================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 0-16471
---------------------
FIRST CITIZENS BANCSHARES, INC.
(Exact name of Registrant as specified in the charter)
Delaware 56-1528994
(State or other
jurisdiction (I.R.S. Employer
of incorporation or
organization) Identification Number)
3128 Smoketree Court
Raleigh, North Carolina 27604
(Address of Principal Executive Offices, Zip Code)
(919) 716-7000
(Registrant's Telephone Number, including Area Code)
---------------------
Securities registered pursuant to:
Section 12(b) of the Act: None
Section 12(g) of the Act: Class A Common Stock, Par Value $1
Class B Common Stock, Par Value $1
(Title of Class)
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on last reported sales prices on March 11, 2002, the aggregate market
value of the Registrant's voting stock held by nonaffiliates of the Registrant
as of such date was $596,839,450.
On March 11, 2002, there were 8,797,154 outstanding shares of the
Registrant's Class A Common Stock and 1,683,575 outstanding shares of the
Registrant's Class B Common Stock.
Portions of the Registrant's definitive Proxy Statement dated March 18, 2002
are incorporated in Part III of this report.
================================================================================
CROSS REFERENCE INDEX
PART 1 Item 1 Description of Business....................................................... 3
Item 2 Properties.................................................................... 4
Item 3 Legal Proceedings............................................................. 28
Item 4 Submission of Matters to a Vote of Shareholders............................... None
PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters..... 4
Item 6 Selected Financial Data....................................................... 6
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 5-29
Item 7A Quantitative and Qualitative Disclosures about Market Risk.................... 17-18
Item 8 Financial Statements and Supplementary Data
Independent Auditors' Report.................................................. 30
Consolidated Balance Sheets at December 31, 2001 and 2000..................... 31
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2001..................................... 32
Consolidated Statements of Changes in Shareholders' Equity for
each of the years in the three-year period ended December 31, 2001............ 33
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2001..................................... 34
Notes to Consolidated Financial Statements.................................... 35-54
Quarterly Financial Summary for 2001 and 2000................................. 26
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..................................................... None
PART III Item 10 Directors and Executive Officers of Registrant................................ *
Item 11 Executive Compensation........................................................ *
Item 12 Security Ownership of Certain Beneficial Owners and Management................ *
Item 13 Certain Relationships and Related Transactions................................ *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements (see Item 8 for reference)
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable, except as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission and are
available upon written request.
(b) During the quarter ended December 31, 2001, no reports on Form 8-K were filed.
- ----------------------------
* Information required by Item 10 is incorporated herein by reference to the
information that appears under the headings 'Section 16(a) Beneficial
Ownership Reporting Compliance', 'Proposal 1: Election of Directors' and
'Executive Officers' on pages 5-13 of the Registrant's Proxy Statement for
the 2002 Annual Meeting of Shareholders.
Information required by Item 11 is incorporated herein by reference to the
information that appears under the heading 'Director Compensation' on page 7
and under the headings 'Executive Compensation', 'Pension Plan' and
'Employment Contracts, Termination of Employment, and Change-in-Control
Agreements' on pages 10-11 of the Registrant's Proxy Statement for the 2002
Annual Meeting of Shareholders.
Information required by Item 12 is incorporated herein by reference to the
information that appears under the headings 'Beneficial Ownership of Voting
Securities' on pages 2-3 of the Registrant's Proxy Statement for the 2002
Annual Meeting of Shareholders.
Information required by Item 13 is incorporated herein by reference to the
information that appears under the heading 'Salary Committee' on pages 8-9
and under the heading 'Transactions with Related Parties' on pages 12-13 of
Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders.
2
Description of Business
- --------------------------------------------------------------------------------
First Citizens BancShares, Inc. (BancShares) was incorporated under the laws
of Delaware on August 7, 1986, to become the holding company of First-Citizens
Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. On
October 21, 1986 BancShares became the sole shareholder of First Citizens Bank.
On April 28, 1997, BancShares opened Atlantic States Bank (ASB), a
federally-chartered thrift institution, which has continued to open new
branches in the suburban Atlanta, Georgia area. During 1999, ASB expanded its
presence into Florida. At December 31, 2001, ASB had 44 offices with total
assets of $867.2 million.
During 2000, BancShares became a financial holding company, a designation
that allows BancShares to offer products and services that a bank holding
company may not provide. As a first step to exercising the broader powers
available to a financial holding company, during 2000, American Guaranty
Insurance Company ("AGI"), formerly a wholly-owned subsidiary of FCB, became a
wholly-owned subsidiary of BancShares. As a direct subsidiary of BancShares,
AGI has more flexibility in its product offering than it did as a subsidiary of
FCB.
FCB was chartered on March 4, 1893, as the Bank of Smithfield, Smithfield,
North Carolina, and through a series of mergers and name changes, it later
became First-Citizens Bank & Trust Company. As of December 31, 2001, FCB
operated 348 offices in North Carolina, Virginia and West Virginia.
BancShares' executive offices are located at 3128 Smoketree Court, Raleigh,
North Carolina 27604, and its telephone number is (919) 716-7000. At December
31, 2001, BancShares and its subsidiaries employed a full-time staff of 4,205
and a part-time staff of 776 for a total of 4,981 employees.
BancShares' principal assets are its investment in and receivables from its
banking subsidiaries and its investment securities portfolio. Its primary
sources of income are dividends from FCB and interest income on its investment
securities portfolio. Certain legal restrictions exist regarding the ability of
FCB and ASB to transfer funds to BancShares in the form of cash dividends or
loans. For information regarding these restrictions, see Note P of BancShares'
consolidated financial statements, contained in this report.
BancShares' subsidiary banks seek to meet the needs of both consumers and
commercial entities in their respective market areas. These services, offered
at most offices, include normal taking of deposits, cashing of checks, and
providing for individual and commercial cash needs; numerous checking and
savings plans; commercial, business and consumer lending; a full-service trust
department; and other activities incidental to commercial banking. Triangle
Life Insurance Company underwrites and sells credit-related life insurance
products. Nantahala, Inc. owns loans originated by FCB. First Citizens Investor
Services, Inc., a registered broker-dealer in securities, provides various
investment products, including annuities, discount brokerage services and
third-party mutual funds to customers. First-Citizens Bank, A Virginia
Corporation (FCB-AVC) is the issuing and processing bank for BancShares' retail
credit cards. Pisgah, Inc., a wholly-owned subsidiary of FCB-AVC, owns credit
card receivables. Various other subsidiaries are either inactive or not
material to BancShares' consolidated financial position or to consolidated net
income.
As a registered financial holding company, BancShares is subject to the
jurisdiction of the Board of Governors of the Federal Reserve System.
BancShares also is registered as a financial holding company with the North
Carolina Commissioner of Banks and is subject to regulations promulgated by the
Commissioner. The internal affairs of BancShares, including the rights of its
shareholders, are governed by Delaware law and by its Certificate of
Incorporation and Bylaws. BancShares files periodic reports under the
Securities Exchange Act of 1934 and is subject to the jurisdiction of the
Securities and Exchange Commission.
FCB is also regulated by the North Carolina Commissioner of Banks as well as
the Federal Deposit Insurance Corporation. ASB is regulated by the Office of
Thrift Supervision. AGI and Triangle Life Insurance Company are regulated by
the North Carolina Department of Insurance.
3
Properties
- --------------------------------------------------------------------------------
Through its subsidiary financial institutions, as of December 31, 2001,
BancShares operated branch offices at 392 locations in North Carolina,
Virginia, West Virginia, Florida and Georgia. BancShares owns many of the
buildings and leases other facilities from third parties.
Additional information relating to premises, equipment and lease commitments
is set forth in Note E of BancShares' consolidated financial statements.
Market for Registrant's Common Equity and Related Shareholder Matters
- --------------------------------------------------------------------------------
BancShares' Class A and Class B common stock is traded in the
over-the-counter market, and the Class A common stock is quoted on the National
Association of Securities Dealers Automated Quotation National Market System
under the symbol FCNCA. The Class B common stock is quoted on the Over the
Counter Bulletin Board. As of December 31, 2001, there were 2,885 holders of
record of the Class A common stock, and 548 holders of record of the Class B
common stock.
The per share cash dividends paid by BancShares and the high and low sales
prices for each quarterly period during 2001 and 2000 are set forth in Table 18
under the caption 'Per Share of Stock' of this report. A cash dividend of 25
cents per share was declared by the Board of Directors on January 28, 2002,
payable April 1, 2002, to holders of record as of March 18, 2002. Payment of
dividends is made at the discretion of the Board of Directors and is contingent
upon satisfactory earnings as well as projected future capital needs. Subject
to the foregoing, it is currently management's expectation that comparable cash
dividends will continue to be paid in the future.
4
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
INTRODUCTION
Management's discussion and analysis of earnings and related financial data
are presented to assist in understanding the financial condition and results of
operations of First Citizens BancShares, Inc. (BancShares), for the years 2001,
2000 and 1999. Within the accompanying discussion, 'we' and 'our' refer to
BancShares.
BancShares is a financial holding company with two wholly-owned banking
subsidiaries: First-Citizens Bank & Trust Company (First Citizens Bank or FCB),
a North Carolina-chartered bank, and Atlantic States Bank (ASB), a federally
chartered thrift institution. First Citizens Bank operates branches in North
Carolina, West Virginia, and Virginia. Atlantic States Bank operates branches
in Georgia and Florida.
This discussion and related financial data should be read in conjunction
with our audited consolidated financial statements and related footnotes,
presented on pages 30 through 54 of this report, which are prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires that we make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosure of contingent assets and
liabilities. BancShares periodically evaluates its estimates, including those
related to the reserve for loan losses, income taxes and contingencies. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
Certain critical accounting policies affect the more significant judgments
and estimates used in the preparation of the consolidated financial statements.
Our single critical accounting policy relates to our reserve for loan losses,
which reflects the estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our
borrowers were to deteriorate, resulting in an impairment of their ability to
make payments, our estimates would be updated, and additional reserves may be
required. For further discussion of the estimates used, refer to the section
captioned Asset Quality.
SUMMARY
BancShares reported net income of $86.9 million during 2001, compared to
$98.3 million in 2000 and $81.8 million in 1999. Net income for 2001
represented an 11.6 percent decrease when compared to 2000. The $11.4 million
reduction was the result of increased levels of noninterest expense and
provision for loan losses, partially offset by improved levels of noninterest
income and marginally higher net interest income. The improvement in net income
during 2000 over 1999 resulted from nonrecurring gains and growth in net
interest income and noninterest income at levels that exceeded the growth in
noninterest expense. Net income per share for 2001 totaled $8.27, compared to
$9.32 and $7.70 for 2000 and 1999, respectively. Return on average assets
totaled 0.77 percent during 2001, 0.98 percent during 2000 and 0.85 percent
during 1999.
An analysis of our financial condition and growth can be made by examining
the changes and trends in interest-earning assets and interest-bearing
liabilities, and a discussion of these changes and trends follows. The
information presented in Table 5 is useful in making such an analysis. Table 2
details acquisitions and divestitures during 2001, 2000 and 1999. All of the
acquisitions were accounted for as purchases, with the results of operations
included in our Statements of Income since the respective acquisition dates.
Table 13 provides a five-year history of the provision for loan losses. Tables
15 and 16 present five-year histories for the components of noninterest income
and expense, respectively.
5
Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income............................. $ 715,427 $ 708,170 $ 633,891 $ 619,487 $ 572,276
Interest expense............................ 346,510 342,828 281,542 292,071 268,013
----------- ----------- ----------- ----------- -----------
Net interest income......................... 368,917 365,342 352,349 327,416 304,263
Provision for loan losses................... 24,134 15,488 11,672 19,879 8,726
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan
losses.................................... 344,783 349,854 340,677 307,537 295,537
Noninterest income.......................... 215,555 202,190 165,339 145,417 114,914
Noninterest expense......................... 422,597 394,784 375,620 342,213 300,401
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 137,741 157,260 130,396 110,741 110,050
Income taxes................................ 50,805 58,949 48,596 39,732 39,492
----------- ----------- ----------- ----------- -----------
Net income.................................. $ 86,936 $ 98,311 $ 81,800 $ 71,009 $ 70,558
=========== =========== =========== =========== ===========
Net interest income, taxable equivalent..... $ 370,857 $ 368,190 $ 354,566 $ 329,764 $ 306,726
=========== =========== =========== =========== ===========
SELECTED AVERAGE BALANCES
Total assets................................ $11,235,859 $10,005,597 $ 9,622,774 $ 9,173,020 $ 8,304,412
Investment securities....................... 2,196,473 1,618,584 1,908,300 2,305,395 2,300,706
Loans....................................... 7,105,915 6,955,772 6,399,114 5,847,531 5,086,723
Interest-earning assets..................... 10,038,074 8,984,878 8,638,698 8,281,072 7,569,075
Deposits.................................... 9,405,328 8,390,920 8,105,443 7,759,315 7,088,019
Interest-bearing liabilities................ 8,798,893 7,772,889 7,517,483 7,249,290 6,521,818
Long-term obligations....................... 186,636 154,634 157,897 133,935 10,472
Shareholders' equity........................ $ 847,374 $ 763,386 $ 693,559 $ 629,089 $ 638,825
Shares outstanding.......................... 10,507,289 10,551,607 10,625,457 10,626,311 11,341,153
=========== =========== =========== =========== ===========
SELECTED PERIOD-END BALANCES
Total assets................................ $11,864,991 $10,691,617 $ 9,717,099 $ 9,605,787 $ 8,951,109
Investment securities....................... 2,791,296 1,816,720 1,371,894 2,160,329 2,483,294
Loans....................................... 7,196,177 7,109,692 6,751,039 6,195,591 5,445,772
Interest-earning assets..................... 10,489,382 9,357,794 8,596,326 8,588,645 8,010,841
Deposits.................................... 9,961,605 8,971,868 8,173,598 8,112,408 7,579,567
Interest-bearing liabilities................ 9,206,903 8,384,692 7,554,229 7,542,636 7,052,749
Long-term obligations....................... 284,009 154,332 155,683 158,801 10,856
Shareholders' equity........................ $ 885,043 $ 810,728 $ 728,757 $ 660,749 $ 601,640
Shares outstanding.......................... 10,483,456 10,522,836 10,610,399 10,625,559 10,627,453
=========== =========== =========== =========== ===========
PROFITABILITY RATIOS (averages)
Rate of return on:
Total assets............................... 0.77 % 0.98 % 0.85 % 0.77 % 0.85 %
Shareholders' equity....................... 10.26 12.88 11.79 11.29 11.04
Dividend payout ratio....................... 12.09 10.73 12.99 15.11 16.08
=========== =========== =========== =========== ===========
LIQUIDITY AND CAPITAL RATIOS
(averages)
Loans to deposits........................... 75.55 % 82.90 % 78.95 % 75.36 % 71.77 %
Shareholders' equity to total assets........ 7.54 7.63 7.21 6.86 7.69
Time certificates of $100,000 or more to
total deposits............................ 11.43 9.46 9.02 9.21 9.62
=========== =========== =========== =========== ===========
PER SHARE OF STOCK
Net income.................................. $ 8.27 $ 9.32 $ 7.70 $ 6.62 $ 6.22
Cash dividends.............................. 1.00 1.00 1.00 1.00 1.00
Market price at December 31 (Class A)....... 97.75 80.75 69.75 90.00 104.03
Book value at December 31................... 84.42 77.04 68.68 62.18 56.61
Tangible book value at December 31.......... 73.78 65.76 58.13 50.73 47.11
=========== =========== =========== =========== ===========
6
NONRECURRING ITEMS
The after-tax impact of nonrecurring items was net gains of $2.8 million
during 2001, $14.7 million during 2000 and $2.6 million during 1999. The per
share amounts of the nonrecurring items were $0.26, $1.39 and $0.25,
respectively, for 2001, 2000 and 1999. The primary nonrecurring items were:
During 2001:
. Securities gains--BancShares reported after-tax gains of $4.5 million
from the sale of available for sale securities; the pre-tax gain of $7.2
million is included in securities gains;
. Non-credit charge-offs--in addition to the normal and customary levels
of non-credit charge-offs, BancShares recognized $1.1 million in
after-tax losses that management views as unlikely to recur in such
amounts; the pre-tax loss of $1.7 million is included in other expense;
. Provision for branch closings--BancShares recognized net-of-tax expenses
of $843,000 related to in-store branches that management either elected
to close during 2001 or were deemed to be impaired; the pre-tax impact
of $1.3 million is divided between occupancy expense ($323,000) and
other expense ($1.0 million).
During 2000:
. Sale of mortgage servicing rights--FCB recognized $12.6 million in net
income resulting from the sale of mortgage servicing rights; the pre-tax
income of $20.2 million is included in gain on sale of mortgage
servicing rights;
. Sale of branches--FCB recognized $2.6 million in net income from the
sale of four branch offices; the pre-tax gain of $4.1 million is
included in gain on sale of branches;
. Provision for branch closings--BancShares recognized net-of-tax expenses
of $1.9 million related to branches that management elected to close
during 2000; the pre-tax impact of $3.1 million is included in occupancy
expense ($1.1 million) and other expense ($2.0 million);
. Securities gains--BancShares reported $1.1 million in after-tax gains
from the sale of available for sale securities; the pre-tax gain of $1.8
million is included in securities gains.
During 1999:
. Sale of branches--FCB recognized $3.1 million in after-tax gains on the
sale of branches; the pre-tax gain of $5.1 million is included in gain
on sale of branches;
. Securities gains--BancShares reported $1.1 million in after-tax gains
from the sale of available for sale securities; the pre-tax gain of $1.7
million is included in securities gains.
Table 2
SIGNIFICANT ACQUISITIONS AND DIVESTITURES
Total Total
Year Institution and Location Loans Deposits
---- ------------------------------------------------- -------- ---------
(thousands)
2001 Purchase of two branches by First Citizens Bank $ 11,187 $ 50,493
2000 Purchase of six branches by First Citizens Bank 13,569 143,078
2000 Sale of four branches by First Citizens Bank (91,406) (91,810)
1999 Purchase of five branches by Atlantic States Bank 12 27,506
1999 Sale of eight branches by First Citizens Bank (38,735) (123,048)
INTEREST-EARNING ASSETS
Interest-earning assets averaged $10.04 billion during 2001, an increase of
$1.05 billion or 11.7 percent over 2000 levels, compared to a $346.2 million or
4.0 percent increase in 2000 over 1999 levels. Growth among interest-earning
assets during 2001 resulted primarily from increases in investment securities
and overnight investments, while growth during 2000 resulted from higher loan
balances. Loan demand in 2001 was not as robust as either 2000 or 1999 due to
the effects of the economic slowdown in our principal market areas.
7
Loans. As of December 31, 2001, gross loans outstanding were $7.20 billion,
a 1.2 percent increase over the December 31, 2000 balance of $7.11 billion.
Loan balances for the last five years are presented in Table 3. The
$86.5 million increase in loans during 2001 was primarily due to growth of
commercial mortgage loans and revolving loans secured by real estate. The
$238.4 million growth among commercial mortgage loans reflects the strong
demand for these loan products among business customers. The $172.4 million
increase in revolving loans secured by real estate reflects the continued
popularity of the EquityLine product and growth of the Capital Line products
among our business customers. Higher balances in these portfolios were
partially offset by reductions of $211.4 million in residential mortgage loans
and $143.9 million among consumer loans. The reduction in residential mortgage
loans resulted from sales and heavy refinancing of existing portfolio loans,
while the reduction in consumer loans reflects continued reductions in
automobile sales finance activity.
During 2000, the $358.7 million increase in loans resulted from general
growth among loans secured by real estate, which increased $557.2 million. This
growth was partially offset by reductions in consumer loans of $175.1 million
and commercial and industrial loans of $52.2 million.
During 2001, average loans were $7.11 billion, an increase of $150.1 million
or 2.2 percent over 2000, compared to an increase of $556.7 million or 8.7
percent in 2000 when compared to 1999.
Table 3
LOANS
December 31
------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(thousands)
Real estate:
Construction and land development $ 283,968 $ 216,439 $ 186,119 $ 157,603 $ 113,735
Mortgage:
Commercial..................... 2,231,498 1,993,067 1,810,904 1,495,214 1,055,529
1-4 family residential......... 1,338,975 1,550,329 1,326,642 1,299,508 1,411,279
Revolving...................... 1,024,181 851,810 755,342 617,062 603,714
Other.......................... 163,914 186,247 161,652 160,289 136,639
---------- ---------- ---------- ---------- ----------
Total real estate loans.......... 5,042,536 4,797,892 4,240,659 3,729,676 3,320,896
Commercial and industrial......... 918,929 933,515 985,738 845,068 633,580
Consumer.......................... 1,074,202 1,218,134 1,393,227 1,516,712 1,402,093
Lease financing................... 139,966 134,483 123,908 93,680 74,589
Other............................. 20,544 25,668 7,507 10,455 14,614
---------- ---------- ---------- ---------- ----------
Total gross loans................ 7,196,177 7,109,692 6,751,039 6,195,591 5,445,772
Less reserve for loan losses...... 107,087 102,655 98,690 96,115 84,360
---------- ---------- ---------- ---------- ----------
Net loans........................ $7,089,090 $7,007,037 $6,652,349 $6,099,476 $5,361,412
========== ========== ========== ========== ==========
- --------
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
Although the downward pressure on interest rates during 2001 would typically
stimulate customer demand for loans, management anticipates more modest demand
for most loan products due to continued sluggish economic prospects for 2002.
Despite lagging demand among other products, revolving mortgage loans are
expected to continue favorable growth trends. Management projects continued
reductions in consumer loans due to modest volumes of automobile sales finance
originations. All growth projections, however, are subject to uncertainty as a
result of changes in general economic conditions in our market areas.
Investment Securities. At December 31, 2001, and 2000, the investment
securities portfolio totaled $2.79 billion and $1.82 billion, respectively.
Investment securities held to maturity totaled $2.66 billion and $1.78 billion,
respectively, at December 31, 2001 and 2000. The increase in investment
securities held to maturity during 2001 resulted from strong deposit growth,
which significantly exceeded loan demand. In each period, U.S. Treasury and
government agency securities represented substantially all of the
held-to-maturity portfolio. The fair values of investment securities available
8
for sale at December 31, 2001 and 2000 were $132.4 million and $38.6 million,
respectively. The $93.9 million increase in investment securities available for
sale results primarily from short-term securities purchased with a portion of
the proceeds from long-term borrowings that were originated in late 2001.
Although we expect the proceeds from the borrowings will ultimately be used to
support growth of the banking subsidiaries, management elected to temporarily
invest the proceeds in the investment securities portfolio. Investment
securities available for sale include U.S. Treasury obligations and equity
securities. Unrealized gains and losses on available-for-sale securities are
included as a component of shareholders' equity, net of deferred taxes.
Table 4
INVESTMENT SECURITIES
December 31
----------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------- --------------------- ---------------------
Average Taxable
Fair Maturity Equivalent Fair Fair
Cost Value (Yrs./Mos.) Yield Cost Value Cost Value
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
(thousands)
Investment securities held to
maturity:
U. S. Government:
Within one year................... $2,452,587 $2,474,155 0/6 4.74% $1,450,484 $1,452,268 $1,077,354 $1,067,979
One to five years................. 197,174 197,169 1/10 3.14 315,194 318,898 263,009 255,805
Five to ten years................. 148 155 8/0 8.00 210 216 176 178
Over ten years.................... 5,348 5,475 24/11 7.39 7,834 7,891 9,665 9,552
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 2,655,257 2,676,954 0/8 4.63 1,773,722 1,779,273 1,350,204 1,333,514
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
State, county and municipal:
Within one year................... 1,254 1,278 0/7 6.84 700 702 699 703
One to five years................. 500 517 3/3 5.55 1,758 1,800 1,963 1,990
Five to ten years................. 143 149 7/4 5.88 1,681 1,808 150 152
Over ten years.................... 1,412 1,517 16/3 6.02 -- -- -- --
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 3,309 3,461 8/0 6.25 4,139 4,310 2,812 2,845
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Other
Within one year................... 25 25 0/1 5.98 20 20 -- --
One to five years................. 10 10 1/1 6.50 35 35 55 55
Five to ten years................. 250 250 6/7 7.75 250 250 250 250
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 285 285 5/10 7.03 305 305 305 305
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total investment securities held
to maturity....................... 2,658,851 2,680,700 0/9 4.63 1,778,166 1,783,888 1,353,321 1,336,664
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Investment securities available
for sale:
U. S. Government:
Within one year................... $ 51,560 $ 51,563 0/10 2.06% -- -- -- --
One to five years................. 25,695 25,664 1/1 2.13 -- -- -- --
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 77,255 77,227 0/11 2.08 -- -- -- --
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
State, county and municipal:
Over ten years.................. 1,263 1,281 15/7 5.33 -- -- -- --
Marketable equity securities...... 41,279 53,937 -- -- 28,875 38,554 7,751 18,573
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total investment securities
available for sale 119,797 132,445 1/2 2.13 28,875 38,554 7,751 18,573
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total investment securities $2,778,648 $2,813,145 $1,807,041 $1,822,442 $1,361,072 $1,355,237
========== ========== ========== ========== ========== ==========
- --------
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
taxes for all periods and 6.90% for state income taxes for 2001 and 7.00% for
2000 and 1999.
Investment securities averaged $2.20 billion during 2001, $1.62 billion
during 2000 and $1.91 billion during 1999. As a percentage of average
interest-earning assets, investment securities represented 21.9 percent, 18.0
percent and 22.1 percent during 2001, 2000 and 1999, respectively. Table 4
presents detailed information relating to the investment portfolio.
9
Table 5
AVERAGE BALANCE SHEETS
2001 2000
--------------------------------- ---------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Income/Expense Rate Balance Income/Expense Rate
----------- -------------- ------ ----------- -------------- ------
(thousands, taxable equivalent)
Assets
Loans.................................. $ 7,105,915 $568,379 8.00 % $ 6,955,772 $587,192 8.44 %
Investment securities:
U. S. Government...................... 2,147,697 117,608 5.48 1,588,930 96,576 6.08
State, county and municipal........... 4,804 416 8.66 4,212 357 8.48
Other................................. 43,972 2,288 5.20 25,442 764 3.00
----------- -------- ----- ----------- -------- -----
Total investment securities......... 2,196,473 120,312 5.48 1,618,584 97,697 6.04
Overnight investments.................. 735,686 28,676 3.90 410,522 26,129 6.36
----------- -------- ----- ----------- -------- -----
Total interest-earning assets....... 10,038,074 $717,367 7.15 % 8,984,878 $711,018 7.91 %
Cash and due from banks................ 592,270 476,929
Premises and equipment................. 466,549 418,388
Other assets........................... 243,841 225,861
Reserve for loan losses................ (104,875) (100,459)
----------- -----------
Total assets........................ $11,235,859 $10,005,597
=========== ===========
Liabilities and shareholders' equity
Interest-bearing deposits:
Checking With Interest................ $ 1,145,115 $ 6,060 0.53 % $ 1,068,545 $ 6,338 0.59 %
Savings............................... 608,882 6,680 1.10 633,666 9,436 1.49
Money market accounts................. 1,744,389 54,309 3.11 1,477,248 63,386 4.29
Time deposits......................... 4,453,109 243,703 5.47 3,859,946 219,796 5.69
----------- -------- ----- ----------- -------- -----
Total interest-bearing deposits..... 7,951,495 310,752 3.91 7,039,405 298,956 4.25
Short-term borrowings.................. 660,762 20,643 3.12 578,850 31,219 5.39
Long-term obligations.................. 186,636 15,115 8.10 154,634 12,653 8.18
----------- -------- ----- ----------- -------- -----
Total interest-bearing liabilities.. 8,798,893 $346,510 3.94 % 7,772,889 $342,828 4.41 %
Demand deposits........................ 1,453,833 1,351,515
Other liabilities...................... 135,759 117,807
Shareholders' equity................... 847,374 763,386
----------- -----------
Total liabilities and shareholders'
equity............................ $11,235,859 $10,005,597
=========== ===========
Interest rate spread................... 3.21 % 3.50 %
Net interest income and net yield on
interest-earning assets............... $370,857 3.69 % $368,190 4.10 %
======== ===== ======== =====
- --------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income
taxes only, or state income taxes only, are stated on a taxable-equivalent
basis assuming a statutory federal income tax rate of 35% for all periods, and
state income tax rates of 6.90% for 2001 and 7.00% for 2000 and 1999.
10
Table 5
AVERAGE BALANCE SHEETS (continued)
1999 1998 1997
- ------------------------------- -------------------------- --------------------------------
Interest
Average Interest Yield/ Average Income/ Yield/ Average Interest Yield/
Balance Income/Expense Rate Balance Expense Rate Balance Income/Expense Rate
- ---------- -------------- ------ ---------- -------- ------ ---------- -------------- ------
(thousands, taxable equivalent)
$6,399,114. $512,419 8.01 % $5,847,531 $480,741 8.22 % $5,086,723 $430,933 8.47%
1,881,591 106,435 5.66 2,273,579 133,535 5.87 2,267,652 133,007 5.87
2,893. 217 7.50 4,340 318 7.33 5,560 421 7.57
23,816. 548 2.30 27,476 507 1.85 27,494 481 1.75
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
1,908,300. 107,200 5.62 2,305,395 134,360 5.83 2,300,706 133,909 5.82
331,284. 16,489 4.98 128,146 6,734 5.25 181,646 9,897 5.45
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
8,638,698. $636,108 7.36 % 8,281,072 $621,835 7.51 % 7,569,075 $574,739 7.59 %
459,202. 400,896 345,578
382,092. 343,307 251,163
239,833. 237,564 220,828
(97,051). (89,819) (82,232)
- ---------- ---------- ----------
$9,622,774. $9,173,020 $8,304,412
========== ========== ==========
$1,074,885. $ 6,858 0.64 % $1,035,761 $ 10,255 0.99 % $ 928,122 $ 9,909 1.07 %
687,191. 10,730 1.56 697,227 12,954 1.86 704,531 14,121 2.00
1,359,433. 47,881 3.52 1,117,286 39,135 3.50 919,049 34,062 3.71
3,680,867. 179,452 4.88 3,725,818 193,173 5.18 3,489,614 185,657 5.32
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
6,802,376. 244,921 3.60 6,576,092 255,517 3.89 6,041,316 243,749 4.03
557,210. 23,921 4.29 539,263 25,850 4.79 470,030 23,420 4.98
157,897. 12,700 8.04 133,935 10,704 7.99 10,472 844 8.06
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
7,517,483. $281,542 3.75 % 7,249,290 $292,071 4.03 % 6,521,818 $268,013 4.11 %
1,303,067. 1,183,223 1,046,703
108,665. 111,418 97,066
693,559. 629,089 638,825
- ---------- ---------- ----------
$9,622,774. $9,173,020 $8,304,412
========== ========== ==========
3.61 % 3.48 % 3.48 %
$354,566 4.10 % $329,764 3.98 % $306,726 4.05 %
======== ===== ======== ===== ======== =====
11
Overnight Investments. At December 31, 2001 and 2000, overnight
investments, which include federal funds sold and interest-bearing deposits in
other banks, totaled $501.9 million and $431.4 million, respectively. These
investments averaged $735.7 million, $410.5 million and $331.3 million,
respectively, during 2001, 2000 and 1999. The increases relate to higher
balances in interest-bearing accounts, resulting from increased balance sheet
liquidity during 2001.
Income on Interest-Earning Assets. Table 5 analyzes the interest-earning
assets and interest-bearing liabilities for the five years ending December 31,
2001. Table 8 identifies the causes for changes in interest income and interest
expense for 2001 and 2000. Interest income amounted to $715.4 million during
2001, a $7.3 million or 1.0 percent increase from 2000 levels, compared to a
$74.3 million or 11.7 percent increase from 1999 to 2000. The growth in
interest income during 2001 reflected the net impact of higher balances of
interest-earning assets, primarily investment securities, partially offset by
lower yields on such assets. During 2000, loan growth and an improved blended
asset yield were the primary factors for the increase in interest income over
1999.
The taxable-equivalent yield on interest-earning assets was 7.15 percent
during 2001, a 76 basis point decrease from the 7.91 percent reported in 2000.
The average taxable-equivalent yield on the loan portfolio decreased from 8.44
percent in 2000 to 8.00 percent in 2001. The lower loan yield during 2001
reflects the changes in market-driven rates that decreased during 2001 as a
result of reductions in the discount and federal funds rate by the Federal
Reserve. Loan interest income decreased $17.9 million or 3.1 percent from 2000,
the result of lower loan yields. This followed an increase of $74.2 million or
14.5 percent in loan interest income in 2000 over 1999, which resulted from
increased average loans and higher loan yields.
Interest income earned on the investment portfolio amounted to $120.2
million, $97.6 million and $107.1 million during 2001, 2000 and 1999,
respectively. The taxable-equivalent yield on the investment securities
portfolio was 5.48 percent, 6.04 percent and 5.62 percent, respectively, for
2001, 2000 and 1999. The $22.6 million increase in investment interest income
during 2001 reflected growth in the portfolio, net of the impact of a lower
yield. The $9.6 million decrease in investment interest income from 1999 to
2000 was primarily the result of the reduction in the investment securities
portfolio during 2000, partially offset by an improved taxable-equivalent yield
on the investment securities portfolio.
INTEREST-BEARING LIABILITIES
At December 31, 2001 and 2000, interest-bearing liabilities totaled $9.21
billion and $8.38 billion, respectively, an increase of $822.2 million or 9.8
percent. The increase during 2001 results from higher levels of
interest-bearing deposits and long-term obligations. Interest-bearing
liabilities averaged $8.80 billion during 2001, an increase of $1.03 billion or
13.2 percent over 2000 levels. During 2000, interest-bearing liabilities
averaged $7.77 billion, an increase of $255.4 million or 3.40 percent over
1999, with much of that growth resulting from time deposits.
Deposits. At December 31, 2001, deposits totaled $9.96 billion, an increase
of $989.7 million or 11.0 percent from the $8.97 billion in deposits recorded
as of December 31, 2000.
Total deposits averaged $9.41 billion in 2001, an increase of $1.01 billion
or 12.1 percent over 2000. Average interest-bearing deposits were $7.95 billion
during 2001, an increase of $912.1 million or 13.0 percent. Time deposits
averaged $4.45 billion during 2001, an increase of $593.2 million or 15.4
percent over 2000. Money market accounts averaged $1.74 billion during 2001,
compared to $1.48 billion during 2000, an increase of $267.1 million or 18.1
percent. Management attributes much of the deposit growth during 2001 to funds
leaving more volatile equity markets as investors sought the stability of
traditional bank deposit products.
During 2000, total deposits averaged $8.39 billion, an increase of $285.5
million or 3.5 percent over 1999. Average interest-bearing deposits were $7.04
billion during 2000, an increase of $237.0 million or 3.5 percent over 1999.
Time deposits averaged $3.86 billion during 2000, an increase of $179.1 million
or 4.9 percent over 1999. Management attributes the growth in 2000 to higher
market interest rates offered on certificates of deposit and IRAs. Money market
deposits averaged $1.48 billion during 2000, an increase of $117.8 million or
8.7 percent over 1999.
12
During 2001, time deposits in excess of $100,000 averaged 11.4 percent of
total deposits, compared to 9.5 percent in 2000. While we do not accept
brokered deposits or solicit out-of-market deposits, the general growth in time
deposits during 2001 has resulted in a larger percentage of high-dollar
deposits. Table 6 provides a maturity distribution for these deposits.
Table 6
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 2001
-----------------
(thousands)
Less than three months $ 472,071
Three to six months... 252,998
Six to 12 months...... 255,527
More than 12 months... 176,311
----------
Total................. $1,156,907
==========
Management anticipates that deposit growth and retention during 2002 will be
difficult due to extremely low market interest rates and competitive pressure
from other financial institutions in our principal market areas.
Short-Term Borrowings. BancShares has access to various short-term
borrowings, including the purchase of federal funds, overnight repurchase
obligations and credit lines with correspondent banks. At December 31, 2001,
short-term borrowings totaled $611.4 million, compared to $632.4 million one
year earlier. For the year ended December 31, 2001, short-term borrowings
averaged $660.8 million, compared to $578.9 million during 2000 and $557.2
million during 1999. The $81.9 million or 14.2 percent increase from 2000 to
2001 resulted primarily from higher master note and repurchase obligations as
business customers more extensively utilized these forms of cash management
instruments. The $21.6 million or 3.9 percent increase from 1999 to 2000
resulted from higher levels of repurchase agreements, partially offset by
reductions in average master note borrowings and federal funds purchased. Table
7 provides additional information regarding short-term borrowed funds.
Table 7
SHORT-TERM BORROWINGS
2001 2000 1999
------------- ------------- -------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(thousands)
Master notes
At December 31........................ $305,537 0.85% $322,944 5.39% $326,984 4.14%
Average during year................... 329,941 3.16 309,145 5.35 322,154 4.16
Maximum month-end balance during year. 343,886 -- 327,774 -- 355,795 --
Repurchase agreements
At December 31........................ 201,763 0.60 181,404 4.89 125,832 3.89
Average during year................... 213,830 2.50 170,925 4.88 117,681 3.76
Maximum month-end balance during year. 231,353 -- 197,113 -- 132,540 --
Federal funds purchased
At December 31........................ 41,700 1.21 71,825 5.93 53,195 4.06
Average during year................... 63,115 3.97 43,157 6.23 60,077 4.92
Maximum month-end balance during year. 92,850 -- 73,015 -- 88,460 --
Other
At December 31........................ 62,390 2.25 56,199 4.16 62,290 5.39
Average during year................... 53,876 4.39 55,623 6.56 57,298 5.45
Maximum month-end balance during year. 63,408 -- 63,893 -- 67,870 --
Long-Term Obligations. At December 31, 2001 and 2000, long-term obligations
totaled $284.0 million and $154.3 million, respectively. The $129.7 million
increase during 2001 results from the issuance of $100.0 million in trust
preferred securities during the fourth quarter of 2001 and $30.0 million in
borrowings from the Federal Home Loan Bank (FHLB). The trust
13
preferred securities issued during the fourth quarter are thirty year
obligations, callable after the fifth year with interest paid quarterly at a
fixed interest rate of 8.40 percent. We issued these obligations to provide
capital to support our continued growth. Although the trust preferred
securities are classified as long-term obligations on the balance sheet,
current regulatory guidelines allow these securities to be included as Tier I
capital for risk-based capital purposes. For that reason, we view these
securities as an effective way to provide resources for growth. The FHLB
advances are 10- and 20-year fixed rate borrowings that provide additional
long-term liquidity.
During 2001, long-term obligations averaged $186.6 million, compared to
$154.6 million during 2000 and $157.9 million during 1999. The increase from
2000 to 2001 results from the origination of the $100 million in trust
preferred securities and the Federal Home Loan Bank borrowings. The reduction
from 1999 to 2000 results from the reclassification of long-term obligations to
short-term borrowings once the scheduled maturity is less than one year.
Expense of Interest-Bearing Liabilities. Interest expense amounted to
$346.5 million in 2001, a $3.7 million or 1.1 percent increase from 2000. This
followed a $61.3 million or 21.8 percent increase in interest expense during
2000 compared to 1999. The blended rate on all interest-bearing liabilities was
3.94 percent during 2001, compared to 4.41 percent in 2000 and 3.75 percent in
1999. The increase in interest expense during 2001 was the combined result of
large increases in average interest-bearing liabilities, significantly offset
by lower market interest rates. The lower cost of borrowing during 2001
resulted from actions of the Federal Reserve to lower discount and federal
funds rates. The reductions in these key index rates pushed deposit and other
borrowing costs materially lower during 2001. The increase in interest expense
during 2000 was the result of increases in average interest-bearing liabilities
and higher interest rates.
The aggregate rate on interest-bearing deposits was 3.91 percent during
2001, compared to 4.25 percent during 2000 and 3.60 percent during 1999.
Interest expense on interest-bearing deposits amounted to $310.8 million during
2001, a 3.9 percent increase from the $299.0 million recorded during 2000,
which was a 22.1 percent increase over the $244.9 million recorded during 1999.
The growth in interest expense from 2000 to 2001 was the result of higher
average deposits, largely offset by the impact of falling interest rates. From
1999 to 2000, the increase in interest expense was the result of higher
interest rates combined with higher average deposit balances. Interest expense
of time deposits was $243.7 million during 2001, a $23.9 million or 10.9
percent increase over 2000. The $219.8 million in interest expense recorded
during 2000 represents a $40.3 million or 22.5 percent increase over 1999.
Interest expense on short-term borrowings amounted to $20.6 million in 2001,
a decrease of $10.6 million or 33.9 percent from 2000. Interest expense related
to short-term borrowings totaled $31.2 million and $23.9 million, respectively,
in 2000 and 1999. The decrease during 2001 was attributable to lower interest
rates, which more than offset the impact of the 14.2 percent increase in
average short-term borrowings. During 2000, the growth in interest expense
resulted from higher interest rates and higher average short-term borrowings
when compared to 1999.
Interest expense associated with long-term obligations increased $2.5
million or 19.5 percent during 2001 to $15.1 million. The increase resulted
from higher average volume, which occurred due to the long-term obligations
originated during 2001.
NET INTEREST INCOME
Net interest income was $368.9 million during 2001, a $3.6 million or 1.0
percent increase over 2000. The strong deposit growth during 2001 and the
resulting increases in investment securities and overnight investments created
large volume-driven increases in interest income and interest expense. However,
the impact of falling interest rates created large rate-driven reductions in
interest income and expense. These two events largely offset each other,
resulting in the slight increase in net interest income.
14
During 2000, net interest income was $365.3 million, a $13.0 million or 3.7
percent increase over 1999. Taxable-equivalent net interest income totaled
$370.9 million during 2001, an increase of $2.7 million or 0.7 percent over
2000. This followed an increase of $13.6 million or 3.8 percent during 2000.
Table 8 presents the annual changes in net interest income due to changes in
volume, yields and rates. This table is presented on a taxable-equivalent basis
to adjust for the tax-exempt status of income earned on certain loans, leases
and municipal securities.
Table 8
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
2001 2000
-------------------------------- --------------------------------
Change from previous year due to: Change from previous year due t
-------------------------------- --------------------------------
Yield/ Total Yield/ Total
Volume Rate Change Volume Rate Change
------- -------- -------- -------- ------- -------
(thousands)
Assets:
Loans................................ $12,342 $(31,155) $(18,813) $ 44,575 $30,198 $74,773
Investment securities:
U. S. Government..................... 32,280 (11,248) 21,032 (16,555) 6,696 (9,859)
State, county and municipal.......... 51 8 59 99 41 140
Other................................ 760 764 1,524 37 179 216
------- -------- -------- -------- ------- -------
Total investment securities........ 33,091 (10,476) 22,615 (16,419) 6,916 (9,503)
Overnight investments................. 16,685 (14,138) 2,547 3,944 5,696 9,640
------- -------- -------- -------- ------- -------
Total interest-earning assets...... $62,118 $(55,769) $ 6,349 $ 32,100 $42,810 $74,910
======= ======== ======== ======== ======= =======
Liabilities:
Deposits:
Checking With Interest............... $ 430 $ (708) $ (278) $ (40) $ (480) $ (520)
Savings.............................. (320) (2,436) (2,756) (836) (458) (1,294)
Money market accounts................ 9,890 (18,967) (9,077) 4,150 11,355 15,505
Time................................. 33,119 (9,212) 23,907 8,731 31,613 40,344
------- -------- -------- -------- ------- -------
Total interest-bearing deposits.... 43,119 (31,323) 11,796 12,005 42,030 54,035
Short-term borrowings................. 3,488 (14,064) (10,576) 929 6,369 7,298
Long-term obligations................. 2,605 (143) 2,462 (262) 215 (47)
------- -------- -------- -------- ------- -------
Total interest-bearing liabilities. $49,212 $(45,530) $ 3,682 $ 12,672 $48,614 $61,286
======= ======== ======== ======== ======= =======
Change in net interest income...... $12,906 $(10,239) $ 2,667 $ 19,428 $(5,804) $13,624
======= ======== ======== ======== ======= =======
- --------
Changes in income relating to certain loans and investment securities are
stated on a fully tax-equivalent basis at a rate that approximates BancShares'
marginal tax rate. The taxable equivalent adjustment was $1,940, $2,848, and
$2,217 for the years 2001, 2000 and 1999, respectively. Table 5 provides
detailed information on average balances, income/expense, yield/rate by
category and the relevant income tax rates. The rate/volume variance is
allocated equally between the changes in volume and rate.
The interest rate spread was 3.21 percent during 2001, a decrease of 29
basis points from 3.50 during 2000. The interest rate spread was 3.61 percent
in 1999. The net yield on interest-earning assets was 3.69 percent in 2001 and
4.10 percent in 2000 and 1999. The reductions in the interest rate spread and
the net yield on interest-earning assets further reflect the impact of the
simultaneous growth in interest-earning assets and the offsetting reduction in
interest rates that contributed to the slight increase in net interest income
during 2001.
Rate Sensitivity. A principal objective of our asset/liability 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 protect net
interest income against wide interest rate fluctuations, thereby limiting, to
the extent possible, the ultimate interest rate exposure. Table 9 provides
BancShares' interest-sensitivity position as of December 31, 2001, which
reflected a one-year negative interest-sensitivity gap of $1.06 billion. As a
result of this liability-sensitive position, management believes increases in
interest rates could have an unfavorable impact on net interest income.
15
Table 9
INTEREST-SENSITIVITY ANALYSIS
1-30 31-90 91-180 181-365 Total
Days Days Days Days One Year Total
December 31, 2001 Sensitive Sensitive Sensitive Sensitive Sensitive Nonsensitive Total
- ----------------- ----------- --------- --------- ---------- ----------- ------------ -----------
(thousands)
Assets:
Loans.................... $ 2,633,536 $ 147,574 $ 222,326 $ 434,733 $ 3,438,169 $3,758,008 $ 7,196,177
Investment securities.... 186,651 499,974 637,281 1,181,025 2,504,931 286,365 2,791,296
Overnight investments.... 501,909 -- -- -- 501,909 -- 501,909
----------- --------- --------- ---------- ----------- ---------- -----------
Total interest-
earning assets...... $ 3,322,096 $ 647,548 $ 859,607 $1,615,758 $ 6,445,009 $4,044,373 $10,489,382
=========== ========= ========= ========== =========== ========== ===========
Liabilities:
Interest-bearing deposits $ 4,054,964 $ 776,664 $ 967,641 $1,091,035 $ 6,890,304 $1,421,200 $ 8,311,504
Short-term borrowings.... 570,838 40,000 552 -- 611,390 -- 611,390
Long-term obligations.... -- -- -- -- -- 284,009 284,009
----------- --------- --------- ---------- ----------- ---------- -----------
Total interest-
bearing liabilities. $ 4,625,802 $ 816,664 $ 968,193 $1,091,035 $ 7,501,694 $1,705,209 $ 9,206,903
=========== ========= ========= ========== =========== ========== ===========
Interest-sensitivity gap $(1,303,706) $(169,116) $(108,586) $ 524,723 $(1,056,685) $2,339,164 $ 1,282,479
=========== ========= ========= ========== =========== ========== ===========
- --------
Assets and liabilities with maturities of one year or less and those that may
be adjusted within this period are considered interest sensitive. The
interest-sensitivity position has meaning only as of the date for which it was
prepared.
To minimize the potential adverse impact of interest rate fluctuations,
management monitors the maturity and repricing distribution of the loan
portfolio to reduce its interest rate risk. Additionally, much of the
residential mortgage loan production is originated through and immediately sold
on a servicing-released basis to correspondents, thereby protecting BancShares
from the interest rate exposure that is typical in such lending.
Table 10
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
December 31, 2001
--------------------------------------------
Within One One to Five After Five
Year Years Years Total
---------- ----------- ---------- ----------
(thousands)
Real estate:
Construction and land development. $ 121,190 $ 133,689 $ 29,089 $ 283,968
Mortgage:
Commercial...................... 982,562 1,018,265 230,671 2,231,498
1-4 family residential.......... 376,381 509,664 452,930 1,338,975
Revolving....................... 71,414 255,046 697,721 1,024,181
Other........................... 69,952 77,166 16,796 163,914
---------- ---------- ---------- ----------
Total real estate loans........... 1,621,499 1,993,830 1,427,207 5,042,536
Commercial and industrial.......... 343,167 427,061 148,701 918,929
Consumer........................... 293,588 718,977 61,637 1,074,202
Lease financing.................... 34,992 104,974 -- 139,966
Other.............................. 8,842 9,435 2,267 20,544
---------- ---------- ---------- ----------
Total........................... $2,302,088 $3,254,277 $1,639,812 $7,196,177
========== ========== ========== ==========
Loans maturing after one year with:
Fixed interest rates.............. $2,806,746 $ 895,761 $3,702,507
Floating or adjustable rates...... 447,531 744,051 1,191,582
---------- ---------- ----------
Total........................... $3,254,277 $1,639,812 $4,894,089
========== ========== ==========
Table 10 details the maturity and repricing distribution as of December 31,
2001. Of the gross loans outstanding on December 31, 2001, 32.0 percent have
scheduled maturities within one year, 45.2 percent have scheduled maturities in
one to five years, while the remaining 22.8 percent have scheduled maturities
extending beyond five years.
16
Table 11
MARKET RISK DISCLOSURES
Maturing in Years ended December 31,
--------------------------------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
---------- -------- -------- -------- -------- ---------- ---------- ----------
(dollars in thousands)
Assets
Investment securities held to maturity
Fixed rate........................... $2,453,883 $112,004 $ 85,144 $ 515 $ 23 $ 7,282 $2,658,851 $2,680,700
Average rate (%)..................... 4.71% 2.51% 3.86% 5.63% 8.25% 6.84% 4.63%
Investment securities available for sale
Fixed rate........................... 51,560 25,695 -- -- -- 1,253 78,508 78,508
Average rate (%)..................... 2.06% 2.13% 5.33% 2.14% --
Marketable equity securities......... -- -- -- -- -- 53,937 53,937 53,937
Loans
Fixed rate........................... 791,867 732,897 692,278 542,389 615,122 856,656 4,231,209 4,238,562
Average rate (%)..................... 7.96% 7.94% 7.88% 7.88% 7.38% 7.68% 7.79%
Variable rate........................ 813,549 325,388 224,097 183,035 229,547 1,189,352 2,964,968 2,964,968
Average rate (%)..................... 5.53% 6.05% 5.94% 5.74% 5.26% 6.60% 6.04%
Liabilities
Savings and interest-bearing checking
Fixed rate........................... 3,885,118 -- -- -- -- -- 3,885,118 3,885,118
Average rate (%)..................... 0.79% 0.79%
Time deposits
Fixed rate........................... 3,622,121 463,680 101,999 122,331 79,421 174 4,389,726 4,460,509
Average rate (%)..................... 4.15% 5.46% 5.01% 5.21% 5.34% 6.00% 4.37%
Variable rate........................ 26,142 10,518 -- -- -- -- 36,660 36,660
Average rate (%)..................... 1.82% 2.11% 1.90%
Short-term borrowings
Fixed rate........................... 611,390 -- -- -- -- -- 611,390 611,390
Average rate (%)..................... 0.94% 0.94%
Long-term obligations
Fixed rate........................... 600 348 321 2,178 376 280,186 284,009 275,185
Average rate (%)..................... 7.55% 8.12% 8.02% 8.00% 7.50% 7.96% 7.96%
Table 11 provides information regarding the market risk profile of
BancShares at December 31, 2001. Market risk is the potential economic loss
resulting from changes in market prices and interest rates. This risk can
result in diminished current fair values or reduced net interest income or both
in future periods. The more significant changes in our market risk profile from
December 31, 2000 to December 31, 2001 include:
. the fair value of investment securities held to maturity increased $896.8
million or 50.3 percent; all of the increase relates to growth among
fixed-rate securities;
. the fair value of investment securities available for sale increased $93.9
million or 243.5 percent; excluding the marketable equity securities, all of
the increase relates to growth among fixed-rate securities;
. the fair value of fixed rate loans declined $1.0 billion or 19.2 percent,
the result of migration toward variable rate loans and fixed-rate loan sales;
. the fair value of variable rate loans increased $1.20 billion or 68.5
percent, the result of strong growth among variable rate loans, especially
Equity Line and Capital Line loans;
. the fair value of savings and interest-bearing checking deposits increased
$522.8 million or 15.5 percent, the result of general volume increases;
. the fair value of fixed rate time deposits increased $252.6 million or 6.0%
percent; the increase primarily results from growth among fixed rate time
deposits maturing in 2002 and 2003; and
. the fair value of long-term obligations, all of which are fixed-rate,
increased $153.0 million or 125.3 percent; the increase is primarily due to
$130.0 million in new obligations originated during 2001, all of which
mature after 2006.
17
Assuming all other factors remain constant, the reductions in interest rates
during 2001 would have resulted in higher fair values for portfolios of fixed
rate assets and liabilities. However, the impact of the changes in amounts
outstanding also contributes to changes in fair value. Given our
liability-sensitive position, net interest income should have improved as a
result of the interest rate reductions during 2001. However, the magnitude of
the drop in interest rates was so large that our interest-sensitive liabilities
reached effective floors, while the rates on interest-sensitive assets
continued to decline. This resulted in compression of our net interest margin
during 2001.
ASSET QUALITY
Nonperforming Assets. Nonperforming asset balances for the past five years
are presented in Table 12. BancShares' nonperforming assets at December 31,
2001 included nonaccrual loans totaling $14.0 million and $6.3 million in
foreclosed property. Nonperforming assets as of December 31, 2001 represent
0.28 percent of loans outstanding and other real estate, up from 0.25 percent
as of December 31, 2000. Nonperforming assets totaled $17.8 million and $12.3
million, respectively, as of December 31, 2000 and 1999. Management anticipates
that the level of nonperforming assets may continue to increase until economic
conditions in our market areas show signs of recovery. At December 31, 2001,
loans outstanding included $6.3 million in balances classified as impaired. At
December 31, 2000, impaired loans totaled $6.6 million. As of December 31,
2001, BancShares reported accruing loans 90 days or more past due of $13.0
million, compared to $6.7 million at December 31, 2000. The growth in past due
balances is consistent with the growth in the levels of nonperforming assets.
Management continues to closely monitor past due accounts to identify loans
that should be classified as impaired or non-accrual.
With the exception of certain residential mortgage loans, the accrual of
interest on loans is discontinued when we deem that collection of additional
principal or interest is doubtful; loans are returned to an accrual status when
both principal and interest are current and the loan is determined to be
performing in accordance with the applicable loan terms. The accrual of
interest on certain residential mortgage loans is discontinued when a loan is
more than three monthly payments past due; the accrual of interest on these
loans resumes when the loan is less than three monthly payments past due.
Table 12
RISK ELEMENTS
December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(thousands, except ratios)
Nonaccrual loans....................................... $ 13,983 $ 15,933 $ 10,720 $ 12,489 $ 12,681
Other real estate...................................... 6,263 1,880 1,600 1,529 1,462
---------- ---------- ---------- ---------- ----------
Total nonperforming assets.......................... $ 20,246 $ 17,813 $ 12,320 $ 14,018 $ 14,143
========== ========== ========== ========== ==========
Accruing loans 90 days or more past due................ $ 12,981 $ 6,731 $ 3,576 $ 5,721 $ 3,953
Loans at December 31................................... $7,196,177 $7,109,692 $6,751,039 $6,195,591 $5,445,772
Ratio of nonperforming assets to total loans plus other
real estate.......................................... 0.28% 0.25% 0.18% 0.23% 0.26%
---------- ---------- ---------- ---------- ----------
Interest income that would have been earned on
nonperforming loans had they been performing......... $ 1,060 $ 1,209 $ 894 $ 1,108 $ 1,156
Interest income earned on nonperforming loans.......... 333 587 287 409 349
========== ========== ========== ========== ==========
- --------
There are no loan concentrations to any multiple number of borrowers engaged in
similar activities or industries in excess of 10 percent of total loans at
December 31, 2001. There were no foreign loans outstanding in any period.
Reserve for Loan Losses. Management evaluates the risk characteristics of
the loan portfolio under current economic conditions and considers such factors
as the financial condition of the borrower, fair market value of collateral and
other items that, in management's opinion, deserve current recognition in
estimating possible credit losses.
18
At December 31, 2001, BancShares' reserve for loan losses was $107.1 million
or 1.49 percent of loans outstanding. This compares to $102.7 million or 1.44
percent at December 31, 2000, and $98.7 million or 1.46 percent at December 31,
1999.
The provision for loan losses charged to operations was $24.1 million during
2001 compared to $15.5 million during 2000 and $11.7 million during 1999. The
$8.6 million increase in provision for loan losses from 2000 to 2001 resulted
from growth in nonperforming assets and past due loans, increased loss
estimates and higher net charge-offs during 2001.
Table 13
SUMMARY OF LOAN LOSS EXPERIENCE
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(thousands, except ratios)
Balance at beginning of year......................... $ 102,655 $ 98,690 $ 96,115 $ 84,360 $ 81,439
Reserve of acquired institutions..................... -- -- -- -- 481
Adjustment for sale of loans......................... (777) -- -- -- --
Provision for loan losses............................ 24,134 15,488 11,672 19,879 8,726
Charge-offs:
Real estate:
Construction and land development................ (205) -- (7) (2) (7)
Mortgage:
Commercial...................................... (2,758) (280) (111) (112) (245)
1-4 family residential.......................... (1,171) (898) (966) (826) (1,350)
Revolving....................................... (899) (805) (23) (134) (90)
---------- ---------- ---------- ---------- ----------
Total real estate loans....................... (5,033) (1,983) (1,107) (1,074) (1,692)
Commercial and industrial.......................... (6,736) (5,678) (1,800) (2,001) (1,061)
Consumer........................................... (10,101) (8,199) (10,748) (10,789) (11,540)
Lease financing.................................... (422) (46) (32) (203) (38)
---------- ---------- ---------- ---------- ----------
Total charge-offs............................. (22,292) (15,906) (13,687) (14,067) (14,331)
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate:
Construction and land development................ -- 8 42 93 1,723
Mortgage:
Commercial...................................... 504 688 1,262 2,877 1,502
1-4 family residential.......................... 260 347 368 689 2,505
Revolving....................................... 58 33 13 10 3
---------- ---------- ---------- ---------- ----------
Total real estate loans....................... 822 1,076 1,685 3,669 5,733
Commercial and industrial.......................... 755 1,581 835 512 698
Consumer........................................... 1,787 1,726 2,070 1,762 1,614
Lease financing.................................... 3 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total recoveries.............................. 3,367 4,383 4,590 5,943 8,045
---------- ---------- ---------- ---------- ----------
Net charge-offs............................... (18,925) (11,523) (9,097) (8,124) (6,286)
---------- ---------- ---------- ---------- ----------
Balance at end of year............................... $ 107,087 $ 102,655 $ 98,690 $ 96,115 $ 84,360
========== ========== ========== ========== ==========
Historical Statistics
Balances
Average total loans................................ $7,105,915 $6,955,772 $6,399,114 $5,847,531 $5,086,723
Total loans at year-end............................ 7,196,177 7,109,692 6,751,039 6,195,591 5,445,772
Ratios
Net charge-offs to average total loans............. 0.27% 0.17% 0.14% 0.14% 0.12%
Reserve for loan losses to total loans at year-end. 1.49 1.44 1.46 1.55 1.55
---------- ---------- ---------- ---------- ----------
- --------
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
Economic weakness and less favorable business conditions caused charge offs
to increase in 2001. Net charge-offs for 2001 totaled $18.9 million, compared
to $11.5 million during 2000 and $9.1 million during 1999. Gross charge-offs
for 2001 were $22.3 million, compared to $15.9 million in 2000 and $13.7
million in 1999. During 2001, BancShares experienced increases of $3.1 million
in charge-offs of loans secured by real estate, $1.9 million among consumer
loans and $1.1 million among commercial and industrial loans.
19
During 2001, total recoveries were $3.4 million, compared to $4.4 million
during 2000 and $4.6 million during 1999. During 2001, gross recoveries
decreased $1.0 million primarily due to reductions in recoveries of commercial
and industrial loans.
The ratio of net charge-offs to average loans outstanding equaled 0.27
percent during 2001, 0.17 percent during 2000 and 0.14 percent during 1999.
Table 13 provides details concerning the reserve for loan losses and provision
for loan losses for the past five years.
Management considers the established reserve adequate to absorb losses that
relate to loans outstanding at December 31, 2001, although future additions 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. Such
agencies may require the recognition of additions to the reserve based on their
judgments of information available to them at the time of their examination.
Table 14 details our allocation of the reserve among the various loan types.
The process used to allocate the loan loss reserve considers, among other
factors, whether the borrower is a retail or commercial customer, whether the
loan is secured or unsecured, and whether the loan is an open or closed-end
agreement. Generally, loans to commercial customers are evaluated individually
and assigned a credit grade, while loans to retail customers are evaluated
among groups of loans with similar characteristics. Loans evaluated
individually are assigned a credit grade using such factors as the borrower's
cash flow, the value of any underlying collateral and the value of any
guarantee. The rating becomes the basis for the reserve allocation for that
individual loan. Groups of loans are aggregated and probable losses are
estimated based on prior experience and current economic conditions. The amount
of the reserve for loan losses not allocated through these loss models becomes
the unallocated reserve. The growth in the unallocated reserve during 2001 and
2000 results from growth in nonperforming assets, higher net charge-offs in
each period and greater uncertainty resulting from current economic conditions.
Table 14
ALLOCATION OF RESERVE FOR LOAN LOSSES
December 31
--------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- --------------- --------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Reserve Loans Reserve Loans Reserve Loans Reserve Loans Reserve Loans
-------- -------- -------- -------- ------- -------- ------- -------- ------- --------
(thousands)
Real estate:
Construction and land
development........... $ 7,099 3.95% $ 5,411 3.04% $ 4,653 2.76% $ 3,027 2.54% $ 3,235 .2.09
Mortgage:
Commercial............. 32,875 31.01 31,786 28.04 32,198 26.82 26,835 24.13 16,388 19.38
1-4 family residential. 6,498 18.61 6,416. 21.81 5,721 19.65 11,182 20.97 14,779 25.92
Revolving.............. 5,349 14.23 4,600 11.98 4,098 11.19 3,338 9.96 4,257 11.09
Other.................. 2,290 2.28 2,860 2.62 3,232 2.39 3,075 2.59 1,712 2.51
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total real estate........ 54,111 70.08 51,073 67.49 49,902 62.81 47,457 60.19 40,371 60.99
Commercial and industrial 19,833 12.77 19,951 13.13 20,084 14.60 13,591 13.64 9,533 11.63
Consumer................. 23,754 14.91 24,523 17.13 26,279 20.64 32,099 24.49 31,025 25.74
Lease financing.......... 1,624 1.95 1,560 1.89 1,572 1.84 1,123 1.51 992 1.37
Other.................... 151 0.29 254 0.36 190 0.11 180 0.17 324 0.27
Unallocated.............. 7,614 - 5,294 - 663 - 1,665 - 2,115 -
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total.................. $107,087 100.00% $102,655 100.00% $98,690 100.00% $96,115 100.00% $84,360 100.00
======== ====== ======== ====== ======= ====== ======= ====== ======= ======
At December 31, 2001, we had no foreign loans or any loans to finance highly
leveraged transactions. Further, management does not contemplate originating or
participating in such transactions in the future.
20
NONINTEREST INCOME
Total noninterest income was $215.6 million during 2001, an increase of
$13.4 million or 6.6 percent over 2000. Noninterest income during 2000 was
$202.2, which was a $36.9 million or 22.3 percent increase over the $165.3
million recorded during 1999. During 2001, 2000 and 1999, various nonrecurring
items have had a significant impact on noninterest income. These items totaled
$7.5 million in 2001, $26.1 million in 2000 and $6.8 million in 1999. Table 15
presents the major components of noninterest income for the past five years.
Much of the increase in core noninterest income during 2001 can be
attributed to increases in service charges on deposit accounts, mortgage income
and credit card income. Service charge income was $70.1 million during 2001,
compared to $59.4 million in 2000 and $55.2 million in 1999. The $10.7 million
or 18.0 percent increase in service charge income during 2001 results from
higher bad check fees and commercial service charges. The growth in commercial
service charges reflects the impact of lower market interest rates since the
service charge on commercial deposit accounts is typically calculated net of an
earnings credit for deposit balances maintained. During 2001, as the earnings
credit rate declined, the amount of service charges increased.
Table 15
NONINTEREST INCOME
Year ended December 31
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(thousands)
Core noninterest income:
Service charges on deposit accounts...... $ 70,066 $ 59,384 $ 55,169 $ 47,055 $ 41,748
Credit card income....................... 42,759 36,837 30,820 25,558 20,053
Commission-based income:
Investments............................ 12,585 12,974 10,700 9,034 6,407
Insurance.............................. 5,220 3,718 3,072 1,325 351
Other.................................. 1,969 603 -- -- --
-------- -------- -------- -------- --------
Total commission-based income........ 19,774 17,295 13,772 10,359 6,758
Fees from processing services............ 17,452 14,556 12,987 11,652 10,511
Trust income............................. 15,114 14,814 13,848 12,710 11,284
Mortgage income.......................... 12,557 5,172 6,440 8,797 2,106
ATM income............................... 11,192 10,844 10,655 10,397 8,524
Other service charges and fees........... 13,896 12,077 9,935 10,176 7,311
Other.................................... 5,256 5,129 4,944 5,646 6,619
-------- -------- -------- -------- --------
Total core noninterest income........ 208,066 176,108 158,570 142,350 114,914
-------- -------- -------- -------- --------
Nonrecurring items:
Securities transactions.................. 7,189 1,810 1,706 -- --
Gain on sale of mortgage servicing rights 300 20,187 -- -- --
Gain on sale of branches................. -- 4,085 5,063 3,067 --
-------- -------- -------- -------- --------
Total nonrecurring items............. 7,489 26,082 6,769 3,067 --
-------- -------- -------- -------- --------
Total..................................... $215,555 $202,190 $165,339 $145,417 $114,914
======== ======== ======== ======== ========
Mortgage income grew $7.4 million from $5.2 million in 2000 to $12.6 million
in 2001. Higher loan originations during 2001 resulted in an increase in
origination fees and servicing release fees earned. Mortgage income decreased
$1.3 million from 1999 to 2000. This 19.7 percent decrease resulted from losses
sustained on the sales of our marketable residential mortgage loans. Credit
card income grew from $36.8 million in 2000 to $42.8 million during 2001, an
increase of $5.9 million or 16.1 percent, the result of continued growth in
merchant and cardholder interchange income. Income recognized during 2000
represented a $6.0 million or 19.5 percent increase from 1999.
Commission-based income totaled $19.8 million during 2001, an increase of
$2.5 million or 14.3 percent over 2000. BancShares reported $17.3 million in
commission-based income during 2000, an increase of $3.5 million or 25.6 percent
21
over 1999. The increase during 2001 resulted from higher insurance and
factoring commissions, while the growth during 2000 resulted primarily from
growth in fees generated by First Citizens Investor Services, BancShares'
registered broker dealer. Acquisitions of insurance agencies and the growth in
business related to BancShares' insurance agency operation has been a
significant factor in the improvement in insurance commissions.
During 2001, BancShares recognized $17.5 million in fees for providing
processing services to other banks, many of which are considered related
parties. This was an increase of $2.9 million or 19.9 percent over the $14.6
million recognized during 2000. Processing fees earned during 2000 represented
a $1.6 million or 12.1 percent increase over those earned during 1999. Fees
from related parties totaled $17.3 million during 2001 and $14.4 million during
2000.
Among nonrecurring components of noninterest income, securities transactions
provided $7.2 million in noninterest income during 2001, compared to $1.8
million in 2000 and $1.7 million during 1999. In each period, these gains
resulted from sales and exchanges of available for sale securities. The $20.2
million gain on mortgage servicing rights realized in 2000 is a result of the
sale of our then-existing mortgage servicing rights. During 2000 and 1999,
BancShares reported gains on the sale of branch facilities, some of which were
to related parties. These gains were $4.1 million and $5.1 million during the
respective periods. No such gains were recognized during 2001.
NONINTEREST EXPENSE
Noninterest expense for 2001 amounted to $422.6 million, a $27.8 million or
7.0 percent increase over 2000. Noninterest expense in 2000 was $394.8 million,
a $19.2 million or 5.1 percent increase over 1999. Table 16 presents the major
components of noninterest expense for the past five years.
Salary expense was $181.0 million during 2001, compared to $168.8 million
during 2000, an increase of $12.2 million or 7.3 percent, following an $8.3
million or 5.2 percent increase in 2000 over 1999. Increases during each period
resulted from new positions arising from franchise growth and expansion, merit
increases and higher levels of incentive-based compensation.
Employee benefits expense was $35.9 million during 2001, an increase of $3.8
million or 11.7 percent from 2000. The $32.1 million in benefits expense
recorded during 2000 represented an increase of $1.7 million or 5.5 percent
over 1999. During 2001, higher costs related to our pension and employee health
insurance plans contributed to the increase in total employee benefits expense.
The increased 2001 pension expense is attributed to a reduced discount rate and
higher levels of covered payroll. During 2000, higher FICA and employee health
insurance costs contributed to the increase in total employee benefits.
Partially offsetting the increase during 2000 was a reduction in pension
expense due to an increase in the discount rate from 1999.
Table 16
NONINTEREST EXPENSE
Year ended December 31
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(thousands)
Salaries and wages......... $181,018 $168,778 $160,440 $142,020 $126,474
Employee benefits.......... 35,897 32,136 30,455 27,434 23,718
Equipment expense.......... 40,861 38,153 37,745 36,545 32,035
Occupancy expense.......... 35,584 33,835 30,041 28,112 23,338
Credit card expense........ 19,514 16,870 14,712 12,658 11,722
Amortization of intangibles 11,585 10,637 10,963 10,652 8,641
Telecommunication expense.. 11,052 10,799 10,052 9,046 8,032
Postage expense............ 8,055 7,062 7,096 6,826 6,623
Advertising expense........ 6,928 7,277 7,313 5,836 6,522
Consultant expense......... 3,470 5,273 5,840 7,134 5,626
Other...................... 68,633 63,964 60,963 55,950 47,670
-------- -------- -------- -------- --------
Total..................... $422,597 $394,784 $375,620 $342,213 $300,401
======== ======== ======== ======== ========
- --------
For 2001 and 2000, occupancy expense includes $323 and $1,130 related to
provisions for branch closings. For 2001 and 2000, other expense includes
$1,011 and $1,972 related to provisions for branch closings.
22
Equipment expense for 2001 was $40.9 million, an increase of $2.7 million or
7.1 percent over 2000, when total equipment expenses were $38.2 million. The
increase during 2001 resulted from higher levels of depreciation and
maintenance expense related to software. During 2000, equipment expense was
$408,000 or 1.1 percent above the amount recorded during 1999, primarily the
result of higher depreciation expense resulting from new and replacement branch
offices.
BancShares recorded occupancy expense of $35.6 million during 2001, an
increase of $1.7 million or 5.2 percent during 2001. Occupancy expense during
2000 was $33.8 million, an increase of $3.8 million or 12.6 percent over 1999.
During 2001 and 2000, occupancy expense included $323,000 and $1.1 million,
respectively, in provisions for branch closings resulting from management's
decision to discontinue operations at certain branch locations. The occupancy
expenses relate to lease payment obligations arising as a result of the
closings. Ignoring the impact of the provision for branch closings, the
increase in occupancy expense in each period resulted from higher depreciation
expense, the result of continuing expansion in Georgia and Florida and new
buildings in North Carolina and Virginia.
Expenses related to credit card processing were $19.5 million in 2001 and
$16.9 million in 2000. This increase of $2.6 million or 15.7 percent is due to
growth in credit card transaction and merchant volume. In 2000, credit card
processing expense increased $2.2 million or 14.7 percent from 1999, primarily
due to higher merchant volume.
Amortization of intangibles totaled $11.6 million during 2001, an increase
of 8.9 percent over the $10.6 million recorded during 2000, the result of
amortization of intangibles recognized in conjunction with branch acquisitions
completed during late 2000 and early 2001. Postage expense during 2001 was $8.1
million, an increase of 14.1 percent over 2000, the result of higher postage
rates and increased volume. Consultant expense decreased $1.8 million during
2001 following the completion of several earnings enhancement projects
conducted during 2000.
Other expense was $68.6 million during 2001, an increase of $4.7 million or
7.3 percent from 2000. During 2000, other expense was $64.0 million, an
increase of $3.0 million or 4.9 percent over 1999. During 2001 and 2000, other
expense included $1.0 million and $2.0 million, respectively, in provisions for
branch closings resulting from management's decision to discontinue operations
at certain locations. These expenses relate to losses resulting from the
abandonment of fixed assets and resulting impairment charges recognized for
similar branch locations. Ignoring the impact of the provision for branch
closings, the increase in other expense in each period results from higher
general levels of operating expenses.
During 2002, management anticipates increases in various operating expenses
related to the continued growth of the branch network. Personnel, occupancy and
certain equipment costs will increase as new branches are opened and new
delivery channels are established. As a result of changes to the treatment of
purchased goodwill that became effective on January 1, 2002, BancShares will
discontinue the periodic amortization of goodwill for 2002, although goodwill
will be subject to an annual review to determine if its carrying value is
appropriate. During 2001, BancShares recorded $5.1 million in goodwill
amortization. Acquisition-related intangibles will continue to be amortized
over their estimated useful lives. During 2001, BancShares recorded $6.5
million in amortization of acquisition-related intangibles.
INCOME TAXES
During 2001, BancShares recorded total income tax expense of $50.8 million,
compared to $58.9 million in income tax expense during 2000 and $48.6 million
during 1999. BancShares' effective tax rate remained largely unchanged at
36.9 percent in 2001, 37.5 in 2000 and 37.3 percent in 1999.
LIQUIDITY
BancShares has historically maintained a strong focus on liquidity,
maintaining a relatively large and highly liquid investment portfolio with
varying maturities to provide needed cash flows to meet liquidity requirements.
At December 31, 2001, investment securities available for sale totaled $132.4
million compared to $38.6 million at December 31, 2000. Investment securities
held to maturity totaled $2.66 billion at December 31, 2001 and $1.78 billion
at December 31, 2000. The weighted-average maturity of investment securities
held to maturity was 9 months at December 31, 2001, providing a significant
source of liquidity. Total investment securities represent 23.5 percent and
17.0 percent of total assets at December 31, 2001 and 2000, respectively.
23
The ability to generate retail deposits provides an additional source of
liquidity. The rate of growth in average deposits was 12.1 percent during 2001,
3.5 percent during 2000 and 4.5 percent during 1999. Through its extensive
branch network and varying deposit promotions, BancShares has the ability to
stimulate or curtail deposit growth.
In addition to deposits, BancShares maintains additional sources for
borrowed funds through federal funds lines of credit and other borrowing
facilities. At December 31, 2001, BancShares had access to $500.0 million in
unfunded borrowings.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. BancShares' total risk-based capital ratios
were 14.4 percent, 11.7 percent and 11.3 percent, respectively, at December 31,
2001, 2000 and 1999. BancShares' Tier 1 capital ratios for December 31, 2001,
2000 and 1999 were 13.1 percent, 10.4 percent and 10.0 percent, respectively.
The minimum capital ratios established by Federal Reserve guidelines are
8 percent for total capital and 4 percent for Tier 1 capital. At December 31,
2001, BancShares' leverage capital ratio was 8.8 percent compared to 8.1
percent and 7.9 percent at December 31, 2000 and 1999, respectively. The
minimum leverage ratio is 3 percent. Failure to meet certain capital
requirements may result in certain actions by regulatory agencies that could
have a direct material effect on the financial statements. The improved capital
ratios during 2001 reflect the impact of the issuance of $100 million in trust
preferred capital securities, which qualify as Tier 1 capital.
Reflecting the increase in net income during 2000 and the subsequent
reduction in net income during 2001, the rate of return on average
shareholders' equity during 2001, 2000 and 1999 amounted to 10.3 percent, 12.9
percent and 11.8 percent, respectively.
Table 17
ANALYSIS OF BANCSHARES' CAPITAL ADEQUACY
December 31
-------------------------------- Regulatory
2001 2000 1999 Minimum
---------- ---------- ---------- ----------
(dollars in thousands)
Tier 1 capital........... $1,015,804 $ 835,678 $ 760,195
Tier 2 capital........... 102,444 104,582 99,443
---------- ---------- ----------
Total capital............ $1,118,248 $ 940,260 $ 859,638
========== ========== ==========
Risk-adjusted assets..... $7,771,031 $8,057,478 $7,616,890
========== ========== ==========
Risk-based capital ratios
Tier 1 capital........ 13.07% 10.37% 9.98% 4.00%
Total capital......... 14.39% 11.67% 11.29% 8.00%
Tier 1 leverage ratio.... 8.78% 8.11% 7.91% 3.00%
During the fourth quarter of 2001 the Board of Directors of BancShares
reauthorized the purchase of its Class A and Class B common stock. Management
views the purchase of its stock as a good investment and will continue to
repurchase shares when market conditions are favorable for such transactions
and excess capital exists to fund those purchases.
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
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 $678.2 million at
December 31, 2000 to $867.2 million at December 31, 2001, an increase of $189.0
million or 27.9 percent. This growth resulted from an expanding branch network,
as ASB added six new branches during 2001. At December 31, 2001, ASB operated
from 44 branches in Florida
24
and Georgia. ASB's net interest income increased $4.2 million or 29.3 percent
during 2001, the result of balance sheet growth. Provision for loan losses
increased $2.4 million or 139.8 percent due to higher levels of nonperforming
assets, net charge-offs and loan loss estimates.
ASB's noninterest income increased $859,000 or 25.1 percent during 2001,
primarily the result of higher service charge income. Noninterest expense
increased $6.6 million or 27.4 percent during 2001. Higher personnel, occupancy
and equipment costs reflect the impact of the expanded branch network.
ASB recorded a net loss of $7.6 million during 2001 compared to a net loss
of $5.2 million during 2000. This represents a $2.5 million or 47.8 percent
increase 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. As a result of plans for continued expansion, ASB's
net losses could extend into the forseeable future.
First Citizens Bank. FCB's total assets increased from $9.89 billion at
December 31, 2000 to $10.77 billion at December 31, 2001, an increase of $876.2
million or 8.9 percent. This growth resulted from strong deposit growth during
2001. FCB's net interest income declined $3.7 million or 1.0 percent during
2001, the result of interest rate reductions. Provision for loan losses
increased $6.3 million or 45.4 percent due to higher levels of nonperforming
assets, higher historical net charge-offs and higher loan loss estimates.
FCB's noninterest income increased $7.8 million or 3.9 percent during 2001,
primarily the result of higher service charge income. Noninterest expense
increased $22.2 million or 6.0 percent during 2001, primarily due to higher
personnel and equipment costs. FCB recorded net income of $101.0 million during
2001 compared to $115.8 million during 2000. This represents a $14.8 million or
12.8 percent reduction in net income.
FOURTH QUARTER ANALYSIS
BancShares' net income for the fourth quarter of 2001 totaled $21.3 million,
compared to $24.0 million during the same period of 2000, a decrease of $2.7
million or 11.1 percent. The decrease in net income was primarily due to a
$7.6 million increase in noninterest expense and a $2.6 million increase in the
provision for loan losses, partially offset by a $5.6 million increase in
noninterest income. Net income per share during the fourth quarter of 2001 was
$2.03 compared to $2.28 during the same period of 2000.
The after-tax impact of all nonrecurring items was a net loss of $43,000
during 2001, and a net gain of $2.3 million during 2000. The per share amounts
of the nonrecurring items were a $0.01 loss during 2001 and a $0.22 gain for
2000. While the impact of nonrecurring items during the fourth quarter of 2001
was not significant, BancShares recognized a $4.1 million pre-tax gain on the
sale of branches during the fourth quarter of 2000. The net-of-tax impact of
the branch sales was $2.6 million. Thus, excluding the impact of the
nonrecurring items, fourth quarter 2001 net income and net income per share was
essentially unchanged from the prior period. Net interest income for the fourth
quarter of 2001 increased by only 0.4 percent from 2000, which was in turn
caused by a declining interest rate spread.
25
Table 18
SELECTED QUARTERLY DATA
2001 2000
-------------------------------------------------- --------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(thousands, except per share data and ratios)
SUMMARY OF OPERATIONS
Interest income.......... $ 167,032 $ 176,709 $ 182,660 $ 189,026 $ 189,328 $ 182,966 $ 171,890 $ 163,986
Interest expense......... 74,113 84,482 91,472 96,443 96,754 91,509 80,184 74,381
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income...... 92,919 92,227 91,188 92,583 92,574 91,457 91,706 89,605
Provision for loan losses 7,444 5,620 5,394 5,676 4,857 4,197 2,975 3,459
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses............. 85,475 86,607 85,794 86,907 87,717 87,260 88,731 86,146
Noninterest income....... 55,014 53,089 54,641 52,811 49,384 67,358 44,097 41,351
Noninterest expense...... 106,912 106,963 105,922 102,800 99,287 101,257 97,953 96,287
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes................... 33,577 32,733 34,513 36,918 37,814 53,361 34,875 31,210
Income taxes............. 12,260 11,977 12,509 14,059 13,826 20,006 13,421 11,696
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 21,317 $ 20,756 $ 22,004 $ 22,859 $ 23,988 $ 33,355 $ 21,454 $ 19,514
=========== =========== =========== =========== =========== =========== =========== ===========
Net interest
income--taxable
equivalent............. $ 93,389 $ 92,698 $ 91,678 $ 93,091 $ 93,240 $ 92,162 $ 92,414 $ 90,374
=========== =========== =========== =========== =========== =========== =========== ===========
SELECTED QUARTERLY
AVERAGES
Total assets............. $11,674,273 $11,333,123 $11,128,229 $10,785,178 $10,420,204 $10,167,665 $ 9,772,765 $ 9,658,251
Investment securities.... 2,684,315 2,195,064 2,042,987 1,854,401 1,747,536 1,633,653 1,594,291 1,497,278
Loans.................... 7,128,818 7,054,247 7,139,623 7,101,238 7,077,991 7,036,622 6,917,041 6,789,203
Interest-earning assets.. 10,446,364 10,126,568 9,952,752 9,616,497 9,335,530 9,142,585 8,788,776 8,667,039
Deposits................. 9,742,153 9,496,699 9,337,298 9,037,155 8,693,634 8,524,930 8,211,252 8,128,968
Interest-bearing
liabilities............. 9,142,487 8,851,916 8,721,873 8,470,303 8,126,969 7,886,410 7,560,267 7,512,781
Long-term obligations.... 274,445 161,587 154,831 154,639 154,609 154,979 153,773 155,171
Shareholders' equity..... $ 874,801 $ 857,417 $ 838,806 $ 819,289 $ 799,234 $ 770,418 $ 748,648 $ 734,777
Shares outstanding....... 10,488,894 10,508,330 10,511,028 10,521,253 10,528,680 10,534,049 10,551,766 10,592,378
=========== =========== =========== =========== =========== =========== =========== ===========
SELECTED QUARTER-END
BALANCES
Total assets............. $11,864,991 $11,522,525 $11,289,166 $11,145,917 $10,691,617 $10,361,296 $ 9,943,877 $ 9,880,732
Investment securities.... 2,791,296 2,482,123 1,987,085 1,868,886 1,816,720 1,730,439 1,543,033 1,547,214
Loans.................... 7,196,177 7,109,584 7,058,070 7,124,535 7,109,692 7,097,773 7,006,824 6,828,095
Interest-earning assets.. 10,489,382 10,217,283 9,981,549 9,870,346 9,357,794 9,278,658 8,871,522 8,896,750
Deposits................. 9,961,605 9,645,226 9,480,108 9,365,356 8,971,868 8,668,642 8,366,364 8,295,850
Interest-bearing
liabilities............. 9,206,903 9,007,989 8,807,409 8,730,946 8,384,692 8,068,241 7,626,805 7,655,102
Long-term obligations.... 284,009 184,018 154,829 154,836 154,332 154,687 153,761 154,915
Shareholders' equity..... $ 885,043 $ 865,963 $ 849,297 $ 830,135 $ 810,728 $ 789,341 $ 758,985 $ 741,136
Shares outstanding....... 10,483,456 10,490,703 10,509,956 10,513,475 10,522,836 10,533,814 10,534,614 10,566,849
=========== =========== =========== =========== =========== =========== =========== ===========
PROFITABILITY RATIOS
(averages)
Rate of return (annualized) on:
Total assets........... 0.72 % 0.74 % 0.79 % 0.86 % 0.92 % 1.31 % 0.88 % 0.81
Shareholders' equity... 9.67 9.82 10.52 11.32 11.94 17.22 11.53 10.68
Dividend payout ratio.... 12.32 12.63 11.96 11.52 10.96 7.89 12.32 13.59
=========== =========== =========== =========== =========== =========== =========== ===========
LIQUIDITY AND CAPITAL
RATIOS (averages)
Loans to deposits........ 73.17 % 74.28 % 76.46 % 78.58 % 81.42 % 82.54 % 84.24 % 83.52
Shareholders' equity to
total assets............ 7.49 7.57 7.54 7.60 7.67 7.58 7.66 7.61
Time certificates of
$100,000 or more to
total deposits.......... 8.98 11.92 11.37 10.60 9.92 9.54 9.27 9.01
=========== =========== =========== =========== =========== =========== =========== ===========
PER SHARE OF STOCK
Net income............... $ 2.03 $ 1.98 $ 2.09 $ 2.17 $ 2.28 $ 3.17 $ 2.03 $ 1.84
Cash dividends........... 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Class A sales price
High.................... 99.99 111.00 113.16 102.50 80.75 73.31 65.00 69.06
Low..................... 84.50 80.00 97.00 77.52 69.38 56.44 58.25 56.47
Class B sales price......
High.................... 94.50 99.43 97.49 94.12 72.50 64.50 62.25 70.00
Low..................... 84.00 86.00 89.00 75.13 62.00 52.00 51.00 58.00
=========== =========== =========== =========== =========== =========== =========== ===========
- --------
Stock information related to Class A and Class B common stock reflects the
sales price, as reported on the Nasdaq National Market System. As of December
31, 2001, there were 2,885 holders of record of the Class A common stock and
548 holders of record of the Class B common stock.
26
Table 19
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS--
FOURTH QUARTER
2001 2000 Increase (decrease) due to:
-------------------------- ------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
Balance Expense Rate Balance Expense Rate Volume Rate Change
----------- -------- ------ ---------- -------- ------ ------- -------- --------
(thousands)
Assets
Total loans......................... $ 7,128,818 $132,188 7.36% $7,077,991 $153,729 8.64% $ 1,168 $(22,709) $(21,541)
Investment securities:
U. S. Government.................. 2,628,842 31,229 4.71 1,706,146 27,384 6.39 12,935 (9,090) 3,845
State, county and municipal....... 4,541 100 8.74 4,674 99 8.43 (3) 4 1
Other............................. 50,932 468 3.65 36,716 391 4.24 141 (64) 77
----------- -------- ---- ---------- -------- ---- ------- -------- --------
Total investment securities....... 2,684,315 31,797 4.70 1,747,536 27,874 6.35 13,073 (9,150) 3,923
Overnight investments............... 633,231 3,517 2.20 510,003 8,391 6.55 1,366 (6,240) (4,874)
----------- -------- ---- ---------- -------- ---- ------- -------- --------
Total interest-earning assets....... $10,446,364 $167,502 6.36% $9,335,530 $189,994 8.10% $15,607 $(38,099) $(22,492)
=========== ======== ==== ========== ======== ==== ======= ======== ========
Liabilities
Deposits:
Checking With Interest............ $ 1,192,775 $ 1,094 0.36% $1,083,490 $ 1,669 0.61% $ 137 $ (712) $ (575)
Savings........................... 609,580 1,251 0.81 606,519 2,044 1.34 13 (806) (793)
Money market accounts............. 1,894,601 9,615 2.01 1,516,924 17,347 4.55 3,136 (10,868) (7,732)
Time deposits..................... 4,508,371 54,264 4.78 4,127,761 63,482 6.12 5,270 (14,488) (9,218)
----------- -------- ---- ---------- -------- ---- ------- -------- --------
Total interest-bearing deposits... 8,205,327 66,224 3.20 7,334,694 84,542 4.59 8,556 (26,874) (18,318)
Short-term borrowings............... 662,715 2,354 1.41 637,666 9,035 5.64 227 (6,908) (6,681)
Long-term obligations............... 274,445 5,535 8.00 154,609 3,177 8.17 2,443 (85) 2,358
----------- -------- ---- ---------- -------- ---- ------- -------- --------
Total interest-bearing liabilities.. $ 9,142,487 $ 74,113 3.22% $8,126,969 $ 96,754 4.74% $11,226 $(33,867) $(22,641)
=========== ======== ==== ========== ======== ==== ======= ======== ========
Interest rate spread................ 3.14% 3.36%
---- ----
Net interest income and net yield on
interest-earning assets........... $ 93,389 3.55% $ 93,240 3.97% $ 4,381 $ (4,232) $ 149
======== ==== ======== ==== ======= ======== ========
- --------
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
state income tax rates of 6.90% for 2001 and 7.00% for 2000.
Interest income decreased $22.3 million or 11.8 percent in the fourth
quarter of 2001 when compared to the same period of 2000 caused by reductions
during 2001 in the discount and fed funds rate by the Federal Reserve.
Interest-earning assets averaged $10.45 billion during the fourth quarter of
2001, an increase of 11.9 percent over the same period of 2000. Average loans
outstanding during the fourth quarter of 2001 were $7.13 billion, an increase
of $50.8 million or 0.7 percent over the same period of 2000. Investment
securities averaged $2.68 billion during the fourth quarter of 2001, a $936.8
million or 53.6 percent increase from the same period of 2000 due to large
levels of liquidity generated by significant increases in deposits.
Interest-earning assets yielded 6.36 percent during the fourth quarter of
2001, a 174 basis point reduction from the 8.10 percent yield recorded during
the fourth quarter of 2000. The loan yield decreased 128 basis points from
8.64 percent during the fourth quarter of 2000 to 7.36 percent during the same
period of 2001. The taxable-equivalent yield on investment securities fell from
6.35 percent during the fourth quarter of 2000 to 4.70 during the same period
of 2001, a 165 basis point reduction. Yield reductions reflect general market
conditions during 2001.
Interest expense decreased $22.6 million or 23.4 percent during the fourth
quarter of 2001, reflective of lower market interest rates during 2001. Average
interest-bearing liabilities experienced a $1.02 billion increase from the
fourth quarter of 2000 to the same period of 2001, primarily the result of
increases in interest-bearing deposits and long-term borrowings. The growth in
interest-bearing deposits resulted from growth among money market and time
deposits, while the higher level of long-term borrowings reflected the impact
of the $100.0 million in trust preferred securities issued during October 2001.
The impact of the growth in interest-bearing liabilities was more than offset
by the 152 basis point reduction in those obligations. The rate on
interest-bearing deposits fell 139 basis points during 2001, as interest rates
on all deposit products plummeted. The rate on short-term borrowings, which are
largely indexed to the federal funds rate, experienced a 423 basis point
reduction.
27
Net interest income was $92.9 million during the fourth quarter of 2001, an
increase of $345,000 or 0.4 percent over the same period of 2000. The net yield
on interest-earning assets was 3.55 percent during the fourth quarter of 2001,
compared to 3.97 percent during the same period of 2000.
Noninterest income for the fourth quarter of 2001 was $55.0 million, an
increase of $5.6 million or 11.4 percent over the same period of 2001.
Adjusting for the impact of nonrecurring items during 2001 and 2000,
noninterest income increased $9.7 million or 21.4 percent. Increases were
recorded in service charges on deposit accounts, which increased $3.2 million,
mortgage income, which increased $2.6 million, and credit card fee income,
which increased $1.5 million.
Noninterest expense amounted to $106.9 million for the quarter ended
December 31, 2001, compared to $99.3 million for the quarter ended December 31,
2000, an increase of $7.6 million or 7.7 percent. Adjusting for the impact of
nonrecurring items, noninterest expense increased $7.7 million or 7.8 percent
from the fourth quarter of 2000 to the same period of 2001. Much of the
increase in noninterest expense results from a $3.8 million increase in salary
expense and a $1.5 million increase in employee benefits expense. Increases
were also noted in occupancy expense and postage expense. Tables 17 and 18 are
useful when making quarterly comparisons.
COMMITMENTS AND CONTINGENCIES
As a normal part of its business, BancShares, FCB, ASB and other
subsidiaries enter into various contractual obligations and participate in
certain commercial commitments. Table 20 identifies significant obligations and
commitments at December 31, 2001.
Table 20
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Payments Due by Period
-----------------------------------------------------------
Type of Obligation Less than 1 year 1-3 years 4-5 years Thereafter Total
------------------ ---------------- --------- --------- ---------- -----------
(thousands)
Contractual obligations:
Deposits..................... $9,183,482 $576,197 $201,752 $ 174 $ 9,961,605
Short-term borrowings........ 611,390 -- -- -- 611,390
Long-term debt............... 600 669 2,554 280,186 284,009
Operating leases............. 10,745 15,369 8,115 47,471 81,700
---------- -------- -------- ---------- -----------
Total contractual obligations $9,806,217 $592,235 $212,421 $ 327,831 $10,938,704
========== ======== ======== ========== ===========
Commercial commitments:
Loan commitments............. $ 709,455 $ 48,073 $ 28,355 $2,769,427 $ 3,555,309
Standy letters of credit..... 25,884 -- -- -- 25,884
---------- -------- -------- ---------- -----------
Total commercial commitments. $ 735,339 $ 48,073 $ 28,355 $2,769,427 $ 3,581,193
========== ======== ======== ========== ===========
LEGAL PROCEEDINGS
BancShares and various subsidiaries have been named as defendants in various
legal actions arising from their normal business activities in which damages in
various amounts are claimed. Although the amount of any ultimate liability with
respect to such matters cannot be determined, in the opinion of management, any
such liability will not have a material effect on BancShares' consolidated
financial position.
RELATED PARTY TRANSACTIONS
BancShares' related parties include our directors and officers and their
associates. There are also several other financial institutions that, as a
result of significant common ownership, are viewed as related parties.
Transactions between BancShares and its related parties that were significant
to net income include $17.3 million and $14.4 million in fees from processing
services earned during 2001 and 2000, respectively. Additionally, during 2000,
BancShares recognized $4.1
28
million in gain on sale of branches that resulted from transactions with
related parties. During 2001 and 2000, BancShares paid $3.5 million and $3.2
million to the law firm that serves as our General Counsel. The senior member
of that firm serves on our board of directors.
At December 31, 2001, loans outstanding include $28.5 million in loans to
related parties, while investment securities available for sale includes $10.3
million in equity investments of related parties. Short-term borrowings include
$24.9 million in federal funds purchased from related parties. Additionally,
BancShares has $30.1 million in unfunded loan commitments to related parties.
During 2001, BancShares purchased $3.14 million in consumer loans from a
related party.
CURRENT ACCOUNTING AND REGULATORY ISSUES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133), which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. BancShares adopted the provisions of Statement 133 on
January 1, 2001, but, as a result of BancShares' limited use of derivative
instruments, the adoption of Statement 133 did not have a material impact on
its consolidated financial statements.
In July 2001, the FASB released two new accounting standards related to
business combinations, goodwill and intangible assets. SFAS No. 141 "Business
Combinations" (Statement 141) requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. Statement
141 also specifies criteria that intangible assets acquired in a purchase
method business combination must meet in order to be recognized and reported
apart from goodwill.
SFAS No. 142 "Goodwill and Other Intangible Assets" (Statement 142) requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. Statement 142
also will require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values and be reviewed for impairment in accordance with FASB's SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." 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.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act, which statements are
inherently subject to risks and uncertainties. Forward-looking statements are
statements that include projections, predictions, expectations or beliefs about
future events or results or otherwise are not statements of historical fact.
Such statements are often characterized by the use of qualifying words (and
their derivatives) such as "expect," "believe," "estimate," "plan," "project,"
"anticipate," or other statements concerning opinions or judgment of BancShares
and its management about future events. Factors that could influence the
accuracy of such forward-looking statements include, but are not limited to,
the financial success or changing strategies of BancShares' customers, actions
of government regulators, the level of market interest rates, and general
economic conditions.
29
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
FIRST CITIZENS BANCSHARES, INC.
We have audited the accompanying consolidated balance sheets of First
Citizens BancShares, Inc. and Subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Citizens BancShares, Inc. and Subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Raleigh, North Carolina
January 28, 2002
30
CONSOLIDATED BALANCE SHEETS
First Citizens BancShares, Inc. and Subsidiaries
December 31
------------------------------
2001 2000
----------- -----------
(thousands, except share data)
ASSETS
Cash and due from banks................................................................ $ 758,987 $ 755,930
Overnight investments.................................................................. 501,909 431,382
Investment securities held to maturity (fair value of $2,680,700 in 2001
and $1,783,888 in 2000).............................................................. 2,658,851 1,778,166
Investment securities available for sale (cost of $119,797 in 2001 and $28,875 in 2000) 132,445 38,554
Loans.................................................................................. 7,196,177 7,109,692
Less reserve for loan losses........................................................... 107,087 102,655
----------- -----------
Net loans........................................................................... 7,089,090 7,007,037
Premises and equipment................................................................. 483,084 444,731
Income earned not collected............................................................ 63,604 62,580
Other assets........................................................................... 177,021 173,237
----------- -----------
Total assets........................................................................ $11,864,991 $10,691,617
=========== ===========
LIABILITIES
Deposits:
Noninterest-bearing................................................................... $ 1,650,101 $ 1,373,880
Interest-bearing...................................................................... 8,311,504 7,597,988
----------- -----------
Total deposits...................................................................... 9,961,605 8,971,868
Short-term borrowings.................................................................. 611,390 632,372
Long-term obligations.................................................................. 284,009 154,332
Other liabilities...................................................................... 122,944 122,317
----------- -----------
Total liabilities................................................................... 10,979,948 9,880,889
Shareholders' equity
Common stock:
Class A--$1 par value (11,000,000 shares authorized; 8,797,154 shares issued
for 2001; 8,813,454 shares issued for 2000)......................................... 8,797 8,813
Class B--$1 par value (2,000,000 shares authorized; 1,686,302 shares issued
for 2001; 1,709,382 shares issued for 2000)......................................... 1,686 1,709
Surplus................................................................................ 143,766 143,766
Retained earnings...................................................................... 723,122 650,148
Accumulated other comprehensive income................................................. 7,672 6,292
----------- -----------
Total shareholders' equity.......................................................... 885,043 810,728
----------- -----------
Total liabilities and shareholders' equity.......................................... $11,864,991 $10,691,617
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
31
CONSOLIDATED STATEMENTS OF INCOME
First Citizens BancShares, Inc. and Subsidiaries
Year Ended December 31
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
(thousands, except share and per share data
INTEREST INCOME
Loans............................................................. $ 566,592 $ 584,475 $ 510,272
Investment securities:
U. S. Government................................................ 117,608 96,576 106,435
State, county and municipal..................................... 263 226 147
Dividends....................................................... 2,288 764 548
----------- ----------- -----------
Total investment securities interest and dividend income...... 120,159 97,566 107,130
Overnight investments............................................. 28,676 26,129 16,489
----------- ----------- -----------
Total interest income......................................... 715,427 708,170 633,891
INTEREST EXPENSE
Deposits.......................................................... 310,752 298,956 244,921
Short-term borrowings............................................. 20,643 31,219 23,921
Long-term obligations............................................. 15,115 12,653 12,700
----------- ----------- -----------
Total interest expense........................................ 346,510 342,828 281,542
----------- ----------- -----------
Net interest income........................................... 368,917 365,342 352,349
Provision for loan losses......................................... 24,134 15,488 11,672
----------- ----------- -----------
Net interest income after provision for loan losses........... 344,783 349,854 340,677
NONINTEREST INCOME
Service charges on deposit accounts............................... 70,066 59,384 55,169
Credit card income................................................ 42,759 36,837 30,820
Commission-based income........................................... 19,774 17,295 13,772
Fees from processing services..................................... 17,452 14,556 12,987
Trust income...................................................... 15,114 14,814 13,848
Mortgage income................................................... 12,557 5,172 6,440
ATM income........................................................ 11,192 10,844 10,655
Other service charges and fees.................................... 13,896 12,077 9,935
Gain on sale of mortgage servicing rights......................... 300 20,187 --
Gain on sale of branches.......................................... -- 4,085 5,063
Securities gains.................................................. 7,189 1,810 1,706
Other............................................................. 5,256 5,129 4,944
----------- ----------- -----------
Total noninterest income...................................... 215,555 202,190 165,339
NONINTEREST EXPENSE
Salaries and wages................................................ 181,018 168,778 160,440
Employee benefits................................................. 35,897 32,136 30,455
Occupancy expense................................................. 35,584 33,835 30,041
Equipment expense................................................. 40,861 38,153 37,745
Other............................................................. 129,237 121,882 116,939
----------- ----------- -----------
Total noninterest expense..................................... 422,597 394,784 375,620
----------- ----------- -----------
Income before income taxes........................................ 137,741 157,260 130,396
Income taxes...................................................... 50,805 58,949 48,596
----------- ----------- -----------
Net income.................................................... 86,936 98,311 81,800
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Unrealized securities gains (losses) arising during period........ 2,357 816 (1,384)
Less: reclassification adjustment for gains included in net income 977 1,104 1,083
----------- ----------- -----------
Other comprehensive income (loss)............................... 1,380 (288) (2,467)
----------- ----------- -----------
Comprehensive income............................................ $ 88,316 $ 98,023 $ 79,333
=========== =========== ===========
PER SHARE INFORMATION
Net income...................................................... $ 8.27 $ 9.32 $ 7.70
Cash dividends.................................................. 1.00 1.00 1.00
Weighted average shares outstanding............................... 10,507,289 10,551,607 10,625,457
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
32
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'
Stock Stock Surplus Earnings Income Equity
- - ------- ------- -------- -------- ------------- -------------
(thousands, except share data)
Balance at December 31, 1998............ $8,906 $1,720 $143,760 $497,316 $ 9,047 $660,749
Redemption of 10,075 shares of Class A
common stock.......................... (10) (696) (706)
Net income.............................. 81,800 81,800
Other comprehensive loss, net of taxes.. (2,467) (2,467)
Cash dividends.......................... (10,619) (10,619)
Other................................... (6) 6 --
------ ------ -------- -------- ------- --------
Balance at December 31, 1999............ 8,890 1,720 143,766 567,801 6,580 728,757
Redemption of 76,585 shares of Class A
common stock.......................... (77) (4,653) (4,730)
Redemption of 10,978 shares of Class B
common stock.......................... (11) (765) (776)
Net income.............................. 98,311 98,311
Other comprehensive loss, net of taxes.. (288) (288)
Cash dividends.......................... (10,546) (10,546)
------ ------ -------- -------- ------- --------
Balance at December 31, 2000............ 8,813 1,709 143,766 650,148 6,292 810,728
Redemption of 16,300 shares of Class A
common stock.......................... (16) (1,407) (1,423)
Redemption of 23,080 shares of Class B
common stock.......................... (23) (2,049) (2,072)
Net income.............................. 86,936 86,936
Other comprehensive income, net of taxes 1,380 1,380
Cash dividends.......................... (10,506) (10,506)
------ ------ -------- -------- ------- --------
Balance at December 31, 2001............ $8,797 $1,686 $143,766 $723,122 $ 7,672 $885,043
====== ====== ======== ======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
33
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Citizens BancShares, Inc. and Subsidiaries
Year Ended December 31,
------------------------------------
2001 2000 1999
----------- ----------- ----------
(thousands)
OPERATING ACTIVITIES
Net income................................................................... $ 86,936 $ 98,311 $ 81,800
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles................................................ 11,636 11,323 12,236
Provision for loan losses.................................................. 24,134 15,488 11,672
Deferred tax expense (benefit)............................................. (676) 516 (3,478)
Change in current taxes payable............................................ 954 832 (6,697)
Depreciation............................................................... 34,339 30,349 30,849
Change in accrued interest payable......................................... (3,986) 27,469 (4,462)
Change in income earned not collected...................................... (1,024) (10,095) 9,031
Securities gains........................................................... (7,189) (1,810) (1,706)
Gain on sale of branches................................................... -- (4,085) (5,063)
Gain on sale of mortgage servicing rights.................................. (300) (20,187) --
Provision for branches to be closed........................................ 1,334 3,102 --
Origination of loans held for sale......................................... (414,082) (247,621) (468,109)
Proceeds from sale of loans held for sale.................................. 614,115 251,378 531,640
Gain on loans held for sale................................................ (3,013) (484) (2,485)
Net amortization of premiums............................................... 10,022 (1,016) 12,176
Net change in other assets................................................. (12,428) 2,163 (4,832)
Net change in other liabilities............................................ 2,625 (358) (4,267)
----------- ----------- ----------
Net cash provided by operating activities............................... 343,397 155,275 188,305
----------- ----------- ----------
INVESTING ACTIVITIES
Net change in loans outstanding............................................ (292,020) (451,150) (664,314)
Purchases of investment securities held to maturity........................ (2,382,522) (1,373,185) (463,313)
Purchases of investment securities available for sale...................... (97,616) (21,651) (2,170)
Maturities of investment securities held to maturity....................... 1,491,815 949,356 1,233,188
Sales and maturities of investment securities available for sale........... 13,883 2,337 7,624
Proceeds from sale of mortgage servicing rights............................ -- 26,513 --
Net change in overnight investments........................................ (70,527) 42,011 (240,668)
Dispositions of premises and equipment..................................... 8,058 5,353 6,447
Additions to premises and equipment........................................ (79,923) (84,246) (68,869)
Purchase and sales of branches, net of cash transferred.................... 34,574 120,042 (104,903)
----------- ----------- ----------
Net cash used by investing activities................................... (1,374,278) (784,620) (296,978)
----------- ----------- ----------
FINANCING ACTIVITIES
Net change in time deposits................................................ 165,349 613,802 (61,568)
Net change in demand and other interest-bearing deposits................... 773,895 133,200 273,173
Net change in short-term borrowings........................................ (21,827) 61,520 (2,957)
Originations of long-term obligations...................................... 130,522 1,200 --
Repurchases of common stock................................................ (3,495) (5,506) (706)
Cash dividends paid........................................................ (10,506) (10,546) (10,619)
----------- ----------- ----------
Net cash provided by financing activities............................... 1,033,938 793,670 197,323
----------- ----------- ----------
Change in cash and due from banks............................................ 3,057 164,325 88,650
Cash and due from banks at beginning of year................................. 755,930 591,605 502,955
----------- ----------- ----------
Cash and due from banks at end of year....................................... $ 758,987 $ 755,930 $ 591,605
=========== =========== ==========
CASH PAYMENTS FOR:
Interest................................................................... $ 350,496 $ 315,359 $ 285,507
Income taxes............................................................... 51,321 58,096 56,754
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Unrealized securities gains (losses)....................................... 2,969 (1,143) (3,871)
Reclassification of loans to held for sale................................. 177,817 -- --
See accompanying Notes to Consolidated Financial Statements.
34
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
First Citizens BancShares, Inc. (BancShares) is a financial holding company
with two banking subsidiaries--First-Citizens Bank & Trust Company,
headquartered in Raleigh, North Carolina (FCB), which operates branches in
North Carolina, Virginia and West Virginia; and Atlantic States Bank (ASB), a
federally-chartered thrift institution headquartered in Fort Myers, Florida
with branch offices in the metropolitan Atlanta, Georgia area and Florida.
FCB and ASB offer full-service banking services designed to meet the needs
of both retail and commercial customers in the markets in which they serve. The
services offered include transaction and savings deposits, commercial and
consumer lending, a full service trust department, a full service securities
broker-dealer, insurance services and other activities incidental to commercial
banking. BancShares is also the parent company of American Guaranty Insurance
Company, which is engaged in writing property and casualty insurance, and
Neuse, Incorporated, which owns some of the real property from which FCB
and ASB operate their branches.
FCB has five subsidiaries. First Citizens Investor Services is a registered
broker-dealer that provides investment services, including sales of annuities
and third party mutual funds. Nantahala, Inc. owns loans originated by FCB.
First-Citizens Bank, A Virginia Corporation (FCB-AVC), is the issuing and
processing bank for BancShares' retail credit cards and merchant accounts.
Pisgah, Inc., a wholly-owned subsidiary of FCB-AVC, owns credit card
receivables. Other subsidiaries are either inactive or are not material to the
consolidated financial statements.
The preparation of consolidated 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 disclosure of contingent liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The most significant estimates made by BancShares in the
preparation of its consolidated financial statements are the determination of
the reserve for loan losses, the valuation allowance for deferred tax assets,
and fair value estimates.
Intercompany accounts and transactions have been eliminated. Certain amounts
for prior years have been reclassified to conform with statement presentations
for 2001. However, the reclassifications have no effect on shareholders' equity
or net income as previously reported.
Investment Securities
For investment securities classified as held to maturity, BancShares has the
ability and the positive intent to hold those investments until maturity. These
securities are stated at cost adjusted for amortization of premium and
accretion of discount. Accreted discounts and amortized premiums are included
in interest income on an effective yield basis. Available for sale securities
are carried at their fair value with the difference between the cost basis and
the fair value, net of deferred income taxes, recorded as a component of
accumulated other comprehensive income within shareholders' equity. At December
31, 2001 and 2000, BancShares had no investment securities held for trading
purposes.
Overnight Investments
Overnight investments include federal funds sold and interest-bearing demand
deposit balances in other banks.
Loans
Loans that are held for investment purposes are carried at the principal
amount outstanding. Loans that are classified as held for sale are carried at
the lower of aggregate cost or fair value. Interest on substantially all loans
is accrued and credited to interest income on a constant yield basis based upon
the daily principal amount outstanding.
35
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Loan Fees
Fees collected and certain costs incurred related to loan originations are
deferred and amortized as an adjustment to interest income over the life of the
related loans. The deferred fees and costs are recorded as an adjustment to
loans outstanding using a method that approximates a constant yield.
Mortgage Servicing Rights
There are no capitalized mortgage servicing rights (MSRs) outstanding at
December 31, 2001 and 2000 due to the sale of BancShares' then-existing
mortgage servicing rights during the third quarter of 2000. At December 31,
1999, the carrying value of MSRs was included in other assets on BancShares'
consolidated balance sheet. Capitalization of MSRs occurs when the underlying
loan is sold. Capitalized MSRs are amortized over the projected life of the
serviced loans and are periodically reviewed for impairment.
Reserve for Loan Losses
The reserve for loan losses is established by charges to operating expense.
To determine the reserve needed, management evaluates the risk characteristics
of the loan portfolio under current economic conditions and considers such
factors as the financial condition of the borrower, fair value of collateral
and other items that, in management's opinion, deserve current recognition in
estimating credit losses.
Management considers the established reserve adequate to absorb probable
losses that relate to loans outstanding as of December 31, 2001, although
future additions to the reserve may be necessary based on changes in economic
and other conditions. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review BancShares' reserve for
loan losses. Such agencies may require the recognition of additions to the
reserve based on their judgments of information available to them at the time
of their examination.
Nonaccrual Loans, Impaired Loans and Other Real Estate
Accrual of interest on certain residential mortgage loans is discontinued
when the loan is more than three payments past due. Accrual of interest on all
other loans is discontinued when management deems that collection of additional
principal or interest is doubtful. Residential mortgage loans return to an
accrual status when the loan balance is less than three payments past due.
Other loans are returned to an accrual status when both principal and interest
are current and the loan is determined to be performing in accordance with the
applicable loan term. Management considers a loan to be impaired when based on
current information and events, it is probable that a borrower will be unable
to pay all amounts due according to contractual terms of the loan agreement.
Impaired loans are valued using either the discounted expected cash flow method
using the loan's original effective interest rate or the collateral value. When
the ultimate collectibility of an impaired loan's principal is doubtful, all
cash receipts are applied to principal. Once the recorded principal balance has
been reduced to zero, future cash receipts are applied to interest income, to
the extent that any interest has been foregone. Additional cash receipts are
recorded as recoveries of any amounts previously charged off.
Other real estate is valued at the lower of the loan balance at the time of
foreclosure or estimated fair value net of selling costs and is included in
other assets. Once acquired, other real estate is periodically reviewed to
ensure that the fair value of the property supports the carrying value, with
writedowns recorded when necessary. Gains and losses resulting from the sale or
writedown of other real estate and income and expenses related to the operation
of other real estate are recorded in other expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. For financial reporting purposes, depreciation and amortization
are computed by the straight-line method and are charged to operations over the
36
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
estimated useful lives of the assets, which range from 25 to 40 years for
premises and three to 10 years for furniture and equipment. Leasehold
improvements are amortized over the terms of the respective leases or the
useful lives of the improvements, whichever is shorter. Gains and losses on
dispositions are recorded in other expense. Maintenance and repairs are charged
to occupancy expense or equipment expense as incurred.
Goodwill and Intangible Assets
Goodwill and intangible assets that result from acquisitions represent the
excess of the purchase price over the fair value of net assets acquired.
Goodwill and acquisition-related intangible assets are amortized on a
straight-line basis over their estimated useful lives, which are reviewed
periodically for reasonableness. At December 31, 2001 and 2000, the carrying
value of goodwill was $41,240 and $46,340, respectively, while the carrying
value of acquisition-related intangible assets was $70,328 and $72,418,
respectively.
The amortization expense of goodwill and acquisition-related intangible
assets is included in other expense. Goodwill amortization expense totaled
$5,100, $5,655 and $5,988 during 2001, 2000 and 1999, respectively. The
amortization expense of acquisition-related intangible assets was $6,485,
$4,982 and $4,975 during 2001, 2000 and 1999, respectively.
Impairment of Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment equals the amount by which the
carrying amount exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
Income Taxes
Income tax expense is based on consolidated income before income taxes and
generally differs from income taxes paid due to deferred income taxes and
benefits arising from income and expenses being recognized in different periods
for financial and income tax reporting purposes. BancShares uses the asset and
liability method to account for deferred income taxes. The objective of the
asset and liability method is to establish deferred tax assets and liabilities
for the temporary differences between the financial reporting basis and the
income tax basis of BancShares' assets and liabilities at enacted rates
expected to be in effect when such amounts are realized or settled. BancShares
and its subsidiaries file a consolidated federal income tax return. BancShares
and its subsidiaries each file separate state income tax returns.
Per Share Data
Net income per share has been computed by dividing net income by the
weighted average number of both classes of common shares outstanding during
each period. The weighted average number of shares outstanding for 2001, 2000
and 1999 was 10,507,289; 10,551,607; and 10,625,457, respectively. BancShares
had no potential common stock outstanding in any period.
Cash dividends per share apply to both Class A and Class B common stock.
Shares of Class A common stock carry one vote per share, while shares of Class
B common stock carry 16 votes per share.
Comprehensive Income
Accumulated other comprehensive income consists entirely of unrealized gains
(losses) on investment securities available for sale.
37
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The tax effects of the components of other comprehensive income included in
the consolidated statements of income are as follows for the years ended
December 31:
2001 2000 1999
- - ------ ----- -------
Unrealized gains (losses) arising during the period................ $2,226 $(149) $ (781)
Less: reclassification adjustments for gains included in net income 637 706 623
------ ----- -------
Total tax effect................................................... $1,589 $(855) $(1,404)
====== ===== =======
Current Accounting Matters
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133), which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. BancShares adopted the provisions of Statement 133 on
January 1, 2001, but, as a result of BancShares' limited use of derivative
instruments, the adoption of Statement 133 did not have a material impact on
its consolidated financial statements.
In July 2001, the FASB released two new accounting standards related to
business combinations and goodwill and intangible assets. SFAS No. 141
"Business Combinations" (Statement 141) requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet in order to be recognized and
reported apart from goodwill.
SFAS No. 142 "Goodwill and Other Intangible Assets" (Statement 142) requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. Statement 142
also will require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values and be reviewed for impairment in accordance with FASB's SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." 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.
38
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE B--INVESTMENT SECURITIES
The aggregate values of investment securities at December 31 along with
gains and losses determined on an individual security basis are as follows:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
Investment securities held to maturity at December 31
2001
U. S. Government....................................... $2,655,257 $24,879 $(3,182) $2,676,954
State, county and municipal............................ 3,309 152 -- 3,461
Other.................................................. 285 -- -- 285
---------- ------- ------- ----------
Total investment securities held to maturity........ $2,658,851 $25,031 $(3,182) $2,680,700
========== ======= ======= ==========
2000
U. S. Government....................................... $1,773,722 $ 8,221 $(2,670) $1,779,273
State, county and municipal............................ 4,139 171 -- 4,310
Other.................................................. 305 -- -- 305
---------- ------- ------- ----------
Total investment securities held to maturity........ $1,778,166 $ 8,392 $(2,670) $1,783,888
========== ======= ======= ==========
Investment securities available for sale at December 31
2001
U. S. Government....................................... $ 77,255 $ -- $ (28) $ 77,227
Marketable equity securities........................... 41,279 12,839 (181) 53,937
State, county and municipal............................ 1,263 18 -- 1,281
---------- ------- ------- ----------
Total investment securities available for sale...... $ 119,797 $12,857 $ (209) $ 132,445
========== ======= ======= ==========
2000
Marketable equity securities........................... $ 27,611 $ 9,660 $ -- $ 37,271
State, county and municipal............................ 1,264 19 -- 1,283
---------- ------- ------- ----------
Total investment securities available for sale...... $ 28,875 $ 9,679 $ -- $ 38,554
========== ======= ======= ==========
The following table provides maturity information for investment securities
at December 31. Callable securities are assumed to mature on their earliest
call date.
2001 2000
--------------------- ---------------------
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
Investment securities held to maturity
Maturing in:
One year or less......................................... $2,453,866 $2,475,458 $1,451,204 $1,452,990
One through five years................................... 197,684 197,696 316,987 320,733
Five to 10 years......................................... 541 554 460 466
Over 10 years............................................ 6,760 6,992 9,515 9,699
---------- ---------- ---------- ----------
Total investment securities held to maturity.......... $2,658,851 $2,680,700 $1,778,166 $1,783,888
========== ========== ========== ==========
Investment securities available for sale
Maturing in:
One year or less....................................... $ 51,560 $ 51,563 $ -- $ --
One through five years................................. 25,695 25,664 -- --
Over 10 years.......................................... 1,263 1,281 1,264 1,283
Marketable equity securities............................... 41,279 53,937 27,611 37,271
---------- ---------- ---------- ----------
Total investment securities available for sale...... $ 119,797 $ 132,445 $ 28,875 $ 38,554
========== ========== ========== ==========
39
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
During 2001, sales and exchanges of investment securities available for sale
resulted in gross realized gains of $7,189. There were no losses realized.
During 2000, sales of investment securities available for sale resulted in
gross realized gains of $1,976. BancShares also realized a loss of $166
resulting from an impaired investment. During 1999, BancShares recognized gross
gains of $1,706 on the sale of investment securities available for sale.
Investment securities having an aggregate carrying value of $1,425,832 at
December 31, 2001 and $1,285,386 at December 31, 2000, were pledged as
collateral to secure public funds on deposit, to secure certain short-term
borrowings and for other purposes as required by law.
NOTE C--LOANS
Loans outstanding at December 31 include the following:
2001 2000
---------- ----------
Loans secured by real estate:
Construction and land development.. $ 283,968 $ 216,439
Residential mortgage............... 1,338,975 1,550,329
Other real estate mortgage loans... 3,419,593 3,031,124
---------- ----------
Total loans secured by real estate. 5,042,536 4,797,892
Commercial and industrial............. 918,929 933,515
Consumer.............................. 1,074,202 1,218,134
Lease financing....................... 139,966 134,483
All other loans....................... 20,544 25,668
---------- ----------
Total loans........................ $7,196,177 $7,109,692
========== ==========
There were no foreign loans outstanding during either period, nor were there
any loans to finance highly leveraged transactions. There are no loan
concentrations exceeding ten percent of loans outstanding involving multiple
borrowers in similar activities or industries at December 31, 2001.
Substantially all loans are to customers domiciled within BancShares' principal
market areas.
At December 31, 2001, $184,765 in residential mortgage loans were pledged to
secure long-term borrowings. No loans were pledged at December 31, 2000.
At December 31, 2001 and 2000, nonperforming loans consisted of nonaccrual
loans of $13,983 and $15,933, respectively. Gross interest income on
nonperforming loans that would have been recorded had these loans been
performing was $1,060, $1,209 and $894, respectively, during 2001, 2000 and
1999. Interest income recognized on nonperforming loans was $333, $587 and $287
during the respective periods. As of December 31, 2001 and 2000, the balance of
other real estate owned was $6,263 and $1,880. Loans transferred to other real
estate totaled $7,523, $3,019 and $4,500 during 2001, 2000 and 1999.
As part of the management of its exposure to changes in interest rates,
BancShares sells significant portions of its originated residential mortgage
loan portfolio. Loan sale activity is summarized below:
2001 2000 1999
-------- -------- --------
Loans held for sale at December 31 $ -- $ 19,980 $ 23,253
For the year ended December 31:
Loans sold....................... 611,102 250,894 529,155
Net gain on sale of loans........ 3,013 484 2,485
40
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Until 2000, FCB operated a mortgage servicing operation for its own loans
and for loans owned by various investors. During 2000, FCB sold the right to
service $1,633,075 of loans owned by others to an independent third party,
while a separate servicer was retained to service BancShares' residential
mortgage loans. BancShares received $26,513 from the sale of its mortgage
servicing rights and recognized gains of $20,187 during 2000 and $300 during
2001.
The changes in the carrying values of mortgage servicing rights for 2001,
2000 and 1999 are summarized in the following table:
2001 2000 1999
------ ------ ------
Balance at beginning of year... $ -- $6,832 $4,405
Amounts capitalized during year 1,415 180 3,700
Amounts amortized during year.. 51 686 1,273
Amounts sold during the year... 1,364 6,326 --
------ ------ ------
Balance at end of year......... $ -- $ -- $6,832
====== ====== ======
The carrying value of loans serviced for others was $1,646,876 as of
December 31, 1999.
NOTE D--RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses is summarized as follows:
2001 2000 1999
-------- -------- --------
Balance at the beginning of year.... $102,655 $ 98,690 $ 96,115
Reserves released from sale of loans (777) -- --
Provision for loan losses........... 24,134 15,488 11,672
Loans charged off................... (22,292) (15,906) (13,687)
Loans recovered..................... 3,367 4,383 4,590
-------- -------- --------
Net charge-offs..................... (18,925) (11,523) (9,097)
-------- -------- --------
Balance at the end of year.......... $107,087 $102,655 $ 98,690
======== ======== ========
At December 31, 2001 and 2000, impaired loans totaled $6,304 and $6,592,
respectively, all of which were classified as nonaccrual. Total reserves of
$2,047 and $1,496 have been established for impaired loans outstanding as
December 31, 2001 and 2000, respectively. The average recorded investment in
impaired loans during the years ended December 31, 2001, 2000 and 1999 was
$6,386, $5,710 and $6,229, respectively. For the years ended December 31, 2001,
2000 and 1999, BancShares recognized cash basis interest income on those
impaired loans of $102, $301 and $143, respectively.
NOTE E--PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows:
2001 2000
-------- --------
Land.......................................... $119,758 $106,175
Premises and leasehold improvements........... 355,859 313,529
Furniture and equipment....................... 224,812 215,638
-------- --------
Total...................................... 700,429 635,342
Less accumulated depreciation and amortization 217,345 190,611
-------- --------
Net book value............................. $483,084 $444,731
======== ========
41
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
BancShares leases certain premises and equipment under various lease
agreements that provide for payment of property taxes, insurance and
maintenance costs. Generally, operating leases provide for one or more renewal
options on the same basis as current rental terms. However, certain leases
require increased rentals under cost of living escalation clauses. Certain of
the leases also provide purchase options.
Future minimum rental commitments for noncancellable operating leases with
initial or remaining terms of one or more years consisted of the following at
December 31, 2001:
Year Ending December 31:
2002...................... $10,745
2003...................... 8,752
2004...................... 6,617
2005...................... 4,403
2006...................... 3,712
Thereafter................ 47,471
-------
Total minimum payments. $81,700
=======
Total rent expense for all operating leases amounted to $13,407 in 2001,
$14,897 in 2000 and $13,946 in 1999.
NOTE F--DEPOSITS
Deposits at December 31 are summarized as follows:
2001 2000
---------- ----------
Demand................ $1,650,101 $1,373,880
Checking With Interest 1,281,222 1,140,472
Money market accounts. 1,994,211 1,621,193
Savings............... 609,685 600,671
Time.................. 4,426,386 4,235,652
---------- ----------
Total deposits..... $9,961,605 $8,971,868
========== ==========
Time deposits with a minimum denomination of $100 totaled $1,156,907 and
$888,541 at December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of time deposits were:
2002................... $3,648,263
2003................... 474,198
2004................... 101,999
2005................... 122,331
2006................... 79,421
Thereafter............. 174
----------
Total time deposits. $4,426,386
==========
42
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE G--SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are as follows:
2001 2000
-------- --------
Master notes................... $305,537 $322,944
Repurchase agreements.......... 201,763 181,404
Federal funds purchased........ 41,700 71,825
Other.......................... 62,390 56,199
-------- --------
Total short-term borrowings. $611,390 $632,372
======== ========
At December 31, 2001, BancShares and its subsidiaries had unused credit
lines allowing access of up to $500,000 on an unsecured basis. These included
overnight borrowings and short-term borrowings under credit facilities with
other banks. Additionally, under various borrowing arrangements with the
Federal Reserve and the Federal Home Loan Bank of Atlanta, BancShares and its
subsidiaries have access, on a secured basis, to additional borrowings as
needed.
NOTE H--LONG-TERM OBLIGATIONS
Long-term obligations at December 31 include:
2001 2000
-------- --------
Trust preferred capital securities at 8.05 percent maturing March 5, 2028... $150,000 $150,000
Trust preferred capital securities at 8.40 percent maturing October 31, 2031 100,000 --
Obligations to the Federal Home Loan Bank, secured by mortgage loans:
Maturing September 9, 2011 at a fixed rate of 5.87 percent................. 15,000 --
Maturing September 9, 2021 at a fixed rate of 6.29 percent................. 15,000 --
Unsecured fixed rate notes payable:
8.00 percent maturing February 23, 2005.................................... 2,178 2,178
7.50 percent note due in annual installments maturing March 1, 2005........ 884 1,200
7.50 percent note maturing March 1, 2006................................... 375 --
6.75 percent note due in annual installments maturing September 1, 2003.... 252 755
Other....................................................................... 320 199
-------- --------
Total long-term obligations.............................................. $284,009 $154,332
======== ========
The 8.05 percent trust preferred capital securities issued in 1998 (1998
Preferred Securities) were issued by a wholly-owned finance subsidiary of
BancShares, and BancShares has fully and unconditionally guaranteed the
repayment of those securities. The proceeds from the issuance of the 1998
Preferred Securities were invested in debentures issued by BancShares and that
investment became the sole asset of the trust. BancShares then made a capital
infusion into FCB. The 1998 Preferred Securities qualify as Tier 1 capital for
regulatory capital adequacy requirements for BancShares and FCB. BancShares may
redeem the 1998 Preferred Securities in whole or in part after March 1, 2008.
The 1998 Preferred Securities mature on March 1, 2028.
The 8.40 percent trust preferred capital securities issued in 2001 (2001
Preferred Securities) were issued by a wholly-owned finance subsidiary of
BancShares, and BancShares has fully and unconditionally guaranteed the
repayment of those securities. The proceeds from the issuance of 2001 Preferred
Securities were invested in debentures issued by BancShares and that investment
became the sole asset of the trust. The 2001 Preferred Securities qualify as
Tier 1 capital for regulatory capital adequacy requirements for BancShares and
FCB. BancShares may redeem 2001 Preferred Securities in whole or in part on or
after October 31, 2006. The 2001 Preferred Securities mature on October 31,
2031.
43
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Long-term obligations maturing in each of the five years subsequent to
December 31, 2001 include:
2002...... $ 600
2003...... 348
2004...... 321
2005...... 2,178
2006...... 376
Thereafter 280,186
--------
$284,009
========
NOTE I--COMMON STOCK
On October 22, 2001 the Board of Directors of BancShares authorized the
purchase in the open market or in private transactions of up to 300,000 shares
of its outstanding Class A common stock and up to 100,000 shares of its
outstanding Class B common stock. The authorization is effective for a period
of 12 months. During 2000 and 1999 the Board of Directors of BancShares had
made similar authorizations to repurchase shares of BancShares stock.
The following table provides information related to shares purchased
pursuant to authorizations for the years ended December 31:
2001 2000 1999
------- ------- -------
Class A
Number of shares purchased. 16,300 76,585 10,075
Cash disbursed............. $ 1,423 $ 4,730 $ 706
Class B
Number of shares purchased. 23,080 10,978 --
Cash disbursed............. $ 2,072 $ 776 $ --
Stock purchases are retired by a charge to common stock for the par value of
the shares retired and to retained earnings for the cost in excess of par value.
NOTE J--ESTIMATED FAIR VALUES
Fair value estimates are made at a specific point in time based on relevant
market information and information about each financial instrument. Where
information regarding the fair value of a financial instrument is available,
those values are used, as is the case with investment securities and
residential mortgage loans. In these cases, an open market exists in which
those financial instruments are actively traded.
44
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Because no market exists for many financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. For those financial instruments with a fixed interest rate, an
analysis of the related cash flows was the basis for estimating fair values.
The expected cash flows were then discounted to the valuation date using an
appropriate discount rate. The discount rates used represent the rates under
which similar transactions would be currently negotiated. Generally, the fair
value of variable rate financial instruments equals the book value.
2001 2000
- - ---------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- ---------- ----------
Cash and due from banks................. $ 758,987 $ 758,987 $ 755,930 $ 755,930
Overnight investments................... 501,909 501,909 431,382 431,382
Investment securities held to maturity.. 2,658,851 2,680,700 1,778,166 1,783,888
Investment securities available for sale 132,445 132,445 38,554 38,554
Loans, net of reserve for loan losses... 7,089,090 7,203,530 7,007,037 7,003,208
Income earned not collected............. 63,604 63,604 62,580 62,580
Deposits................................ 9,961,605 10,032,388 8,971,868 8,893,773
Short-term borrowings................... 611,390 611,390 632,372 632,372
Long-term obligations................... 284,009 275,185 154,332 122,152
Accrued interest payable................ 71,313 71,313 75,299 75,299
No forward commitments to sell loans existed at December 31, 2001. Forward
commitments to sell loans as of December 31, 2000 had no carrying value and
unrealized losses of $185. For other off-balance sheet commitments and
contingencies, carrying amounts are reasonable estimates of the fair values for
such financial instruments. Carrying amounts include unamortized fee income
and, in some cases, reserves for any credit losses from those financial
instruments. These amounts are not material to BancShares' financial position.
NOTE K--EMPLOYEE BENEFIT PLANS
Employees who qualify under length of service and other requirements
participate in a noncontributory defined benefit pension plan. Under the plan,
retirement benefits are based on years of service and average earnings. The
policy is to fund the maximum amount that is deductible for federal income tax
purposes. During 2001, BancShares contributed $1,343 the plan. No contributions
were made during the two-year period ending December 31, 2000. The plan's
assets consist primarily of investments in FCB's common trust funds, which
include listed common stocks and fixed income securities.
45
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The following table sets forth the plan's funded status at December 31:
2001 2000
-------- --------
Change in benefit obligation:
Net benefit obligation at beginning of year.............. $155,379 $140,002
Service cost............................................. 6,988 5,912
Interest cost............................................ 11,883 10,890
Actuarial (gain) loss.................................... 11,583 7,904
Gross benefits paid...................................... (7,167) (9,329)
-------- --------
Net benefit obligation at end of year.................... $178,666 $155,379
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year........... $177,283 $183,582
Actual return on plan assets............................. (1,281) 3,030
Employer contributions................................... 1,343 --
Gross benefits paid...................................... (7,167) (9,329)
-------- --------
Fair value of plan assets at end of year................. $170,178 $177,283
======== ========
Funded status at end of year.............................. $ (8,488) $ 21,904
Unrecognized net actuarial gain........................... (7,121) (32,738)
Unrecognized prior service cost........................... 583 737
Unrecognized net transition asset......................... (1,164) (2,392)
-------- --------
Net amount recognized in other liabilities at end of year $(16,190) $(12,489)
======== ========
The net periodic pension cost for the years ended December 31 included the
following:
2001 2000 1999
-------- -------- --------
Components of net periodic benefit cost:
Service cost........................... $ 6,988 $ 5,912 $ 6,131
Interest cost.......................... 11,883 10,890 10,075
Expected return on assets.............. (12,753) (12,221) (10,712)
Amortization of:
Transition asset..................... (1,228) (1,228) (1,228)
Prior service cost................... 154 154 154
-------- -------- --------
Total net periodic benefit cost...... $ 5,044 $ 3,507 $ 4,420
======== ======== ========
Prior service cost is being amortized on a straight-line basis over the
estimated average remaining service period of employees. In determining the
projected benefit obligation at December 31, 2001, 2000 and 1999, the following
assumptions were used:
2001 2000 1999
---- ---- ----
Weighted average discount rate......... 7.00% 7.25% 7.50%
Long-term rate of return on plan assets 8.50 8.50 8.50
Rate of future compensation increases.. 4.75 4.75 4.75
Employees are also eligible to participate in a 401(k) plan after 31 days of
service. The 401(k) plan allows associates to defer portions of their salary.
Based on the employee's contribution, BancShares will match up to 75% of the
employee contribution. BancShares made participating contributions of $5,327,
$5,210 and $4,654 during 2001, 2000 and 1999, respectively.
46
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE L--NONINTEREST INCOME AND NONINTEREST EXPENSE
Commission-based income includes commissions from investment broker-dealer
activities of $12,585, $12,974 and $10,700 for 2001, 2000 and 1999,
respectively.
Other noninterest expense for the years ended December 31 consisted of the
following:
2001 2000 1999
-------- -------- --------
Credit card expense................ $ 19,514 $ 16,870 $ 14,712
Amortization of intangibles........ 11,585 10,637 10,963
Telecommunications expense......... 11,052 10,799 10,052
Postage expense.................... 8,055 7,062 7,096
Advertising expense................ 6,928 7,277 7,313
Consultant expense................. 3,470 5,273 5,840
Other.............................. 68,633 63,964 60,963
-------- -------- --------
Total other noninterest expense. $129,237 $121,882 $116,939
======== ======== ========
NOTE M--INCOME TAXES
At December 31, income tax expense consisted of the following:
2001 2000 1999
------- ------- -------
Current tax expense
Federal................................ $49,191 $55,159 $48,261
State.................................. 2,290 3,274 3,813
------- ------- -------
Total current tax expense............ 51,481 58,433 52,074
------- ------- -------
Deferred tax expense (benefit)
Federal................................ (453) (153) (2,754)
State.................................. (223) 669 (724)
------- ------- -------
Total deferred tax expense (benefit). (676) 516 (3,478)
------- ------- -------
Total tax expense.................... $50,805 $58,949 $48,596
======= ======= =======
Income tax expense differed from the amounts computed by applying the
federal income tax rate of 35 percent in each period to pretax income as a
result of the following:
2001 2000 1999
------- ------- -------
Income at statutory rates................................... $48,210 $55,041 $45,639
Increase (reduction) in income taxes resulting from:
Amortization of goodwill................................... 1,785 1,979 2,096
Nontaxable income on loans and investments,
net of nondeductible expenses............................ (991) (1,174) (1,276)
State and local income taxes, including change in valuation
allowance, net of federal income tax benefit............. 1,344 2,563 2,008
Other, net................................................. 457 540 129
------- ------- -------
Total tax expense........................................ $50,805 $58,949 $48,596
======= ======= =======
47
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The net deferred tax asset included the following components at December 31:
2001 2000
------- -------
Reserve for loan losses.................................... $41,257 $39,085
Deferred compensation...................................... 5,348 5,373
Net pension liability...................................... 6,117 4,830
State operating loss carryforward.......................... 1,271 730
Other...................................................... 3,591 3,141
------- -------
Gross deferred tax asset.................................. 57,584 53,159
Less valuation allowance................................... 3,819 2,704
------- -------
Deferred tax asset........................................ 53,765 50,455
------- -------
Accelerated depreciation................................... 5,418 5,132
Lease financing activities................................. 12,306 8,307
Unrealized gain on investment securities available for sale 4,976 3,387
Net deferred loan fees and costs........................... 3,392 3,204
Other...................................................... 502 1,307
------- -------
Deferred tax liability.................................... 26,594 21,337
------- -------
Net deferred tax asset.................................... $27,171 $29,118
======= =======
The valuation allowance of $3,819 and $2,704 at December 31, 2001 and 2000,
respectively, is the amount necessary to reduce BancShares' gross state
deferred tax asset to the amount that is more likely than not to be realized.
NOTE N--RELATED PARTY TRANSACTIONS
BancShares, FCB and ASB have had, and expect to have in the future, banking
transactions in the ordinary course of business with several directors,
officers and their associates (Related Parties), on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. Those transactions neither involve
more than the normal risk of collectibility nor present any unfavorable
features.
An analysis of changes in the aggregate amounts of loans to Related Parties
for the year ended December 31, 2001 is as follows:
Balance at beginning of year $24,771
New loans................... 11,950
Repayments.................. (8,269)
-------
Balance at end of year...... $28,452
=======
Unfunded loan commitments to Related Parties totaled $30,500 at December 31,
2001.
BancShares provides processing and operational services to other financial
institutions. Certain of these institutions are deemed to be Related Parties
since significant shareholders of BancShares are also significant shareholders
of the other banks. During 2001, 2000 and 1999, BancShares received $17,273,
$14,353 and $12,723, respectively, for services rendered to these Related
Parties, substantially all of which is included in fees from processing
services and relates to data processing services, securities portfolio
management services, courier services and retirement plan services.
During 2000 and 1999, BancShares sold several of its branch offices to
Related Parties. Gain on sale of branches includes gains of $4,085 and $4,432
earned on the sale of branches to Related Parties. No such sales occurred
during 2001.
48
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Investment securities available for sale includes investments in certain
Related Parties. For 2001, these investments had a carrying value of $10,272
and a cost of $508. For 2000, these investments had a carrying value of $8,254
and a cost of $508.
Short-term borrowings include federal funds purchased from Related Parties
that totaled $24,850 and $51,765 at December 31, 2001 and 2000.
NOTE O--ACQUISITIONS AND DIVESTITURES
BancShares and its subsidiaries have consummated numerous acquisitions in
recent years. All of the acquisitions have been accounted for as purchases,
with the results of operations not included in BancShares' Consolidated
Statements of Income until after the transaction date. The pro forma impact of
the acquisitions as though they had been made at the beginning of the periods
presented is not material to BancShares' consolidated financial statements.
The following table provides information regarding the acquisitions and
divestitures of branches that have been consummated during the three-year
period ended December 31, 2001:
Year Transaction Assets/1/ Deposits Intangible
---- -------------------------------- -------- --------- ----------
2001 Purchase of two branches by FCB $ 12,014 $ 50,493 $ 3,905
2000 Purchase of six branches by FCB 15,726 143,078 18,138
2000 Sale of four branches by FCB/2/ (94,773) (91,810) (3,780)
1999 Purchase of five branches by ASB 289 27,506 981
1999 Sale of eight branches by FCB/2/ (41,523) (123,048) (1,004)
--------
/1/Excludes the transfer of cash
/2/Sale of certain offices was made to related parties; see Note N
NOTE P--REGULATORY REQUIREMENTS
Various regulatory agencies have implemented guidelines that evaluate
capital based on risk-adjusted assets. An additional capital computation
evaluates tangible capital based on tangible assets. Minimum capital
requirements set forth by the regulators require a Tier 1 capital ratio of no
less than 4 percent, a total capital ratio of no less than 8 percent of risk
adjusted assets, and a leverage capital ratio of no less than 3 percent of
tangible assets. To meet the FDIC's well-capitalized standards, the Tier 1 and
total capital ratios must be at least 6 percent and 10 percent, respectively.
Failure to meet minimum capital requirements may result in certain actions by
regulators that could have a direct material effect on the consolidated
financial statements.
Based on the most recent notifications from its regulators, FCB and ASB are
well capitalized under the regulatory framework for prompt corrective action.
Management believes that as of December 31, 2001, BancShares, FCB and ASB met
all capital adequacy requirements to which they are subject and was not aware
of any conditions or events that would affect FCB's and ASB's well-capitalized
status.
49
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Following is an analysis of FCB and ASB capital ratios as of December 31,
2001 and 2000.
FCB ASB Requirement for
----------------------- -------------------------- Well-capitalized
2001 2000 2001 2000 Status
----------- ---------- ---------------- -------- ----------------
Risk-based capital:
Tier 1 capital................ $ 801,913 $ 782,658 $ 79,112 $ 66,683
Total capital................. 890,779 857,632 87,010 71,156
Risk-adjusted assets............. 7,026,677 6,835,098 712,083 459,998
Quarterly average tangible assets 10,571,665 9,560,837 -- --
Adjusted total assets............ -- -- 866,405 677,358
Tier 1 capital ratio............. 11.41% 11.45% 11.11% 14.50% 6.00%
Total capital ratio.............. 12.68 12.55 12.22 15.47 10.00
Leverage capital ratio........... 7.59 8.19 9.13 9.84 5.00
The Board of Directors of FCB may declare a dividend on a portion of its
undivided profits as it may deem appropriate, subject to the requirements of
the FDIC and the General Statutes of North Carolina, without prior regulatory
approval. As of December 31, 2001 this amount was $575,142. Dividends declared
by FCB amounted to $81,001 in 2001, $50,037 in 2000 and $48,485 in 1999.
BancShares and its banking subsidiaries are subject to certain requirements
imposed by state and federal banking statutes and regulations. These
regulations require the maintenance of noninterest-bearing reserve balances at
the Federal Reserve Bank. Banks are allowed to reduce the required balances by
the amount of its vault cash. For 2001, the requirement was $95,079 for FCB and
$622 for ASB. Both obligations were fully satisfied by vault cash balances.
NOTE Q--COMMITMENTS AND CONTINGENCIES
In the normal course of business, BancShares and its subsidiaries have
financial instruments with off-balance sheet risk in order to meet the
financing needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to extend
credit, standby letters of credit and forward commitments to sell loans. These
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
Established credit standards control the credit-risk exposure associated with
these commitments. In some cases, BancShares requires that collateral be
pledged to secure the commitment. At December 31, 2001 and 2000, BancShares had
unused commitments totaling $3,555,309 and $3,158,561, respectively.
Standby letters of credit are commitments guaranteeing performance of a
customer to a third party. Those guarantees are issued primarily to support
public and private borrowing arrangements. In order to minimize its exposure,
BancShares' credit policies also govern the issuance of standby letters of
credit. At December 31, 2001 and 2000, BancShares had standby letters of credit
amounting to $25,884 and $18,744, respectively.
At December 31, 2000, management had elected to enter into forward
commitments to sell loans as a hedge against fluctuations in market rates for
the commitments to originate residential mortgage loans. These forward
commitments, which totaled $40,000, were at fixed prices and were scheduled to
settle within 60 days of that date. At December 31, 2000 these forward
commitments had no carrying value and unrealized losses of $185. These amounts
are included with
50
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
the carrying value of loans held for sale and commitments to originate mortgage
loans when determining whether a valuation allowance is required to reduce the
loans and commitments to the lower of cost or fair value. No forward
commitments were outstanding at December 31, 2001.
BancShares and various subsidiaries have been named as defendants in various
legal actions arising from their normal business activities in which damages in
various amounts are claimed. Although the amount of any ultimate liability with
respect to such matters cannot be determined, in the opinion of management, any
such liability will not have a material effect on BancShares' consolidated
financial statements.
NOTE R--SEGMENT DISCLOSURES
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. The 'Other'
category in the accompanying table 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 for 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 service fees paid from one
company to another within BancShares' consolidated group.
51
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The following table provides selected financial information for BancShares'
reportable business segments.
2001
-----------------------------------------------------------------------
ASB FCB Other Total Adjustments Consolidated
-------- ----------- ---------- ----------- ----------- ------------
Interest Income.................. $ 52,455 $ 654,096 $ 32,790 $ 739,341 $ (23,914) $ 715,427
Interest expense................. 34,084 295,845 40,495 370,424 (23,914) 346,510
-------- ----------- ---------- ----------- ----------- -----------
Net interest income (loss)....... 18,371 358,251 (7,705) 368,917 -- 368,917
Provision for loan losses........ 4,107 20,027 -- 24,134 -- 24,134
-------- ----------- ---------- ----------- ----------- -----------
Net interest income (loss) after
provision for loan losses...... 14,264 338,224 (7,705) 344,783 -- 344,783
Noninterest income............... 4,276 208,481 7,253 220,010 (4,455) 215,555
Noninterest expense.............. 30,432 389,881 6,739 427,052 (4,455) 422,597
-------- ----------- ---------- ----------- ----------- -----------
Income (loss) before income taxes (11,892) 156,824 (7,191) 137,741 -- 137,741
Income taxes..................... (4,254) 55,849 (790) 50,805 -- 50,805
-------- ----------- ---------- ----------- ----------- -----------
Net income (loss)................ $ (7,638) $ 100,975 $ (6,401) $ 86,936 $ -- $ 86,936
======== =========== ========== =========== =========== ===========
Year-end assets.................. $867,210 $10,770,847 $1,702,376 $13,340,433 $(1,475,442) $11,864,991
======== =========== ========== =========== =========== ===========
2000
-----------------------------------------------------------------------
ASB FCB Other Total Adjustments Consolidated
-------- ----------- ---------- ----------- ----------- ------------
Interest income.................. $ 40,341 $ 661,232 $ 32,597 $ 734,170 $ (26,000) $ 708,170
Interest expense................. 26,138 299,245 43,445 368,828 (26,000) 342,828
-------- ----------- ---------- ----------- ----------- -----------
Net interest income (loss)....... 14,203 361,987 (10,848) 365,342 -- 365,342
Provision for loan losses........ 1,713 13,775 -- 15,488 -- 15,488
-------- ----------- ---------- ----------- ----------- -----------
Net interest income (loss) after
provision for loan losses...... 12,490 348,212 (10,848) 349,854 -- 349,854
Noninterest income............... 3,417 200,680 1,921 206,018 (3,828) 202,190
Noninterest expense.............. 23,879 367,731 7,002 398,612 (3,828) 394,784
-------- ----------- ---------- ----------- ----------- -----------
Income (loss) before income taxes (7,972) 181,161 (15,929) 157,260 -- 157,260
Income taxes..................... (2,803) 65,400 (3,648) 58,949 -- 58,949
-------- ----------- ---------- ----------- ----------- -----------
Net income (loss)................ $ (5,169) $ 115,761 $ (12,281) $ 98,311 $ -- $ 98,311
======== =========== ========== =========== =========== ===========
Year-end assets.................. $678,232 $ 9,894,642 $1,378,706 $11,951,580 $(1,259,963) $10,691,617
======== =========== ========== =========== =========== ===========
1999
-----------------------------------------------------------------------
ASB FCB Other Total Adjustments Consolidated
-------- ----------- ---------- ----------- ----------- ------------
Interest income.................. $ 27,744 $ 595,414 $ 29,586 $ 652,744 $ (18,853) $ 633,891
Interest expense................. 16,886 243,163 40,110 300,159 (18,853) 281,306
-------- ----------- ---------- ----------- ----------- -----------
Net interest income (loss)....... 10,858 352,251 (10,524) 352,585 -- 352,585
Provision for loan losses........ 1,306 10,366 -- 11,672 -- 11,672
-------- ----------- ---------- ----------- ----------- -----------
Net interest income (loss) after
provision for loan losses...... 9,552 341,885 (10,524) 340,913 -- 340,913
Noninterest income............... 2,170 164,168 1,815 168,153 (3,050) 165,103
Noninterest expense.............. 16,297 355,027 7,346 378,670 (3,050) 375,620
-------- ----------- ---------- ----------- ----------- -----------
Income (loss) before income taxes (4,575) 151,026 (16,055) 130,396 -- 130,396
Income taxes..................... (1,625) 53,821 (3,600) 48,596 -- 48,596
-------- ----------- ---------- ----------- ----------- -----------
Net income (loss)................ $ (2,950) $ 97,205 $ (12,455) $ 81,800 $ -- $ 81,800
======== =========== ========== =========== =========== ===========
Year-end assets.................. $462,833 $ 9,165,335 $1,311,432 $10,939,600 $(1,222,501) $ 9,717,099
======== =========== ========== =========== =========== ===========
52
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE S--FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY)
First Citizens BancShares, Inc.'s principal assets are its investments in
and receivables from its subsidiaries. Its sources of income are dividends and
interest income. The Parent Company's condensed balance sheets as of
December 31, 2001 and 2000, and the related condensed statements of income and
cash flows for the years ended December 31, 2001, 2000 and 1999 are as follows:
CONDENSED BALANCE SHEETS
December 31
---------------------
2001 2000
---------- ----------
Assets
Cash............................................... $ 87,846 $ 4,952
Investment securities held to maturity............. 120,000 160,000
Investment securities available for sale........... 105,907 14,266
Investment in subsidiaries......................... 982,936 935,376
Due from subsidiaries.............................. 150,987 160,236
Other assets....................................... 49,070 51,772
---------- ----------
Total assets................................... $1,496,746 $1,326,602
========== ==========
Liabilities and Shareholders' Equity
Short-term borrowings.............................. $ 345,537 $ 357,944
Long-term obligations.............................. 257,733 154,640
Other liabilities.................................. 8,433 3,290
Shareholders' equity............................... 885,043 810,728
---------- ----------
Total liabilities and shareholders' equity..... $1,496,746 $1,326,602
========== ==========
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
---------------------------
2001 2000 1999
------- -------- --------
Interest income......................................................... $17,952 $ 20,030 $ 17,137
Interest expense........................................................ 26,728 31,370 28,035
------- -------- --------
Net interest income (loss).............................................. (8,776) (11,340) (10,898)
Dividends from subsidiaries............................................. 81,001 50,037 48,485
Other income............................................................ 6,888 1,840 1,814
Other operating expense................................................. 6,390 6,875 7,346
------- -------- --------
Income before income tax benefit and equity in undistributed net income
of subsidiaries....................................................... 72,723 33,662 32,055
Income tax benefit...................................................... (913) (3,668) (3,600)
------- -------- --------
Income before equity in undistributed net income of subsidiaries........ 73,636 37,330 35,655
Equity in undistributed net income of subsidiaries...................... 13,300 60,981 46,145
------- -------- --------
Net income.......................................................... $86,936 $ 98,311 $ 81,800
======= ======== ========
53
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
------------------------------
2001 2000 1999
- - -------- --------- ---------
OPERATING ACTIVITIES
Net income............................................................ $ 86,936 $ 98,311 $ 81,800
Adjustments...........................................................
Equity in undistributed net income of subsidiaries................. (13,300) (60,981) (46,145)
Net amortization of premiums and discounts......................... 401 (185) 1,742
Securities gains................................................... (7,189) (1,810) (1,706)
Change in other assets............................................. 1,113 4,590 7,895
Change in other liabilities........................................ 5,143 (2,863) (17,102)
-------- --------- ---------
Net cash provided by operating activities............................. 73,104 37,062 26,484
-------- --------- ---------
INVESTING ACTIVITIES
Net change in due from subsidiaries................................ 9,249 115,605 (151,808)
Purchase of investment securities available for sale............... (95,366) (130,136) (40,000)
Maturities of investment securities held to maturity............... 39,599 20,136 200,000
Proceeds from sales of investment securities available for sale.... 13,883 2,337 7,624
Investment in subsidiaries......................................... (34,260) (27,866) (15,000)
-------- --------- ---------
Net cash (used) provided by investing activities...................... (66,895) (19,924) 816
-------- --------- ---------
FINANCING ACTIVITIES
Net change in short-term borrowings................................ (12,407) 960 (15,619)
Originations of long-term obligations.............................. 103,093 -- --
Repurchase of common stock......................................... (3,495) (5,506) (706)
Cash dividends paid................................................ (10,506) (10,546) (10,619)
-------- --------- ---------
Net cash provided (used) by financing activities...................... 76,685 (15,092) (26,944)
-------- --------- ---------
Net change in cash.................................................... 82,894 2,046 356
Cash balance at beginning of year..................................... 4,952 2,906 2,550
-------- --------- ---------
Cash balance at end of year........................................... $ 87,846 $ 4,952 $ 2,906
======== ========= =========
Cash payments for
Interest........................................................... $ 26,990 $ 31,006 $ 29,159
Income taxes....................................................... 51,321 58,096 56,754
Supplemental disclosure of noncash investing and financing activities:
Unrealized securities gains (losses)............................... 2,969 (1,143) (3,871)
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 18, 2002
FIRST CITIZENS BANCSHARES, INC.
(Registrant)
/S/ JAMES B. HYLER, JR. *
_____________________________________
James B. Hyler, Jr.
Vice Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant and in the capacities indicated on March 18, 2002.
Signature Title Date
--------- ----- ----
/s/ LEWIS R. HOLDING * Chairman and Chief Executive March 18, 2002
_____________________________ Officer (principal
Lewis R. Holding executive officer)
/s/ FRANK B. HOLDING * Executive Vice Chairman March 18, 2002
__________________________
Frank B. Holding
/s/ JAMES B. HYLER, JR. * Vice Chairman March 18, 2002
_____________________________
James B. Hyler, Jr.
/s/ FRANK B. HOLDING, JR. * President March 18, 2002
_____________________________
Frank B. Holding, Jr.
/S/ KENNETH A. BLACK Vice President, Treasurer, March 18, 2002
_____________________________ and Chief Financial Officer
Kenneth A. Black (principal financial
and accounting officer)
/s/ JOHN M. ALEXANDER, JR. * Director March 18, 2002
_____________________________
John M. Alexander, Jr.
_____________________________ Director
Carmen Holding Ames
_____________________________ Director
B. Irvin Boyle
/s/ GEORGE H. BROADRICK * Director March 18, 2002
_____________________________
George H. Broadrick
/s/ H. M. CRAIG, III * Director March 18, 2002
_____________________________
H. M. Craig, III
/s/ BETTY M. FARNSWORTH * Director March 18, 2002
_____________________________
Betty M. Farnsworth
_____________________________ Director
Lewis M. Fetterman
/s/ CHARLES B.C. HOLT * Director March 18, 2002
_____________________________
Charles B.C. Holt
55
Signature Title Date
--------- ----- ----
/s/ GALE D. JOHNSON * Director March 18, 2002
_____________________________
Gale D. Johnson
/s/ FREEMAN R. JONES * Director March 18, 2002
_____________________________
Freeman R. Jones
/s/ LUCIUS S. JONES * Director March 18, 2002
_____________________________
Lucius S. Jones
/s/ JOSEPH T. MALONEY, JR. * Director March 18, 2002
_____________________________
Joseph T. Maloney, Jr.
/s/ J. CLAUDE MAYO, JR. * Director March 18, 2002
_____________________________
J. Claude Mayo, Jr.
/s/ LEWIS T. NUNNELEE, II * Director March 18, 2002
_____________________________
Lewis T. Nunnelee, II
/s/ TALBERT O. SHAW * Director March 18, 2002
_____________________________
Talbert O. Shaw
/s/ R. C. SOLES, JR. * Director March 18, 2002
_____________________________
R. C. Soles, Jr.
/s/ DAVID L. WARD, JR * Director March 18, 2002
_____________________________
David L. Ward, Jr.
Alexander G. MacFadyen, Jr. hereby signs this Annual Report on Form 10-K on
March 18, 2002, on behalf of each of the indicated persons for whom he is
attorney-in-fact pursuant to a Power of Attorney filed herewith.
*By:/s/ ALEXANDER G. MACFADYEN, JR.
__________________________________
Alexander G. MacFadyen, Jr.
As Attorney-In-Fact
56
EXHIBIT INDEX
*3.1 Certificate of Incorporation of the Registrant, as amended (incorporated
by reference from Registrant's Form 10-K for the year ended December 31,
1992)
*3.2 Bylaws of the Registrant, as amended (incorporated by reference from
Registrant's Form 10-K for the year ended December 31, 2000)
*4.1 Specimen of Registrant's Class A Common Stock certificate (incorporated
by reference from Registrant's Form 10-K for the year ended December 31,
1993)
*4.2 Specimen of Registrant's Class B Common Stock certificate (incorporated
by reference from Registrant's Form 10-K for the year ended December 31,
1993)
*10.1 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 1, 1986, as amended by the Fourth
Amendment of Employee Death Benefit and Post-Retirement Non-Competition
and Consultation Agreement, dated October 26, 1998, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and Lewis R. Holding
(incorporated by reference from Registrant's Form 10-K for the year
ended December 31, 1998)
*10.2 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 1, 1986, as amended by the Fourth
Amendment of Employee Death Benefit and Post-Retirement Non-Competition
and Consultation Agreement, dated October 26, 1998, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and Frank B. Holding
(incorporated by reference from Registrant's Form 10-K for the year
ended December 31, 1998)
*10.3 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 1, 1986, as amended by the Fourth
Amendment of Employee Death Benefit and Post-Retirement Non-Competition
and Consultation Agreement, dated October 26, 1998, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and James B. Hyler, Jr.
(incorporated by reference from Registrant's Form 10-K for the year
ended December 31, 1998)
*10.4 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 23, 1996, as amended by the First
Amendment of Employee Death Benefit and Post-Retirement Noncompetition
and Consultation Agreement, dated October 26, 1998, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and Frank B. Holding,
Jr. (incorporated by reference from Registrant's Form 10-K for the year
ended December 31, 1998)
*10.5 Employee Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement dated January 22, 1996, as amended by the First
Amendment of Employee Death Benefit and Post-Retirement Noncompetition
and Consultation Agreement, dated October 26, 1998, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and Joseph A. Cooper,
Jr. (incorporated by reference from Registrant's Form 10-K for the year
ended December 31, 1999)
*10.6 Second Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement dated April 28, 1997, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick
(incorporated by reference from Registrant's Form 10-K for the year
ended December 31, 1997)
*10.7 Consulting Agreement dated February 17, 1988, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick
(incorporated by reference from Registrant's Form 10-K for the year
ended December 31, 1987)
*10.13 Article IV Section 4.1.d of the Agreement and Plan of Reorganization and
Merger by and among First Investors Savings Bank, Inc., SSB,
First-Citizens Bank & Trust Company and First Citizens BancShares, Inc.,
dated October 25, 1995, located at page II-38 of Registrant's S-4
Registration Statement filed with the SEC on December 19, 1994
(Registration No. 33-84514)
*10.14 Article IV Section 4.1.e of the Agreement and Plan of Reorganization and
Merger by and among State Bank and First-Citizens Bank & Trust Company
and First Citizens BancShares, Inc., dated October 25, 1995, located at
page I-36 of Registrant's S-4 Registration Statement filed with the SEC
on November 16, 1994 (Registration No. 33-86286)
*10.16 Amended and Restated Trust Agreement of FCB/NC Capital Trust I
(incorporated by reference from Registration No. 333-59039)
*10.17 Form of Guarantee Agreement (incorporated by reference from Registration
No. 333-59039)
57
*10.18 Junior Subordinated Indenture dated March 5, 1998 between Registrant and
Bankers Trust Company, as Debenture Trustee (incorporated by reference
from Registration No. 333-59039)
*10.19 Amended and Restated Trust Agreement of FCB/NC Capital Trust II
(incorporated by reference from Registration No. 333-68340)
*10.20 Guarantee Agreement relating to Registrant's guarantee of the capital
securities of FCB/NC Capital Trust II (incorporated by reference from
Registration No. 333-68340)
*10.21 Junior Subordinated Indenture dated October 10, 2001, between Registrant
and Bankers Trust Company, as Delaware Trustee (incorporated by
reference from Registration No. 333-68340)
22 Subsidiaries of the Registrant (filed herewith)
24 Power of Attorney (filed herewith)
99 Proxy Statement for Registrant's 2002 Annual Meeting (previously filed)
- --------
* Incorporated by reference from a previous filing
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO
KENNETH A. BLACK, CHIEF FINANCIAL OFFICER OF FIRST CITIZENS BANCSHARES, INC.
58