UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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) 3128 Smoketree Court, Raleigh, North Carolina 27604 - -------------------------------------------------------------------------------- (Address of principle 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 Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes X No Class A Common Stock-$1 Par Value-8,758,670 shares Class B Common Stock-$1 Par Value-1,677,675 shares - -------------------------------------------------------------------------------- (Number of shares outstanding, by class, as of May 5, 2004) First Citizens BancShares, Inc and Subsidiaries First Quarter 2004 <Page> INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at March 31, 2004, December 31, 2003,and March 31, 2003 4 Consolidated Statements of Income for the three-month periods ended March 31, 2004 and March 31, 2003 5 	 Consolidated Statements of Changes in Shareholders' Equity for the three-month periods ended March 31, 2004, and March 31, 2003 6 Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2004, and March 31, 2003 7 Notes to Consolidated Financial Statements 8-9 Item 2. Management's Discussion and Analysis of Financial 10-27 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Item 4. Controls and Procedures (a) BancShares' Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of BancShares' disclosure controls and procedures in accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, BancShares' disclosure controls and procedures were effective in enabling it to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act. (b) During the quarter, there were no significant changes in Registrant's internal controls over financial reporting or in other factors that could significantly affect these controls. (b) No change in BancShares' internal control over financial reporting occurred during the first quarter of 2004 that materially affected, or is reasonably likely to materially affect, BancShares' internal control over financial reporting. First Citizens BancShares, Inc and Subsidiaries First Quarter 2004 <Page> Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32 Certifications of Chief Executive Officer and Chief Financial Officer (b) Reports on Form 8-K. During the quarter ended March 31, 2004, Registrant filed no Current Reports 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 7, 2004 By:/s/Kenneth A. Black Kenneth A. Black Vice President, Treasurer, and Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Consolidated Balance Sheets First Citizens BancShares, Inc. and Subsidiaries March 31* December 31# March 31* (thousands, except share data) 2004 2003 2003 - ----------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 639,658 $ 790,168 $ 753,578 Overnight investments 622,212 294,405 925,255 Investment securities held to maturity 1,064,751 1,226,717 1,991,916 Investment securities available for sale 1,085,987 1,242,730 370,214 Loans 8,616,987 8,326,598 7,704,492 Less reserve for loan losses 121,957 119,357 113,382 - ----------------------------------------------------------------------------------------------------------------------- Net loans 8,495,030 8,207,241 7,591,110 Premises and equipment 542,340 539,616 509,733 Income earned not collected 39,336 41,929 41,977 Other assets 217,641 217,102 204,958 - ----------------------------------------------------------------------------------------------------------------------- Total assets $ 12,706,955 $ 12,559,908 $ 12,388,741 ======================================================================================================================= Liabilities Deposits: Noninterest-bearing $ 2,225,397 $ 2,178,897 $ 1,992,797 Interest-bearing 8,570,139 8,532,435 8,601,583 - ----------------------------------------------------------------------------------------------------------------------- Total deposits 10,795,536 10,711,332 10,594,380 Short-term borrowings 467,895 430,191 438,427 Long-term obligations 289,118 289,277 253,386 Other liabilities 107,323 99,803 118,913 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 11,659,872 11,530,603 11,405,106 Shareholders' Equity Common stock: Class A - $1 par value (8,758,670; 8,758,670 and 8,792,561 shares issued, respectively) 8,759 8,759 8,792 Class B - $1 par value (1,677,675 shares issued, respectively, for all periods) 1,678 1,678 1,678 Surplus 143,766 143,766 143,766 Retained earnings 878,931 864,470 819,533 Accumulated other comprehensive income 13,949 10,632 9,866 - ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,047,083 1,029,305 983,635 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 12,706,955 $ 12,559,908 $ 12,388,741 ======================================================================================================================= </Table> * Unaudited # Derived from the Consolidated Balance Sheets included in the 2002 Annual Report on Form 10-K. See accompanying Notes to Consolidated Financial Statements. First Citizens BancShares, Inc and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Consolidated Statements of Income First Citizens BancShares, Inc. and Subsidiaries Three Months Ended March 31 (thousands, except per share data; unaudited) 2004 2003 - ---------------------------------------------------------------------------------------------------------------------------- Loans $ 109,594 $ 113,440 Investment securities: U. S. Government 12,920 15,429 State, county and municipal 73 38 Dividends 269 377 - ---------------------------------------------------------------------------------------------------------------------------- Total investment securities interest and dividend income 13,262 15,844 Overnight investments 838 1,790 - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 123,694 131,074 Interest expense Deposits 25,122 36,334 Short-term borrowings 692 581 Long-term obligations 5,413 5,243 - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 31,227 42,158 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 92,467 88,916 Provision for loan losses 7,847 5,563 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 84,620 83,353 Noninterest income Service charges on deposit accounts 19,371 18,444 Cardholder and merchant services income 14,129 12,386 Trust income 4,310 3,723 Fees from processing services 5,856 5,138 Commission income 6,554 6,018 ATM income 2,394 2,104 Mortgage income 1,976 3,719 Other service charges and fees 3,461 3,905 Securities gains (losses) 1,852 (975) Other 1,640 1,587 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest income 61,543 56,049 Noninterest expense Salaries and wages 51,067 48,119 Employee benefits 12,570 11,471 Occupancy expense 11,330 10,234 Equipment expense 12,650 11,968 Other 31,279 29,152 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 118,896 110,944 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 27,267 28,458 Income taxes 9,936 10,164 - ---------------------------------------------------------------------------------------------------------------------------- Net income 17,331 18,294 ============================================================================================================================ Other comprehensive income net of taxes Unrealized securities gains arising during period 4,438 620 Less: reclassified adjustment for gains (losses) included in net income 1,121 (590) - ---------------------------------------------------------------------------------------------------------------------------- Other comprehensive income 3,317 1,210 - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 20,648 $ 19,504 - ---------------------------------------------------------------------------------------------------------------------------- Average shares outstanding 10,436,345 10,472,065 Net income per share $ 1.66 $ 1.75 - ---------------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Consolidated Statements of Changes in Shareholders' Equity First Citizens BancShares, Inc. and Subsidiaries Accumulated Class A Class B Other Total Common Common Retained Comprehensive Shareholders' (thousands,except share data, unaudited) Stock Stock Surplus Earnings Income Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2002 $ 8,794 $ 1,678 $ 143,766 $ 804,397 $ 8,656 $ 967,291 Redemption of 2,108 shares of Class A common stock (2) (193) (195) Redemption of 950 shares of Class B common stock - (86) (86) Net income 18,294 18,294 Unrealized securities gains, net of deferred taxes 1,210 1,210 Cash dividends (2,879) (2,879) ==================================================================================================================================== Balance at March 31, 2003 $ 8,792 $ 1,678 $ 143,766 $ 819,533 $ 9,866 $ 983,635 ==================================================================================================================================== Balance at December 31, 2003 $ 8,759 $ 1,678 $ 143,766 $ 864,470 $ 10,632 $ 1,029,305 Net income 17,331 17,331 Unrealized securities gains, net of deferred taxes 3,317 3,317 Cash dividends (2,870) (2,870) ==================================================================================================================================== Balance at March 31, 2004 $ 8,759 $ 1,678 $ 143,766 $ 878,931 $ 13,949 $ 1,047,083 ==================================================================================================================================== See accompanying Notes to Consolidated Financial Statements </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Consolidated Statements of Cash Flows First Citizens BancShares, Inc. and Subsidiaries Three months ended March 31, 2004 2003 - --------------------------------------------------------------------------------------------------------------------- Net income $ 17,331 $ 18,294 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 581 666 Provision for loan losses 7,847 5,563 Deferred tax benefit 1,612 2,143 Change in current taxes payable 7,040 12,337 Depreciation 11,103 9,728 Change in accrued interest payable (3,870) (7,571) Change in income earned not collected 2,593 4,982 Securities losses (gains) (1,852) 975 Origination of loans held for sale (123,372) (230,336) Proceeds from sale of loans held for sale 125,823 230,415 Gain on loans held for sale (1,066) (1,951) Net amortization of premiums and discounts 2,823 5,473 Net change in other assets (4,895) (13,087) Net change in other liabilities 4,350 5,204 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 46,048 42,835 - --------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans outstanding (297,021) (87,071) Purchases of investment securities held to maturity (76,363) (156,111) Purchases of investment securities available for sale (381,082) (247,535) Proceeds from maturities of investment securities held to maturity 235,506 576,305 Proceeds from maturities of investment securities available for sale 545,157 - Net change in overnight investments (327,807) (301,685) Dispositions of premises and equipment 3,783 5,526 Additions to premises and equipment (17,610) (17,720) - --------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (315,437) (228,291) - --------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in time deposits 60,325 (56,236) Net change in demand and other interest-bearing deposits 23,879 210,996 Net change in short-term borrowings 37,545 (24,223) Repurchases of common stock - (281) Cash dividends paid (2,870) (2,879) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 118,879 127,377 - --------------------------------------------------------------------------------------------------------------------- Change in cash and due from banks (150,510) (58,079) Cash and due from banks at beginning of period 790,168 811,657 ===================================================================================================================== Cash and due from banks at end of period $ 639,658 $ 753,578 ===================================================================================================================== CASH PAYMENTS FOR: Interest $ 35,097 $ 49,729 Income taxes 211 27 - --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Unrealized securities gains $ 5,480 $ 2,001 - --------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 Notes 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 financial statements. In the opinion of management, the consolidated financial statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the 2003 First Citizens BancShares, Inc. Annual Report, which is incorporated by reference on Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2004. However, the reclassifications have no effect on shareholders' equity or net income as previously reported. First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> Note B Operating Segments BancShares conducts its banking operations through its two wholly-owned subsidiaries, First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB). Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has a separate management group. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth. FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia and West Virginia. ISB began operations in 1997 and currently operates branches in Georgia, Florida, Texas, Arizona and California under a federal thrift charter. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ISB account for more than 90 percent of consolidated assets, revenues and net income. Other includes activities of the parent company, Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company. The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments to interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other services fees paid by one company to another within BancShares' consolidated group. March 31, 2004 ISB FCB Other Total Adjustments Consolidated Interest income $ 15,193 $ 108,446 $ 571 $ 124,210 $ (516) $ 123,694 Interest expense 4,562 21,720 5,461 31,743 (516) 31,227 -------------------------------------------------------------------------------------------- Net interest income 10,631 86,726 (4,890) 92,467 - 92,467 Provision for loan losses 699 7,148 - 7,847 - 7,847 -------------------------------------------------------------------------------------------- Net interest income after 9,932 79,578 (4,890) 84,620 - 84,620 provision for loan losses Noninterest income 1,255 59,540 2,430 63,225 (1,682) 61,543 Noninterest expense 11,152 108,697 729 120,578 (1,682) 118,896 -------------------------------------------------------------------------------------------- Income (loss) before income taxes 35 30,421 (3,189) 27,267 - 27,267 Income taxes 62 10,975 (1,101) 9,936 - 9,936 -------------------------------------------------------------------------------------------- Net income (loss) $ (27) $ 19,446 $ (2,088) $ 17,331 $ - $ 17,331 ============================================================================================ Period-end assets $ 1,248,913 $ 11,334,414 $ 1,551,014 $ 14,134,341 $ (1,427,386) $12,706,955 March 31, 2003 ISB FCB Other Total Adjustments Consolidated Interest income $ 14,568 $ 116,339 $ 6,152 $ 137,059 $ (5,985) $ 131,074 Interest expense 5,299 32,169 10,675 48,143 (5,985) 42,158 -------------------------------------------------------------------------------------------- Net interest income 9,269 84,170 (4,523) 88,916 - 88,916 Provision for loan losses 196 5,367 - 5,563 5,563 -------------------------------------------------------------------------------------------- Net interest income after 9,073 78,803 (4,523) 83,353 - 83,353 provision for loan losses Noninterest income 1,233 56,796 (538) 57,491 (1,104) 56,387 Noninterest expense 10,189 101,356 841 112,386 (1,104) 111,282 -------------------------------------------------------------------------------------------- Income (loss) before income taxes 117 34,243 (5,902) 28,458 - 28,458 Income taxes 50 12,200 (2,086) 10,164 10,164 -------------------------------------------------------------------------------------------- Net income (loss) $ 67 $ 22,043 $ (3,816) $ 18,294 $ - $ 18,294 ============================================================================================ Period-end assets $ 1,095,895 $ 11,201,620 $ 1,747,422 $ 14,044,937 $ (1,656,196) $ 12,388,741 First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> Note C Employee Benefits BancShares recognized pension expense totaling $2,703 and $2,300, respectively, in the quarters ended March 31, 2004 and 2003. Pension expense is included as a component of employee benefits expense. Components of Net Periodic Benefit Cost 2004 2003 Service cost $2,891 $1,847 Interset cost 3,744 2,663 Expected return on plan assets (4,473) (2,403) Amortization of prior service cost 38 29 Recognized net actuarial loss 503 164 ----------------------------------------- Net periodic benefit cost $2,703 $2,300 First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Financial Summary Table 1 2004 2003 (thousands, except per share data First Fourth Third Second First and ratios) Quarter Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------------- Summary of Operations Interest income $ 123,694 $ 125,343 $ 124,887 $ 129,173 $ 131,074 Interest expense 31,227 32,301 34,573 39,505 42,158 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 92,467 93,042 90,314 89,668 88,916 Provision for loan losses 7,847 5,079 6,353 7,192 5,563 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 84,620 87,963 83,961 82,476 83,353 Noninterest income 61,543 58,601 62,736 66,550 56,049 Noninterest expense 118,896 120,089 118,478 115,577 110,944 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 27,267 26,475 28,219 33,449 28,458 Income taxes 9,936 9,901 8,672 12,677 10,164 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 17,331 $ 16,574 $ 19,547 $ 20,772 $ 18,294 =========================================================================================================================== Net interest income-taxable equivalent $ 92,758 $ 93,297 $ 90,568 $ 89,926 $ 89,200 - --------------------------------------------------------------------------------------------------------------------------- Selected Quarterly Averages Total assets $ 12,508,227 $ 12,449,537 $ 12,287,273 $ 12,203,618 $ 12,054,717 Investment securities 2,340,956 2,602,630 2,665,203 2,594,983 2,476,426 Loans 8,454,599 8,140,751 7,946,501 7,811,739 7,642,673 Interest-earning assets 11,138,812 11,100,897 10,994,308 10,890,420 10,741,160 Deposits 10,634,865 10,612,173 10,441,989 10,394,829 10,283,143 Interest-bearing liabilities 9,210,244 9,178,628 9,126,076 9,177,931 9,173,567 Long-term obligations 289,161 261,333 253,351 253,379 253,389 Shareholders' equity $ 1,037,260 $ 1,020,181 $ 1,002,524 $ 991,047 $ 974,900 Shares outstanding 10,436,345 10,436,345 10,436,345 10,465,909 10,472,065 - --------------------------------------------------------------------------------------------------------------------------- Selected Quarter-End Balances Total assets $ 12,706,955 $ 12,552,227 $ 12,387,281 $ 12,394,744 $ 12,388,741 Investment securities 2,150,738 2,469,447 2,646,829 2,475,821 2,362,130 Loans 8,616,987 8,326,598 8,026,502 7,857,220 7,704,492 Interest-earning assets 11,389,937 11,090,450 10,941,968 10,951,437 10,991,877 Deposits 10,795,536 10,711,332 10,563,135 10,558,616 10,594,380 Interest-bearing liabilities 9,327,152 9,251,903 9,165,645 9,158,867 9,293,396 Long-term obligations 289,118 289,277 256,752 253,376 253,386 Shareholders' equity $ 1,047,083 $ 1,029,305 $ 1,015,678 $ 999,789 $ 983,635 Shares outstanding 10,436,345 10,436,345 10,436,345 10,436,345 10,470,236 - --------------------------------------------------------------------------------------------------------------------------- Profitability Ratios (averages) Rate of return (annualized) on: Total assets 0.56 % 0.53 % 0.63 % 0.68 % 0.62 % Shareholders' equity 6.72 6.45 7.74 8.41 7.61 Dividend payout ratio 16.57 17.30 14.71 13.89 15.71 - --------------------------------------------------------------------------------------------------------------------------- Liquidity and Capital Ratios (averages) Loans to deposits 79.50 % 76.71 % 76.10 % 75.15 % 74.32 % Shareholders' equity to total assets 8.29 8.19 8.16 8.12 8.09 Time certificates of $100,000 or more to total deposits 10.69 10.31 10.22 10.34 10.44 - --------------------------------------------------------------------------------------------------------------------------- Per Share of Stock Net income $ 1.66 $ 1.59 $ 1.87 $ 1.98 $ 1.75 Cash dividends 0.275 0.275 0.275 0.275 0.275 Book value at period end 100.33 98.63 97.32 95.80 93.95 Tangible book value at period end 89.25 87.56 86.95 85.36 83.39 - --------------------------------------------------------------------------------------------------------------------------- First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Outstanding Loans by Type Table 2 2004 2003 First Fourth Third Second First (thousands) Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------------- Real estate: Construction and land development $ 878,790 $ 854,660 $ 839,650 $ 835,209 $ 834,027 Mortgage: 1-4 family residential 912,015 904,082 923,691 950,555 975,010 Commercial 2,462,854 2,347,792 2,221,741 2,140,521 2,077,633 Revolving 1,646,662 1,598,603 1,530,096 1,466,454 1,404,014 Other 159,668 160,043 160,222 157,597 148,684 - -------------------------------------------------------------------------------------------------------------------------------- Total real estate 6,059,989 5,865,180 5,675,400 5,550,336 5,439,368 Commercial and industrial 986,819 929,039 909,314 937,125 936,387 Consumer 1,345,782 1,303,718 1,233,856 1,174,807 1,135,622 Lease financing 162,765 160,390 146,416 140,133 137,562 Other 61,632 68,271 61,516 54,819 55,553 - -------------------------------------------------------------------------------------------------------------------------------- Total loans 8,616,987 8,326,598 8,026,502 7,857,220 7,704,492 Less reserve for loan losses 121,957 119,357 117,747 115,382 113,382 - -------------------------------------------------------------------------------------------------------------------------------- Net loans $8,495,030 $8,207,241 $7,908,755 $7,741,838 $7,591,110 ================================================================================================================================ First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Investment Securities Table 3 March 31, 2004 March 31, 2003 - ----------------------------------------------------------------------------------------------------------------------------------- Average Taxable Average Taxable Fair Maturity Equivalent Fair Maturity Equivalent (thousands) Cost Value (Yrs./Mos.) Yield Cost Value (Yrs./Mos.) Yield - ----------------------------------------------------------------------------------------------------------------------------------- Investment securities held to maturity: U. S. Government: Within one year $ 924,355 $ 928,562 0/6 1.94 % $ 1,364,403 $ 1,369,721 0/5 2.42 % One to five years 122,207 122,749 1/5 1.75 600,271 608,015 1/5 2.30 Five to ten years 56 59 5/8 8.00 88 94 6/9 8.00 Ten to twenty years 15,229 15,914 13/1 5.55 23,247 24,250 14/1 5.55 Over twenty years 709 733 24/8 7.23 1,617 1,690 25/8 7.14 - ----------------------------------------------------------------------------------------------------------------------------------- Total 1,062,556 1,068,017 0/10 1.97 1,989,626 2,003,770 0/11 2.42 State, county and municipal: Within one year - - - - One to five years 355 355 1/3 5.55 480 502 2/3 5.55 Five to ten years 145 156 5/1 5.88 144 155 6/1 5.88 Ten to twenty years 1,420 1,581 14/1 6.02 1,416 1,555 15/1 6.02 - ----------------------------------------------------------------------------------------------------------------------------------- Total 1,920 2,092 11/0 5.92 2,040 2,212 11/5 5.90 Other Within one year 25 25 1/0 1.05 - - One to five years 250 250 24/4 7.75 - - Five to ten years - - 250 250 5/4 7.75 - ----------------------------------------------------------------------------------------------------------------------------------- Total 275 275 4/11 7.14 250 250 5/8 7.54 Total investment securities held to maturity 1,064,751 1,070,384 0/10 1.98 1,991,916 2,006,232 0/11 2.43 - ----------------------------------------------------------------------------------------------------------------------------------- Investment securities available for sale: U. S. Government: Within one year 788,447 789,772 0/3 2.67 292,223 293,238 0/3 3.05 One to five years 214,270 214,877 1/8 1.81 20,446 20,593 1/4 1.90 Five to ten years 706 724 8/8 5.04 569 547 8/10 4.48 Ten to twenty years 1,990 1,986 14/0 4.61 - - Over twenty years 19,013 19,099 28/11 5.24 145 145 29/8 1.15 - ----------------------------------------------------------------------------------------------------------------------------------- 1,024,426 1,026,458 1/2 2.55 313,383 314,523 0/4 2.97 State, county and municipal: Within one year 1,233 1,234 0/2 1.89 - - One to five years 4,029 4,059 2/11 2.53 - - Five to ten years 2,149 2,168 6/9 4.25 - - Ten to twenty years - - - - - - Over twenty years 145 145 28/9 1.15 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total 7,556 7,606 4/1 2.89 - - Marketable equity securities 30,929 51,923 40,526 55,691 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale 1,062,911 1,085,987 1/2 353,909 370,214 0/4 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities $ 2,127,662 $ 2,156,371 $ 2,345,825 $ 2,376,446 - ----------------------------------------------------------------------------------------------------------------------------------- Average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities that are exempt from federal and/or state income taxes are stated on a taxable-equivalent basis assuming statutory rates of 35% for federal income tax purposes and 6.9% for state income taxes for all periods. First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Consolidated Taxable Equivalent Rate/Volume Variance Analysis - First Quarter Table 4 2004 2003 Increase (decrease) due to: - ---------------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income Yield Yield/ Total (thousands) Balance Expense Rate Balance Expense /Rate Volume Rate Change - ---------------------------------------------------------------------------------------------------------------------------------- Assets Total loans $ 8,454,599 $ 109,863 5.22 % $ 7,642,673 $ 113,714 6.02 % $ 11,752 $ (15,603) $ (3,851) Investment securities: U. S. Government 2,279,443 12,921 2.28 2,417,337 15,429 2.59 (766) (1,742) (2,508) State, county and municipal 9,555 94 3.96 3,546 48 5.49 71 (25) 46 Other 51,958 269 2.08 55,543 377 2.75 (20) (88) (108) - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,340,956 13,284 2.28 2,476,426 15,854 2.60 (715) (1,855) (2,570) Overnight investments 343,257 838 0.98 622,061 1,790 1.17 (735) (217) (952) ================================================================================================================================== Total interest-earning assets $ 11,138,812 $ 123,985 4.47 % $ 10,741,160 $ 131,358 4.95 % $ 10,302 $ (17,675) $ (7,373) ================================================================================================================================== Liabilities Deposits: Checking With Interest $ 1,451,797 $ 425 0.12 % $ 1,321,761 $ 609 0.19 % $ 54 $ (238) $ (184) Savings 719,244 358 0.20 661,427 715 0.44 50 (407) (357) Money market accounts 2,603,661 4,300 0.66 2,569,867 6,935 1.09 102 (2,737) (2,635) Time deposits 3,710,755 20,039 2.17 3,938,700 28,075 2.89 (1,311) (6,725) (8,036) - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 8,485,457 25,122 1.19 8,491,755 36,334 1.74 (1,105) (10,107) (11,212) Federal funds purchased 47,925 101 0.85 35,171 97 1.12 32 (28) 4 Repurchase agreements 138,820 119 0.34 161,275 130 0.33 (17) 6 (11) Master notes 189,592 314 0.67 226,448 333 0.60 (57) 38 (19) Other short-term borrowings 59,289 158 1.07 5,529 21 1.54 175 (38) 137 Long-term obligations 289,161 5,413 7.49 253,389 5,243 8.28 702 (532) 170 ================================================================================================================================== Total interest-bearing liabilities $ 9,210,244 $ 31,227 1.36 % $ 9,173,567 $ 42,158 1.86 % $ (270)$ (10,661) $ (10,931) ================================================================================================================================== Interest rate spread 3.11 % 3.09 % - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income and net yield on interest-earning assets $ 92,758 3.35 % $ 89,200 3.37 % $ 10,572 $ (7,014) $ 3,558 - ---------------------------------------------------------------------------------------------------------------------------------- </Table> Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and state income tax rate of 6.90% for each period. The taxable-equivalent adjustment was $291 for 2004 and $284 for 2003. First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page> <Table> <Caption> Summary of Loan Loss Experience and Risk Elements Table 5 2004 2003 First Fourth Third Second First (thousands, except ratios) Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------------- Reserve balance at beginning of period $ 119,357 $ 117,747 $ 115,382 $ 113,382 $ 112,533 Acquired reserve - 409 - - - Provision for loan losses 7,847 5,079 6,353 7,192 5,563 Net charge-offs: Charge-offs (5,952) (5,246) (5,050) (6,089) (5,273) Recoveries 705 1,368 1,062 897 559 - ----------------------------------------------------------------------------------------------------------------------------------- Net charge-offs (5,247) (3,878) (3,988) (5,192) (4,714) - ----------------------------------------------------------------------------------------------------------------------------------- Reserve balance at end of period $ 121,957 $ 119,357 $ 117,747 $ 115,382 $ 113,382 =================================================================================================================================== Historical Statistics Average loans $ 8,454,599 $ 8,140,751 $ 7,946,501 $ 7,811,739 $ 7,642,673 Loans at period-end 8,616,987 8,326,598 8,026,502 7,857,220 7,704,492 - ----------------------------------------------------------------------------------------------------------------------------------- Risk Elements Nonaccrual loans $ 13,969 $ 18,190 $ 13,494 $ 17,438 $ 16,988 Other real estate 6,202 5,949 6,827 8,147 8,155 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 20,171 $ 24,139 $ 20,321 $ 25,585 $ 25,143 - ----------------------------------------------------------------------------------------------------------------------------------- Accruing loans 90 days or more past due $ 16,220 $ 11,492 $ 11,840 $ 7,848 $ 7,349 - ----------------------------------------------------------------------------------------------------------------------------------- Ratios Net charge-offs (annualized) to average total loans 0.25% 0.19% 0.20% 0.27% 0.25% Reserve for loan losses to total loans at period-end 1.42 1.43 1.47 1.47 1.47 Nonperforming assets to total loans plus other real estate at period-end 0.23 0.29 0.25 0.33 0.33 - ----------------------------------------------------------------------------------------------------------------------------------- </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 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). BancShares is a financial holding company with two wholly-owned banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift institution. FCB operates branches in North Carolina, West Virginia, and Virginia. ISB operates in Georgia, Florida, Texas, Arizona, California, New Mexico and Colorado. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2004, the reclassifications have no effect on shareholders' equity or net income as previously reported. SUMMARY BancShares' earnings and cash flows are derived primarily from the commercial banking activities conducted by its banking subsidiaries, which include commercial and consumer lending, deposit and cash management products, cardholder and merchant services, trust and retail broker-dealer services as well as various other products and services typically associated with commercial banking. FCB and ISB gather interest-bearing and noninterest-bearing deposits from retail and commercial customers. BancShares and its subsidiaries also provide supplemental short-term and long-term funding through various non-deposit sources. The liquidity generated from these funding sources is primarily used to invest in interest-earning assets consisting of various types of loans, investment securities and overnight investments. In addition, funds are invested in bank premises as well as furniture and equipment used in the subsidiaries' commercial banking business. Various external factors influence customer demand for our deposit and loan products. During 2003, economic uncertainty in our primary market areas restrained customer demand for loan products. However, in early 2004, economic conditions have shown signs of improvement, and we have experienced robust loan demand. Additionally, the low level of interest rates continues to affect the composition of our deposit base, as customers have largely avoided investing in low-rate time deposits and have instead chosen to allow liquidity to reside in transaction, savings and money market accounts. The general strength of the economy also influences the quality and collectibility of the loan portfolio, as consumer bankruptcy rates and business debt service levels tend to reflect the general economic cycle. Utilizing various asset-liability management and asset quality tools, we strive to minimize the potentially adverse financial impact of unforeseen and unfavorable economic trends and to take advantage of favorable economic conditions where appropriate. Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability, and therefore measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders' equity. BancShares' return on average assets and return on average equity have historically compared unfavorably to the returns of similarly sized financial holding companies. BancShares has historically placed significant emphasis upon asset quality, balance sheet liquidity and capital conservation, even when those priorities may be detrimental to current earnings. Our strategic analysis and the competitive position of BancShares within the financial services industry indicate continued opportunities for growth and expansion. We operate in diverse and growing geographic markets and believe that through superior customer service, opportunities exist to increase earnings by attracting customers of larger competitors and customers of banks that have focused on merger transactions. We seek opportunities to increase fee income in areas such as merchant processing, client bank services, factoring, insurance, cash management, wealth management and private banking services. We focus substantial attention on the risks that can endanger our profitability and growth prospects. Such risks fall generally into categories of economic, industry systemic, competitive and regulatory. We view economic risk as the greatest exposure, since the potential impact is so great and we are unable to exercise any meaningful control over this area. Specific economic risks include recession, rapid movements in interest rates and significant increases in inflation expectations. Compared to our larger competitors, our relatively small asset size and our limited capital resources result in significant management focus on economic risk. Detailed information regarding the components of net income and other key financial data over the most recent five quarters is provided in Table 1. Table 4 provides information on net interest income. Table 5 provides information related to asset quality. Net income. BancShares realized a decrease in earnings during the first quarter of 2004 compared to the first quarter of 2003. Consolidated net income during the first quarter of 2004 was $17.3 million, compared to $18.3 million earned during the corresponding period of 2003. The $963,000 or 5.3 percent reduction resulted from higher noninterest expense and provision for loan losses, partially offset by increases in net interest and noninterest income. Net income for the first quarter of 2004 included pretax securities gains of $1.9 million and a $2.1 million pretax gain on ISB for the sale of real property. Net income for the first quarter of 2003 included securities losses of $975,000. Net income per share during the first quarter of 2004 totaled $1.66, compared to $1.75 during the first quarter of 2003, a 5.1 percent reduction. Return on average assets was 0.56 percent for the first quarter of 2004 and 0.62 percent for the first quarter of 2003. Return on average equity for the first quarter of 2004 was 6.72 percent compared to 7.61 percent during the first quarter of 2003. Including the $2.1 million property sale gain, ISB reported a net loss of $27,000 during the first quarter of 2004, compared to net income of $67,000 during the first quarter of 2003. Since its inception, ISB has generated a net loss of $23.4 million. Based on the magnitude of recent branch growth and plans for market expansion, ISB's net losses will likely extend into the foreseeable future. Shareholders' Equity. BancShares and its banking subsidiaries continue to exceed all minimum regulatory capital requirements, and the financial institutions remain well-capitalized. In recent years, the continued de novo growth and expansion of ISB has consumed significant amounts of capital. BancShares infused $15.0 million into ISB during the first quarter of 2004 to support its expansion into Oregon and its rapidly expanding balance sheet. We expect an additional $15.0 million will be infused into ISB during 2004. Through March 31, 2004, BancShares has provided $215.0 million in capitalization for ISB. BancShares' prospective capacity to provide capital to support the growth and expansion of ISB is dependent upon FCB's ability to return capital through dividends to BancShares. INTEREST-EARNING ASSETS Interest-earning assets include loans, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and maturity of the underlying asset. Accordingly, riskier investments typically carry a higher interest rate, but expose the investor to potentially higher levels of default. We have historically focused on maintaining high asset quality, which results in a loan portfolio subjected to strenuous underwriting and monitoring procedures. Our investment securities portfolio includes high-quality assets, primarily United States Treasury and government agency securities. Generally, the investment securities portfolio grows and shrinks based on loan and deposit trends. When deposit growth exceeds loan demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds deposit growth, we use proceeds from maturing securities to fund loan demand. Overnight investments are selectively made with other financial institutions that are within our risk tolerance. During the first quarter of 2004, interest-earning assets averaged $11.14 billion, an increase of $397.7 million or 3.7 percent from the first quarter of 2003. This increase resulted from growth in the loan portfolio, partially offset by reductions in overnight investments and investment securities. Loans. At March 31, 2004 and 2003, gross loans totaled $8.62 billion and $7.70 billion, respectively. As of December 31, 2003, gross loans were $8.33 billion. The $912.5 million or 11.8 percent growth in loans from March 31, 2003 to March 31, 2004 results from growth within BancShares' commercial mortgage, revolving mortgage loans and consumer portfolios. This growth has resulted from improved customer demand and BancShares' continued focus on these product lines during this period. Commercial real estate loans totaled $2.46 billion at March 31, 2004, representing 28.6 percent of total gross loans. This represents an increase of $385.2 million or 18.5 percent since March 31, 2003. Demand for commercial real estate loans continues to be strong at both FCB and ISB. Revolving mortgage loans totaled $1.65 billion at March 31, 2004, representing 19.1 percent of total loans outstanding. This component of the loan portfolio increased $242.6 million or 17.3 percent since March 31, 2003. However, originations of new lines of credit have declined since the third quarter of 2003, and the $48.1 million in growth since December 31, 2003 represents an annual growth rate of 12.0 percent. Consumer loans totaled $1.35 billion at March 31, 2004, an increase of $210.2 million or 18.5 percent from March 31, 2003. The $42.1 million increase since December 31, 2003 represents an annual growth rate of 12.9 percent. This growth results from strong automobile sales finance origination activity during 2003 and 2004. During the first quarter of 2004, loans averaged $8.45 billion, an increase of $811.9 million or 10.6 percent from the comparable period of 2003. Demand among commercial, Equity Line and consumer customers and BancShares' ability to offer desirable products fueled the strong growth in loans. Our recent growth through ISB has allowed us to mitigate our historic exposure to geographic concentration in North Carolina and Virginia. Although these markets have endured economic instability in the past, we are pleased with the diversification that we are beginning to realize by the growth of ISB. We are aware that, in the absence of rigorous underwriting and monitoring controls, rapid loan growth in new markets may present incremental lending risks. During the expansion of ISB into new markets, we have endeavored to ensure that such controls are functioning effectively and will continue to place emphasis upon maintaining strong lending standards in new markets. Recent improvements in general economic conditions in certain of our markets have resulted in stronger loan demand among our business customers during 2004. Management anticipates continued growth in commercial mortgage and revolving real estate loans during 2004. Consumer loan demand may be constrained due to soft labor growth in many of our market areas. All loan projections are subject to change as a result of further economic deterioration or improvement. Loan projections are also dependent on interest rate movements, which are subject to the influence of inflation expectations and Federal Reserve actions. Investment Securities. At March 31, 2004 and 2003, the investment portfolio totaled $2.15 billion and $2.36 billion, respectively. At December 31, 2003, the investment portfolio was $2.47 billion. Table 3 presents detailed information relating to the investment securities portfolio. Investment securities held to maturity totaled $1.06 billion at March 31, 2004, compared to $1.99 billion at March 31, 2003. The $927.2 million reduction in investment securities held to maturity resulted from our decision during 2003 to reinvest a portion of the proceeds from maturing held-to-maturity securities in securities classified as available for sale. This redirection of the investment securities portfolio enhances the overall liquidity and flexibility of the balance sheet. The average maturity of the held-to-maturity portfolio has shortened from 11 months at March 31, 2003 to 10 months at March 31, 2004. Securities that are classified as held to maturity reflect BanchShares' ability and positive intent to hold those investments until maturity. Investment securities available for sale totaled $1.09 billion at March 31, 2004, compared to $370.2 million at March 31, 2003. The $715.8 million increase from March 31, 2003 results from the decision to invest in available-for-sale securities in order to further enhance balance sheet liquidity and flexibility. Available-for-sale securities are reported at their aggregate fair value. Total investment securities averaged $2.34 billion during the first quarter of 2004, compared to $2.48 billion during the first quarter of 2003, a decrease of $135.5 million or 5.5 percent. The reduction in average total investment securities resulted from liquidity needs arising from strong loan demand. Overnight investments. Overnight investments averaged $343.3 million during the first quarter of 2004, a decrease of $278.8 million or 44.8 percent from the first quarter of 2003. The lower balance in overnight investments resulted from liquidity management decisions. Income on Interest-Earning Assets. Interest income amounted to $123.7 million during the first quarter of 2004, a 5.6 percent decrease from the first quarter of 2003. Lower yields caused the decrease in interest income in the first quarter of 2004 when compared to the same period of 2003, although interest-earning asset growth and a higher mix of loans within interest-earning assets partially offset the impact of the lower yields. The taxable-equivalent yield on interest-earning assets for the first quarter of 2004 was 4.47 percent, compared to 4.95 percent for the corresponding period of 2003. The lower asset yields resulted from continued repricing of loans to current market rates. Loan interest income for the first quarter of 2004 was $109.6 million, a decrease of $3.8 million or 3.4 percent from the first quarter of 2003, the result of lower yields offset largely by higher average loan balances. The taxable-equivalent yield on the loan portfolio was 5.22 percent during the first quarter of 2004, compared to 6.02 percent during the same period of 2003. The lower loan yields resulted from the competitive environment associated with current origination activity as well as customer-initiated refinancing of fixed-rate loans. Interest income earned on the investment securities portfolio amounted to $13.3 million during the first quarter of 2004 and $15.8 million during the same period of 2003, a decrease of $2.6 million or 16.3 percent. This decrease in income is the result of the 32 basis point reduction in the taxable-equivalent yield and the $135.5 million decrease in average securities. The investment securities portfolio taxable-equivalent yield decreased from 2.60 percent for the quarter ended March 31, 2003, to 2.28 percent for the quarter ended March 31, 2004. Maturing securities not needed to fund loan growth were reinvested in securities with lower yields than the maturing or called securities. Interest income from overnight investments was $838,000 during the first quarter of 2004, a decrease of $952,000 or 53.2 percent from the $1.8 million earned during the first quarter of 2003, the combined result of a 44.8 percent reduction in average overnight investments and a 19 basis points reduction in the earned yield. INTEREST-BEARING LIABILITIES Interest-bearing liabilities include our interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits are our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and, in some cases, to fulfill commercial customer requirements for cash management services. Certain of our long-term borrowings also provide capital strength under existing guidelines established by the Federal Reserve. At March 31, 2004 and 2003, interest-bearing liabilities totaled $9.33 billion and $9.29 billion, respectively, compared to $9.25 billion as of December 31, 2003. During the first quarter of 2004, interest-bearing liabilities averaged $9.21 billion, an increase of $36.7 million or 0.4 percent from the first quarter of 2003. This increase primarily resulted from higher levels of short-term borrowings and long-term obligations, offset by reductions in interest-bearing deposits. Deposits At March 31, 2004, total deposits were $10.80 billion, an increase of $201.2 million or 1.9 percent over March 31, 2003. Compared to the December 31, 2003 balance of $10.71 billion, total deposits have increased $84.2 million. Average interest-bearing deposits were $8.49 billion during the first quarter of 2004. Total interest-bearing deposits decreased by $6.3 million from the first quarter of 2003. Average time deposits decreased $227.9 million or 5.8 percent to $3.71 billion from March 31, 2003 to March 31, 2004. Offsetting the decline in time deposits, average Checking With Interest increased $130.0 million or 9.8 percent from the first quarter of 2003 to the same period of 2004. Average savings balances increased $57.8 million or 8.7 percent, while average money market accounts increased $33.8 million or 1.3 percent from first quarter of 2003 to the first quarter of 2004. We attribute the ongoing run-off of time deposits to the continuing low interest rate environment, and expect that time deposits balances may continue to erode until market interest rates increase significantly. Although demand for time deposits remains weak, BancShares continues to offer competitively-priced products in an effort to attract and retain core deposit relationships. Short-term Borrowings At March 31, 2004, short-term borrowings totaled $467.9 million compared to $430.2 million at December 31, 2003 and $438.4 million at March 31, 2003. For the quarters ended March 31, 2004 and 2003, short-term borrowings averaged $435.6 million and $428.4 million, respectively. The growth in short-term borrowings is the result of higher FHLB borrowings and federal funds purchased, partially offset by lower repurchase agreements and master notes. Long-term Obligations. Long-term obligations averaged $289.2 million during the first quarter of 2004, an increase of $35.8 million or 14.1 percent. The growth in average long-term borrowings was primarily due to additional borrowing to provide liquidity for ISB's rapidly expanding loan portfolio. Expense on Interest-Bearing Liabilities. BancShares' interest expense amounted to $31.2 million during the first quarter of 2004, a $10.9 million or 25.9 percent decrease from the first quarter of 2003. The lower interest expense was the result of lower rates. The rate on average interest-bearing liabilities was 1.36 percent, a 50 basis point decrease in the aggregate blended rate on interest-bearing liabilities as compared to the first quarter of 2003. NET INTEREST INCOME Net interest income totaled $92.5 million during the first quarter of 2004, an increase of $3.6 million or 4.0 percent from the first quarter of 2003. The taxable-equivalent net yield on interest-earning assets was 3.35 percent for the first quarter of 2004, compared to the 3.37 percent achieved for the first quarter of 2003. The taxable-equivalent interest rate spread for the first quarter of 2004 was 3.11 percent compared to 3.09 percent for the same period of 2003. The 48 basis point yield reduction on interest-earning assets was slightly less than the 50 basis point rate reduction on interest-bearing liabilities. As the economy continues to strengthen, inflation concerns could prompt the Federal Reserve to increase interest rates earlier than previously anticipated. Management believes a rate increase in the third quarter of 2004 is possible. However, until the job market strengthens, action by the Federal Reserve could be delayed until the fourth quarter of 2004 at the earliest. Continued asset growth and strong loan demand should prevent reductions in net interest income during the remaining quarters of 2004. Any increase in interest rates by the Federal Reserve resulting in a higher prime lending rate would have a positive effect on the interest rate spread due to BancShares' one-year positive interest rate gap. 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 minimize the potential for 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 of financial instruments or reduced net interest income in future periods. As of March 31, 2004, BancShares' market risk profile has not changed significantly from December 31, 2003. 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 The maintenance of excellent asset quality is one of our primary areas of focus. We have historically dedicated significant resources to ensuring we are prudent in our lending practices. Accordingly, we have focused on asset quality as a key performance measure. Nonperforming assets. At March 31, 2004, BancShares' nonperforming assets amounted to $20.2 million or 0.23 percent of gross loans plus foreclosed properties, compared to $24.1 million at December 31, 2003, and $25.1 million at March 31, 2003. Management views these levels of nonperforming assets as evidence of strong asset quality. Management continues to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure. Reserve for loan losses. Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the reserve for loan losses. Such factors as the financial condition of borrowers, fair market value of collateral and other considerations are recognized in estimating probable credit losses. At March 31, 2004, the reserve for loan losses amounted to $122.0 million or 1.42 percent of loans outstanding. This compares to $119.4 million or 1.43 percent at December 31, 2003, and $113.4 million or 1.47 percent at March 31, 2003. The provision for loan losses charged to operations during the first quarter of 2004 was $7.8 million, compared to $5.6 million during the first quarter of 2003. The $2.3 million increase in the provision for loan loss during 2004 resulted from reserves established due to growth in the loan portfolio and moderately higher net charge-offs. Net loan charge-offs during the first quarter of 2004 were $5.2 million compared to $4.7 million during the first quarter of 2003. On an annualized basis, these net charge-offs represent 0.25 percent of average loans outstanding during both periods. Table 5 provides details concerning the reserve and provision for loan losses over the past five quarters. Management considers the established reserve adequate to absorb estimated probable losses that relate to loans outstanding at March 31, 2004. While management uses available information to establish the reserve 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. NONINTEREST INCOME The growth of noninterest income is essential to our ability to sustain adequate levels of profitability. The primary sources of noninterest income are service charges on deposit accounts, cardholder and merchant services income, various types of commission-based income including the sale of investments by our broker-dealer subsidiary, fees from processing services for client banks, mortgage income and various types of revenues derived from wealth management services. During the first three months of 2004, noninterest income was $61.5 million, compared to $56.0 million during the same period of 2003. The $5.5 million or 9.8 percent increase was primarily due to gains on securities transactions and growth in cardholder and merchant services income, service charge income, trust income and fees from processing services. During the first quarter of 2004, securities transactions generated a net gain of $1.9 million compared to a net loss of $975,000 in 2003, an improvement of $2.8 million. In 2004, cardholder and merchant services income increased $1.7 million or 14.1 percent to $14.1 million during the first quarter. This increase resulted from higher merchant discount income, which is the result of higher transaction volume. Service charge income was $19.4 million and $18.4 million for the first quarter of 2004 and 2003, respectively. The $927,000 or 5.0 percent increase was primarily the result of higher fees collected for bad checks and overdrafts. Fees from processing services totaled $5.9 million in the first quarter of 2004 and $5.1 million in the first quarter of 2003. The $717,000 or 14.0 percent increase was primarily the result of a new fee schedule that was effective January 1, 2004. Trust income improved $587,000 or 15.8 percent to $4.3 million during the first quarter of 2004 due to new sales activity and favorable results from accounts that generate fees based on asset values. Commission-based income increased $536,000 or 8.9 percent to $6.6 million during the first quarter due to improved results from First Citizens Investor Services and insurance sales. Partially offsetting these favorable increases was a $1.7 million decrease in mortgage income. Mortgage income was $3.7 million in the first quarter of 2003 and $2.0 million in the first quarter of 2004. This decrease resulted from significantly lower mortgage origination activity during 2004. Management anticipates that mortgage origination activity during 2004 will lag behind that achieved in 2003, resulting in a continuing reduction in mortgage income. NONINTEREST EXPENSE The primary components of noninterest expense are salaries and related employee benefit costs, occupancy costs related to branch offices and support facilities, and equipment costs related to branch offices and technology. Noninterest expense equaled $118.9 million for the first three months of 2004, a 7.2 percent increase over the $110.9 million recorded during the same period of 2003. A significant portion of the $8.0 million increase in total noninterest expense relates to personnel and occupancy expenses, with ISB expansion contributing to the magnitude of the increases. During the first quarter of 2004, noninterest expense includes a $2.1 million gain recognized on the sale of property. Salaries and wages increased $2.9 million during 2004 when compared to the same period of 2003 due to merit increases and higher salary costs at ISB. Employee benefits expense totaled $12.6 million for the first three months of 2004, an increase of $1.1 million. This 9.6 percent increase was the result of higher employee health and pension costs. Occupancy expense was $11.3 million during the first quarter of 2004 and $10.2 million during the first quarter of 2003. The $1.1 million or 10.7 percent increase resulted from higher rent expense and other occupancy costs arising from ISB's continued branch expansion. Equipment expense increased $682,000 to $12.7 million for the first quarter of 2004 when compared to the same period in 2003. Much of the 5.7 percent increase in equipment expense is related to software and hardware depreciation. Other expenses increased $2.1 million or 7.3 percent from the first quarter of 2003 to the first quarter of 2004, due to higher card processing, legal and advertising costs. Partially offsetting these negative variances was a $1.2 million favorable variance recorded in net loss on asset sales, primarily resulting from a $2.1 million gain recognized on the sale of property during the first quarter of 2004. INCOME TAXES Income tax expense amounted to $9.9 million during the three months ended March 31, 2004, compared to $10.2 million during the same period of 2003. The 2.2 percent decrease in income tax expense was primarily the result of lower pre-tax income. The effective tax rates for these periods were 36.4 percent and 35.7 percent, respectively. LIQUIDITY Management relies on the investment portfolio as a primary source of liquidity, with maturities designed to provide needed cash flows. Further, deposits generated throughout the branch network have enabled management to fund asset growth and maintain adequate levels of liquidity. In the event additional liquidity is needed, BancShares maintains sources for borrowed funds through federal funds lines of credit and other borrowing facilities. Loan growth during the first quarter was funded primarily by maturities and calls of investment securities. Deposits are expected to display seasonal patterns through the remainder of 2004, building in the third and fourth quarters to provide a portion of the required funding for anticipated loan growth. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. At March 31, 2004 and 2003, the leverage capital ratios of BancShares were 9.42 percent and 9.30 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares' Tier 1 capital ratios were 12.61 percent at March 31, 2004 and 13.44 percent at March 31, 2003. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratios were 13.96 percent at March 31, 2004 and 14.77 percent as of March 31, 2003. The minimum total capital ratio is 8 percent. BancShares and its subsidiary banks exceed the capital standards established by their respective regulatory agencies. SEGMENT REPORTING BancShares conducts its banking operations through its two banking subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and has separate management groups. We monitor growth and financial results in these institutions separately and, within each institution, by geographic segregation. Although FCB has grown through acquisition in certain of its markets, throughout its history much of its expansion has been accomplished on a de novo basis. However, because of FCB's size, market share and maturity as well as the current modest expansion of its branch network, the costs associated with de novo branching are not material to FCB's financial performance. Since it first opened in 1997, ISB has followed a similar business model for growth and expansion. Yet, due to the magnitude of the number of immature branch offices that have yet to attain sufficient size for profitability, the financial results and trends of ISB are significantly affected by its current and continuing growth. Each new market ISB enters creates additional operating costs that are typically not fully offset by operating revenues until the third year after initial opening. ISB's rapid growth in new markets in recent years has continued to adversely impact its financial performance. IronStone Bank. At March 31, 2004, ISB operated 45 branches in Florida, Georgia, Texas, Arizona, California and New Mexico and has loan production offices in Colorado and New Mexico. Substantially all of ISB's growth has been on a de novo basis, and ISB continues efforts to build a customer base in demographically superior markets. Our business model and our growth expectations are contingent on two fundamental operating criteria. First, we are recruiting and hiring experienced bankers who are established in the markets we are entering and who are focused on strong asset quality and delivering high quality customer service. Second, we are occupying attractive and accessible branch facilities. Both of these are costly goals, but we believe are critical to establishing a solid foundation for future success in these new markets. ISB's total assets increased from $1.10 billion at March 31, 2003 to $1.25 billion at March 31, 2004, an increase of $153.0 million or 14.0 percent. ISB's net interest income increased $1.4 million or 14.7 percent during the first quarter of 2004 , the result of balance sheet growth. When compared to the same period of 2003, average interest-earning assets increased $155.4 million, primarily due to loan growth. Partially offsetting the favorable impact of this asset growth were yield reductions among interest-earning assets. The taxable-equivalent yield on interest-earning assets declined 59 basis points, from 6.01 percent during 2003 to 5.42 percent during 2004. The provision for loan losses increased $503,000 during the first quarter of 2004 due to reserves needed for current loan growth. Net charge-offs declined from $196,000 in the first quarter of 2003 to $99,000 in the first quarter of 2004. ISB's noninterest income increased slightly during 2004, as growth in service charge income was more than offset by reduced mortgage income. Noninterest expense increased $963,000 or 9.5 percent during the first quarter of 2004, versus the same period of 2003. The continuing expansion resulted in a $770,000 or 17.8 percent increase in salary expense, a $332,000 or 43.0 percent increase in employee benefits expense, a $561,000 or 28.9 percent increase in occupancy expense and a $238,000 or 35.6 percent increase in equipment expense. These increases are likely to continue through 2004 as we continue to open new ISB facilities. These increases were partially offset by a $2.1 million gain on the sale of property that is included in other noninterest expense. ISB recorded a net loss of $27,000 during the first quarter of 2004, inclusive of the favorable impact of the $2.1 million pretax gain on sale of property, compared to net income of $67,000 recorded during the same period of 2003. This represents an unfavorable variance of $94,000. In March 2004, Atlantic States Bank changed its corporate name to ISB, simultaneously changing the name under which branches in Georgia and Florida operated. Since initial opening, branches in all other states operated under the ISB name as a division of Atlantic States Bank. ISB has recently opened facilities in New Mexico and Colorado and has received approval to operate in Oregon and Washington. ISB continues to evaluate other markets for further expansion. As this growth continues, ISB will continue to incur incremental operating costs, particularly in the areas of personnel, occupancy and equipment. As a result of the de novo status of much of the ISB franchise and plans for continued expansion, ISB's net losses will likely extend into the foreseeable future. First Citizens Bank. At March 31, 2004, FCB operated 337 branches in North Carolina, Virginia and West Virginia, compared to 341 branches at March 31, 2003. FCB's total assets increased from $11.20 billion at March 31, 2003 to $11.33 billion at March 31, 2004, an increase of $132.8 million or 1.2 percent, the result of strong loan growth, offset by reductions in investment securities and overnight investments. FCB's net interest income increased $2.6 million or 3.0 percent during 2004, as the favorable impact of increased loan balances more than offset the impact of falling asset yields. The strong loan growth also resulted in higher provision for loan losses, which increased $1.8 million or 33.2 percent during 2004. FCB's noninterest income increased $2.7 million or 4.8 percent during the first quarter of 2004, primarily the result of higher service charge, cardholder and merchant services and commission-based income. Noninterest expense increased $7.3 million or 7.2 percent during 2004, due to higher personnel and occupancy costs. FCB recorded net income of $19.4 million during the first quarter of 2004 compared to $22.0 million during the same period of 2003. This represents a $2.6 million or 11.8 percent decrease in net income. CURRENT ACCOUNTING AND REGULATORY ISSUES In December 2003, the FASB issued SFAS No. 132 (revised), Employers' Disclosures about Pensions and Other Postretirement Benefits (Statement 132). Statement 132 prescribes employers' disclosures about pension plans and other postretirement benefit plans, but does not change the measurement or recognition of those plans. Statement 132 retains and revises the disclosure requirements contained in the original statement. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. Statement 132 is effective for fiscal years ending after December 15, 2003. The disclosures made elsewhere in this report conform to the requirements of Statement 132. During March 2004, the SEC issued Staff Accounting Bulletin 105 Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 addresses the accounting for loan commitments and provides that the required fair value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 applies to mortgage loan commitments accounted for as derivatives and entered into after March 31, 2004. Substantially all of our mortgage loan commitments are based on rates provided by third party correspondents, who have agreed to purchase resulting loans at those rates. As a result, we are protected from interest rate risk, and the adoption of SAB 105 will not have a material impact on our 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 2004 <Page> Exhibit 31.1 CERTIFICATION I, Lewis R. Holding, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens BancShares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 5, 2004 /s/ Lewis R. Holding Lewis R. Holding Chief Executive Officer First Citizens BancShares, Inc and Subsidiaries First Quarter 2004 <Page> Exhibit 31.2 CERTIFICATION I, Kenneth A. Black, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens BancShares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 5, 2004 /s/ Kenneth A. Black Kenneth A. Black Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries First Quarter 2004 <Page> Exhibit 32 CERTIFICATION The undersigned hereby certifies that, to his or her knowledge, (i) the Form 10-Q filed by First Citizens BancShares, Inc. (the "Issuer") for the quarter ended September 30, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein. May 5, 2004 /s/ Lewis R. Holding Lewis R. Holding Chairman and Chief Executive Officer /s/ Kenneth A. Black Kenneth A. Black Vice President and Chief Financial Officer First Citizens BancShares, Inc. and Subsidiaries First Quarter 2004 <Page>