 7,139,623 7,101,238 7,077,991 7,036,622 6,917,041 7,120,536 6,853,122
Interest-earning assets 9,952,752 9,616,497 9,365,530 9,142,585 8,788,776 9,785,554 8,727,906
Deposits 9,337,298 9,037,155 8,693,634 8,524,930 8,211,252 9,187,715 8,170,165
Interest-bearing liabilities 8,721,873 8,470,303 8,126,969 7,886,410 7,560,267 8,597,297 7,536,525
Long-term obligations 154,831 154,639 154,609 154,979 153,773 154,736 154,472
Shareholders' equity $ 838,806 $ 819,289 $ 799,234 $ 770,418 $ 748,648 $ 828,892 $ 741,795
Shares outstanding 10,511,028 10,521,253 10,528,679 10,534,049 10,551,766 10,516,109 10,572,072
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Quarter-End Balances
Total assets $11,289,166 $11,145,917 $10,691,617 $10,361,296 $9,943,877 $11,289,166 $9,943,877
Investment securities 1,987,085 1,868,886 1,816,720 1,730,439 1,543,033 1,987,085 1,543,033
Loans 7,058,069 7,124,535 7,109,692 7,097,773 7,006,824 7,058,069 7,006,824
Interest-earning assets 9,981,548 9,870,346 9,357,794 9,278,658 8,871,522 9,981,548 8,871,522
Deposits 9,480,108 9,365,356 8,971,868 8,668,642 8,366,364 9,480,108 8,366,364
Interest-bearing liabilities 8,807,409 8,730,946 8,384,692 8,068,241 7,626,805 8,807,409 7,626,805
Long-term obligations 154,829 154,836 154,332 154,687 153,761 154,829 153,761
Shareholders' equity $ 849,297 $ 830,135 $ 810,728 $ 789,341 $ 758,985 $ 849,297 $ 758,985
Shares outstanding 10,509,956 10,513,475 10,522,836 10,533,814 10,534,614 10,509,956 10,534,614
- ------------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.79 % 0.86 % 0.92 % 1.31 % 0.88 % 0.83 % 0.85 %
Shareholders' equity 10.52 11.32 11.94 17.22 11.53 10.91 11.11
Dividend payout ratio 11.96 11.52 10.96 7.89 12.32 11.71 12.89
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 76.46 % 78.58 % 81.42 % 82.54 % 84.24 % 77.50 % 83.88 %
Shareholders' equity to total assets 7.54 7.60 7.67 7.58 7.66 7.56 7.64
Time certificates of $100,000 or more
to total deposits 11.37 10.60 9.92 9.54 9.27 10.96 9.15
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $ 2.09 $ 2.17 $ 2.28 $ 3.17 $ 2.03 $ 4.27 $ 3.88
Cash dividends 0.25 0.25 0.25 0.25 0.25 0.50 0.50
Book value at period end 80.81 78.96 77.04 74.93 72.05 80.81 72.05
Tangible book value at period end 69.65 67.52 65.76 64.77 61.92 69.65 61.92
- ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Outstanding Loans by Type Table 2
2001 2000
Second First Fourth Third Second
(thousands) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
Real estate $ 4,816,861 $ 4,881,043 $ 4,797,892 $ 4,745,393 $ 4,614,167
Commercial and industrial 948,098 943,722 933,515 942,507 946,067
Consumer 1,132,117 1,140,407 1,218,134 1,248,793 1,297,982
Lease financing 136,806 134,352 134,483 134,655 131,579
Other 24,187 25,011 25,668 26,425 17,029
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 7,058,069 7,124,535 7,109,692 7,097,773 7,006,824
Less reserve for loan losses 105,025 103,825 102,655 101,565 100,515
- ---------------------------------------------------------------------------------------------------------------------------
Net loans $ 6,953,044 $ 7,020,710 $ 7,007,037 $ 6,996,208 $ 6,906,309
- ---------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Investment Securities
Table 3
June 30, 2001 June 30, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Average Taxable Average Taxable
Book Fair Maturity Equivalent Book Fair Maturity Equivalent
(thousands) Value Value(Yrs./Mos.) Yield Value Value(Yrs./Mos.) Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Government:
Within one year $ 1,637,765 $ 1,652,099 0/7 5.83% $ 1,150,347 $ 1,135,868 0/6 5.88 %
One to five years 296,807 299,382 1/2 4.63 360,910 356,896 1/10 6.84
Five to ten years 188 197 8/11 8.03 280 281 8/4 8.12
Over ten years 6,621 6,749 25/6 7.41 8,634 8,472 26/5 7.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,941,381 1,958,427 0/9 5.65 1,520,171 1,501,517 0/10 6.11
State, county and municipal:
Within one year 514 520 0/10 6.33 1,150 1,155 0/7 7.20
One to five years 1,243 1,277 2/4 6.53 1,260 1,270 2/1 7.21
Five to ten years 142 149 7/10 5.88 500 500 5/0 7.94
Over ten years 1,541 1,653 16/5 5.74 1,557 1,588 17/9 8.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,440 3,599 10/9 6.02 4,467 4,514 7/6 7.77
Other:
Within one year 35 35 0/7 6.02 10 10 0/1 5.28
One to five years 10 10 1/7 6.50 45 45 1/11 6.64
Five to ten years 250 25 7/1 7.75 250 250 8/1 4.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total 295 295 4/9 7.13 305 305 5/3 4.95
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,945,116 1,962,321 0/10 5.65 1,524,943 1,506,336 1/0 6.12 %
Securities available for sale 31,399 41,969 - - 8,481 18,090 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 1,976,515 $ 2,004,290 - - $ 1,533,424 $ 1,524,426 - -
- ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Second Quarter
Table 4
2001 2000 Increase (decrease) due to:
Interest Interest
Average Income Yield Average Income Yield Yield
(thousands) Balance Expense /Rate Balance Expense /Rate Volume /Rate Total
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Total loans $7,139,623 $145,555 8.18% $6,917,041 $144,058 8.38% $4,798 $(3,301) $1,497
Investment securities:
U. S. Government 1,993,191 29,023 5.84 1,573,315 23,324 5.96 6,204 (505) 5,699
State, county and municipal 4,797 104 8.70 4,091 87 8.55 15 2 17
Other 44,999 121 1.08 16,885 133 3.17 149 (161) (12)
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,042,987 29,248 5.74 1,594,291 23,544 5.94 6,368 (664) 5,704
Overnight investments 770,142 8,347 4.35 277,444 4,996 7.24 7,122 (3,771) 3,351
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 9,952,752$ 183,150 7.38 % $ 8,788,776$ 172,598 7.90 % $ 18,288 $ (7,736) $ 10,552
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Checking With Interest $1,144,359 $1,698 0.60 % $1,074,503 $1,562 0.58 % $ 92 $ 44 $ 136
Savings 613,522 1,833 1.20 645,346 2,500 1.56 (106) (561) (667)
Money market accounts 1,679,226 14,648 3.50 1,441,085 15,116 4.22 2,312 (2,780) (468)
Time deposits 4,465,685 64,223 5.77 3,692,946 50,492 5.50 10,921 2,810 13,731
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,902,792 82,402 4.18 6,853,880 69,670 4.09 13,219 (487) 12,732
Federal funds purchased 71,300 751 4.22 36,278 558 6.19 456 (263) 193
Repurchase agreements 216,603 1,587 2.94 167,901 2,068 4.95 481 (962) (481)
Master notes 325,182 2,936 3.62 294,464 3,893 5.32 349 (1,306) (957)
Other short-term borrowings 51,165 621 4.87 53,971 837 6.24 (38) (178) (216)
Long-term obligations 154,831 3,175 8.23 153,773 3,158 8.26 25 (8) 17
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities$ 8,721,873 $ 91,472 4.21 $ 7,560,267 $ 80,184 4.27 % $ 14,492 $ (3,204) $ 11,288
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.17 % 3.63 %
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $ 91,678 3.69 % $ 92,414 4.23 % $ 3,796 $ (4,532) $ (736)
- ------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income taxes
only, or state income taxes only, are stated on a taxable-equivalent basis
assuming a statutory federal income tax rate of 35% for each period, and a state
income tax rate of 6.9% for 2001 and 7% for 2000.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Table>
<Caption>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Six Months
Table 5
2001 2000 Increase (decrease) due to:
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
(thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans $7,120,536 $297,045 8.41% $6,853,122 $282,711 8.28 % $10,448 $3,886 $14,334
Investment securities:
U. S. Government 1,902,701 57,421 6.09 1,524,029 44,239 5.84 11,129 2,053 13,182
State, county and municipal 5,002 216 8.71 3,853 162 8.46 49 5 54
Other 41,512 633 3.07 17,902 255 2.86 347 31 378
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,949,215 58,270 6.03 1,545,784 44,656 5.81 11,525 2,089 13,614
Overnight investments 715,803 17,370 4.89 329,001 9,986 6.10 10,529 (3,145) 7,384
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $9,785,554 $372,685 7.68% $8,727,907 $337,353 7.76 % $32,502 $2,830 $35,332
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Checking With Interest $1,120,574 $3,618 0.65% $1,069,858 $3,114 0.59 % $167 $337 $504
Savings 607,766 3,818 1.27 649,819 5,029 1.56 (301) (910) (1,211)
Money market accounts 1,661,582 31,606 3.84 1,468,401 29,552 4.05 3,731 (1,677) 2,054
Time deposits 4,397,923 128,856 5.91 3,647,539 96,775 5.34 20,821 11,260 32,081
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,787,845 167,898 4.35 6,835,617 134,470 3.96 24,418 9,010 33,428
Federal funds purchased 72,718 1,754 4.86 34,975 1,029 5.92 1,008 (283) 725
Repurchase agreements 203,154 3,584 3.56 153,722 3,563 4.66 1,001 (980) 21
Master notes 325,316 6,897 4.28 300,641 7,411 4.96 553 (1,067) (514)
Other short-term borrowings 53,528 1,436 5.41 57,098 1,784 6.28 (106) (242) (348)
Long-term obligations 154,736 6,346 8.27 154,472 6,308 8.21 1 37 38
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities$8,597,297 $187,915 4.41% $7,536,525 $154,565 4.12 % $26,875 $6,475 $33,350
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.27% 3.64 %
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $184,770 3.81% $182,788 4.21 % $5,627 ($3,645) $1,982
- ----------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
<Table>
<Caption>
Summary of Loan Loss Experience and Risk Elements
Table 6
2001 2000 Six Months Ended
Second First Fourth Third Second June 30
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Reserve balance at beginning of period $ 103,825 $ 102,655 $ 101,565 $ 100,515 $ 99,590 $ 102,655 $ 98,690
Adjustment for sale of loans (777) - - - - (777) -
Provision for loan losses 5,394 5,676 4,857 4,197 2,975 11,070 6,434
Net charge-offs:
Charge-offs (4,386) (5,273) (5,232) (3,989) (3,395) (9,659) (6,685)
Recoveries 969 767 1,465 842 1,345 1,736 2,076
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (3,417) (4,506) (3,767) (3,147) (2,050) (7,923) (4,609)
===============================================================================================================================
Reserve balance at end of period $ 105,025 $ 103,825 $ 102,655 $ 101,565 $ 100,515 $ 105,025 $ 100,515
===============================================================================================================================
Historical Statistics
Balances
Average total loans $7,139,623 $7,101,238 $7,077,991 $7,036,622 $6,917,041 $7,120,536 $6,853,122
Total loans at period-end 7,058,069 7,124,535 7,109,692 7,097,773 7,006,824 7,058,069 7,006,824
- -------------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $ 12,658 $ 12,830 $ 15,933 $ 13,918 $ 9,910 $ 12,658 $ 9,910
Other real estate acquired through
foreclosure 2,798 3,082 1,880 2,079 1,249 2,798 1,249
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 15,456 $ 15,912 $ 17,813 $ 15,997 $ 11,159 $ 15,456 $ 11,159
- -------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $ 7,487 $ 6,413 $ 6,731 $ 6,866 $ 6,051 $ 7,487 $ 6,051
- -------------------------------------------------------------------------------------------------------------------------------
Ratios
Net charge-offs (annualized) to average
total loans 0.19 % 0.26 % 0.21 % 0.18 % 0.12 % 0.22 % 0.14%
Reserve for loan losses to total loans
at period-end 1.49 1.46 1.44 1.43 1.43 1.49 1.43
Nonperforming assets to total loans plus
foreclosed real estate at period-end 0.22 0.22 0.25 0.23 0.16 0.22 0.16
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2001
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 note presented within this report.
The focus of this discussion concerns BancShares' two banking subsidiaries.
First-Citizens Bank & Trust Company ("FCB") operates branches in North Carolina,
West Virginia, and Virginia. Atlantic States Bank operates offices in Georgia
and Florida.
SUMMARY
BancShares realized an increase in earnings during the second quarter of
2001 compared to the second quarter of 2000. Consolidated net income during the
second quarter of 2001 was $22.0 million, compared to $21.5 million earned
during the corresponding period of 2000. Net income per share totaled $2.09 and
$2.03 during the second quarter of 2001and 2000, respectively. Return on average
assets was 0.79 percent for the second quarter of 2001 compared to 0.88 percent
during the same period of 2000. Return on average equity for the second quarter
of 2001 was 10.52 percent compared to 11.53 percent during the second quarter of
2001.
For the first six months of 2001, BancShares recorded net income of $44.9
million, compared to $41.0 million earned during the first six months of 2000.
The 9.5 percent increase was the result of higher noninterest income. Net income
per share for the first six months of 2001 was $4.27, compared to $3.88 during
the same period of 2000. BancShares returned 0.83 percent on average assets
during the first six months of 2001 and 0.85 percent during the corresponding
period of 2000. Return on average equity for the first six months of 2001 was
10.91 percent compared to 11.11 percent during the same period of 2000. Despite
the increase in net income during the second quarter and first six months of
2001 when compared to the same periods of 2000, growth in average assets and
average equity resulted in reductions in BancShares' key return ratios. The
increase in net income during 2001 results from securities gains. During the
second quarter and first six months of 2001, BancShares recorded net-of-tax
securities gains of $1.0 million and $4.4 million, respectively. Excluding the
impact of securities gains, noninterest income improved during both the second
quarter and the year to date. However, the benefit of those increases was offset
by higher noninterest expense, higher provision for loan losses and, during the
second quarter, lower net interest income. Various profitability, liquidity and
capital ratios are presented in Table 1. To understand the changes and trends in
interest-earning assets and interest-bearing liabilities, refer to the average
balance sheets presented in Table 4 for the second
quarters and Table 5 for the first six months of 2001 and 2000.
INTEREST-EARNING ASSETS
Interest-earning assets for the second quarter of 2001 averaged $9.95
billion, an increase of $1.16 billion or 13.2 percent from the second quarter of
2000, primarily the result of growth in investment securities and overnight
investments. For the six months ended June 30, 2001, earning assets averaged
$9.79 billion, an increase of $1.06 billion or 12.1 percent over the same period
of 2000. This increase resulted from growth in all interest-earning assets.
Loans. At June 30, 2001 and 2000, gross loans totaled $7.06 billion and
$7.01 billion, respectively. As of December 31, 2000, gross loans were $7.11
billion. Total loans at June 30, 2001 have increased $51.2 million or 0.7
percent from June 30, 2000, the result of sluggish loan demand in recent
quarters. Total real estate loans have increased $202.7 million or 4.4 percent
since June 30, 2000, the result of growth in commercial real estate and retail
home equity loans. However, consumer loans have decreased $165.9 million or 12.8
percent since June 30, 2000. This reduction is primarily due to lower levels of
sales finance origination activity. Table 2 details outstanding loans by type
for the past five quarters.
During the second quarter of 2001, loans averaged $7.14 billion, an
increase of $222.6 million or 3.2 percent from the comparable period of 2000.
The increase was the net result of growth among real estate loans and reductions
in consumer purpose loans. Growth among retail EquityLine loans and commercial
real estate loans continues, although the rate of growth slowed somewhat during
the second quarter of 2001.
Management anticipates modest growth among real estate secured loans during
the remainder of 2001. Growth among commercial and industrial loans will likely
remain sluggish during the last half of 2001. Retail loans will likely stabilize
after several quarters of decline, the result of renewed activity in the sales
finance network. Growth projections for all loan types are largely dependent on
interest rate movements, as further easing of interest rates will likely
stimulate retail and commercial loan growth.
For the year-to-date, gross loans have averaged $7.12 billion for 2001
compared to $6.85 billion for the same period of 2000. This $267.4 million or
3.9 percent increase is likewise due to growth among real estate loans.
As of June 30, 2001, $38.6 million in fixed-rate residential mortgage loans
are classified as held for sale. All loans held for sale are carried at the
lower of cost or fair value. Investment securities. At June 30, 2001 and 2000,
the investment portfolio totaled $1.99 billion and $1.54 billion, respectively.
At December 31, 2000, the investment portfolio was $1.82 billion. The 9.4
percent increase in the investment portfolio since December 31, 2000 resulted
from growth in deposits that has outpaced loan demand. As a result, BancShares
has invested excess liquidity in its investment securities portfolio during
2001. All securities that are classified as held-to-maturity reflect
BancShares'ability and positive intent to hold those investments until maturity.
Marketable equity securities are classified as available-for-sale and are
reported at their aggregate fair value. Table 3 presents detailed
information relating to the investment securities portfolio.
Overnight Investments. At June 30, 2001, overnight investments, which
includes Federal Funds sold and deposits in interest-bearing accounts, totaled
$936.4 million, compared to $321.7 million at June 30, 2000 and $431.4 million
at December 31, 2000. Average overnight investments increased $492.7 million or
177.6 percent from the second quarter of 2000 to the second quarter of 2001.
Similar to the growth among investment securities, increases in overnight
investments reflect the impact of the growth in deposits during 2001 at rates
that exceed current loan demand.
Income on Interest-Earning Assets. Interest income amounted to $182.7
million during the second quarter of 2001, a 6.3 percent increase over the
second quarter of 2000. Balance sheet growth contributed to higher interest
income in the second quarter of 2001 when compared to the same period of 2000.
The taxable-equivalent yield on interest-earning assets for the second quarter
of 2001 was 7.38 percent, compared to 7.90 percent for the corresponding period
of 2000, the result of downward market rate pressures during 2001. The lower
yield on earning assets during 2001 results primarily from a reduction in the
blended taxable-equivalent yield on overnight investments and loans. The yield
on average overnight investments decreased from 7.24 percent during the second
quarter of 2000 to 4.35 percent during the second quarter of 2001.
Loan interest income for the second quarter of 2001 was $145.1 million, an
increase of $1.7 million or 1.2 percent from the second quarter of 2000, due to
volume growth. The taxable-equivalent yield on the loan portfolio was 8.18
percent during the second quarter of 2001, compared to 8.38 percent during the
same period of 2000, the reduction resulting from lower market rates. Income
earned on the investment securities portfolio amounted to $29.2 million during
the second quarter of 2001 and $23.5 million during the same period of 2000, an
increase of $5.7 million or 24.2 percent. This increase is the result of a
$448.7 million or 28.1 percent increase in the average securities portfolio. The
investment securities portfolio taxable-equivalent yield decreased 20 basis
points to 5.74 percent for the second quarter of 2001 from 5.94 percent for the
second quarter of 2000. For the six months ended June 30, 2001, interest income
totaled $371.7 million, a $35.8 million or 10.7 percent increase over the same
period of 2000. The taxable-equivalent yield on interest-earning assets for the
first six months of 2001 was 7.68 percent, compared to 7.76 percent for the
corresponding period of 2000. Loan interest income was $296.1 million, an
increase of $14.8 million or 5.3 percent over the same period of 2000. The
increase in interest income reflects the growth in the loan portfolio and
investment securities.
For the six months ended June 30, 2001, interest income from investment
securities was $58.2 million, compared to $44.6 million during the same period
of 2000, an increase of 30.5 percent. This increase is the result of a $403.4
million increase in the average securities portfolio. Management expects the
rate reductions earlier this year to further reduce asset yields in the third
and fourth quarters of 2001.
INTEREST-BEARING LIABILITIES
At June 30, 2001 and 2000, interest-bearing liabilities totaled $8.81
billion and $7.63 billion, respectively, compared to $8.38 billion as of
December 31, 2000. During the second quarter of 2001, interest-bearing
liabilities averaged $8.72 billion, an increase of $1.16 billion or 15.4 percent
from the second quarter of 2000. This increase primarily resulted from growth in
time deposits.
Deposits. At June 30, 2001, total deposits were $9.48 billion, an increase
of $1.11 billion or 13.3 percent over June 30, 2000. Compared to the December
31, 2000 balance of $8.97 billion, total deposits have increased $508.2 million
or 5.7 percent.
Average interest-bearing deposits were $7.90 billion during the second
quarter of 2001 compared to $6.85 billion during the second quarter of 2000, an
increase of 15.3 percent. Much of the increase is due to average time deposits,
which increased $772.7 million from the second quarter of 2000 to the second
quarter of 2001. Average money market accounts increased $238.1 million from the
second quarter of 2000 to the second quarter of 2001, while average Checking
With Interest accounts increased $69.9 million between the two periods. Average
savings deposits decreased $31.8 million or 4.9 percent during the second
quarter of 2001. Time deposits of $100,000 or more averaged 11.37 percent of
total average deposits during the second quarter of 2001, compared to 9.27
percent during the same period of 2000. Management attributes the increase in
large denomination deposits to renewed interest in bank deposits given the
continuing turbulence in the equity and bond markets.
Borrowed Funds. At June 30, 2001, short-term borrowings totaled $677.2
million compared to $632.4 million at December 31, 2000 and $562.9 million at
June 30, 2000. For the quarters ended June 30, 2001 and 2000, short-term
borrowings averaged $664.3 million and $552.6 million, respectively. This
increase resulted from growth among repurchase agreements and federal funds
purchased. Long-term obligations averaged $154.8 million during the second
quarter of 2001, compared to $153.8 million during the second quarter of 2000.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $91.5 million during the second quarter of 2001, an $11.3 million or
14.1 percent increase from the second quarter of 2000. The higher interest
expense was the result of higher average volume, the impact of which was
partially offset by the reduction in rates. The rate on these average
liabilities was 4.21 percent during the second quarter of 2001 compared to 4.27
percent during the same period of 2000.
For the year-to-date, interest expense was $187.9 million, compared to
$154.6 million for the same period of 2000. The 21.6 percent increase results
primarily from higher average time deposits.
NET INTEREST INCOME
Net interest income totaled $91.2 million during the second quarter of
2001, a decrease of 0.6 percent from the $91.7 million recording during the
second quarter of 2000. The taxable-equivalent net yield on interest-earning
assets was 3.69 percent for the second quarter of 2001, a decrease of 54 basis
points from the 4.23 percent reported for the second quarter of 2000. The
taxable equivalent interest rate spread for the second quarter of 2001 was 3.17
percent compared to 3.63 percent for the same period of 2000. The lower net
yield on interest-earning assets reflects the adverse impact of interest rate
reductions during 2001 and the growth among lower-yielding interest-earning
assets. The interest rate reductions have reduced asset yields and interest
income more quickly than interest expense, creating pressure on net interest
income. Management projects continued pressure on net interest income during the
rest of 2001.
A principal objective of BancShares' asset/liability management function is
to manage interest rate risk or the exposure to changes in interest rates.
Management maintains portfolios of interest-earning assets and interest-bearing
liabilities with maturities or repricing opportunities that will protect against
wide interest rate fluctuations, thereby limiting, to the extent possible, the
ultimate interest rate exposure. Management is aware of the potential negative
impact that movements in market interest rates may have on net interest income.
Market risk is the potential economic loss resulting from changes in market
prices and interest rates. This risk can either result in diminished current
fair values or reduced net interest income in future periods. As of June 30,
2001, BancShares' market risk profile has not changed significantly from
December 31, 2000.
ASSET QUALITY
Reserve for loan losses. Management continuously analyzes the growth and
risk characteristics of the total loan portfolio under current economic
conditions in order to evaluate the adequacy of the reserve for loan losses.
Such factors as the financial condition of the borrower, fair market value of
collateral and other considerations are recognized in estimating probable credit
losses. At June 30, 2001, the reserve for loan losses amounted to $105.0 million
or 1.49 percent of loans outstanding. This compares to $102.7 million or 1.44
percent at December 31, 2000, and $100.5 million or 1.43 percent at June 30,
2000.
Management considers the established reserve adequate to absorb losses that
relate to loans outstanding at June 30, 2001. 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.
The provision for loan losses charged to operations during the second
quarter of 2001 was $5.4 million, compared to $3.0 million during the second
quarter of 2000. For the six month periods ended June 30, total provision for
loan losses was $11.1 million for 2001 and $6.4 million for 2000. The $4.6
million increase primarily results from higher levels of nonperforming assets
and net charge-offs during 2001 and greater economic uncertainty.
Net charge-offs for the three months ended June 30, 2000 totaled $3.4
million, compared to net charge-offs of $2.1 million during the same period of
2000. On an annualized basis, these net charge-offs represent 0.19 percent and
0.12 percent of average loans outstanding during the respective periods. Net
charge-offs for the six month period ended June 30, 2001 totaled $7.9 million,
compared to $4.6 million during the same period of 2000. As a percentage of
average loans outstanding, the losses represent 0.22 percent for 2001 and 0.14
for 2000 on an annualized basis. Gross charge-offs totaled $9.7 million and $6.7
million for the six month periods ended June 30, 2001 and 2000 respectively.
Gross recoveries were $1.7 million and $2.1 million for the respective periods.
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 2001 and 2000.
Nonperforming assets. At June 30, 2001, BancShares' nonperforming assets
amounted to $15.5 million or 0.22 percent of gross loans plus foreclosed
properties, compared to $17.8 million at December 31, 2000, and $11.2 million at
June 30, 2000. Management continues to closely monitor nonperforming assets,
taking necessary actions to minimize potential exposure.
NONINTEREST INCOME
During the first six months of 2001, noninterest income was $107.5 million,
compared to $85.4 million during the same period of 2000. The $22.0 million or
25.8 percent increase was primarily due to gains on securities transactions,
growth in service charges on deposit accounts and improved credit card and
mortgage income. BancShares recognized a pre-tax gain of $7.0 million on
securities transactions during the first six months of 2001, compared to $22,000
during the first six months of 2000. Ignoring the impact of securities gains,
noninterest income still displayed robust growth, increasing $15.0 million or
17.5 percent over 2000. During the first six months of 2001, service charges on
deposit accounts was $33.3 million, compared to $28.8 million earned during the
same period of 2000, the 15.9 percent increase resulting from changes in the
commercial service charge structure. Credit card income increased $2.9 million
over the $16.9 million earned during the first six months of 2000, a 17.2
percent increase, with continued growth resulting from increases in merchant and
cardholder transaction volumes. Noninterest income generated from mortgage
operations contributed an additional $2.90 million during the first six months
of 2001 compared to the same period of 2000, the result of a significant
increase in mortgage originations and a corresponding increase in loan sale
volumes. These loan sales generated gains of $1.9 million during the first six
months of 2001. The sale of loans from current production also generated $4.0
million in servicing release fees, more than offsetting the $2.8 million
reduction in servicing income resulting from the third quarter 2000 sale of the
mortgage servicing portfolio.
Fees from processing services generated an additional $1.3 million or 19.4
percent during the first six months of 2001, primarily due to higher transaction
volume at client banks. Commission-based income increased $1.8 million or 22.5
percent during 2001, primarily the result of higher income from the insurance
agency.
NONINTEREST EXPENSE
Noninterest expense was $208.7 million for the first six months of 2001, a
7.5 percent increase over the $194.2 million recorded during the same period of
2000. The $14.5 million increase in noninterest expense relates primarily to
higher personnel costs and branch closing costs. Salary expenses increased $5.6
million during 2001 when compared to the same period of 2000. This 6.7 percent
increase reflects general increases in salary costs. Employee benefits expense
increased $939,000 or 5.5 percent during the first six months of 2001, compared
to the corresponding period of 2000 due to increased health insurance and
pension costs.
Occupancy expense increased $1.3 million or 7.8 percent during the first
six months of 2001, the result of higher lease costs and higher depreciation
expense. Equipment expense increased $1.6 million or 8.5 percent during the
first six months of 2001, the result of higher depreciation and maintenance
expenses associated with technology projects.
The $5.1 million or 8.6 percent increase in other expenses resulted from a
$1.4 million increase in credit card processing costs, a $1.3 million increase
in non-credit charge-offs and smaller increases in intangible amortization
expense and losses on the sale of assets.
INCOME TAXES
Income tax expense amounted to $26.6 million during the first six months of
2001, compared to $25.1 million during the same period of 2000, a 5.8 percent
increase resulting from higher pre-tax income. The effective tax rates for these
periods were 37.2 percent and 38.0 percent, respectively, the reduction
resulting from growth in tax-advantaged investment securities during 2001.
LIQUIDITY
Management relies on the investment portfolio as a source of liquidity,
with maturities designed to provide needed cash flows. Further, retail deposits
generated throughout the branch network have enabled management to fund asset
growth and maintain liquidity. In the event additional liquidity is needed,
BancShares maintains readily available sources to borrow funds through its
correspondent network.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. At June 30, 2001 and 2000, the leverage capital
ratio of BancShares was 7.95 percent and 8.24 percent, respectively, surpassing
the minimum level of 3 percent. As a percentage of risk-adjusted assets,
BancShares' Tier 1 capital ratio was 10.64 percent at June 30, 2001, and 10.13
percent as of June 30, 2000. The minimum ratio allowed is 4 percent of
risk-adjusted assets. The total risk-adjusted capital ratio was 11.94 percent at
June 30, 2001 and 11.42 percent as of June 30, 2000. The minimum total capital
ratio is 8 percent. BancShares and its subsidiary banks exceed the standards
established by their respective regulatory agencies for well-capitalized
institutions.
ACCOUNTING MATTERS
The Financial Accounting Standards Board has issued new requirements
regarding business combinations and the proper accounting for intangibles.
Statement 141 "Business Combinations" requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also provides guidance on classifying intangible assets. Statement
142 "Goodwill and Other Intangible Assets" prohibits the amortization of
goodwill and intangible assets with indefinite useful lives. Instead, those
intangible assets will be tested for impairment at least annually. Assets with
estimable useful lives will continue to be amortized over their estimated useful
lives, and those assets will be reviewed for impairment under Statement 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The implementation of Statement 142 requires an assessment of
goodwill to determine if any impairment exists as of the date of adoption. Any
transitional impairment loss will be recognized on the income statement as the
cumulative effect of a change in accounting principle. At this time, management
has not completed its evaluation of intangible assets to determine if any
impairment exists. Management is not aware of any current recommendations by
regulatory authorities that, if implemented, would have or would be reasonably
likely to have a material effect on liquidity, capital ratios, or results of
operations.
FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act, which statements are
inherently subject to risks and uncertainties. Forward-looking statements are
statements that include projections, predictions, expectations or beliefs about
future events or results or otherwise are not statements of historical fact.
Such statements are often characterized by the use of qualifying words (and
their derivatives) such as "expect," "believe," "estimate,
"plan," "project,"
"anticipate," or other statements concerning opinions or judgment of BancShares
and its management about future events. Factors that could influence the
accuracy of such forward-looking statements include, but are not limited to, the
financial success or changing strategies of BancShares' customers, actions of
government regulators, the level of market interest rates, and general economic
conditions.