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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 September 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-- 8,794,669 shares
Class B Common Stock--$1 Par Value-- 1,681,318 shares
(Number of shares outstanding, by class, as of November 13,2002)
INDEX
PART I. FINANCIAL INFORMATION PAGES
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2002,
December 31, 2001,and September 30, 2001 4
Consolidated Statements of Income for the three-month
and nine-month periods ended September 30, 2002 and
September 30, 2001 5
Consolidated Statements of Changes in Shareholders'
Equity for the nine-month periods ended September 30, 2002,
and September 30, 2001 6
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2002, and September 30, 2001 7
Note to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures
(a) In conjunction with this filing and their certifications of the
disclosures contained within this filing, Chief Executive Officer
Lewis R. Holding and Chief Financial Officer Kenneth A. Black
evaluated the effectiveness of Registrant's disclosure controls and
procedures. This review, which occurred within 90 days of this
report's filing, found the disclosure controls and procedures to be
effective.
(b) There were no significant changes in Registrant's internal controls or
in other factors that could significantly affect these controls
subsequent to the examination by Mr. Holding and Mr. Black.
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 September 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: November 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 September 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.
November 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
Third Quarter 2002
CERTIFICATIONS
Certification of Chief Executive Officer
I, Lewis R. Holding, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Citizens
BancShares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 13, 2002 /s/ Lewis R. Holding
_________________________
Lewis R. Holding
Chief Executive Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2002
Certification of Chief Financial Officer
I, Kenneth A. Black, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Citizens
BancShares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; 4.
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 13, 2002 /s/ Kenneth A. Black
_______________________
Kenneth A. Black
Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2002
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
September 30* December 31# September 30*
(thousands, except share data) 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 801,450 $ 758,987 $ 691,594
Overnight investments 623,182 501,909 625,576
Investment securities held to maturity 2,351,678 2,658,851 2,430,718
Investment securities available for sale 150,348 132,445 51,405
Loans 7,521,834 7,196,177 7,109,584
Less reserve for loan losses 111,577 107,087 105,775
- -----------------------------------------------------------------------------------------------------------------------
Net loans 7,410,257 7,089,090 7,003,809
Premises and equipment 502,966 483,084 477,218
Income earned not collected 53,548 63,604 64,747
Other assets 188,754 177,021 177,458
=======================================================================================================================
Total assets $ 12,082,183 $ 11,864,991 $ 11,522,525
=======================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $1,830,455 $1,650,101 $1,497,606
Interest-bearing 8,456,370 8,311,504 8,147,620
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 10,286,825 9,961,605 9,645,226
Short-term borrowings 498,988 611,390 676,351
Long-term obligations 253,418 284,009 184,018
Other liabilities 98,050 122,944 150,967
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 11,137,281 10,979,948 10,656,562
Shareholders' Equity
Common stock:
Class A - $1 par value (8,794,669; 8,797,154 and
8,797,154 shares issued, respectively) 8,794 8,797 8,797
Class B - $1 par value (1,681,468; 1,686,302 and
1,693,549 shares issued, respectively) 1,681 1,686 1,694
Surplus 143,766 143,766 143,766
Retained earnings 782,986 723,122 705,067
Accumulated other comprehensive income 7,675 7,672 6,639
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 944,902 885,043 865,963
=======================================================================================================================
Total liabilities and shareholders' equity $ 12,082,183 $ 11,864,991 $ 11,522,525
=======================================================================================================================
* Unaudited
# Derived from the Consolidated Balance Sheets included in the 2001 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2002
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended September 30 Nine Months Ended September 30
(thousands, except per share data; unaudited) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Interest income
Loans $ 123,280 $ 138,711 $ 370,494 $ 434,837
Investment securities:
U. S. Government 21,527 28,958 77,223 86,379
State, county and municipal 46 64 168 200
Dividends 407 1,187 1,272 1,820
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities interest
and dividend income 21,980 30,209 78,663 88,399
Overnight investments 2,482 7,789 6,504 25,159
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 147,742 176,709 455,661 548,395
Interest expense
Deposits 45,741 76,630 146,350 244,528
Short-term borrowings 1,134 4,618 3,615 18,289
Long-term obligations 5,252 3,234 16,341 9,580
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 52,127 84,482 166,306 272,397
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 95,615 92,227 289,355 275,998
Provision for loan losses 5,592 5,620 19,394 16,690
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 90,023 86,607 269,961 259,308
Noninterest income
Service charges on deposit accounts 19,179 17,818 56,588 51,162
Cardholder and merchant services income 12,921 11,944 36,356 32,627
Trust income 3,774 3,848 11,683 11,588
Fees from processing services 4,757 4,483 14,161 12,784
Commission income 5,426 4,955 16,751 14,797
ATM income 2,434 2,494 6,964 7,279
Mortgage income 2,806 2,937 8,658 8,813
Other service charges and fees 3,465 3,302 11,209 10,117
Securities gains (losses) (360) 150 (446) 7,188
Other 880 1,158 2,847 4,186
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 55,282 53,089 164,771 160,541
Noninterest expense
Salaries and wages 47,508 46,372 139,266 134,547
Employee benefits 10,354 9,162 30,897 27,178
Occupancy expense 9,453 9,119 27,472 26,780
Equipment expense 11,100 10,379 31,933 30,403
Other 32,497 31,931 99,073 96,777
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 110,912 106,963 328,641 315,685
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 34,393 32,733 106,091 104,164
Income taxes 12,275 11,977 37,645 38,545
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 22,118 $ 20,756 $ 68,446 $ 65,619
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) net of taxes
Unrealized securities gains (losses)
arising during period $ (1,188) $ 337 $ 163 $ 1,867
Less: reclassified adjustment for gains
(losses) included in net income (159) 95 160 1,520
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (1,029) 242 3 347
- ----------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 21,089 $ 20,998 $ 68,449 $ 65,966
- ----------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 10,477,886 10,508,330 10,480,011 10,513,488
Net income per share $ 2.11 $ 1.98 $ 6.53 $ 6.24
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Consolidated Statements of Changes in Shareholders' Equity
First Citizens BancShares, Inc. and Subsidiaries
Accumulated
Class A Class B Other
Common Common Retained Comprehensive Total
(thousands, except share data, unaudited) Stock Stock Surplus Earnings Income Equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $8,813 $1,709 $143,766 $ 650,148 $ 6,292 $ 810,728
Redemption of 16,300 shares of Class A
common stock (16) (1,408) (1,424)
Redemption of 15,833 shares of Class B
common stock (15) (1,408) (1,423)
Net income 65,619 65,619
Unrealized securities gains, net of taxes 347 347
Cash dividends (7,884) (7,884)
==========================================================================================================================
Balance at September 30, 2001 $8,797 $1,694 $143,766 $ 705,067 $ 6,639 $ 865,963
==========================================================================================================================
Balance at December 31, 2001 $8,797 $1,686 $143,766 $ 723,122 $ 7,672 $ 885,043
Redemption of 2,485 shares of Class A
common stock (3) (260) (263)
Redemption of 4,834 shares of Class B
common stock (5) (461) (466)
Net income 68,446 68,446
Unrealized securities gains, net of taxes 3 3
Cash dividends (7,861) (7,861)
==========================================================================================================================
Balance at September 30, 2002 $8,794 $1,681 143,766 $ 782,986 $ 7,675 $ 944,902
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Nine months ended September 30
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(thousands, unaudited)
OPERATING ACTIVITIES
Net income $ 68,446 $ 65,619
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of intangibles 9,865 8,682
Provision for loan losses 19,394 16,690
Deferred tax expense 3,540 2,183
Change in current taxes payable (297) 16,837
Depreciation 27,974 25,152
Change in accrued interest payable (33,064) (4,128)
Change in income earned not collected 10,056 (2,167)
Securities losses (gains) 446 (7,188)
Provision for branches to be closed - 895
Origination of loans held for sale (17,171) (220,124)
Proceeds from sale of loans held for sale 13,987 419,002
Gain on loans held for sale (22) (1,858)
Net amortization (accretion) of premiums and discounts 17,882 3,498
Net change in other assets (19,237) (16,031)
Net change in other liabilities 8,467 15,046
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 110,266 322,108
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans outstanding (337,355) (210,482)
Purchases of investment securities held to maturity (1,711,561) (1,762,855)
Purchases of investment securities available for sale (19,050) (11,295)
Proceeds from maturities of investment securities held to maturity 2,000,852 1,106,805
Proceeds from maturities of investment securities available for sale 911 6,924
Net change in overnight investments (121,273) (194,194)
Dispositions of premises and equipment 8,274 4,800
Additions to premises and equipment (62,238) (62,439)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (241,440) (1,122,736)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in time deposits (395,225) 305,869
Net change in demand and other interest-bearing deposits 720,445 367,489
Net change in short-term borrowings (112,993) 43,143
Origination of long-term obligations - 30,522
Repayment of long-term obligations (30,000) -
Repurchases of common stock (729) (2,847)
Cash dividends paid (7,861) (7,884)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 173,637 736,292
- ------------------------------------------------------------------------------------------------------------------------------
Change in cash and due from banks 42,463 (64,336)
Cash and due from banks at beginning of period 758,987 755,930
==============================================================================================================================
Cash and due from banks at end of period $ 801,450 $ 691,594
==============================================================================================================================
CASH PAYMENTS FOR:
Interest $ 199,370 $ 276,525
Income taxes 38,343 40,248
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains $ 210 $ 6,924
Reclassification of loans to held for sale - 177,817
Reclassification of premises and equipment to other real estate 6,108 -
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
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. See further discussion of
FAS 72 goodwill included in Note B.
First Citizens BancShares, Inc. and Subsidiaries
Third 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 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 nine-month periods ended September 30,
2002 and 2001, all of which relates to a single reporting unit, First-Citizens
Bank & Trust Company (FCB):
2002 2001
----------------------------------
Balance, January 1 $41,240 $46,340
Amortization - 3,825
==================================
Balance, September 30 $41,240 $42,515
==================================
In connection with Statement 142s transitional goodwill impairment
evaluation, we performed an assessment to determine whether there existed an
impairment of goodwill 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. As required by Statement 142, we completed our
annual impairment analysis during the third quarter. The analysis concluded no
impairment existed.
The following information relates to other intangible assets, all of which
are being amortized:
September 30, December 31, September 30,
2002 2001 2001
-----------------------------------------------------------------------------------
FAS 72 goodwill $ 60,463 $ 70,328 $ 71,928
During the three-month periods ended September 30, 2002 and 2001,
BancShares recorded amortization expense of $3,215 and $1,639 related to these
intangible assets. During the nine-month periods ended September 30, 2002 and
2001, BancShares recorded amortization expense of $9,865 and $4,857 related to
these intangible assets.
In October 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 147 (Statement 147), which requires
financial institutions to subject all of their goodwill (including FAS 72
goodwill relating to transactions determined to be business combinations) that
relates to an acquisition of a business to an annual impairment test instead of
amortizing the asset over its estimated useful life. Management is currently
evaluating the provisions of Statement 147 to determine if the transactions that
generated FAS 72 goodwill are deemed to be business combinations. If those
transactions are characterized as business combinations, the FAS 72 goodwill
amortization expense recognized during 2002 will be reversed during the fourth
quarter of 2002.
If those transactions are not determined to qualify as business
combinations, the intangible will continue to be amortized. In that case, 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 September 30 Nine months ended September 30
2002 2001 2002 2001
-----------------------------------------------------------------------
Net income $ 22,118 $ 20,756 $ 68,446 $ 65,619
Addition of goodwill amortization - 1,275 - 3,825
=======================================================================
Adjusted net income $ 22,118 $ 22,031 $ 68,446 $ 69,444
=======================================================================
Net income per share $ 2.11 $ 1.98 $ 6.53 $ 6.24
Addition of goodwill amortization - 0.12 - 0.36
=======================================================================
Adjusted net income per share $ 2.11 $ 2.10 $ 6.53 $ 6.60
=======================================================================
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Note C
Operating Segments
BancShares conducts its banking operations through its two wholly-owned
subsidiaries, FCB and Atlantic States Bank (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, Florida and Texas
under a federal thrift charter. ASB has announced plans to expand its branch
network into Arizona before the end of 2002 and into California during 2003.
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.
September 30, 2002
ASB FCB Other Total Adjustments Consolidated
-------------------------------------------------------------------------------------
Interest income $ 42,143 $ 409,400 $ 22,560 $ 474,103 $ (18,442) $ 455,661
Interest expense 18,710 132,137 33,901 184,748 (18,442) 166,306
------------------------------------------------------------------------------------------------
Net interest income 23,433 277,263 (11,341) 289,355 - 289,355
Provision for loan losses 2,724 16,670 - 19,394 - 19,394
------------------------------------------------------------------------------------------------
Net interest income after 20,709 260,593 (11,341) 269,961 - 269,961
provision for loan losses
Noninterest income 3,713 164,138 313 168,164 (3,393) 164,771
Noninterest expense 26,828 304,854 352 332,034 (3,393) 328,641
------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,406) 119,877 (11,380) 106,091 - 106,091
Income taxes (804) 42,504 (4,055) 37,645 - 37,645
------------------------------------------------------------------------------------------------
Net income (loss) $ (1,602) $ 77,373 $ (7,325) $ 68,446 $ - $ 68,446
================================================================================================
Period-end assets $ 999,629 $ 10,876,101 $ 1,695,694 $ 13,571,424 $ (1,489,241) $ 12,082,183
September 30, 2001
ASB FCB Other Total Adjustments Consolidated
Interest income $ 39,086 $ 503,940 $ 24,116 $ 567,142 $ (18,747) $ 548,395
Interest expense 25,883 235,407 29,854 291,144 (18,747) 272,397
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Net interest income 13,203 268,533 (5,738) 275,998 - 275,998
Provision for loan losses 2,562 14,128 - 16,690 - 16,690
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Net interest income after 10,641 254,405 (5,738) 259,308 - 259,308
provision for loan losses
Noninterest income 3,031 152,855 7,483 163,369 (2,828) 160,541
Noninterest expense 22,448 291,497 4,568 318,513 (2,828) 315,685
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Income (loss) before income taxes (8,776) 115,763 (2,823) 104,164 - 104,164
Income taxes (3,135) 41,321 359 38,545 - 38,545
------------------------------------------------------------------------------------------------
================================================================================================
Net income (loss) $ (5,641) $ 74,442 $ (3,182) $ 65,619 $ - $ 65,619
================================================================================================
================================================================================================
Period-end assets $ 824,865 $ 10,543,495 $ 1,556,159 $ 12,924,519 $ (1,401,994) $ 11,522,525
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Financial Summary
Table 1
2002 2001 Nine Months Ended
(thousands, except per share data Third Second First Fourth Third September 30
and ratios) Quarter Quarter Quarter Quarter Quarter 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
C> C>
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income $ 147,742 $ 151,771 $ 156,148 $ 167,032 $ 176,709 $ 455,661 $ 548,395
Interest expense 52,127 55,042 59,137 74,113 84,482 166,306 272,397
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 95,615 96,729 97,011 92,919 92,227 289,355 275,998
Provision for loan losses 5,592 7,822 5,980 7,444 5,620 19,394 16,690
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 90,023 88,907 91,031 85,475 86,607 269,961 259,308
Noninterest income 55,282 55,259 54,230 55,014 53,089 164,771 160,541
Noninterest expense 110,912 108,292 109,437 106,912 106,963 328,641 315,685
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 34,393 35,874 35,824 33,577 32,733 106,091 104,164
Income taxes 12,275 12,744 12,626 12,260 11,977 37,645 38,545
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,118 $ 23,130 $ 23,198 $ 21,317 $ 20,756 $ 68,446 $ 65,619
====================================================================================================================================
Net interest income-taxable equivalent $ 95,932 $ 97,074 $ 97,382 $ 93,389 $ 92,698 $ 290,388 $ 277,468
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Averages
Total assets $11,871,334 $11,756,150 $11,664,376 $11,674,273 $11,333,123 $11,764,711 $11,083,960
Investment securities 2,553,957 2,641,898 2,704,077 2,684,315 2,195,064 2,632,761 2,032,072
Loans 7,450,271 7,312,384 7,207,757 7,128,818 7,054,247 7,324,359 7,098,197
Interest-earning assets 10,592,386 10,491,811 10,353,509 10,446,364 10,126,568 10,480,111 9,900,481
Deposits 10,060,785 9,934,615 9,776,690 9,742,153 9,496,699 9,925,071 9,291,841
Interest-bearing liabilities 9,131,569 9,075,549 9,073,637 9,142,487 8,851,916 9,093,797 8,683,102
Long-term obligations 253,973 262,224 283,993 274,445 161,587 266,620 157,044
Shareholders' equity $ 935,735 $ 916,387 $ 894,689 $ 874,801 $ 857,417 $ 915,387 $ 838,262
Shares outstanding 10,477,886 10,480,527 10,481,661 10,488,894 10,508,330 10,480,011 10,513,488
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Period-End Balances
Total assets $12,082,183 $11,864,461 $11,746,352 $11,864,991 $11,522,525 $12,082,183 $11,522,525
Investment securities 2,502,026 2,464,779 2,576,383 2,791,296 2,482,123 2,502,026 2,482,123
Loans 7,521,834 7,434,662 7,248,088 7,196,177 7,109,584 7,521,834 7,109,584
Interest-earning assets 10,647,042 10,438,386 10,422,451 10,489,382 10,217,283 10,647,042 10,217,283
Deposits 10,286,825 10,065,180 9,872,979 9,961,605 9,645,226 10,286,825 9,645,226
Interest-bearing liabilities 9,208,776 9,121,010 9,099,535 9,206,903 9,007,989 9,208,776 9,007,989
Long-term obligations 253,970 253,979 283,988 284,009 184,018 253,970 184,018
Shareholders' equity $ 944,902 $ 926,878 $ 906,281 $ 885,043 $ 865,963 $ 944,902 $ 865,963
Shares outstanding 10,476,137 10,480,391 10,480,624 10,483,456 10,490,703 10,476,137 10,490,703
- ------------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.74 % 0.79 % 0.81 % 0.72 % 0.74 % 0.78 % 0.79 %
Shareholders' equity 9.38 10.12 10.52 9.67 9.82 10.00 10.47
Dividend payout ratio 11.85 11.31 11.31 12.32 12.63 11.49 12.02
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 74.05 % 73.61 % 73.72 % 73.17 % 74.28 % 73.80 % 76.39 %
Shareholders' equity to total assets 7.88 7.79 7.67 7.49 7.57 7.78 7.56
Time certificates of $100,000 or more
to total deposits 10.54 10.90 11.54 11.97 11.92 11.00 11.28
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $ 2.11 $ 2.21 $ 2.21 $ 2.03 $ 1.98 $ 6.53 $ 6.24
Cash dividends 0.25 0.25 0.25 0.25 0.25 0.75 0.75
Book value at period end 90.20 88.44 86.47 84.42 82.55 90.20 88.44
Tangible book value at period end 80.49 78.43 76.15 73.78 71.64 80.49 78.43
- ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Outstanding Loans by Type
Table 2
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Third Second First Fourth Third
(thousands) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
Real estate:
Construction and land development $ 667,142 $ 653,525 $ 656,749 $ 654,377 $ 638,927
Mortgage:
1-4 family residential 1,173,480 1,207,664 1,229,955 1,322,809 1,338,655
Commercial 2,030,731 1,992,795 1,953,323 1,889,259 1,798,157
Revolving 1,259,593 1,175,693 1,080,896 1,024,181 970,295
Other 158,370 157,518 155,170 151,910 169,948
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate 5,289,316 5,187,195 5,076,093 5,042,536 4,915,982
Commercial and industrial 940,515 956,365 938,349 918,929 931,850
Consumer 1,132,551 1,130,900 1,077,412 1,074,202 1,096,775
Lease financing 142,695 141,351 137,383 139,966 142,305
Other 16,757 18,851 18,851 20,544 22,672
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 7,521,834 7,434,662 7,248,088 7,196,177 7,109,584
Less reserve for loan losses 111,577 110,472 108,692 107,087 105,775
- -----------------------------------------------------------------------------------------------------------------------------
Net loans $ 7,410,257 $ 7,324,190 $ 7,139,396 $ 7,089,090 $ 7,003,809
- -----------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Investment Securities
Table 3
September 30, 2002 September 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
- --------------------------------------------------------------------------------------------------------------------------------
U. S. Government:
Within one year $ 1,841,554 $ 1,848,946 0/5 3.17 % $ 2,048,934 $ 2,076,706 0/7 5.11 %
One to five years 479,465 485,297 1/6 2.60 371,974 376,703 1/5 3.74
Five to ten years 94 100 7/3 8.00 179 188 7/10 8.03
Over ten years 27,767 28,740 15/8 5.71 6,027 6,234 25/3 7.40
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,348,880 2,363,083 0/10 3.08 2,427,114 2,459,831 0/8 4.90
State, county and municipal:
Within one year 500 504 0/2 7.78 753 761 0/8 6.20
One to five years 480 501 2/9 5.55 1,002 1,036 2/5 6.67
Five to ten years 144 157 6/7 5.88 143 151 7/7 5.88
Over ten years 1,414 1,578 15/7 6.01 1,411 1,534 15/1 5.47
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,538 2,740 9/7 6.27 3,309 3,482 10/4 6.00
Other
Within one year 10 10 0/4 2.32 35 35 0/4 6.02
One to five years - - 10 10 1/4 6.50
Five to ten years 250 250 6/10 7.75 250 250 6/10 7.75
- -----------------------------------------------------------------------------------------------------------------------------------
Total 260 260 5/8 7.54 295 295 4/6 7.13
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 2,351,678 2,366,083 0/7 4.33 % 2,430,718 2,463,608 0/9 4.90 %
Marketable equity securities 137,489 150,348 41,697 51,405
- ----------------------------------------------------------------------------------------------------------
Total investment securities $ 2,489,167 $ 2,516,431 $ 2,472,415 $ 2,515,013
- ----------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third 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 $ 7,450,271 $ 123,574 6.58 % $ 7,054,247 $ 139,146 7.83 % $ 7,194 $ (22,766)$ (15,572)
Investment securities:
U. S. Government 2,493,554 21,527 3.43 2,149,139 28,958 5.35 3,786 (11,217) (7,431)
State, county and municipal 3,391 69 8.07 4,675 100 8.49 (27) (4) (31)
Other 57,012 407 2.83 41,250 1,187 11.42 282 (1,062) (780)
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,553,957 22,003 3.42 2,195,064 30,245 5.47 4,041 (12,283) (8,242)
Overnight investments 588,158 2,482 1.67 877,257 7,789 3.52 (1,893) (3,414) (5,307)
===================================================================================================================================
Total interest-earning assets $10,592,386 $ 148,059 5.55 % $10,126,568 $ 177,180 6.95 % $ 9,342 $ (38,463$ (29,121)
===================================================================================================================================
Liabilities
Deposits:
Checking With Interest $ 1,265,092 $ 847 0.27 % $ 1,145,737 $ 1,348 0.47 % $ 108 $ (609) $ (501)
Savings 651,110 874 0.53 610,378 1,611 1.05 84 (821) (737)
Money market accounts 2,383,130 9,573 1.59 1,757,093 13,088 2.96 3,597 (7,112) (3,515)
Time deposits 4,063,898 34,447 3.36 4,506,419 60,583 5.33 (4,875) (21,261) (26,136)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,363,230 45,741 2.17 8,019,627 76,630 3.79 (1,086) (29,803) (30,889)
Federal funds purchased 38,479 155 1.60 58,941 505 3.40 (129) (221) (350)
Repurchase agreements 193,118 277 0.57 226,348 1,224 2.15 (114) (833) (947)
Master notes 266,912 644 0.96 336,660 2,398 2.83 (334) (1,420) (1,754)
Other short-term borrowings 15,857 58 1.45 48,753 491 4.00 (226) (207) (433)
Long-term obligations 253,973 5,252 8.20 161,587 3,234 7.94 1,878 140 2,018
==================================================================================================================================
Total interest-bearing liabilities $ 9,131,569 $ 52,127 2.26 % $ 8,851,916 $ 84,482 3.79 % $ (11) $ (32,344$ (32,355)
===================================================================================================================================
Interest rate spread 3.29 % 3.16 %
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $ 95,932 3.60 % $ 92,698 3.64 % $ 9,353 $ (6,119) $ 3,234
- -----------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income
taxes only, or state income taxes only are stated on a taxable-equivalent
basis assuming a statutory federal income tax rate of 35% and state income
tax rate of 7.00% for each period. The taxable-equivalent adjustment was
$317 for 2002 and $471 for 2001.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine 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 $7,324,359 $371,446 6.77 % $7,098,196 $436,191 8.21 % $12,797 ($77,542) ($64,745)
Investment securities:
U. S. Government 2,572,228 77,223 4.01 1,985,650 86,379 5.82 21,630 (30,786) (9,156)
State, county and municipal 4,088 249 8.14 4,892 316 8.64 (50) (17) (67)
Other 56,445 1,272 3.01 41,531 1,820 5.86 495 (1,043) (548)
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,632,761 78,744 4.00 2,032,073 88,515 5.82 22,075 (31,846) (9,771)
Overnight investments 522,990 6,504 1.66 770,212 25,159 4.37 (5,562) (13,093) (18,655)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $10,480,110 $456,694 5.82 % $9,900,481 $549,865 7.42 % $29,310 ($122,481) ($93,171)
================================================================================================================================
Liabilities
Deposits:
Checking with Interest $ 1,248,191 $ 2,662 0.29 % $1,129,054 $ 4,966 0.59 % $ 378 $ (2,682) $ (2,304)
Savings 640,895 2,594 0.54 608,646 5,429 1.19 206 (3,041) (2,835)
Money market accounts 2,240,889 27,482 1.64 1,693,769 44,694 3.53 10,588 (27,800) (17,212)
Time deposits 4,157,794 113,612 3.65 4,434,486 189,439 5.71 (9,659) (66,168) (75,827)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,287,769 146,350 2.36 7,865,955 244,528 4.16 1,513 (99,691) (98,178)
Federal funds purchased 41,132 489 1.59 68,075 2,259 4.44 (607) (1,163) (1,770)
Repurchase agreements 196,152 804 0.55 210,970 4,808 3.05 (199) (3,805) (4,004)
Master notes 278,409 1,973 0.95 329,139 9,295 3.78 (895) (6,427) (7,322)
Other short-term borrowings 23,715 349 1.97 51,919 1,927 4.96 (732) (846) (1,578)
Long-term obligations 266,620 16,341 8.19 157,044 9,580 8.16 6,707 54 6,761
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 9,093,797 $166,306 2.45 % $8,683,102 $272,397 4.19 % $ 5,787 $ (111,878)$ 106,091)
================================================================================================================================
Interest rate spread 3.37 % 3.23 %
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $290,388 3.70 % $277,468 3.75 % $ 23,523 $ (10,603) $ 12,920
- --------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income
taxes only, or state income taxes only, are stated on a taxable-equivalent
basis assuming a statutory federal income tax rate of 35% and state income
tax rate of 7.00% for each period. The taxable-equivalent adjustment was
$1,033 for 2002 and $1,470 for 2001.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Summary of Loan Loss Experience and Risk Elements
Table 6
2002 2001
----------------------------------------- ----------------------- Nine Months Ended
Third Second First Fourth Third September 30
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Reserve balance at beginning of period $ 110,472 $ 108,692 $ 107,087 $ 105,775 $ 105,025 $ 107,087 $102,655
Adjustment for sale of loans - - - - - - (777)
Provision for loan losses 5,592 7,822 5,980 7,444 5,620 19,394 16,690
Net charge-offs:
Charge-offs (5,319) (7,262) (5,393) (7,171) (5,462) (17,974) (15,121)
Recoveries 832 1,220 1,018 1,039 592 3,070 2,328
- --------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (4,487) (6,042) (4,375) (6,132) (4,870) (14,904) (12,793)
- --------------------------------------------------------------------------------------------------------------------------------
Reserve balance at end of period $111,577 $ 110,472 $ 108,692 $ 107,087 $ 105,775 $111,577 $105,775
================================================================================================================================
Historical Statistics
Balances
Average total loans $7,450,271 $7,312,384 $7,207,757 $7,128,818 $7,054,247 $7,324,359 $7,098,196
Total loans at period-end 7,521,834 7,434,662 7,248,088 7,196,177 7,109,584 7,521,834 7,109,584
- --------------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $14,944 $ 17,397 $ 17,735 $ 13,983 $ 13,349 $14,944 $13,349
Other real estate acquired through
foreclosure 12,092 10,563 12,461 6,263 4,242 12,092 4,242
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $27,036 $ 27,960 $ 30,196 $ 20,246 $ 17,591 $27,036 $17,591
- --------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $8,928 $ 9,945 $ 11,012 $ 12,981 $ 14,993 $8,928 $14,993
- --------------------------------------------------------------------------------------------------------------------------------
Ratios
Net charge-offs (annualized) to average
total loans 0.24 % 0.33 % 0.25 % 0.34 % 0.27 % 0.27 % 0.24 %
Reserve for loan losses to total loans
at period-end 1.48 1.49 1.50 1.49 1.49 1.48 1.49
Nonperforming assets to total loans plus
foreclosed real estate at period-end 0.36 0.38 0.42 0.28 0.25 0.36 0.25
- --------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Noninterest Income Table 7
2002 2001 Nine Months Ended
--------------------------- -----------------
Third Second First Fourth Third September 30
(thousands) Quarter Quarter Quarter Quarter Quarter 2002 2001
- ----------------------------------------------------------------------------------------------- -------------------
- ------------------------------------------------------------------------------------------------ -------------------
Service charges on deposit accounts $ 19,179 $ 18,961 $ 18,448 $ 18,904 $ 17,818 $ 56,588 $ 51,162
Cardholder and merchant services income 12,921 12,793 10,642 10,132 11,944 36,356 32,627
Trust income 3,774 3,915 3,994 3,526 3,848 11,683 11,588
Fees from processing services 4,757 4,720 4,684 4,668 4,483 14,161 12,784
Commission income 5,426 5,992 5,333 4,977 4,955 16,751 14,797
ATM income 2,434 2,035 2,495 3,913 2,494 6,964 7,279
Mortgage income 2,806 2,590 3,262 4,044 2,937 8,658 8,813
Other service charges and fees 3,465 3,712 4,032 3,779 3,302 11,209 10,117
Securities gains (losses) (360) (396) 310 1 150 (446) 7,188
Other 880 937 1,030 1,070 1,158 2,847 4,186
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 55,282 $ 55,259 $ 54,230 $ 55,014 $ 53,089 $ 164,771 $ 160,541
========================================================================================================================
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
Noninterest Expense Table 8
2002 2001 Nine Months Ended
----------------------------------- -----------------------
Third Second First Fourth Third September 30
(thousands) Quarter Quarter Quarter Quarter Quarter 2002 2001
- -------------------------------------------------------------------------------------------------- -----------------------
Salaries and wages $ 47,508 $ 44,823 $ 46,935 $ 46,471 $ 46,372 $ 139,266 $ 134,547
Employee benefits 10,354 9,958 10,585 8,719 9,162 30,897 27,178
Occupancy expense 9,453 9,020 8,999 8,804 9,119 27,472 26,780
Equipment expense 11,100 10,675 10,158 10,458 10,379 31,933 30,403
Other 32,497 33,816 32,760 32,460 31,931 99,073 96,777
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 110,912 $ 108,292 $ 109,437 $ 106,912 $ 106,963 $ 328,641 $ 315,685
===========================================================================================================================
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2002
1
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 BancShares' 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, Florida and Texas.
On October 1, 2002, First-Citizens Bank, A Virginia Corporation (FCB-AVC),
a wholly-owned subsidiary of FCB, commenced operation under a national charter.
Concurrent with the change from a bank chartered under the laws of the
Commonwealth of Virginia, FCB-AVC changed its name to First Citizens Bank,
National Association. First Citizens Bank, National Association is the credit
card issuing and merchant processing bank for FCB and ASB.
SUMMARY
BancShares realized an increase in earnings during the third quarter of
2002 compared to the third quarter of 2001. Consolidated net income during the
third quarter of 2002 was $22.1 million, compared to $20.8 million earned during
the corresponding period of 2001, an increase of $1.4 million or 6.6 percent.
During the third quarter of 2002, higher levels of net interest income and
noninterest income more than offset the impact of higher noninterest expense
when compared to the same period of 2001. Net income per share during the third
quarter of 2002 totaled $2.11, compared to $1.98 during the third quarter of
2001. Our annualized return on average assets was 0.74 percent for the third
quarters of 2002 and 2001, while the annualized return on average equity was
9.38 percent and 9.82 percent during the third quarter of 2002 and 2001,
respectively.
For the first nine months of 2002, we recorded net income of $68.4 million,
compared to $65.6 million earned during the first nine months of 2001. The $2.8
million or 4.3 percent increase was the result of higher net interest income and
noninterest income. During 2002, the growth in net interest income and
noninterest income exceeded the increases in noninterest expense and the
provision for loan losses. Net income per share for the first nine months of
2002 was $6.53, compared to $6.24 recorded during the same period of 2001. On an
annualized basis, we returned 0.78 percent on average assets during the first
nine months of 2002 compared to 0.79 percent during the corresponding period of
2001. The annualized return on average equity for the first nine months of 2002
was 10.00 percent compared to 10.47 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 third quarter and Table 5 for the first nine months of 2002 and
2001.
INTEREST-EARNING ASSETS
Interest-earning assets for the third quarter of 2002 averaged $10.59
billion, an increase of $465.8 million or 4.6 percent from the third quarter of
2001. For the nine months ended September 30, 2002, earning assets averaged
$10.48 billion, an increase of $579.6 million or 5.9 percent over the same
period of 2001. These increases during 2002 resulted from growth in both
investment securities and the loan portfolio.
Loans. At September 30, 2002 and 2001, gross loans totaled $7.52 billion
and $7.11 billion, respectively. As of December 31, 2001, gross loans were $7.20
billion. The $412.3 million or 5.8 percent growth in loans from September 30,
2001 to September 30, 2002 results from growth among real estate loans. Real
estate loans increased from $4.92 billion at September 30, 2001, to $5.29
billion at September 30, 2002, an increase of $373.3 million or 7.6 percent.
Revolving real estate loans increased $289.3 million or 29.8 percent in the
twelve months preceding September 30, 2002, primarily due to growth in the
EquityLine product. Commercial real estate loans increased $232.6 million or
12.9 percent from September 30, 2001 to September 30, 2002. Partially offsetting
this growth was a reduction in 1-4 family residential mortgage loans, which
decreased $165.2 million or 12.3 percent, the result of loan sales and refinance
activity. Table 2 details outstanding loans by type for the past five quarters.
During the third quarter of 2002, loans averaged $7.45 billion, an increase
of $396.0 million or 5.6 percent from the comparable period of 2001. For the
year-to-date, gross loans have averaged $7.32 billion for 2002 compared to $7.10
billion for the same period of 2001, an increase of $226.2 million or 3.2
percent. Growth in the third quarter and first nine months of 2002, when
compared to the comparable periods of 2001, is due to increases among business
and revolving real estate loans.
As of September 30, 2002, $3.3 million in fixed-rate residential mortgage
loans are classified as held for sale. All loans held for sale are carried at
the lower of cost or fair value.
Management anticipates continued strong growth in EquityLine loans while
commercial-purpose and consumer loans are expected to exhibit more modest growth
during the remainder of 2002 and into early 2003. 1-4 family residential
mortgage loans will likely continue to decline due to heavy refinance activity
and reduced new loan originations. 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 certain retail customers to defer purchases of large-ticket items that
would normally require purchase money financing.
Investment securities. At September 30, 2002 and 2001, the investment
portfolio totaled $2.50 billion and $2.48 billion, respectively. At December 31,
2001, the investment portfolio was $2.79 billion. The 10.4 percent decrease in
the investment portfolio since December 31, 2001 resulted from the liquidity
demands resulting from current loan growth as well as higher levels of overnight
investments at September 30, 2002 versus December 31, 2001. All securities that
are classified as held-to-maturity reflect our ability and positive intent to
hold those investments until maturity. Marketable equity securities are
classified as available-for-sale and are reported at their fair value. Table 3
presents detailed information relating to the investment securities portfolio.
Investment securities held to maturity totaled $2.35 billion at September
30, 2002, compared to $2.43 billion at September 30, 2001, a reduction of $79.0
million. Investment securities available for sale increased $98.9 million from
September 30, 2001 to September 30, 2002, the result of purchases of marketable
equity securities during late 2001 and the purchase of $95.8 million of US
Treasury securities designated as available for sale.
Overnight Investments. Overnight investments totaled $623.2 million at
September 30, 2002, compared to $625.6 million at September 30, 2001, and $501.9
million at December 31, 2001. Overnight investments include federal funds sold,
money market investments and interest-bearing balances at the Federal Home Loan
Bank of Atlanta.
Income on Interest-Earning Assets. Interest income amounted to $147.7
million during the third quarter of 2002, a $29.0 million or 16.4 percent
decrease from the third quarter of 2001. The yield on interest-earning assets
declined 140 basis points from 6.95 percent in the third quarter of 2001 to 5.55
percent in the third quarter of 2002. Yields on loans, investment securities and
overnight investments all declined significantly from the third quarter of 2001
to the same period of 2002. All yield reductions reflect the significant market
rate reductions that occurred during 2001 and 2002, as maturing loans and
investment securities continue to be replaced by lower-yielding assets.
Loan interest income for the third quarter of 2002 was $123.3 million, a
decrease of $15.4 million or 11.1 percent from the third quarter of 2001, due to
declines in loan yields. The taxable-equivalent yield on the loan portfolio was
6.58 percent during the third quarter of 2002, compared to 7.83 percent during
the same period of 2001. For the nine months ended September 30, 2002, loan
interest income was $370.5 million, a decrease of $64.3 million or 14.8 percent
from the same period of 2001. The decrease in loan interest income for the year
to date results from yield reductions, as the taxable-equivalent loan yield
declined 144 basis points from 8.21 percent during 2001 to 6.77 percent for the
first nine months of 2002.
Investment securities interest and dividend income was $22.0 million during
the third quarter of 2002 compared to $30.2 million during the third quarter of
2001. We attribute the decrease to a 205 basis point reduction in the portfolio
yield. The taxable-equivalent yield on investment securities was 5.47 percent
during the third quarter of 2001 compared to 3.42 percent during the third
quarter of 2002.
For the nine months ended September 30, 2002, income earned on the
investment securities portfolio amounted to $78.7 million in 2002 and $88.4
million during the same period of 2001, a decrease of $9.7 million or 11.0
percent. This decrease is the result of a 182 basis point decline in the
taxable-equivalent yield. The investment securities portfolio taxable-equivalent
yield decreased to 4.00 percent in 2002 from 5.82 percent in 2001.
INTEREST-BEARING LIABILITIES
At September 30, 2002 and 2001, interest-bearing liabilities totaled $9.21
billion and $9.01 billion, respectively, compared to $9.21 billion as of
December 31, 2001. During the third quarter of 2002, interest-bearing
liabilities averaged $9.13 billion, an increase of $279.7 million or 3.2 percent
from the third quarter of 2001. This increase primarily resulted from growth in
money market accounts, Checking With Interest and long term obligations,
partially offset by lower average time deposits.
Deposits. At September 30, 2002, total deposits were $10.29 billion, an
increase of $641.6 million or 6.7 percent over September 30, 2001. Compared to
the December 31, 2001 balance of $9.96 billion, total deposits have increased
$325.2 million or 3.3 percent as of September 30, 2002.
Average interest-bearing deposits were $8.36 billion during the third
quarter of 2002 compared to $8.02 billion during the third quarter of 2001, an
increase of $343.6 million or 4.3 percent. The increase resulted from average
money market accounts, which increased $626.0 million from the third quarter of
2001 to the third quarter of 2002, and Checking With Interest, which increased
$119.4 million from the third quarter of 2001 to the third quarter of 2002.
Partially offsetting this growth was average time deposits, which decreased
$442.5 million between the two periods. We attribute much of the increase in
money market accounts and Checking With Interest to a customer avoidance of
certificates of deposit and IRAs resulting from the historically low market
rates currently offered on time deposits. Time deposits of $100,000 or more
averaged 10.54 percent of total average deposits during the third quarter of
2002, compared to 11.92 percent during the same period of 2001.
Interest bearing deposits averaged $8.29 billion during the first nine
months of 2002, an increase of $421.8 million or 5.4 percent over the same
period of 2001. Average money market deposits increased $547.1 million or 32.3
percent over the same period of 2001, while average Checking With Interest
increased $119.1 million or 10.6 percent. As in the third quarter, the increases
in these deposit categories were partially offset by loss of time deposits. For
the first nine months of 2002, time deposits averaged $4.16 billion, a $276.7
million or 6.2 percent reduction from the same period of 2001.
Short-term Borrowings. At September 30, 2002, short-term borrowings totaled
$499.0 million compared to $611.4 million at December 31, 2001 and $676.4
million at September 30, 2001. For the quarters ended September 30, 2002 and
2001, short-term borrowings averaged $514.4 million and $670.7 million,
respectively. This decrease resulted from lower average master notes and
repurchase obligations.
For the nine months ended September 30, 2002, short-term borrowings
averaged $539.4 million, an 18.3 percent reduction from $660.1 million recorded
during the same period of 2001. The $120.7 million decrease reflects lower
levels of master note and federal funds borrowings due primarily to lower levels
of master note balances from customers caused by low market interest rates.
Long-term obligations averaged $254.0 million during the third quarter of
2002, compared to $161.6 million during the third quarter of 2001. For the nine
months ended September 30, 2002, long-term obligations averaged $266.6 million
compared to $157.0 million during 2001. For both the third quarter and the
year-to-date, the increase results from the issuance of $100 million of trust
preferred capital securities during the fourth quarter of 2001.
Expense on Interest-Bearing Liabilities. Our interest expense amounted to
$52.1 million during the third quarter of 2002, a $32.4 million or 38.3 percent
decrease from the third quarter of 2001. The lower interest expense was the
result of a 153 basis point rate reduction on interest-bearing liabilities. The
rate on these liabilities was 2.26 percent during the third quarter of 2002
compared to 3.79 percent during the same period of 2001.
For the year-to-date, interest expense was $166.3 million, compared to
$272.4 million for the same period of 2001. The 38.9 percent decrease results
from a 174 basis point reduction among interest-bearing liabilities. During the
first nine months of 2002, these liabilities carried an average cost of 2.45
percent compared to 4.19 percent for the same period of 2001.
NET INTEREST INCOME
Net interest income totaled $95.6 million during the third quarter of 2002,
an increase of $3.4 million or 3.7 percent from the $92.2 million recording
during the third quarter of 2001. The taxable-equivalent net yield on
interest-earning assets was 3.60 percent for the third quarter of 2002, a
decrease of 4 basis points from the 3.64 percent reported for the third quarter
of 2001 as reductions in interest-earning asset yields closely matched
reductions in interest-bearing liability rates. The taxable equivalent interest
rate spread for the third quarter of 2002 was 3.29 percent compared to 3.16
percent for the same period of 2001. For the first nine months of 2002, net
interest income was $289.4 million, a $13.4 million or 4.8 percent increase over
2001. The taxable-equivalent net yield on interest-earning assets was 3.70
percent for 2002, compared to 3.75 percent for 2001. The interest rate spread
increased from 3.23 percent during 2001 to 3.37 percent during 2002. In the
coming quarters, we expect reductions in interest rate spreads as fixed-rate
loans mature and are replaced with newer loans with lower yields.
A principal objective of BancShares' asset/liability management function is
to manage interest rate risk or the exposure to changes in interest rates.
Management maintains portfolios of interest-earning assets and interest-bearing
liabilities with maturities or repricing opportunities that will protect against
wide interest rate fluctuations, thereby limiting, to the extent possible, the
ultimate interest rate exposure. Management is aware of the potential negative
impact that movements in market interest rates may have on net interest income.
Market risk is the potential economic loss resulting from changes in market
prices and interest rates. This risk can either result in diminished current
fair values or reduced net interest income in future periods. After the multiple
rate reductions initiated by the Federal Reserve Bank's Open Market Committee
during 2001, there were no actions during the first nine months of 2002.
However, the impact of the 2001 reductions in the fed funds and discount rates
and the resulting reductions in the other market rates continued to provide
downward pressure on interest rates during 2002. As a result, we have continued
to experience reductions in the yields on assets and liabilities during 2002,
when compared to amounts disclosed at December 31, 2001.
On an aggregate basis, BancShares had a liability-sensitive one-year
sensitivity gap of $1.06 billion at December 31, 2001. As a result of growth
among variable rate loans and a reduction in time deposits with maturities of
less than one year, our liability-sensitive position has declined to $317.3
million at September 30, 2002. Consequently, changes in interest rates will have
a less volatile impact on net interest income.
The taxable-equivalent yield on investment securities held to maturity has
declined from 4.63 percent at December 31, 2001 to 4.33 percent at September 30,
2002. Substantially all of our portfolio of held-to-maturity securities are
fixed rate with a large percentage of securities maturing within two years.
Loan growth since December 31, 2001 has included significant growth among
EquityLine loans, a variable rate product, as well as commercial real estate
loans. In an effort to minimize the interest rate risk associated with long-term
fixed rate loans, we continue to encourage variable rate lending and we are
pleased with growth among variable rate loans.
Among interest-bearing deposits, we have experienced significant growth
among Checking With Interest and money market products, while time deposits have
experienced volume reductions. The net impact of these trends is an increase in
interest-bearing deposits maturing within one year. Substantially all of our
interest-bearing deposits have been and remain fixed rate.
Short-term borrowings and long-term obligations have both experienced
decreases since December 31, 2001, as fixed rate borrowings have been repaid,
including the early repayment of $30.0 million in long-term borrowings.
ASSET QUALITY
Reserve for loan losses. Management continuously analyzes the growth and
risk characteristics of the total loan portfolio under current economic
conditions in order to evaluate the adequacy of the reserve for loan losses.
Such factors as the financial condition of the borrower, fair market value of
collateral and other considerations are considered in 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 of similarly graded loans. For all other loans, loss
estimates are made by management based on historical data and current economic
trends.
Based on the results of the model, at September 30, 2002, the reserve for
loan losses amounted to $111.6 million or 1.48 percent of loans outstanding.
This compares to $107.1 million or 1.49 percent at December 31, 2001, and $105.8
million or 1.49 percent at September 30, 2001.
We consider the established reserve adequate to absorb losses that relate
to loans outstanding at September 30, 2002, although future additions to the
reserve may be necessary based on changes in economic conditions or other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the reserve for loan losses. Such
agencies may require the recognition of adjustments to the reserve based on
their judgments of information available to them at the time of their
examination.
The provision for loan losses charged to operations during the third
quarter of 2002 and 2001 was $5.6 million. For the nine month periods ended
September 30, total provision for loan losses was $19.4 million for 2002 and
$16.7 million for 2001. The $2.7 million increase primarily results from the
higher net charge offs during 2002. 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.
Net charge-offs for the three months ended September 30, 2002 totaled $4.5
million, compared to net charge-offs of $4.9 million during the same period of
2001. On an annualized basis, these net charge-offs represent 0.24 percent and
0.27 percent of average loans outstanding during the respective periods. Net
charge-offs for the nine month period ended September 30, 2002 totaled $14.9
million, compared to $12.8 million during the same period of 2001. As a
percentage of average loans outstanding, the year-to-date losses represent 0.27
percent for 2002 and 0.24 for 2001 on an annualized basis. Gross charge-offs
totaled $18.0 million and $15.1 million for the nine month periods ended
September 30, 2002 and 2001 respectively. Gross recoveries were $3.1 million and
$2.3 million for the respective periods.
During 2002, as a result of the recessionary economy, 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 loan losses have
remained largely unchanged from 2001.
Nonperforming assets. At September 30, 2002, our nonperforming assets
amounted to $27.0 million or 0.36 percent of gross loans plus foreclosed
properties, compared to $20.2 million at December 31, 2001, and $17.6 million at
September 30, 2001. At September 30, 2002, nonaccrual loans totaled $14.9
million, compared to $14.0 million at December 31, 2001 and $13.3 million at
September 30, 2001. The $961,000 increase in nonaccrual loans from December 31,
2001 to September 30, 2002 results from higher levels of commercial nonaccrual
loans. At September 30, 2002, the balance of other real estate includes $5.5
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, before the end of 2002. Management
continues to closely monitor nonperforming assets, taking necessary actions to
minimize potential exposure.
NONINTEREST INCOME
During the first nine months of 2002, noninterest income was $164.8
million, compared to $160.5 million during the same period of 2001. The $4.2
million or 2.6 percent increase was primarily due to higher service charges on
deposit accounts and cardholder and merchant services income, partially offset
by the absence of securities gains recognized during 2001. Similar trends were
noted for the third quarter of 2002, when compared to the same period of 2001.
Noninterest income during the third quarter of 2002 was $55.3 million, a $2.2
million or 4.1 percent increase over the same period of 2001. Growth in service
charge income, cardholder and merchant services income and commission income
more than offset the impact of lower securities gains. The components of
noninterest income for the past five quarters and the year-to-date for 2002 and
2001 are included in Table 7.
During the first nine months of 2002, service charges on deposit accounts
were $56.6 million, compared to $51.2 million earned during the same period of
2001. This $5.4 million or 10.6 percent increase resulted from higher bad check
and overdraft fees and commercial service charges. For the third quarter of
2002, service charge income was $19.2 million, a $1.4 million or 7.6 percent
increase over the same period of 2001, the result of increases similar to those
observed for the year-to-date.
Cardholder and merchant income increased $3.7 million or 11.4 percent from
$32.6 million earned in the first nine months of 2001 to $36.4 million earned in
the first nine months of 2002. For the third quarter of 2002, income from our
card operation was $12.9 million compared to $11.9 million during the same
period of 2001, a $977,000 or 8.2 percent increase. For both the year to date
and the third quarter, much of the growth resulted from higher merchant income
and interchange fees.
These increases in noninterest income were partially offset by the impact
of lower income from securities transactions. Securities transactions generated
net losses of $446,000 during the first nine months of 2002, compared to net
gains of $7.2 million recognized during the same period of 2001, a net reduction
of $7.6 million. The gains recognized during 2001 resulted from sales and
exchanges of available-for-sale equity securities. The losses recognized during
2002 primarily relate to $885,000 of other than temporary impairment losses that
have been recorded as a result of sustained fair value reductions among certain
equity securities. We recognized $360,000 in securities losses during the third
quarter of 2002, compared to securities gains of $150,000 during the same period
of 2001, a $510,000 unfavorable variance. The losses recognized during the third
quarter of 2002 result from $482,000 in other than temporary impairment losses.
Unless market conditions improve significantly, we anticipate further securities
losses will be recorded during the fourth quarter of 2002. Based on September
30, 2002 market values, we expect to evaluate securities with aggregate
unrealized losses of $866,000 for other than temporary impairment during the
fourth quarter.
Commission income contributed an additional $2.0 million during the first
nine months of 2002 compared to the same period of 2001. This increase
represents a 13.2 percent increase over the same period of 2001, the result of
higher fees earned for the sales of annuity and insurance products. For similar
reasons, commission income totaled $5.4 million for the third quarter of 2002,
compared to $5.0 million during the same period of 2001, a $471,000 or 9.5
percent increase.
Fees from processing services increased $1.4 million or 10.8 percent over
the $12.8 million earned during the first nine months of 2001. For the third
quarter of 2002, we recognized $4.8 million fees from processing services,
compared to $4.5 million during the same period of 2001, a $274,000 or 6.1
percent increase. Increase during the three- and nine-month periods resulted
from rate increases that became effective January 1, 2002.
Trust income increased slightly during 2002 when compared to 2001. However,
trust income for the third quarter of 2002 was off 1.9 percent from the third
quarter of 2001. We anticipate trust income will remain flat through early 2003
as many trust fees are determined based on the market value of trust assets. ATM
income has declined during 2002, the result of fewer ATM transactions.
Mortgage income during 2002 is also below the amount recognized during
2001. Although volumes have improved recently as a result of refinance activity,
originations were sluggish during early 2002. The reduction in other income
during 2002 reflects the impact of a nonrecurring gain recognized during 2001.
Additionally, net premium income has decreased from 2001. American Guaranty
Insurance Company (AGI), a property and casualty insurance company that is
wholly-owned by BancShares, reported higher premium income during 2002, the
result of a higher in force coverage. During 2002, AGI began offering its
insurance products through an agency network; previously, AGI products were
primarily offered to FCB customers. More than offsetting the growth by AGI is a
reduction in premiums written by Triangle Life Insurance Company (TLI), a
wholly-owned subsidiary of FCB. The demand for TLI credit-life products
continues to diminish. We expect the growth in AGI and the reduction in TLI
premium income to continue in the coming quarters.
NONINTEREST EXPENSE
Noninterest expense was $328.6 million for the first nine months of 2002, a
4.1 percent increase over the $315.7 million recorded during the same period of
2001. The $13.0 million increase in noninterest expense relates to higher
personnel costs, higher card processing costs and higher intangible
amortization. Total noninterest expense was $110.9 million during the third
quarter of 2002, a $3.9 million or 3.7 percent increase over the $107.0 million
recorded during the same period of 2001. The components of noninterest expense
for the past five quarters and the year-to-date for 2002 and 2001 are included
in Table 8.
Salary expenses increased $4.7 million during 2002 when compared to the
same nine-month period of 2001 and $1.1 million during the third quarter of 2002
when compared to the same period of 2001. For the year-to-date, this 3.5 percent
increase reflects the growth in compensation resulting from annual employee
raises that were effective July 1, 2001 and July 1, 2002. The July 1, 2002
annual raises resulted in the 2.4 percent increase for the third quarter of
2002.
Employee benefits expense increased $3.7 million or 13.7 percent during the
first nine months of 2002, compared to the corresponding period of 2001. For the
third quarter of 2002, employee benefits expense increased 1.2 million or 13.0
percent over the same period of 2001. For both the third quarter and the
year-to-date, the increases were due to higher health insurance and pension
costs.
Equipment expense increased $1.5 million or 5.0 percent during the first
nine months of 2002, the result of higher software depreciation and maintenance
resulting from our network expansion during 2001. Occupancy expense increased
$692,000 to $27.5 million during the first nine months of 2002. This 2.6 percent
increase resulted from higher depreciation expense for new bank buildings. We
expect equipment and occupancy expenses will increase in the coming quarters as
branches of IronStone Bank, a division of ASB, begin to open. IronStone Bank is
the name under which ASB is expanding into Texas, Arizona and California.
The $2.3 million increase in other expenses for the nine-month period
resulted from higher card processing costs, intangible amortization and legal
expenses. Credit card processing costs increased $1.8 million or 12.7 percent
during 2002, the result of growth in transaction volumes. Legal expenses
increased $863,000 or $30.9 percent during 2002, the result of higher defense
costs for various litigation matters and the costs associated with establishing
IronStone Bank.
Total amortization expense for goodwill and other intangible assets was
$9.9 million during the nine-month period ending September 30, 2002, compared to
$8.7 million during the same period of 2001, an increase of $1.2 million or 13.6
percent. This increase results from changes in generally accepted accounting
principles and a change in an accounting estimate as discussed below.
During the first nine months of 2001, BancShares recognized goodwill
amortization expense of $3.8 million. In accordance with the provisions of
Statement of Financial Accounting Standards No. 142 (Statement 142), which we
fully adopted on January 1, 2002, we discontinued the amortization of goodwill.
During the first quarter of 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 nine months of 2002, we recorded amortization
expense of $9.9 million, compared to $5.0 million during the same period of
2001.
During October of 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 147 (Statement 147). Statement
147 requires financial institutions to subject all of their goodwill (including
FAS 72 goodwill relating to transactions determined to be business combinations)
to an annual impairment test instead of amortizing the asset over its estimated
useful life. Management is currently evaluating the provisions of Statement 147
to determine if the transactions that generated FAS 72 goodwill are deemed to be
business combinations. If those transactions are characterized as business
combinations, the FAS 72 goodwill amortization expense recognized during 2002
will be reversed during the fourth quarter of 2002. We anticipate that this
matter will be resolved during the fourth quarter of 2002.
INCOME TAXES
Income tax expense amounted to $37.6 million during the first nine months
of 2002, compared to $38.5 million during the same period of 2001, a 2.3 percent
reduction. The effective tax rates for these periods were 35.5 percent and 37.0
percent, respectively. The decrease in income tax expense and the 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. Income
tax expense for the third quarter of 2002 was $12.3 million, compared to $12.0
million during the same period of 2001. The effective tax rates for were 35.7
percent and 36.6 percent for the third quarter of 2002 and 2001. The higher
income tax expense reflects the impact of higher pre-tax income, while the lower
effective tax rates result from the discontinuation of goodwill amortization.
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 September 30, 2002 and 2001, the leverage
capital ratio of BancShares was 9.22 percent and 7.98 percent, respectively,
surpassing the minimum level of 3 percent. As a percentage of risk-adjusted
assets, BancShares' Tier 1 capital ratio was 13.42 percent at September 30,
2002, and 11.71 percent as of September 30, 2001. The minimum ratio allowed is 4
percent of risk-adjusted assets. The total risk-adjusted capital ratio was 14.73
percent at September 30, 2002 and 13.02 percent as of September 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 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 $824.9 million at
September 30, 2001 to $999.6 million at September 30, 2002, an increase of
$174.8 million or 21.2 percent. This growth resulted from loan growth and an
expanding branch network. ASB's net interest income increased $10.2 million or
77.5 percent during the first nine months of 2002, when compared to the same
period of 2001, the result of balance sheet growth. Provision for loan losses
increased $162,000 or 6.3 percent due to higher levels of nonperforming assets,
higher historical net charge-offs and loan growth.
ASB's noninterest income increased $682,000 or 22.5 percent during the
first nine months of 2002, primarily the result of higher service charge income.
Noninterest expense increased $4.4 million or 19.5 percent during 2002. Higher
personnel, occupancy and equipment costs reflect the impact of the expanded
branch network.
ASB recorded a net loss of $1.6 million during the first nine months of
2002 compared to a net loss of $5.6 million during the same period of 2001. This
represents a $4.0 million or 71.6 percent reduction in the net loss, primarily
due to ASB's balance sheet growth. 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 planned expansions into the Austin, Texas and Scottsdale,
Arizona markets and at various locations in California. 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 $10.54 billion at
September 30, 2001 to $10.88 billion at September 30, 2002, an increase of
$332.6 million or 3.2 percent. This growth resulted from deposit growth. FCB's
net interest income increased $8.7 million or 3.3 percent during the first nine
months of 2002, the result of growth in interest-earning assets. Provision for
loan losses increased $2.5 million or 18.0 percent due to higher net charge-offs
and nonperforming assets.
FCB's noninterest income increased $11.3 million or 7.4 percent during the
first nine months of 2002, primarily the result of higher service charge and
cardholder and merchant services income. Noninterest expense increased $13.4
million or 4.6 percent during the first nine months of 2002, primarily due to
higher personnel costs.
FCB recorded net income of $77.4 million during the first nine months of
2002 compared to $74.4 million during the same period of 2001. This represents a
$2.9 million or 3.9 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 and the October 2002 issuance of Statement 147 is found under the
caption Noninterest Expense and in the notes to the accompanying 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.
The provisions of Statement 147 are discussed above, under the caption
Noninterest Expense.
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.