FIRST CITIZENS BANCSHARES INC /DE/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the period ended June 30, 2002

Commission File Number: 0-16471

First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)

Delaware 56-1528994
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

239 Fayetteville Street, Raleigh, North Carolina 27601
(Address of principal executive offices) (zip code)

(919) 716-7000
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.

Yes X No _____

Class A Common Stock--$1 Par Value-- 8,813,454 shares
Class B Common Stock--$1 Par Value-- 1,696,136 shares
(Number of shares outstanding, by class, as of August 13, 2002)

INDEX

PART I. FINANCIAL INFORMATION PAGES

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets at June 30, 2002,
December 31, 2001,and June 30, 2001 5

Consolidated Statements of Income for the three-month
and six-month periods ended June 30, 2002 and
June 30, 2001 6

Consolidated Statements of Changes in Shareholders'
Equity for the six-month periods ended June 30, 2002, and
June 30, 2001 7

Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2002, and June 30, 2001 8

Note to Consolidated Financial Statements 9

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-21

Item 3. Market Risk Disclosure 20

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a vote of Security Holders

On April 22, 2002 at the Annual Meeting of Shareholders of
Registrant two matters were considered by the shareholders:

(a) Election of Directors - The shareholder vote regarding
the election of the nominees for Board of Directors was:

NOMINEE FOR WITHHELD
J. M. Alexander, Jr. 31,876,400 157,630
C. H. Ames 31,878,700 155,330
V. E. Bell, III 31,878,761 155,269
G. H. Broadrick 31,856,423 177,607
H. M. Craig, III 31,870,871 163,159
B. M. Farnsworth 31,556,721 477,309
L. M. Fetterman 31,561,982 472,048
F. B. Holding 31,486,137 547,893
F. B. Holding, Jr. 31,485,759 548,271
L. R. Holding 31,486,218 547,812
C. B. C. Holt 31,858,182 175,848
J. B. Hyler, Jr. 31,485,947 548,083
G. D. Johnson 31,364,742 669,288
F. R. Jones 31,561,982 472,048
L. S. Jones 31,878,449 155,581
J. T. Maloney, Jr. 31,562,021 472,009
J. C. Mayo, Jr. 31,559,701 474,329
R. T. Newcomb 31,875,700 158,330
L. T. Nunnelee, II 31,558,982 475,048
T. O. Shaw 31,556,492 477,538
R. C. Soles, Jr. 31,878,256 155,774
D. L. Ward, Jr. 31,844,603 189,427

(b) Appointment of Independent Public Accountants - The
shareholder vote regarding the appointment of KPMG
LLP as BancShares' independent public accountant
for 2002 was:

FOR: 31,845,812 votes
AGAINST: 59,105 votes
ABSTAIN: 129,113 votes

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits. None.

(b) Reports on Form 8-K. During the quarter ended June 30, 2002,
Registrant filed no Current Report on Form 8-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

FIRST CITIZENS BANCSHARES, INC.
(Registrant)

Dated: August 13, 2002 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer

CERTIFICATION

The undersigned hereby certifies that, to his or her knowledge, (i) the Form
10-Q filed by First Citizens BancShares, Inc. (the "Issuer") for the quarter
ended June 30, 2002, fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and (ii) the information contained
in that report fairly presents, in all material respects, the financial
condition and results of operations of the Issuer on the dates and for the
periods presented therein.

August 13, 2002 Lewis R. Holding
Chairman and Chief Executive Officer

Kenneth A. Black
Vice President and Chief Financial Officer

First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2002

First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2002

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

- --------------------------------------------------------------------------------
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
statements.
In the opinion of management, the consolidated statements contain all
material adjustments necessary to present fairly the financial position of First
Citizens BancShares, Inc. as of and for each of the periods presented, and all
such adjustments are of a normal recurring nature. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates.
These financial statements should be read in conjunction with the financial
statements and notes included in the 2001 First Citizens BancShares, Inc. Annual
Report, which is incorporated by reference on Form 10-K. Certain amounts for
prior periods have been reclassified to conform with statement presentations for
2002. However, the reclassifications have no effect on shareholders' equity or
net income as previously reported.
At January 1, 2002, management reviewed the estimated useful lives of all
amortizing intangible assets, including intangibles accounted for pursuant to
Statement of Financial Accounting Standards No. 72 (FAS 72 goodwill). As a
result of this review, management determined that, in certain instances, a
shorter life was appropriate. Accordingly, the estimated useful lives were
shortened, and the carrying value of FAS 72 goodwill is being amortized over the
respective asset's estimated remaining useful life.

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Note B
New Accounting Standards
On January 1, 2002, BancShares fully adopted the provisions of Statement of
Financial Accounting Standards No. 142 (Statement 142), which provides guidance
for the accounting for goodwill and intangible assets. Statement 142 requires
that goodwill and intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually. Statement 142
also requires that intangible assets with estimated useful lives be amortized
over their respective estimated useful lives to their estimated residual values
and be reviewed for impairment in accordance with existing accounting guidance.
Certain provisions of Statement 142 were effective on July 1, 2001, and the
statement was fully adopted by BancShares on January 1, 2002. In connection with
Statement 142's transitional goodwill impairment evaluation, we have completed
an assessment to determine whether there is an indication that goodwill is
impaired as of the date of adoption. Based on the initial assessment, there was
no evidence of impairment, and there was no adjustment to the carrying value of
goodwill. In the future, BancShares will annually review goodwill for impairment
under the provisions of Statement 142.
In accordance with the provisions of Statement 142, BancShares discontinued
the amortization of goodwill effective January 1, 2002. Set forth below is a
summary of goodwill activity during the six-month periods ended June 30, 2002
and 2001, all of which relates to a single reporting unit, FCB:

2002 2001
------------------------------

Balance, January 1 $ 41,240 $ 46,340
Amortization - 2,550
==============================
Balance, June 30 $ 41,240 $ 43,790
==============================

The following information relates to other intangible assets, all of which
are being amortized:

June 30, December 31, June 30,
2002 2001 2001
----------------------------------------------

Amortized intangible assets $ 63,678 $ 70,328 $ 73,529

During the three-month periods ended June 30, 2002 and 2001, BancShares
recorded amortization expense of $3,215 and $1,628 related to these intangible
assets. During the six-month periods ended June 30, 2002 and 2001, BancShares
recorded amortization expense of $6,650 and $3,218 related to these intangible
assets. Based on current estimated useful lives and current carrying values,
BancShares anticipates amortization expense for intangible assets in subsequent
periods to be:

Projected amortization expense:

Year ended December 31, 2002 $ 13,080
Year ended December 31, 2003 12,195
Year ended December 31, 2004 10,859
Year ended December 31, 2005 9,490
Year ended December 31, 2006 8,283

The following table describes the impact of the adoption of Statement 142
on net income and net income per share:

Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
----------------------------------------------------------------

Addition of goodwill amortization - 1,275 - 2,550
================================================================
Adjusted net income $ 23,130 $ 23,279 $ 46,328 $ 47,413
================================================================

Net income per share $ 2.21 $ 2.09 $ 4.42 $ 4.27
Addition of goodwill amortization - 0.12 - 0.24
================================================================
Adjusted net income per share $ 2.21 $ 2.21 $ 4.42 $ 4.51
================================================================

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Note C
Operating Segments
BancShares conducts its banking operations through its two wholly-owned
subsidiaries, FCB and ASB. Although FCB and ASB offer similar products and
services to customers, each entity operates in distinct geographic markets and
each entity has a separate management group. Additionally, the financial results
and trends of ASB reflect the de novo nature of its growth.
FCB is a mature banking institution that operates from a single charter
from its branch network in North Carolina, Virginia and West Virginia. ASB began
operations in 1997 and currently operates branches in Georgia and Florida under
a federal thrift charter. ASB has announced plans to expand its branch network
into the Austin, Texas and Scottsdale, Arizona markets before the end of 2002.
ASB's significance to BancShares' consolidated financial results continues to
grow.
Accordingly, management has determined that FCB and ASB are reportable
business segments. In the aggregate, FCB and its consolidated subsidiaries,
which are integral to its branch operation, and ASB account for more than 90
percent of consolidated assets, revenues and net income. Other includes
activities of the parent company, two subsidiaries that are the issuing trusts
for outstanding preferred securities, Neuse, Incorporated, a subsidiary that
owns real property used in the banking operation and American Guaranty Insurance
Corporation, a property insurance company.
The adjustments in the accompanying tables represent the elimination of the
impact of certain inter-company transactions. The adjustments to interest income
and interest expense neutralize the earnings and cost of inter-company
borrowings. The adjustments to noninterest income and noninterest expense
reflect the elimination of management fees and other services fees paid by one
company to another within BancShares' consolidated group.

June 30, 2002
ASB FCB Other Total Adjustments Consolidated

Interest income $ 26,995 $ 277,480 $ 15,780 $ 320,255 $ (12,336) $ 307,919
Interest expense 12,424 91,227 22,864 126,515 (12,336) 114,179
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net interest income 14,571 186,253 (7,084) 193,740 - 193,740
Provision for loan losses 2,282 11,520 - 13,802 - 13,802
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net interest income after 12,289 174,733 (7,084) 179,938 - 179,938
provision for loan losses
Noninterest income 2,372 109,523 213 112,108 (2,619) 109,489
Noninterest expense 17,231 202,858 259 220,348 (2,619) 217,729
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,570) 81,398 (7,130) 71,698 - 71,698
Income taxes (888) 28,814 (2,556) 25,370 - 25,370
---------------------------------------------------------------------------------------------
=============================================================================================
Net income (loss) $ (1,682) $ 52,584 $ (4,574) $ 46,328 $ - $ 46,328
=============================================================================================
=============================================================================================
Period-end assets $ 1,009,382 $ 10,732,897 $ 1,707,627 $ 13,449,906 $ (1,585,445) $ 11,864,461

June 30, 2002
ASB FCB Other Total Adjustments Consolidated

Interest income $ 25,593 $ 343,183 $ 16,515 $ 385,291 $ (13,605) $ 371,686
Interest expense 17,377 163,378 20,765 201,520 (13,605) 187,915
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net interest income 8,216 179,805 (4,250) 183,771 - 183,771
Provision for loan losses 1,377 9,693 - 11,070 - 11,070
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net interest income after 6,839 170,112 (4,250) 172,701 - 172,701
provision for loan losses
Noninterest income 1,847 100,911 7,347 110,105 (2,653) 107,452
Noninterest expense 14,770 193,523 3,082 211,375 (2,653) 208,722
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,084) 77,500 15 71,431 - 71,431
Income taxes (2,158) 27,743 983 26,568 - 26,568
---------------------------------------------------------------------------------------------
=============================================================================================
Net income (loss) $ (3,926) $ 49,757 $ (968) $ 44,863 $ - $ 44,863
=============================================================================================
=============================================================================================
Period-end assets $ 747,954 $ 10,370,500 $ 1,534,119 $ 12,652,573 $ (1,363,407) $ 11,289,166

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Financial Summary
Table 1
2002 2001 Six Months Ended
(thousands, except per share data Second First Fourth Third Second June 30
and ratios) Quarter Quarter Quarter Quarter Quarter 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income $ 151,771 $ 156,148 $ 167,032 $ 176,709 $ 182,660 $ 307,919 $ 371,686
Interest expense 55,042 59,137 74,113 84,482 91,472 114,179 187,915
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 96,729 97,011 92,919 92,227 91,188 193,740 183,771
Provision for loan losses 7,822 5,980 7,444 5,620 5,394 13,802 11,070
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 88,907 91,031 85,475 86,607 85,794 179,938 172,701
Noninterest income 55,259 54,230 55,014 53,089 54,641 109,489 107,452
Noninterest expense 108,292 109,437 106,912 106,963 105,922 217,729 208,722
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,874 35,824 33,577 32,733 34,513 71,698 71,431
Income taxes 12,744 12,626 12,260 11,977 12,509 25,370 26,568
===================================================================================================================================
Net income $ 23,130 $ 23,198 $ 21,317 $ 20,756 $ 22,004 $ 46,328 $ 44,863
===================================================================================================================================
Net interest income-taxable equivalent 97,074 $ 97,382 $ 93,389 $ 92,698 $ 91,678 $ 194,456 $ 184,770
- -----------------------------------------------------------------------------------------------------------------------------------
Selected Quarterly Averages
Total assets 11,756,150 $ 11,664,376 $ 11,674,273 $ 11,333,123 $ 11,128,229 $ 11,710,516 $ 10,957,311
Investment securities 2,641,898 2,704,077 2,684,315 2,195,064 2,042,987 2,672,816 1,949,215
Loans 7,312,384 7,207,757 7,128,818 7,054,247 7,139,623 7,260,359 7,120,536
Interest-earning assets 10,491,811 10,353,509 10,446,364 10,126,568 9,952,752 10,423,042 9,785,554
Deposits 9,934,615 9,776,690 9,742,153 9,496,699 9,337,298 9,856,089 9,187,715
Interest-bearing liabilities 9,075,549 9,073,637 9,142,487 8,851,916 8,721,873 9,074,598 8,597,297
Long-term obligations 262,224 283,993 274,445 161,587 154,831 253,979 154,736
Shareholders' equity $ 916,387 $ 894,689 $ 874,801 $ 857,417 $ 838,806 $ 905,432 $ 828,892
Shares outstanding 10,480,527 10,481,661 10,488,894 10,508,330 10,511,028 10,481,091 10,516,109
- -----------------------------------------------------------------------------------------------------------------------------------
Selected Quarter-End Balances
Total assets $ 11,864,461 $ 11,746,352 $ 11,864,991 $ 11,522,525 $ 11,289,166 $ 11,864,461 $ 11,289,166
Investment securities 2,464,779 2,576,383 2,791,296 2,482,123 1,987,085 2,464,779 1,987,085
Loans 7,434,662 7,248,088 7,196,177 7,109,584 7,058,070 7,434,662 7,058,070
Interest-earning assets 10,438,386 10,422,451 10,489,382 10,217,283 9,981,549 10,438,386 9,981,549
Deposits 10,065,180 9,872,979 9,961,605 9,645,226 9,480,108 10,065,180 9,480,108
Interest-bearing liabilities 9,121,010 9,099,535 9,206,903 9,007,989 8,807,409 9,121,010 8,807,409
Long-term obligations 253,979 283,988 284,009 184,018 154,829 253,979 154,829
Shareholders' equity $ 926,878 $ 906,281 $ 885,043 $ 865,963 $ 849,297 $ 926,878 $ 849,297
Shares outstanding 10,480,391 10,480,624 10,483,456 10,490,703 10,509,956 10,480,391 10,509,956
- -----------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.79 % 0.81 % 0.72 % 0.74 % 0.79 0.80 0.83
Shareholders' equity 10.12 10.52 9.67 9.82 10.52 10.32 10.91
Dividend payout ratio 11.31 11.31 12.32 12.63 11.96 11.31 11.71
- -----------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 73.61 % 73.72 % 73.17 % 74.28 % 76.46 73.66 77.50
Shareholders' equity to total assets 7.79 7.67 7.49 7.57 7.54 7.73 7.56
Time certificates of $100,000 or more to total
deposits 10.90 11.54 11.97 11.92 11.37 11.23 10.96
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $ 2.21 $ 2.21 $ 2.03 $ 1.98 $ 2.09 $ 4.42 $ 4.27
Cash dividends 0.25 0.25 0.25 0.25 0.25 0.50 0.50
Book value at period end 88.44 86.47 84.42 82.55 80.81 88.44 80.81
Tangible book value at period end 78.43 76.15 73.78 71.64 69.65 78.43 69.65
- -----------------------------------------------------------------------------------------------------------------------------------

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Outstanding Loans by Type Table 2
2002 2001
Second First Fourth Third Second
(thousands) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------

Real estate:
Construction and land development $ 297,953 $ 293,185 $ 283,968 $ 274,972 $ 257,407
Mortgage:
1-4 family residential 1,224,761 1,246,245 1,338,975 1,354,476 1,401,051
Commercial 2,317,610 2,284,309 2,231,498 2,135,201 2,055,482
Equity Line 1,175,693 1,080,896 1,024,181 970,295 913,759
Other 171,178 171,459 163,914 181,038 189,161
- -------------------------------------------------------------------------------------------------------------------------
Total real estate 5,187,195 5,076,094 5,042,536 4,915,982 4,816,860
Commercial and industrial 956,365 938,349 918,929 931,850 948,098
Consumer 1,130,900 1,077,412 1,074,202 1,096,775 1,132,118
Lease financing 141,351 137,383 139,966 142,305 136,806
Other 18,851 18,850 20,544 22,672 24,187
- -------------------------------------------------------------------------------------------------------------------------
Total loans 7,434,662 7,248,088 7,196,177 7,109,584 7,058,069
Less reserve for loan losses 110,472 108,692 107,087 105,775 105,025
- -------------------------------------------------------------------------------------------------------------------------
Net loans $7,324,190 $7,139,396 $7,089,090 $7,003,809 $6,953,044
- -------------------------------------------------------------------------------------------------------------------------

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Investment Securities
Table 3
June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Average Taxable Average Taxable
Book Fair Maturity Equivalent Book Fair Maturity Equivalent
(thousands) Value Value(Yrs./Mos.) Yield Value Value(Yrs./Mos.) Yield
- ------------------------------------------------------------------------------------------------------------------------------------

Securities held to maturity:
U. S. Government:
Within one year $ 2,067,594 $ 2,079,456 0/5 3.82 % $ 1,637,765 $ 1,652,099 0/7 5.83 %
One to five years 230,661 233,856 2/2 3.87 296,807 299,382 1/2 4.63
Five to ten years 115 123 7/6 8.00 188 197 8/11 8.03
Over ten years 28,924 29,380 16/0 7.41 6,621 6,749 25/6 7.41
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,327,294 2,342,815 0/9 3.85 1,941,381 1,958,427 0/9 5.65
State, county and municipal:
Within one year 741 749 0/3 7.18 514 520 0/10 6.33
One to five years 485 501 3/0 5.55 1,243 1,277 2/4 6.53
Five to ten years 143 153 7/10 5.88 142 149 7/10 5.88
Over ten years 1,414 1,535 15/6 5.69 1,541 1,653 16/5 5.74
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,783 2,938 8/10 6.07 3,440 3,599 10/9 6.02
Other:
Within one year 10 10 0/7 6.90 35 35 0/7 6.02
One to five years - - - - 10 10 1/7 6.50
Five to ten years 250 250 256/1 7.75 250 250 27/1 7.75
- -----------------------------------------------------------------------------------------------------------------------------------
Total 260 260 5/10 7.54 295 295 4/9 7.13
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 2,330,337 2,346,013 0/8 4.27 % 1,945,116 1,962,321 0/10 5.65 %
Securities available for sale 119,913 134,442 - - 31,399 41,969 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 2,450,250 $ 2,480,455 - - $ 1,976,515 $2,004,290 - -
- ------------------------------------------------------------------------------------------------------------------------------------

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Second Quarter
Table 4
2002 2001 Increase (decrease) due to:
Interest Interest
Average Income Yield Average Income Yield Yield
(thousands) Balance Expense /Rate Balance Expense /Rate Volume /Rate Total
- -------------------------------------------------------------------------------------------------------------------------------

Assets
Total loans $ 7,312,384 $123,304 6.76 % $7,139,623 $145,555 8.18 % $3,274 $(25,525) $(22,251)
Investment securities:
U. S. Government 2,580,223 26,058 4.05 1,993,191 29,023 5.84 7,239 (10,204) (2,965)
State, county and municipal 4,322 88 8.17 4,797 104 8.70 (10) (6) (16)
Other 57,353 430 3.01 44,999 121 1.08 63 246 309
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,641,898 26,576 4.03 2,042,987 29,248 5.74 7,292 (9,964) (2,672)
Overnight investments 537,529 2,236 1.67 770,142 8,347 4.35 (1,744) (4,367) (6,111)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $10,491,811 $152,116 5.81 % $9,952,752 $183,150 7.38 % $8,822 $(39,856) $(31,034)
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Checking With Interest $ 1,254,177 $ 868 0.28 % $1,144,359 $1,698 0.60 % $124 $ (954) $ (830)
Savings 647,382 861 0.53 613,522 1,833 1.20 77 (1,049) (972)
Money market accounts 2,239,620 9,443 1.69 1,679,226 14,648 3.50 3,631 (8,836) (5,205)
Time deposits 4,149,715 37,376 3.61 4,465,685 64,223 5.77 (3,672) (23,175) (26,847)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,290,894 48,548 2.35 7,902,792 82,402 4.18 160 (34,014) (33,854)
Federal funds purchased 41,410 165 1.60 71,300 751 4.22 (217) (369) (586)
Repurchase agreements 194,625 257 0.53 216,603 1,587 2.94 (95) (1,235) (1,330)
Master notes 275,833 649 0.94 325,182 2,936 3.62 (280) (2,007) (2,287)
Other short-term borrowings 10,563 41 1.56 51,165 621 4.87 (325) (255) (580)
Long-term obligations 262,224 5,382 8.23 154,831 3,175 8.23 2,205 2 2,207
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 9,075,549 $ 55,042 2.43 $8,721,873 $ 91,472 4.21 % $1,448 $(37,878) $(36,430)
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.38 % 3.17 %
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $ 97,074 3.71 % $ 91,678 3.69 % $7,374 $ (1,978) $5,396
- --------------------------------------------------------------------------------------------------------------------------------

Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income taxes
only, or state income taxes only are stated on a taxable-equivalent basis
assuming a statutory federal income tax rate of 35% and a state income tax rate
of 6.9% for each period. The taxable-eqivalent adjustment was $345 and $490 for
2002 and 2001, respectively.

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Six Months Table 5
2002 2001 Increase (decrease) due to:
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
(thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------------------------

Assets
Total loans $7,260,359 $247,872 6.86 % $7,120,536 $297,045 8.41 % $5,641 ($54,814) ($49,173)
Investment securities:
U. S. Government 2,612,217 55,696 4.30 1,902,701 57,421 6.09 18,296 (20,021) (1,725)
State, county and municipal 4,442 180 8.17 5,002 216 8.71 (23) (13) (36)
Other 56,157 865 3.11 41,512 633 3.07 223 9 232
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,672,816 56,741 4.28 1,949,215 58,270 6.03 18,496 (20,025) (1,529)
Overnight investments 489,867 4,022 1.66 715,803 17,370 4.89 (3,681) (9,667) (13,348)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $10,423,042 $308,635 5.96 % $9,785,554 $372,685 7.68 % $20,456 ($84,506) ($64,050)
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Checking With Interest $1,239,600 $1,815 0.30 % $1,120,574 $3,618 0.65 % $263 ($2,066) ($1,803)
Savings 635,704 1,720 0.55 607,766 3,818 1.27 124 (2,222) (2,098)
Money market accounts 2,168,590 17,909 1.67 1,661,582 31,606 3.84 6,919 (20,616) (13,697)
Time deposits 4,205,520 79,165 3.80 4,397,923 128,856 5.91 (4,657) (45,034) (49,691)
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Total interest-bearing deposits 8,249,414 100,609 2.46 7,787,845 167,898 4.35 2,649 (69,938) (67,289)
Federal funds purchased 42,480 334 1.59 72,718 1,754 4.86 (485) (935) (1,420)
Repurchase agreements 197,695 527 0.54 203,154 3,584 3.56 (55) (3,002) (3,057)
Master notes 284,253 1,329 0.94 325,316 6,897 4.28 (526) (5,042) (5,568)
Other short-term borrowings 27,708 291 2.12 53,528 1,436 5.41 (482) (663) (1,145)
Long-term obligations 273,048 11,089 8.19 154,736 6,346 8.27 4,828 (85) 4,743
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Total interest-bearing liabilities $9,074,598 $114,179 2.54 % $8,597,297 $187,915 4.41 % $5,929 ($79,665) ($73,736)
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Interest rate spread 3.42 % 3.27 %
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Net interest income and net yield
on interest-earning assets $194,456 3.76 % $184,770 3.81 % $14,527 ($4,841) $9,686
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Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income taxes
only, or state income taxes only are stated on a taxable-equivalent basis
assuming a statutory federal income tax rate of 35% and a state income tax rate
of 6.9% for each period. The taxable-eqivalent adjustment was $716 and $999 for
2002 and 2001, respectively.

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2002

INTRODUCTION
Management's discussion and analysis of earnings and related financial data
are presented to assist in understanding the financial condition and results of
operations of First Citizens BancShares, Inc. and Subsidiaries ("BancShares").
This discussion and analysis should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes presented within this
report. The focus of this discussion concerns our two banking subsidiaries.
First-Citizens Bank & Trust Company ("FCB") operates branches in North Carolina,
West Virginia, and Virginia. Atlantic States Bank ("ASB") operates offices in
Georgia and Florida and has recently announced plans to expand into the Austin,
Texas and Scottsdale, Arizona markets. ASB's expansion into these new markets
will be accomplished through its new division IronStone Bank.

SUMMARY
BancShares realized an increase in earnings during the second quarter of
2002 compared to the second quarter of 2001. Consolidated net income during the
second quarter of 2002 was $23.1 million, compared to $22.0 million earned
during the corresponding period of 2001. The $1.1 million or 5.1 percent
increase during 2002 results from growth in net interest income and noninterest
income, partially offset by the impact of higher noninterest expense and
provision for loan losses. Net income per share during the second quarter of
2002 totaled $2.21, compared to $2.09 during the second quarter of 2001. Return
on average assets was 0.79 percent for the second quarter of 2002, unchanged
from the same period in 2001. Return on average equity for the second quarter of
2002 was 10.12 percent compared to 10.52 percent during the second quarter of
2001.
For the first six months of 2002, we recorded net income of $46.3 million,
compared to $44.9 million earned during the first six months of 2001. The $1.5
million or 3.3 percent increase was the result of higher net interest income and
noninterest income, the benefit of which more than offset the impact of higher
noninterest expense and provision for loan losses. Net income per share for the
first six months of 2002 was $4.42, compared to $4.27 during the same period of
2001. We returned 0.80 percent on average assets during the first six months of
2002 compared to 0.83 percent during the corresponding period of 2001. Return on
average equity for the first six months of 2002 was 10.32 percent compared to
10.91 percent during the same period of 2001.
Various profitability, liquidity and capital ratios are presented in Table
1. To understand the changes and trends in interest-earning assets and
interest-bearing liabilities, refer to the average balance sheets presented in
Table 4 for the second quarter and Table 5 for the first six months of 2002 and
2001.

INTEREST-EARNING ASSETS
Interest-earning assets for the second quarter of 2002 averaged $10.49
billion, an increase of $539.1 million or 5.4 percent from the second quarter of
2001. For the six months ended June 30, 2002, earning assets averaged $10.42
billion, an increase of $637.5 million or 6.5 percent over the same period of
2001. Increases during the second quarter and the first six months of 2002
resulted primarily from growth in investment securities.
Loans. At June 30, 2002 and 2001, gross loans totaled $7.43 billion and
$7.06 billion, respectively. As of December 31, 2001, gross loans were $7.20
billion. The $376.6 million growth in loans from June 30, 2001 to June 30, 2002
results from growth within real estate lending. As of June 30, 2002, we had $3.2
million in residential mortgage loans classified as held for sale. All loans
held for sale are carried at the lower of cost or fair value. Table 2 details
outstanding loans by type for the past five quarters.
During the second quarter of 2002, loans averaged $7.31 billion, an
increase of $172.8 million or 2.4 percent from the comparable period of 2001.
Growth among EquityLine customers has remained strong, while demand among
commercial customers was more modest. Demand for other products was sluggish.
For the year-to-date, gross loans have averaged $7.26 billion for 2002
compared to $7.12 billion for the same period of 2001. This $139.8 million or
2.0 percent increase reflects the growth in commercial real estate loans and
retail home equity loans. BancShares has experienced weak loan demand among
other loan categories throughout its market areas during the past year.
Management anticipates continued growth among EquityLine loans and more
modest growth among commercial-purpose loans during the remainder of 2002. We
project consumer loans will be essentially unchanged due to weak demand for
automobile loans. Growth projections are largely dependent on economic
conditions, as the sluggish economy has caused many commercial customers to
delay business expansion and concerns about unemployment have caused many retail
customers to defer purchases of large-ticket items that would normally require
purchase money financing.
Investment securities. At June 30, 2002 and 2001, investment securities
held to maturity totaled $2.33 billion and $1.95 billion, respectively. At
December 31, 2001, the held-to-maturity portfolio was $2.66 billion. The $328.5
million or 12.4 percent decrease in the portfolio of investment securities held
to maturity since December 31, 2001 resulted from the growth in loans outpacing
the growth in deposits. All securities that are classified as held-to-maturity
reflect our ability and positive intent to hold those investments until their
scheduled maturity.
Investment securities available for sale totaled $134.4 million at June 30,
2002, compared to $132.4 million at December 31, 2001 and $42.0 million at June
30, 2001. Growth in available-for-sale securities results from purchases with
the liquidity generated during the fourth quarter of 2001 from the issuance of
$100 million in trust-preferred securities. Investment securities available for
sale are reported at their aggregate fair value. Table 3 presents detailed
information relating to the investment securities portfolio.
Investment securities averaged $2.64 billion during the second quarter of
2002, an increase of $598.9 million or 29.3 percent over the same period of
2001. For the first six months of 2002, investment securities averaged $2.67
billion, compared to $1.95 billion during the same period of 2001, an increase
of $723.6 million or 37.1 percent. Increases during the second quarter and first
six months of 2002 above the respective periods of 2001 result from strong
growth in deposits during 2001 and early 2002, when loan demand was very
limited.
We anticipate reductions among investment securities held to maturity
during the remainder of 2002 as maturing securities are used to fund anticipated
loan demand. Sales of investment securities available for sale are possible as
BancShares begins to deploy to its banking subsidiaries the capital generated
through the trust-preferred securities issued during 2001.
Overnight investments. Overnight investments totaled $538.9 million at June
30, 2002, compared to $501.9 million at December 31, 2001 and $936.4 million at
June 30, 2001. These investments, which include federal funds sold and
interest-bearing deposits in other banks, averaged $537.5 million during the
second quarter of 2002, a decrease of $232.6 million or 30.2 percent from the
second quarter of 2001.
Income on Interest-Earning Assets. Interest income amounted to $151.8
million during the second quarter of 2002, a $30.9 million or 16.9 percent
decrease from the second quarter of 2001. The reduction in interest income
reflects the net impact of a 157 basis point reduction in the taxable-equivalent
yield on interest-earning assets and the 5.4 percent increase in average earning
assets. The taxable-equivalent yield on interest-earning assets declined from
7.38 percent in the second quarter of 2001 to 5.81 percent in the second quarter
of 2002, more than offsetting the impact of the growth among earning assets.
For the six-month period ended June 30, 2002, interest income totaled
$307.9 million, a reduction of $63.8 million or 17.2 percent from the same
period of 2001. The taxable-equivalent yield on all interest-earning assets fell
from 7.68 percent during the first six months of 2001 to 5.96 percent during the
same period of 2002, a 172 basis point reduction.
Loan interest income for the second quarter of 2002 was $123.0 million, a
reduction of $22.1 million or 15.2 percent from the second quarter of 2001 due
to loan yield reductions. The taxable-equivalent yield on the loan portfolio was
6.76 percent during the second quarter of 2002, compared to 8.18 percent during
the same period of 2001, the reduction resulting from lower market rates.
For the six months ended June 30, 2002, loan interest income was $247.2
million, a decrease of $48.9 million or 16.5 percent from the same period of
2001. The decrease in interest income reflects the decline in loan yields.
Income earned on investment securities was $26.5 million during the second
quarter of 2002 compared to $29.2 million during the second quarter of 2001.
Much of the decrease can be attributed to lower yields, which decreased 171
basis points from the second quarter of 2001 to the second quarter of 2002, more
than offsetting the impact of growth in the investment securities portfolio. The
yield on average investment securities was 5.74 percent during the second
quarter of 2001 and 4.03 percent during the second quarter of 2002.
For the six months ended June 30, 2002, income earned on the investment
securities portfolio amounted to $56.7 million in 2002 compared to $58.2 million
during the same period of 2001, a decrease of $1.5 million or 2.6 percent. This
decrease is the result of a 175 basis point decline in the taxable-equivalent
yield. The investment securities portfolio's taxable-equivalent yield decreased
from 6.03 percent in 2001 to 4.28 percent in 2002.

INTEREST-BEARING LIABILITIES
At June 30, 2002 and 2001, interest-bearing liabilities totaled $9.12
billion and $8.81 billion, respectively, compared to $9.21 billion as of
December 31, 2001. During the second quarter of 2002, interest-bearing
liabilities averaged $9.08 billion, an increase of $353.7 million or 4.1 percent
over the second quarter of 2001. For the six-month period ended June 30, 2002,
interest-bearing liabilities averaged $9.07 billion, an increase of $477.3
million or 5.6 percent over the same period of 2001. For both the quarter and
the six-month periods, the increase in average interest-bearing liabilities
primarily resulted from growth in money market accounts and long-term
obligations.
Deposits. At June 30, 2002, total deposits were $10.07 billion, an increase
of $585.1 million or 6.2 percent over June 30, 2001. Compared to the December
31, 2001 balance of $9.96 billion, total deposits have increased $103.6 million
or 1.0 percent.
Average interest-bearing deposits were $8.29 billion during the second
quarter of 2002 compared to $7.90 billion during the second quarter of 2001, an
increase of $388.1 million or 4.9 percent. Much of the increase is due to growth
among money market accounts, which increased $560.4 million or 33.4 percent from
the second quarter of 2001 to the second quarter of 2002. Average Checking With
Interest deposits increased $109.8 million or 9.6 percent from the second
quarter of 2001 to the second quarter of 2002. Average time deposits decreased
$316.0 million or 7.1 percent between the two periods. Time deposits of $100,000
or more averaged 10.90 percent of total average deposits during the second
quarter of 2002, compared to 11.37 percent during the same period of 2001.
Interest-bearing deposits averaged $8.25 billion during the six months
ended June 30, 2002, compared to $7.79 billion during the same period of 2001,
an increase of $461.6 million or 5.9 percent. Average money market deposits
increased $507.0 million or 30.5 percent during 2002, while average time
deposits decreased $192.4 million or 4.4 percent.
We attribute much of the growth among non-time deposits during the second
quarter and the first six months of 2002 to strong demand for traditional bank
deposits by customers who are fearful of riskier investment options. We believe
the reduction in time deposits results from customer avoidance of investing at a
fixed-rate during a period of historically low deposit yields. In the near-term,
as economic conditions remain strained, we anticipate continued demand for bank
deposit products with moderate growth in outstanding deposits. As economic
conditions improve, we anticipate deposit run-off as investors return to more
aggressive investment strategies.
Short-term Borrowings. At June 30, 2002, short-term borrowings totaled
$507.0 million compared to $611.4 million at December 31, 2001 and $677.2
million at June 30, 2001. For the quarters ended June 30, 2002 and 2001,
short-term borrowings averaged $522.4 million and $664.3 million, respectively.
This $141.8 million or 21.4 percent decrease resulted from lower master note and
federal fund borrowings. For the six-month periods ended June 30, short-term
borrowings averaged $552.1 million and $654.7 million during 2002 and 2001,
respectively, a $102.6 million or 15.7 percent reduction.
Long-term Obligations. Long-term obligations were $254.0 million, $284.0
million and $154.8 million at June 30, 2002, December 31, 2001 and June 30,
2001, respectively. These borrowings averaged $262.2 million during the second
quarter of 2002, an increase of $107.4 million or 69.4 percent over the first
quarter of 2001. The growth in average long-term obligations relates to the
October 2001 issuance of $100.0 million in trust-preferred securities. The rate
on long-term obligations during the second quarter of 2002 was 8.23 percent,
unchanged from the same period of 2001.
Expense on Interest-Bearing Liabilities. Our interest expense amounted to
$55.0 million during the second quarter of 2002, a $36.4 million or 39.8 percent
decrease from the second quarter of 2001. The lower interest expense was the
result of the reduction in interest rates. The rate on these average liabilities
was 2.43 percent during the second quarter of 2002 compared to 4.21 percent
during the same period of 2001, a 178 basis point reduction.
For the year to date, interest expense was $114.2 million, compared to
$187.9 million for the same period of 2001. The 39.2 percent decrease results
from a 187 basis point reduction in the rate on interest-bearing liabilities.
The blended rate fell from 4.41 percent during the first six months of 2001 to
2.54 percent during the same period of 2002.

NET INTEREST INCOME
Net interest income totaled $96.7 million during the second quarter of
2002, an increase of $5.5 million or 6.1 percent from the $91.2 million recorded
during the second quarter of 2001. The growth in net interest income during the
second quarter of 2002 was volume-driven, as the aggregate impact of changes in
interest rates yielded a reduction in net interest income. The
taxable-equivalent net yield on interest-earning assets was 3.71 percent for the
second quarter of 2002, an increase of 2 basis points from the 3.69 percent
reported for the second quarter of 2001. The taxable equivalent interest rate
spread for the second quarter of 2002 was 3.38 percent compared to 3.17 percent
for the same period of 2001.
For the six months ended June 30, 2002, net interest income totaled $193.7
million, an increase of $10.0 million or 5.4 percent from the same period of
2001. Like the second quarter, the increase in year-to-date net interest income
resulted from balance sheet growth, the impact of which was greater than the
impact of falling interest rates. The taxable-equivalent net yield on
interest-earning assets was 3.76 percent for the first six months of 2002, a 5
basis points reduction from the 3.81 percent reported for the first six months
of 2001. The taxable equivalent interest rate spread for the first six months of
2002 was 3.42 percent compared to 3.27 percent for the same period of 2001.
A principal objective of our asset/liability management function is to
manage interest rate risk or the exposure to changes in interest rates. We
maintain portfolios of interest-earning assets and interest-bearing liabilities
with maturities or repricing opportunities that will protect against wide
interest rate fluctuations, thereby limiting, to the extent possible, the
ultimate interest rate exposure. Management is aware of the potential negative
impact that movements in market interest rates may have on net interest income.
Market risk is the potential economic loss resulting from changes in market
prices and interest rates. This risk can either result in diminished current
fair values or reduced net interest income in future periods. As of June 30,
2002, our market risk profile has not changed significantly from December 31,
2001.

ASSET QUALITY
Reserve for loan losses. We continuously analyze the growth and risk
characteristics of the total loan portfolio under current economic conditions in
order to evaluate the adequacy of the reserve for loan losses. Such factors as
the financial condition of the borrower, fair market value of collateral and
other considerations are considered in establishing the reserve for loan losses.
We continually review the assumptions imbedded within the model used to
calculate the loan loss reserve. Business loans are generally graded, and those
credit grades become the basis for the loss estimates based on historical
experience. For all other loans, loss estimates are made by management based on
historical data and current economic trends. Based on the model, at June 30,
2002, the reserve for loan losses amounted to $110.5 million, compared to $107.1
million at December 31, 2001 and $105.0 million at June 30, 2001. In each
period, the reserve represented 1.49 percent of loans outstanding.
We consider the established reserve adequate to absorb losses that relate
to loans outstanding at June 30, 2002, although future adjustments to the
reserve may be necessary based on changes in economic conditions and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the reserve for loan losses. These
agencies may require the recognition of adjustments to the reserve based on
their judgments of information available to them at the time of their
examination.
The provision for loan losses charged to operations during the second
quarter of 2002 was $7.8 million, compared to $5.4 million during the second
quarter of 2001, an increase of $2.4 million or 45.0 percent. For the six-month
periods ended June 30, total provision for loan losses was $13.8 million for
2002 and $11.1 million for 2001, increases of $2.7 million or 24.7 percent. The
increase during the second quarter and first six months of 2002 results from
higher levels of net charge-offs and nonperforming assets and general economic
uncertainty.
Net charge-offs for the three months ended June 30, 2002 totaled $6.0
million, compared to net charge-offs of $3.4 million during the same period of
2001, an increase of $2.6 million or 76.8 percent. On an annualized basis, these
net charge-offs represent 0.33 percent and 0.19 percent of average loans
outstanding during the respective periods. Net charge-offs for the six-month
period ended June 30, 2002 totaled $10.4 million, an increase of $2.5 million or
31.5 percent over the $7.9 million recorded during the same period of 2001. As a
percentage of average loans outstanding, the losses represent 0.29 percent for
2002 and 0.22 percent for 2001 on an annualized basis. Gross charge-offs totaled
$12.7 million and $9.7 million for the six-month periods ended June 30, 2002 and
2001 respectively. Gross recoveries were $2.2 million and $1.7 million for the
respective periods.
During 2002, as a result of the recessionary economy, we have experienced
an increase in commercial and leasing charge-offs, although those losses have
been partially offset by recoveries of amounts previously charged off. Among
retail loans, we have noted higher levels of direct installment charge-offs and
losses among real estate loans secured by first mortgage loans and revolving
home equity loans. We are encouraged that our credit card and other retail
unsecured losses have remained largely unchanged from 2001.
Table 6 provides details concerning the reserve and provision for loan
losses over the past five quarters and for the year-to-date for 2002 and 2001.
Nonperforming assets. At June 30, 2002, our nonperforming assets amounted
to $28.0 million or 0.38 percent of gross loans plus foreclosed properties,
compared to $20.2 million at December 31, 2001, and $15.5 million at June 30,
2001. Nonaccrual loans totaled $17.4 million at June 30, 2002, compared to $14.0
million at December 31, 2001 and $12.7 million at June 30, 2001. The $3.4
million increase in nonaccrual loans from December 31, 2001 to June 30, 2002
results from higher levels of commercial nonaccrual loans. At June 30, 2002, the
balance of other real estate includes $6.1 million that we transferred from
premises and equipment to other real estate during the first quarter when
management elected to classify the property as held for sale. FCB has entered
into an agreement to sell this property, subject to the satisfaction of various
contingencies, during the third quarter of 2002.
Despite the volatility in recent quarters, we view these levels of
nonperforming assets as further evidence of strong asset quality. Management
continues to closely monitor nonperforming assets, taking necessary actions to
minimize potential exposure.

NONINTEREST INCOME
During the first six months of 2002, noninterest income was $109.5 million,
compared to $107.5 million during the same period of 2001. The $2.0 million or
1.9 percent increase was primarily due to growth in service charges on deposit
accounts and cardholder and merchant services income, partially offset by lower
income from securities transactions. During the first six months of 2002, total
service charges on deposits were $37.4 million, compared to $33.3 million earned
during the same period of 2001. This increase resulted from higher bad check and
over draft fees and commercial service charges.
Cardholder and merchant services income increased $2.8 million from $20.7
million earned in the first six months of 2001 to $23.4 million in the first six
months of 2002. This 13.3 percent increase in cardholder income was due to
higher merchant discount income and higher interchange income from credit and
debit card transactions.
Commission income contributed an additional $1.5 million during the first
six months of 2002 compared to the same period of 2001. This increase represents
a 15.1 percent increase over the same period of 2001, primarily due to higher
commissions generated by First Citizens Investor Services. Fees from processing
services increased $1.1 million to $9.4 million over the $8.3 million during the
first half of 2001, an increase of 13.3 percent, the result of higher processing
rates that became effective during 2002.
Partially offsetting the impact of these increases in noninterest income
was a reduction in income generated from securities transactions. During the
first six months of 2002, BancShares recognized a net loss of $86,000, compared
to a net gain of $7.0 million during the first six months of 2001. The loss
during 2002 was the net result other than temporary impairment losses that were
recorded on equity securities classified as available for sale and gains
recognized on the exchange of investments during the first quarter of 2002. The
large gains we recognized during 2001 resulted from the exchange and subsequent
sale of available-for-sale securities in companies represented in our equity
securities portfolio.

NONINTEREST EXPENSE
Noninterest expense was $217.7 million for the first six months of 2002, a
4.3 percent increase over the $208.7 million recorded during the same period of
2001. The $9.0 million increase in noninterest expense primarily relates to
higher personnel costs. Salary expenses increased $3.6 million during 2002 when
compared to the same period of 2001. This 4.1 percent increase reflects the
impact of annual salary increases that were effective for most associates on
July 1, 2001. Employee benefits expense increased $2.5 million or 14.0 percent
during the first six months of 2002, compared to the corresponding period of
2001 due to increased health insurance and pension costs.
Occupancy expense increased $358,000 to $18.0 million during the first six
months of 2002. This 2.0 percent increase resulted from higher building
depreciation. Equipment expense increased $809,000 or 4.0 percent during the
first six months of 2002, the result of higher software depreciation and
maintenance costs.
The $1.7 million or 2.7 percent increase in other expenses resulted from
higher credit card processing costs and core deposit amortization. In accordance
with the provisions of Statement of Financial Accounting Standards No. 142
(Statement 142), which we fully adopted on January 1, 2002, we discontinued the
amortization of goodwill. During the first six months of 2001, BancShares
recognized goodwill amortization expense of $2.5 million. During the first
quarter of 2002, we also reviewed the estimated useful lives of our other
intangible assets, including goodwill accounted for under the provisions of
Statement of Financial Accounting Standards No. 72 (FAS 72 goodwill). As a
result of adjustments to shorten the estimated useful lives of FAS 72 goodwill,
during the first six months of 2002, we recorded amortization expense of $6.7
million, compared to $3.2 million during the same period of 2001.

INCOME TAXES
Income tax expense amounted to $25.4 million during the first six months of
2002, compared to $26.6 million during the same period of 2001, a 4.5 percent
decrease. The effective tax rates for these periods were 35.38 percent and 37.19
percent, respectively. The decrease in effective tax rate resulted from the
adoption of Statement 142 at January 1, 2002, at which time we discontinued the
amortization of goodwill. Since this amortization expense was non-deductible for
income tax purposes, the expense reduction resulting from the change did not
generate additional income tax expense.

LIQUIDITY
Management relies on the investment portfolio as a source of liquidity,
with maturities designed to provide needed cash flows. Further, retail deposits
generated throughout the branch network have enabled management to fund asset
growth and maintain liquidity. In the event additional liquidity is needed,
BancShares maintains readily available sources to borrow funds through its
correspondent network.

SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. At June 30, 2002 and 2001, the leverage capital
ratio of BancShares was 9.12 percent and 7.95 percent, respectively, surpassing
the minimum level of 3 percent. As a percentage of risk-adjusted assets,
BancShares' Tier 1 capital ratio was 13.24 percent at June 30, 2002, and 10.64
percent as of June 30, 2001. The minimum ratio allowed is 4 percent of
risk-adjusted assets. The total risk-adjusted capital ratio was 14.56 percent at
June 30, 2002 and 11.94 percent as of June 30, 2001. The minimum total capital
ratio is 8 percent. BancShares and its subsidiary banks exceed the capital
standards established by their respective regulatory agencies.

SEGMENT REPORTING
BancShares conducts its banking operations through its two wholly-owned
subsidiaries, FCB and ASB. Although FCB and ASB offer similar products and
services to customers, each entity operates in distinct geographic markets and
each entity has separate management groups. Additionally, the financial results
and trends of ASB reflect the de novo nature of its growth.
Atlantic States Bank. ASB's total assets increased from $748.0 million at
June 30, 2001 to $1.0 billion at June 30, 2002, an increase of $261.4 million or
35.0 percent. This growth resulted from loan growth and an expanding branch
network. ASB's net interest income increased $6.4 million or 77.3 percent during
the first six months of 2002, when compared to the same period of 2001, the
result of balance sheet growth. Provision for loan losses increased $905,000 or
65.7 percent due to higher levels of nonperforming assets, higher historical net
charge-offs and loan growth.
ASB's noninterest income increased $525,000 or 28.4 percent during the
first six months of 2002, primarily the result of higher service charge income.
Noninterest expense increased $2.5 million or 16.7 percent during 2002. Higher
personnel, occupancy and equipment costs reflect the impact of the expanded
branch network.
ASB recorded a net loss of $1.7 million during the first six months of 2002
compared to a net loss of $3.9 million during the same period of 2001. This
represents a $2.2 million or 57.2 percent reduction in the net loss.
Substantially all of ASB's growth has been on a de novo basis, and ASB continues
its efforts to build a customer base in its highly competitive markets. We
continue to seek new growth opportunities for ASB, including the recently
announced expansion into the Austin, Texas and Scottsdale, Arizona markets. Our
early investments in these new markets will result in higher levels of
noninterest expense in the coming quarters.
First Citizens Bank. FCB's total assets increased from $10.37 billion at
June 30, 2001 to $10.73 billion at June 30, 2002, an increase of $362.4 million
or 3.5 percent. This growth resulted from strong deposit growth during 2001,
much of which was invested in the securities portfolio due to weak loan demand.
FCB's net interest income increased $6.5 million or 3.6 percent during the first
six months of 2002, the result of growth in interest-earning assets. Provision
for loan losses increased $1.8 million or 18.8 percent due to higher net
charge-offs and nonperforming assets.
FCB's noninterest income increased $8.6 million or 8.5 percent during the
first six months of 2002, primarily the result of higher service charge and
cardholder and merchant services income. Noninterest expense increased $9.3
million or 4.8 percent during the first six months of 2002, primarily due to
higher personnel costs.
FCB recorded net income of $52.6 million during the first six months of
2002 compared to $49.8 million during the same period of 2001. This represents a
$2.8 million or 5.7 percent increase in net income.

ACCOUNTING MATTERS
Except for those provisions that became effective and were adopted by
BancShares during 2001, we adopted the provisions of Statements of Financial
Accounting Standards (SFAS) No. 142 (Statement 142) on January 1, 2002. During
the second quarter of 2002, we completed our initial goodwill impairment review,
and no impairment was identified. Further discussion related to the adoption of
Statement 142 is found under the caption Noninterest Expense and in the notes to
the consolidated financial statements.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(Statement 144), which supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Statement 144 establishes a single accounting model for
long-lived assets to be disposed of by a sale. We adopted the provisions of
Statement 144 on January 1, 2002. The implementation did not have a material
impact on our consolidated financial position or consolidated results of our
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (Statement 146), which becomes
effective prospectively for exit or disposal activities initiated after December
31, 2002. Under Statement 146, we will record a liability for a cost associated
with an exit or disposal activity when that liability is incurred and can be
measured at fair value. In periods after initially recording a liability, we
will adjust the liability to reflect revisions to the expected timing or amount
of estimated cash flows, discounted at the appropriate interest rate originally
used to measure the liability. Statement 146 also establishes accounting
standards for employee and contract termination costs. The impact from the
adoption of Statement 146 is dependent on the nature and extent of exit and
disposal activities. Consequently, at this time, we are unable to estimate the
ultimate impact from the adoption of Statement 146.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios, or results of operations.

FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act, which statements are
inherently subject to risks and uncertainties. Forward-looking statements are
statements that include projections, predictions, expectations or beliefs about
future events or results or otherwise are not statements of historical fact.
Such statements are often characterized by the use of qualifying words (and
their derivatives) such as "expect," "believe," "estimate," "plan," "project,"
"anticipate," or other statements concerning opinions or judgments of BancShares
and its management about future events. Factors that could influence the
accuracy of such forward-looking statements include, but are not limited to, the
financial success or changing strategies of BancShares' customers, actions of
government regulators, the level of market interest rates, and general economic
conditions.