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 March 31, 2002
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-- 8,797,154 shares
Class B Common Stock--$1 Par Value-- 1,683,470 shares
(Number of shares outstanding, by class, as of May 13, 2002)
<Page>
INDEX
PART I. FINANCIAL INFORMATION PAGES
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2002,
December 31, 2001,and March 31, 2001 5
Consolidated Statements of Income for the three-month
periods ended March 31, 2002, and March 31, 2001 6
Consolidated Statements of Changes in Shareholders' Equity
for the three-month periods ended March 31, 2002, and
March 31, 2001 7
Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 2002, and March 31, 2001 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-21
Item 3. Market Risk Disclosure 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. During the quarter ended March 31, 2002,
Registrant filed no Current Report on Form 8-K.
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: May 13, 2002 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
First Quarter 2002
<Page>
<Table>
<Caption>
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
March 31* December 31# March 31*
(thousands, except share data) 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 709,757 $ 758,987 $ 690,080
Overnight investments 597,980 501,909 876,925
Investment securities held to maturity 2,441,456 2,658,851 1,821,648
Investment securities available for sale 134,927 132,445 47,238
Loans 7,248,088 7,196,177 7,124,535
Less reserve for loan losses 108,692 107,087 103,825
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 7,139,396 7,089,090 7,020,710
Premises and equipment 481,981 483,084 453,793
Income earned not collected 60,970 63,604 60,134
Other assets 179,885 177,021 175,389
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,746,352 $ 11,864,991 $ 11,145,917
=================================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 1,615,435 $ 1,650,101 $ 1,457,456
Interest-bearing 8,257,544 8,311,504 7,907,900
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 9,872,979 9,961,605 9,365,356
Short-term borrowings 558,003 611,390 668,209
Long-term obligations 283,988 284,009 154,837
Other liabilities 125,101 122,944 127,380
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,840,071 10,979,948 10,315,782
Shareholders' equity
Common stock:
Class A-$1 par value (8,797,154; 8,797,154 and
8,813,454 shares issued, respectively) 8,797 8,797 8,813
Class B-$1 par value (1,683,470; 1,686,302 and
1,700,021 shares issued, respectively) 1,683 1,686 1,700
Surplus 143,766 143,766 143,766
Retained earnings 743,443 723,122 669,571
Accumulated other comprehensive income 8,592 7,672 6,285
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 906,281 885,043 830,135
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,746,352 $ 11,864,991 $ 11,145,917
=================================================================================================================================
* Unaudited
# Derived from the Consolidated Balance Sheets included in the 2001 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc and Subsidiaries
First Quarter 2002
<Page>
<Table>
<Caption>
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended March 31
(thousands, except per share data, unaudited) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Interest income
Loans $ 124,227 $ 151,022
Investment securities:
U. S. Government 29,638 28,398
State, county and municipal 62 71
Dividend 435 512
- ----------------------------------------------------------------------------------------------------------
Total investment securities interest and dividend income 30,135 28,981
Overnight investments 1,786 9,023
- ----------------------------------------------------------------------------------------------------------
Total interest income 156,148 189,026
Interest expense
Deposits 52,061 85,496
Short-term borrowings 1,369 7,776
Long-term obligations 5,707 3,171
- ----------------------------------------------------------------------------------------------------------
Total interest expense 59,137 96,443
- ----------------------------------------------------------------------------------------------------------
Net interest income 97,011 92,583
Provision for loan losses 5,980 5,676
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 91,031 86,907
Noninterest income
Service charges on deposit accounts 18,448 15,931
Cardholder and merchant services income 10,642 9,400
Trust income 3,994 3,893
Fees from processing services 4,684 3,929
Commission-based income 5,333 4,952
ATM income 2,495 2,637
Mortgage income 3,262 1,278
Other service charges and fees 4,032 3,522
Securities gains 310 5,451
Other 1,030 1,818
- ----------------------------------------------------------------------------------------------------------
Total noninterest income 54,230 52,811
Noninterest expense
Salaries and wages 46,935 43,834
Employee benefits 10,585 8,940
Occupancy expense 8,999 9,010
Equipment expense 10,158 9,686
Other 32,760 31,330
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense 109,437 102,800
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 35,824 36,918
Income taxes 12,626 14,059
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net income 23,198 22,859
- ----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of taxes
Unrealized securities gains (losses) arising during period 1,106 (553)
Less: reclassification adjustment for gains included in net income (186) (546)
- ----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of taxes 920 (7)
- ----------------------------------------------------------------------------------------------------------
==========================================================================================================
Comprehensive income $ 24,118 $ 22,852
==========================================================================================================
Average shares outstanding 10,481,661 10,521,253
Per Share
Net income $ 2.21 $ 2.17
Cash dividends 0.25 0.25
- ----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
<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, 2000 $ 8,813 $ 1,709 $143,766 $ 650,148 $ 6,292 $ 810,728
Net income 22,859 22,859
Other comprehensive loss, net of taxes (7) (7)
Cash dividends (2,628) (2,628)
Redemption of 9,361 shares of Class B
common stock (9) (808) (817)
===================================================================================================================================
Balance at March 31, 2001 $ 8,813 $ 1,700 $143,766 $ 669,571 $ 6,285 $ 830,135
===================================================================================================================================
Balance at December 31, 2001 $ 8,797 $ 1,686 $143,766 $ 723,122 $ 7,672 $ 885,043
Net income 23,198 23,198
Other comprehensive income, net of taxes 920 920
Cash dividends (2,620) (2,620)
Redemption of 2,832 shares of Class B
common stock (3) (257) (260)
===================================================================================================================================
Balance at March 31, 2002 $ 8,797 $ 1,683 $143,766 $ 743,443 $ 8,592 $ 906,281
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
<Page>
<Table>
<Caption>
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Three months ended March 31
---------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
(thousands)
OPERATING ACTIVITIES
Net income $ 23,198 $ 22,859
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of intangibles 3,435 2,865
Provision for loan losses 5,980 5,676
Deferred tax expense 2,084 2,235
Change in current taxes payable 14,164 15,787
Depreciation 9,173 7,941
Change in accrued interest payable (16,577) (12,680)
Change in income earned not collected 2,634 2,446
Securities gains (310) (5,451)
Origination of loans held for sale (14,205) (102,161)
Proceeds from sale of loans held for sale 11,716 77,368
Loss (gain) on loans held for sale (301) 2
Net amortization (accretion) of premiums and discounts 5,592 (151)
Net change in other assets (2,760) (3,907)
Net change in other liabilities 4,570 1,956
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,393 14,785
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans outstanding (53,496) 16,623
Purchases of investment securities held to maturity (228,347) (409,041)
Purchases of investment securities available for sale (1,678) (2,680)
Proceeds from maturities of investment securities held to maturity 440,150 365,710
Proceeds from maturities of investment securities available for sale 911 -
Net change in overnight investments (96,071) (445,543)
Dispositions of premises and equipment 4,693 2,007
Additions to premises and equipment (18,871) (18,183)
Purchase and sale of branches, net of cash transferred - 28,552
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 47,291 (462,555)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in time deposits (244,656) 156,458
Net change in demand and other interest-bearing deposits 156,030 192,565
Net change in short-term borrowings (53,408) 35,820
Net change in long-term obligations - 522
Repurchases of common stock (260) (817)
Cash dividends paid (2,620) (2,628)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (144,914) 381,920
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash and due from banks (49,230) (65,850)
Cash and due from banks at beginning of period 758,987 755,930
============================================================================================================================
Cash and due from banks at end of period $ 709,757 $ 690,080
============================================================================================================================
CASH PAYMENTS FOR:
Interest $ 75,714 $ 109,123
Income taxes 3,544 74
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses) 1,405 (553)
Reclassification of premises and equipment to other real estate 6,108 -
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
Notes to Consolidated Financial State
(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 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 2001 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
2002. However, the reclassifications have no effect on shareholders' equity or
net income as previously reported.
At January 1, 2002, management reviewed the estimated useful lives of all
amortizing intangible assets, including intangibles accounted for pursuant to
Statement of Financial Accounting Standards No. 72 (FAS 72 goodwill). As a
result of this review, management determined that, in certain instances, a
shorter life was appropriate. Accordingly, the estimated useful lives were
shortened, and the carrying value of FAS 72 goodwill is being amortized over the
respective asset's estimated remaining useful life.
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
Note B
New Accounting Standards
On January 1, 2002, BancShares fully adopted the provisions of Statement of
Financial Accounting Standards No. 142 (Statement 142), which provides guidance
for the accounting for goodwill and intangible assets. Statement 142 requires
that goodwill and intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually. Statement 142
also requires that intangible assets with estimated useful lives be amortized
over their respective estimated useful lives to their estimated residual values
and be reviewed for impairment in accordance with existing accounting guidance.
Certain provisions of Statement 142 were effective on July 1, 2001, and the
statement was fully adopted by BancShares on January 1, 2002. In connection with
Statement 142's transitional goodwill impairment evaluation, an assessment will
determine whether there is an indication that goodwill is impaired as of the
date of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the statement of
income.
In accordance with the provisions of Statement 142, BancShares discontinued
the amortization of goodwill effective January 1, 2002. BancShares will complete
an initial evaluation of its goodwill by June 30, 2002 and will record any
impairment at that time. In the future, BancShares will annually review goodwill
for impairment under the provisions of Statement 142. Set forth below is a
summary of goodwill activity during the three-month periods ended March 31, 2002
and 2001, all of which relates to a single reporting unit, FCB:
2002 2001
-----------------------------
-----------------------------
Balance, January 1 $ 41,240 $ 46,340
Amortization - 1,275
-----------------------------
=============================
Balance, March 31 $ 41,240 $ 45,065
=============================
The following information relates to other intangible assets, all of which are
being amortized:
March 31, December 31, March 31,
2002 2001 2001
-------------------------------------------
Amortized intangible assets $ 66,892 $ 70,328 $ 75,157
During the three month periods ended March 31, 2002 and 2001, BancShares
recorded amortization expense of $3,435 and $1,590 related to these intangible
assets. Based on current estimated useful lives and current carrying values,
BancShares anticipates amortization expense for intangible assets in subsequent
periods to be:
Projected amortization expense:
Year ended December 31, 2002 $ 13,080
Year ended December 31, 2003 12,195
Year ended December 31, 2004 10,859
Year ended December 31, 2005 9,490
Year ended December 31, 2006 8,283
The following table describes the impact of the adoption of Statement 142 on net
income and net income per share.
Three months ended March 31,
Net income 2002 2001
-----------------------------
Addition of goodwill amortization $ 23,198 $ 22,859
Adjusted net income - 1,275
=============================
$ 23,198 $ 24,134
=============================
Net income per share
Addition of goodwill amortization $ 2.21 $ 2.17
Adjusted net income per share - 0.12
=============================
$ 2.21 $ 2.29
=============================
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
Note C
Operating Segments
BancShares conducts its banking operations through its two wholly-owned
subsidiaries, FCB and ASB. Although FCB and ASB offer similar products and
services to customers, each entity operates in distinct geographic markets and
each entity has a separate management group. Additionally, the financial results
and trends of ASB 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. ASB began
operations in 1997 and operates from a thrift charter in Florida and Georgia.
ASB's significance to BancShares' consolidated financial results continues to
grow.
Accordingly, management has determined that FCB and ASB are reportable business
segments. In the aggregate, FCB and its consolidated subsidiaries, which are
integral to its branch operation, and ASB account for more than 90 percent of
consolidated assets, revenues and net income. Other includes activities of the
parent company, two subsidiaries that are the issuing trusts for outstanding
preferred securities, 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 BancShare's consolidated group.
March 31, 2002
ASB FCB Other Total Adjustments Consolidated
Interest income $ 13,072 $ 140,487 $ 8,384 $ 161,943 $ (5,795) $ 156,148
Interest expense 6,399 47,046 11,487 64,932 (5,795) 59,137
--------------------------------------------------------------------------------------------
Net interest income 6,673 93,441 (3,103) 97,011 - 97,011
Provision for loan losses 1,065 4,915 - 5,980 - 5,980
--------------------------------------------------------------------------------------------
Net interest income after 5,608 88,526 (3,103) 91,031 - 91,031
provision for loan losses
Noninterest income 1,218 53,944 305 55,467 (1,237) 54,230
Noninterest expense 8,163 102,314 197 110,674 (1,237) 109,437
--------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,337) 40,156 (2,995) 35,824 - 35,824
Income taxes (461) 14,157 (1,070) 12,626 - 12,626
============================================================================================
Net income (loss) $ (876) $ 25,999 $ (1,925) $ 23,198 $ - $ 23,198
============================================================================================
Period-end assets $ 880,803 $ 10,620,746 $ 1,739,378 $ 13,240,927 $ (1,494,575) $ 11,746,352
March 31, 2001
ASB FCB Other Total Adjustments Consolidated
Interest income $ 12,997 $ 174,424 $ 8,526 $ 195,947 $ (6,921) $ 189,026
Interest expense 8,827 83,928 10,609 103,364 (6,921) 96,443
--------------------------------------------------------------------------------------------
Net interest income 4,170 90,496 (2,083) 92,583 - 92,583
Provision for loan losses 442 5,234 - 5,676 - 5,676
--------------------------------------------------------------------------------------------
Net interest income after 3,728 85,262 (2,083) 86,907 - 86,907
provision for loan losses
Noninterest income 987 47,316 5,644 53,947 (1,136) 52,811
Noninterest expense 7,161 95,049 1,726 103,936 (1,136) 102,800
--------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,446) 37,529 1,835 36,918 - 36,918
Income taxes (860) 13,604 1,315 14,059 - 14,059
============================================================================================
Net income (loss) $ (1,586) $ 23,925 $ 520 $ 22,859 $ - $ 22,859
============================================================================================
Period-end assets $ 742,432 $ 10,302,996 $ 1,495,838 $ 12,541,266 $ (1,395,349) $ 11,145,917
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
<Page>
<Table>
<Caption>
Financial Summary
Table 1
2002 2001
First Fourth Third Second First
(thousands, except per share data and ratios) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income $ 156,148 $ 167,032 $ 176,709 $ 182,660 $ 189,026
Interest expense 59,137 74,113 84,482 91,472 96,443
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 97,011 92,919 92,227 91,188 92,583
Provision for loan losses 5,980 7,444 5,620 5,394 5,676
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 91,031 85,475 86,607 85,794 86,907
Noninterest income 54,230 55,014 53,089 54,641 52,811
Noninterest expense 109,437 106,912 106,963 105,922 102,800
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,824 33,577 32,733 34,513 36,918
Income taxes 12,626 12,260 11,977 12,509 14,059
====================================================================================================================================
Net income $ 23,198 $ 21,317 $ 20,756 $ 22,004 $ 22,859
====================================================================================================================================
Net interest income-taxable equivalent $ 97,382 $ 93,389 $ 92,698 $ 91,678 $ 93,091
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Quarterly Averages
Total assets $ 11,664,376 $ 11,674,273 $ 11,333,123 $ 11,128,229 $10,785,178
Investment securities 2,704,077 2,684,315 2,195,064 2,042,987 1,854,401
Loans 7,207,757 7,128,818 7,054,247 7,139,623 7,101,238
Interest-earning assets 10,353,509 10,446,364 10,126,568 9,952,752 9,616,497
Deposits 9,776,690 9,742,153 9,496,699 9,337,298 9,037,155
Interest-bearing liabilities 9,073,637 9,142,487 8,851,916 8,721,873 8,470,303
Long-term obligations 283,993 274,445 161,587 154,831 154,639
Shareholders' equity $ 894,689 $ 874,801 $ 857,417 $ 838,806 $ 819,289
Shares outstanding 10,481,661 10,488,894 10,508,330 10,511,028 10,521,253
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Quarter-End Balances
Total assets $ 11,746,352 $ 11,864,991 $ 11,522,525 $ 11,289,166 $11,145,917
Investment securities 2,576,383 2,791,296 2,482,123 1,987,085 1,868,886
Loans 7,248,088 7,196,177 7,109,584 7,058,070 7,124,535
Interest-earning assets 10,422,451 10,489,382 10,217,283 9,981,549 9,870,346
Deposits 9,872,979 9,961,605 9,645,226 9,480,108 9,365,356
Interest-bearing liabilities 9,099,535 9,206,903 9,007,989 8,807,409 8,730,946
Long-term obligations 283,988 284,009 184,018 154,829 154,836
Shareholders' equity $ 906,281 $ 885,043 $ 865,963 $ 849,297 $ 830,135
Shares outstanding 10,480,624 10,483,456 10,490,703 10,509,956 10,513,475
- ------------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.81 % 0.72 % 0.74 % 0.79 % 0.86 %
Shareholders' equity 10.52 9.67 9.82 10.52 11.32
Dividend payout ratio 11.31 12.32 12.63 11.96 11.52
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 73.72 % 73.17 % 74.28 % 76.46 % 78.58 %
Shareholders' equity to total assets 7.67 7.49 7.57 7.54 7.60
Time certificates of $100,000 or more to total
deposits 11.54 11.97 11.92 11.37 10.60
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $ 2.21 $ 2.03 $ 1.98 $ 2.09 $ 2.17
Cash dividends 0.25 0.25 0.25 0.25 0.25
Book value at period end 86.47 84.42 82.55 80.81 78.96
Tangible book value at period end 76.15 73.78 71.64 69.65 67.52
- ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
<Page>
<Table>
<Caption>
Outstanding Loans by Type
Table 2
2002 2001
First Fourth Third Second First
(thousands) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
Real estate:
Construction and land development $ 293,185 $ 283,968 $ 274,972 $ 257,407 $ 237,354
Mortgage:
1-4 family residential 1,246,245 1,338,975 1,354,476 1,401,051 1,596,920
Commercial 2,284,309 2,231,498 2,135,201 2,055,483 1,997,798
Equity Line 1,080,896 1,024,181 970,295 913,759 862,231
Other 171,459 163,914 181,038 189,161 186,740
- -------------------------------------------------------------------------------------------------------------------------
Total real estate 5,076,094 5,042,536 4,915,982 4,816,861 4,881,043
Commercial and industrial 938,349 918,929 931,850 948,098 943,722
Consumer 1,077,412 1,074,202 1,096,775 1,132,118 1,140,407
Lease financing 137,383 139,966 142,305 136,806 134,352
Other 18,850 20,544 22,672 24,187 25,011
- -------------------------------------------------------------------------------------------------------------------------
Total loans 7,248,088 7,196,177 7,109,584 7,058,070 7,124,535
Less reserve for loan losses 108,692 107,087 105,775 105,025 103,825
- -------------------------------------------------------------------------------------------------------------------------
Net loans $7,139,396 $7,089,090 $7,003,809 $6,953,045 $7,020,710
- -------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
<Page>
<Table>
<Caption>
Investment Securities
Table 3
March 31, 2002 March 31, 2001
Average Taxable Average Taxable
Book Fair Maturity Equivalent Book Fair Maturity Equivalent
(thousands) Value Value (Yrs./Mos.) Yield Value Value (Yrs./Mos.) Yield
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. Government:
Within one year $2,263,950 $2,268,657 0/5 4.27 % $1,506,877 $1,518,839 0/6 6.18
One to five years 169,244 168,081 2/5 4.03 303,006 307,373 1/4 5.76
Five to ten years 141 149 7/9 8.00 199 207 8/3 8.04
Over 10 years 4,676 4,805 24/6 7.38 7,331 7,448 25/8 7.30
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,438,011 2,441,692 0/8 4.26 1,817,413 1,833,867 0/8 6.11
State, county and municipal:
Within one year 1,104 1,118 0/5 6.81 650 653 0/3 7.41
One to five years 500 516 3/3 5.55 1,607 1,664 2/4 6.68
Five to ten years 143 149 7/1 5.88 142 151 8/1 5.88
Over ten years 1,413 1,507 15/9 5.69 1,541 1,712 15/3 5.85
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,160 3,141 10/3 5.96 3,940 4,029 9/11 6.30
Other:
Within one year 35 35 0/8 3.46 10 10 0/9 5.36
One to five years - - - - 35 35 1/4 6.96
Five to ten years 250 250 6/4 7.75 250 250 7/4 4.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total 285 285 4/4 6.25 295 295 5/0 4.96
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 2,441,456 2,445,118 0/7 4.33 1,821,648 1,838,191 0/10 6.11
Investment securities
available for sale 120,874 134,927 36,855 47,238
====================================================================================================================================
Total investment securities $2,562,330 $2,580,045 $1,858,503 $1,885,429
====================================================================================================================================
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
<Page>
<Table>
<Caption>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - First Quarter
Table 4
2002 2001 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 $ 7,207,757 $ 124,568 6.98 % $7,101,238 $151,489 8.61 % $ 1,412 $(28,333) $ (26,921)
Investment securities:
U. S. Government 2,644,567 29,638 4.55 1,811,204 28,398 6.36 11,284 (10,044) 1,240
State, county and municipal 4,563 92 8.18 5,210 112 8.72 (14) (6) (20)
Other 54,947 435 3.21 37,987 512 5.47 184 (261) (77)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,704,077 30,165 4.52 1,854,401 29,022 6.35 11,454 (10,311) 1,143
Overnight investments 441,675 1,786 1.64 660,859 9,023 5.54 (1,924) (5,313) (7,237)
====================================================================================================================================
Total interest-earning assets $ 10,353,509 $ 156,519 6.11 % $9,616,498 $189,534 7.96 % $ 10,942 $(43,957) $ (33,015)
====================================================================================================================================
Liabilities:
Deposits:
Checking with Interest $ 1,224,860 $ 947 0.31 % $1,096,526 $ 1,920 0.71 % $ 172 $(1,145) $ (973)
Savings 623,896 859 0.56 601,946 1,985 1.34 57 (1,183) (1,126)
Money market accounts 2,096,771 8,466 1.64 1,643,742 16,958 4.18 3,299 (11,791) (8,492)
Time deposits 4,261,946 41,789 3.98 4,329,409 64,633 6.05 (788) (22,056) (22,844)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,207,473 52,061 2.57 7,671,623 85,496 4.52 2,740 (36,175) (33,435)
Federal funds purchased 43,562 169 1.57 74,151 1,003 5.49 (264) (570) (834)
Repurchase agreements 200,799 270 0.55 189,556 1,997 4.27 73 (1,800) (1,727)
Master notes 292,766 680 0.94 325,452 3,961 4.94 (223) (3,058) (3,281)
Other short-term borrowings 45,044 250 2.25 54,885 815 6.02 (99) (466) (565)
Long-term obligations 283,993 5,707 8.15 154,639 3,171 8.32 2,639 (103) 2,536
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities$ 9,073,637 $ 59,137 2.64 % $8,470,306 $96,443 4.62 % $ 4,866 $(42,172) $ (37,306)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.47 % 3.34 %
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $ 97,382 3.81 % $93,091 3.93 % $ 6,076 $(1,785) $ 4,291
- ------------------------------------------------------------------------------------------------------------------------------------
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 2002 and 6.9% for 2001.
- --------------------------------
</Table>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
<Table>
<Caption>
Summary of Loan Loss Experience and Risk Elements
Table 5
2002 2001
First Fourth Third Second First
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
Reserve balance at beginning of period $ 107,087 $ 105,775 $ 105,025 $ 103,825 $ 102,655
Adjustment for sale of loans - - - (777) -
Provision for loan losses 5,980 7,444 5,620 5,394 5,676
Net charge-offs:
Charge-offs (5,393) (7,171) (5,462) (4,386) (5,273)
Recoveries 1,018 1,039 592 969 767
- -----------------------------------------------------------------------------------------------------------------------------
Net charge-offs (4,375) (6,132) (4,870) (3,417) (4,506)
=============================================================================================================================
Reserve balance at end of period $ 108,692 $ 107,087 $ 105,775 $ 105,802 $ 103,825
=============================================================================================================================
Historical Statistics
Average loans $ 7,207,757 $7,128,818 $7,054,247 $7,139,623 $7,101,238
Loans at period-end 7,248,088 7,196,177 7,109,584 7,058,069 7,124,535
- -----------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $ 17,735 $ 13,983 $ 13,349 $ 12,658 $ 12,830
Other real estate 12,461 6,263 4,242 2,798 3,082
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 30,196 $ 20,246 $ 17,591 $ 15,456 $ 15,912
- -----------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $ 11,012 $ 12,981 $ 14,993 $ 10,371 $ 6,413
- -----------------------------------------------------------------------------------------------------------------------------
Ratios
Net charge-offs (annualized) to average total loans 0.25 % 0.34 % 0.27 % 0.19 % 0.26 %
Reserve for loan losses to total loans at period-end 1.50 1.49 1.49 1.49 1.46
Nonperforming assets to total loans plus other
real estate at period-end 0.42 0.28 0.25 0.22 0.22
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002
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, referred to in
this document as BancShares. Within this document, 'we' or 'our' also refer to
BancShares. This discussion and analysis should be read in conjunction with our
unaudited Consolidated Financial Statements and related notes presented
elsewhere in this report. The focus of this discussion concerns our two banking
subsidiaries. First-Citizens Bank & Trust Company ("FCB") operates branches in
North Carolina, Virginia, and West Virginia. Atlantic States Bank ("ASB")
operates offices in Georgia and Florida.
SUMMARY
BancShares realized increased earnings during the first quarter of 2002
compared to the first quarter of 2001. Consolidated net income during the first
quarter of 2002 was $23.2 million, compared to $22.9 million earned during the
corresponding period of 2001. Net income per share during the first quarter of
2002 totaled $2.21, compared to $2.17 during the first quarter of 2001.
Annualized return on average assets was 0.81 percent for the first quarter of
2002 and 0.86 percent for the first quarter of 2001. The higher net income and
net income per share resulted from improved net interest income, noninterest
income and a lower effective tax rate. These improvements were partially offset
by higher noninterest expense during the first quarter of 2002.
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 first three months of 2002 and 2001.
INTEREST-EARNING ASSETS
At March 31, 2002, interest-earning assets totaled $10.42 billion, an
increase of $552.1 million or 5.6 percent from March 31, 2001. This increase
results from growth in investment securities and the loan portfolio.
Loans. At March 31, 2002 and 2001, gross loans totaled $7.25 billion and
$7.12 billion, respectively. As of December 31, 2001, gross loans were $7.20
billion. The $123.6 million growth in loans from March 31, 2001 to March 31,
2002 results from growth within our commercial and revolving real estate loans.
This growth has resulted from customer demand and from our continued focus on
these products during this period. Traditional 1-4 family residential mortgage
loans decreased from March 31, 2001 to March 31, 2002, the result of refinance
activity and sales of portfolio loans during the second quarter of 2001.
Although demand for residential mortgage loans has surged due to interest rate
reductions, most of our residential mortgage loan production is originated on a
correspondent basis, which does not generate growth in loans outstanding.
Consumer loans and commercial and industrial loans are down slightly from their
March 31, 2001 balances.
As a result of only modest demand for most loan products during 2002, loans
outstanding have increased less than 1 percent since December 31, 2001. Although
the downward pressure on interest rates during 2001 would typically stimulate
loan demand, sluggish economic conditions continue to restrain loan demand.
Although demand for revolving real estate and commercial real estate loans has
improved slightly, we anticipate other loan products will experience limited
growth until economic conditions improve in our market areas.
During the first quarter of 2002, loans averaged $7.21 billion, an increase
of $106.5 million or 1.5 percent from the comparable period of 2001.
Investment securities. At March 31, 2002 and 2001, the investment portfolio
totaled $2.58 billion and $1.87 billion, respectively. At December 31, 2001, the
investment portfolio was $2.79 billion. During the first quarter of 2002, the
investment securities portfolio averaged $2.70 billion, an $849.7 million or
45.8 percent increase over the first quarter of 2001. Investment securities held
to maturity totaled $2.44 billion at March 31, 2002, a $619.8 million or 34.0
percent increase over the $1.82 billion portfolio outstanding at March 31, 2001.
The increase reflects the impact of the robust growth in customer deposits
during 2001, which occurred during a time of minimal loan growth. Much of the
excess liquidity generated by the deposit growth was invested in investment
securities held to maturity. All securities that are classified as
held-to-maturity reflect our ability and positive intent to hold those
investments until maturity.
Investment securities available for sale totaled $134.9 million at March
31, 2002, compared to $47.2 million at March 31, 2001. The $87.7 million
increase resulted from purchases of securities with the liquidity generated
during the fourth quarter of 2001 with the proceeds from the issuance of $100
million in trust preferred securities. Available-for-sale securities are
reported at their aggregate fair value.
Table 3 presents detailed information relating to the investment securities
portfolio at March 31, 2002 and 2001. We anticipate reductions among investment
securities held to maturity during much of 2002 as maturing securities are used
to fund a seasonal reduction in deposits. Sales of investment securities
available for sale are likely as BancShares begins to deploy to its banking
subsidiaries the capital generated through the trust preferred securities issued
during 2001.
Overnight investments. Overnight investments totaled $598.0 million at
March 31, 2002, compared to $501.9 million at December 31, 2001 and $876.9
million at March 31, 2001. These investments, which include federal funds sold
and interest-bearing deposits in other banks, averaged $441.7 million during the
first quarter of 2002, a decrease of $219.2 million or 33.2 percent from the
first quarter of 2001.
Income on Interest-Earning Assets. Interest income amounted to $156.1
million during the first quarter of 2002, a $32.9 million or 17.4 percent
decrease from the first quarter of 2001. Lower yields more than offset the
impact of asset growth, resulting in the decrease in interest income in the
first quarter of 2002 when compared to the same period of 2001. The
taxable-equivalent yield on interest-earning assets for the first quarter of
2002 was 6.11 percent, compared to 7.96 percent for the corresponding period of
2001, a 185 basis point reduction, the result of falling market rates.
Loan interest income for the first quarter of 2002 was $124.2 million, a
decrease of $26.8 million or 17.7 percent from the first quarter of 2001, the
result of lower yields. The taxable-equivalent yield on the loan portfolio was
6.98 percent during the first quarter of 2002, compared to 8.61 percent during
the same period of 2001. The lower loan yields resulted from market-driven rate
movements. The decrease in loan interest income resulting from lower yields was
partially offset by an increase in average volume. Average loans increased
$106.5 million or 1.5 percent from the first quarter of 2001 to the first
quarter of 2002.
Income earned on the investment securities portfolio amounted to $30.1
million during the first quarter of 2002 and $29.0 million during the same
period of 2001, an increase of $1.2 million or 4.0 percent. The impact of an
$849.7 million increase in the average securities portfolio more than offset the
183 basis point yield reduction. The investment securities portfolio
taxable-equivalent yield decreased from 6.35 percent for the quarter ended March
31, 2001, to 4.52 percent for the quarter ended March 31, 2002, the result of
lower market rates.
Interest income from overnight investments decreased $7.2 million from the
first quarter of 2001 to the same period of 2002, an 80.2 percent decrease. This
large decrease results from lower average invested balances and a 390 basis
point yield reduction.
INTEREST-BEARING LIABILITIES
At March 31, 2002 and 2001, interest-bearing liabilities totaled $9.10
billion and $8.73 billion, respectively, compared to $9.21 billion as of
December 31, 2001. During the first quarter of 2002, interest-bearing
liabilities averaged $9.07 billion, an increase of $603.3 million or 7.1 percent
from the first quarter of 2001. This increase primarily resulted from an
increase in interest-bearing deposits and long-term obligations. No deposits
have been acquired or divested during 2002.
Deposits. At March 31, 2002, total deposits were $9.87 billion, an increase
of $507.6 million or 5.4 percent over March 31, 2001. Compared to the December
31, 2001 balance of $9.96 billion, total deposits have decreased $88.6 million,
reflecting the seasonal reduction in total deposits during the first and second
quarters.
Average interest-bearing deposits were $8.21 billion during the first
quarter of 2002 compared to $7.67 billion during the first quarter of 2001, an
increase of $535.9 million, due primarily to growth among money market accounts.
Average money market accounts increased $453.0 million or 27.6 percent from
first quarter of 2001 to the first quarter of 2002. Average Checking With
Interest increased $128.3 million or 11.7 percent for the first quarter of 2001
compared to the same period of 2002. These increases were partially offset by
lower average time deposits. Average time deposits decreased $67.5 million or
1.6 percent to $4.26 billion from March 31, 2001 to March 31, 2002.
Management attributes the growth in interest-bearing deposits from the
first quarter of 2001 to the first quarter of 2002 to several factors. FCB and
ASB continue to focus on deposit gathering and retention in their respective
market areas. In addition, some of the deposit growth in recent quarters has
resulted from investors seeking the safety of traditional bank deposits as
equity markets remain extraordinarily volatile. Although it is unclear how long
the economic uncertainty will continue to adversely affect the equity markets,
we continue to provide attractive products at reasonable rates to attract and
retain core deposit relationships. Management attributes the reduction in
average time deposits to a general reluctance by customers to invest in
fixed-rate certificates of deposit and IRAs when interest rates on many of these
products are very similar to rates offered on money market accounts.
Short-term Borrowings. At March 31, 2002, short-term borrowings totaled
$558.0 million compared to $611.4 million at December 31, 2001 and $668.2
million at March 31, 2001. For the quarters ended March 31, 2002 and 2001,
short-term borrowings averaged $582.2 million and $644.0 million, respectively.
The lower average short-term borrowings is primarily the result of reductions
among federal funds purchased and master notes.
Long-term Obligations. Long-term obligations averaged $284.0 million during
the first quarter of 2002, an increase of $129.4 million or 83.6 percent over
the first quarter of 2001. The growth in average long-term obligations relates
to the October 2001 issuance of $100.0 million in trust preferred securities and
$30.0 million borrowed from the Federal Home Loan Bank during the third quarter
of 2001. The rate on average long-term borrowings decreased 17 basis points to
8.15 percent.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $59.1 million during the first quarter of 2002, a $37.3 million or
38.7 percent decrease from the first quarter of 2001. The lower interest expense
was the result of substantially lower rates, partially offset by higher average
volume. The rate on average interest-bearing liabilities during the first
quarter of 2002 was 2.64 percent, a 198 basis point decrease in the aggregate
blended rate on interest-bearing liabilities. The rate on these liabilities was
4.62 percent during the first quarter of 2001. The large rate reduction resulted
from falling market rates. The impact of the rate reduction was partially offset
by higher average interest-bearing liabilities, which increased $603.3 million
to $9.07 billion during the first quarter of 2002.
Among short-term borrowings, the combined impact of lower interest rates
and reductions in average balances outstanding contributed to lower interest
expense. For long-term obligations, total interest expense increased $2.5
million, the result of an increase in average outstandings, which more than
offset the impact of a 17 basis point rate reduction.
NET INTEREST INCOME
Net interest income totaled $97.0 million during the first quarter of 2002,
an increase of $4.4 million or 4.8 percent from the first quarter of 2001. The
improvement in net interest income results from balance sheet growth, the impact
of which more than offset the result of decreases in interest rates.
The favorable impact of the growth among interest-earning assets was
greater than the incremental cost resulting from the growth of interest-bearing
liabilities, resulting in a favorable volume variance for the first quarter of
2002. However, the unfavorable impact of changing interest rates partially
offset the benefit of volume growth. The taxable-equivalent net yield on
interest-earning assets was 3.81 percent for the first quarter of 2002, compared
to the 3.93 percent achieved for the first quarter of 2001. The taxable
equivalent interest rate spread for the first quarter of 2002 was 3.47 percent
compared to 3.34 percent for the same period of 2001.
A principal objective of our asset/liability management function is to
manage interest rate risk or the exposure to changes in interest rates. 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. 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 March 31,
2002, our market risk profile has not changed significantly from December 31,
2001. Changes in fair value that result from movement in market rates can not 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
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 considered in estimating probable credit
losses. Management periodically reviews the assumptions imbedded within the
model used to calculate the loan loss reserve. Business loans are generally
graded, and those credit grades become the basis for the loss estimates based on
historical experience. For all other loans, loss estimates are made by
management based on historical data, current trends and estimated repayment
frequencies. Based on the model, at March 31, 2002, the reserve for loan losses
amounted to $108.7 million or 1.50 percent of loans outstanding. This compares
to $107.1 million or 1.49 percent at December 31, 2001, and $103.8 million or
1.46 percent at March 31, 2001. Management considers the established reserve
adequate to absorb losses that relate to loans outstanding at March 31, 2002,
although future adjustments to the reserve may be necessary based on changes in
economic conditions and other factors. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
reserve for loan losses. These 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 first
quarter of 2002 was $6.0 million, compared to $5.7 million during the first
quarter of 2001. The $304,000 increase in the provision for loan loss during
2002 primarily resulted from loan growth, continued economic pressures and
higher levels of nonperforming assets. Net charge-offs of loans during the first
quarter of 2002 were $4.4 million compared to $4.5 million during the first
quarter of 2001. On an annualized basis, these net charge-offs represent 0.25
percent and 0.26 percent of average loans outstanding during the respective
periods. We remain committed to maintaining high levels of credit quality. Table
5 provides details concerning the reserve and provision for loan losses over the
past five quarters.
Nonperforming assets. At March 31, 2002, our nonperforming assets amounted
to $30.2 million or 0.42 percent of gross loans plus foreclosed properties,
compared to $20.2 million at December 31, 2001, and $15.9 million at March 31,
2001. The $3.8 million increase in nonaccrual loans from December 31, 2001 to
March 31, 2002 results from higher level of commercial nonaccrual loans. At
March 31, 2002, the balance of other real estate includes $6.1 million that was
transferred from premises and equipment to other real estate during the first
quarter when management elected to classify the property as held for sale. FCB
has entered into an agreement to sell this property, subject to the satisfaction
of various contingencies, during the third quarter of 2002. Despite the
volatility in recent quarters, we view these levels of nonperforming assets as
further evidence of strong asset quality. Management continues to closely
monitor nonperforming assets, taking necessary actions to minimize potential
exposure.
NONINTEREST INCOME
During the first three months of 2002, noninterest income was $54.2
million, compared to $52.8 million during the same period of 2001. During the
first three months of 2002, service charges on deposit accounts totaled $18.4
million, compared to $15.9 million earned during the same period of 2001, an
increase of $2.5 million or 15.8 percent. This increase resulted from higher
service charges on commercial accounts and an increase in fees collected for bad
checks and our overdraft protection plan. We recorded mortgage income of $3.3
million during the first quarter of 2002, compared to $1.3 million earned during
the same period of 2001. The $2.0 million or 55.2 percent increase resulted from
higher mortgage originations, most of which are now originated on a
correspondent basis, resulting in immediate recognition of origination fees.
Cardholder and merchant services income was $10.6 million during the first
quarter of 2002, an increase of $1.2 million or 13.2 percent, the result of
continued growth among merchant services and higher interchange income resulting
from debit card transactions. Fees from processing services increased $755,000
or 19.2 percent during the first quarter of 2002, the result of higher rates
that became effective January 1, 2002.
Partially offsetting the benefit of these increases was a $5.2 million
reduction in securities gains recognized during the first quarter of 2002.
During the first quarter of 2001, we recognized $5.5 million in securities gains
on equity investments that were triggered by acquisitions of the issuers.
NONINTEREST EXPENSE
Noninterest expense was $109.4 million for the first three months of 2002,
a 6.5 percent increase over the $102.8 million recorded during the same period
of 2001. Much of the $6.6 million increase in total noninterest expense relates
to personnel expenses. Salaries and wages increased $3.1 million or 7.1 percent
during 2002 when compared to the same period of 2001. This increase includes
merit increases that became effective after the first quarter of 2001. Employee
benefits increased $1.6 million to $10.6 million for the first three months of
2002. This 18.4 percent increase was the result of higher life and health
insurance expenses.
Occupancy expense was $9.0 million during both the first quarter of 2001
and 2002. Higher depreciation expense was offset by lower repairs expense and
rent expense. Equipment expense was $10.2 million for the first three months of
2002, a 4.9 percent increase over the $9.7 million recorded during the same
period of 2001. Much of the increase was the result of higher hardware and
software depreciation and maintenance costs. Other expenses increased $1.4
million or 4.6 percent from the first quarter of 2001 to the first quarter of
2002. In accordance with the provisions of Statement of Financial Accounting
Standards No. 142 (Statement 142), which we fully adopted on January 1, 2002, we
discontinued the amortization of goodwill. During the first quarter of 2001,
BancShares recognized goodwill amortization expense of $1.3 million. Concurrent
with the adoption of Statement 142, we also reviewed the estimated useful lives
of our other intangible assets, including goodwill accounted for under the
provisions of Statement of Financial Accounting Standards No. 72 (FAS 72
goodwill). As a result of adjustments to shorten the estimated useful lives of
FAS 72 goodwill, during the first quarter of 2002, we recorded amortization
expense of $3.4 million, compared to $1.6 million during the same period of
2001.
During the first quarter of 2002, we also designated $6.1 million in
premises and equipment as held for sale. As a result of this reclassification,
these assets were written down to their fair value less selling costs, which
required that we record a $765,000 writedown.
INCOME TAXES
Income tax expense amounted to $12.6 million during the three months ended
March 31, 2002, compared to $14.1 million during the same period of 2001. The
effective tax rates for these periods were 35.2 percent and 38.1 percent,
respectively. The decrease in effective tax rate resulted from the adoption of
Statement 142 at January 1, 2002, at which time we discontinued the amortization
of goodwill. Since this amortization expense was non-deductible for income tax
purposes, the benefit resulting from the change did not generate any additional
income tax expense.
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, we
maintain readily available sources to borrow funds through its correspondent
network. Loan growth during the first quarter was funded by liquidity generated
from maturity of investment securities.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. At March 31, 2002 and 2001, our leverage
capital ratios were 8.99 percent and 7.97 percent, respectively, surpassing the
minimum level of 3 percent. As a percentage of risk-adjusted assets, our Tier 1
capital ratios were 13.20 percent at March 31, 2002 and 10.43 percent at March
31, 2001. The minimum ratio allowed is 4 percent of risk-adjusted assets. The
total risk-adjusted capital ratios were 14.53 percent at March 31, 2002 and
11.77 percent as of March 31, 2001. The minimum total capital ratio is 8
percent. BancShares and our subsidiary banks exceed the capital standards
established by their respective regulatory agencies.
SEGMENT REPORTING
BancShares conducts its banking operations through its two wholly-owned
subsidiaries, FCB and ASB. Although FCB and ASB 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 ASB reflect the de novo nature of its growth. Atlantic States
Bank. ASB's total assets increased from $742.4 million at March 31, 2001 to
$880.8 million at March 31, 2002, an increase of $138.4 million or 18.6 percent.
This growth resulted from loan growth and an expanding branch network. ASB's net
interest income increased $2.5 million or 60.0 percent during the first quarter
of 2002, when compared to the same period of 2001, the result of balance sheet
growth. Provision for loan losses increased $623,000 due to higher level of
nonperforming assets, higher historical net charge-offs and higher loan loss
projections.
ASB's noninterest income increased $231,000 or 23.4 percent during 2001,
primarily the result of higher service charge income. Noninterest expense
increased $1.0 million or 14.0 percent during 2001. Higher personnel, occupancy
and equipment costs reflect the impact of the expanded branch network.
ASB recorded a net loss of $876,000 during the first quarter of 2002
compared to a net loss of $1.6 million during the same period of 2001. This
represents a $710,000 or 44.8 percent reduction in the net loss. Substantially
all of ASB's growth has been on a de novo basis, and ASB continues its efforts
to build a customer base in its highly-competitive markets. Once a sufficient
level of volume is established, management anticipates ASB will become
profitable.
First Citizens Bank. FCB's total assets increased from $10.30 billion at
March 31, 2001 to $10.62 billion at March 31, 2002, an increase of $317.8
million or 3.1 percent. This growth resulted from strong deposit growth during
2001, much of which was invested in the securities portfolio due to weak loan
demand. FCB's net interest income increased $2.9 million or 3.3 percent during
the first quarter of 2002, the result of growth in interest-earning assets.
Provision for loan losses decreased $319,000 or 6.1 percent due to stabilizing
levels of nonperforming assets and net charge-offs.
FCB's noninterest income increased $6.6 million or 14.0 percent during the
first quarter of 2002, primarily the result of higher service charge income.
Noninterest expense increased $7.3 million or 7.6 percent during the first
quarter of 2002, primarily due to higher personnel and equipment costs.
FCB recorded net income of $26.0 million during the first quarter of 2002
compared to $23.9 million during the same period of 2001. This represents a $2.1
million or 8.7 percent increase in net income.
ACCOUNTING MATTERS
Except for those provisions that became effective and were adopted by
BancShares during 2001, we adopted the provisions of Statements of Financial
Accounting Standards No. 142 on January 1, 2002. Further discussion related to
the adoption of Statement 142 is found under the caption Noninterest Expense and
in the notes to the consolidated financial statements. Management is not aware
of any current recommendations by regulatory authorities that, if implemented,
would have or would be reasonably likely to have a material effect on liquidity,
capital ratios, or results of operations.
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 judgments 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.
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 2002