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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number: 0-16471
First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)
Delaware 56-1528994
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 _____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes X No _____
Class A Common Stock--$1 Par Value-- 8,750,670 shares
Class B Common Stock--$1 Par Value-- 1,677,675 shares
(Number of shares outstanding, by class, as of August 11, 2003)
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2003,
December 31, 2002,and June 30, 2002
Consolidated Statements of Income for the three-month
and six-month periods ended June 30, 2003 and
June 30, 2002
Consolidated Statements of Changes in Shareholders'
Equity for the six-month periods ended June 30, 2003,
and June 30, 2002
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2003, and June 30, 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 as of June 30, 2003. This review found the disclosure
controls and procedures to be effective.
(b) During the quarter, there were no significant changes in Registrant's
internal controls over financial reporting or in other factors that
could significantly affect these controls.
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2003
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 28, 2003 at the Annual Meeting of Shareholders of Registrant,
the shareholders considered the election of directors. The
shareholder vote regarding the election of the nominees for Board
of Directors was:
Nominee For Withheld
J.M. Alexander, Jr. 32,212,470 253,938
C.H. Ames 32,212,024 254,384
B.I. Boyles 31,880,616 585,792
G.H. Broadrick 31,895,579 570,829
H.M. Craig, III 32,212,470 253,938
B.M. Farnsworth 31,889,204 577,204
L.M. Fetterman 31,894,653 571,755
F.B. Holding 31,816,978 649,430
F.B. Holding, Jr. 31,817,577 648,831
L.R. Holding 31,816,978 649,430
C.B.C. Holt 32,209,203 257,205
J.B. Hyler, Jr. 31,815,838 650,570
G.D. Johnson 31,885,258 581,150
F.R. Jones 31,894,410 571,998
L.S. Jones 32,208,445 257,963
J.T. Maloney, Jr. 32,211,810 254,598
J.C. Mayo, Jr. 31,889,567 576,841
L.T. Nunnelee, II 31,891,385 575,023
T.O. Shaw 31,391,899 1,074,509
R.C. Soles, Jr. 32,208,997 257,411
D.L. Ward, Jr. 32,187,075 279,333
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2003
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certifications of Chief Executive Officer and
Chief Financial Officer
(b) Reports on Form 8-K. During the quarter ended June 30, 2003,
Registrant filed noCurrent Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS BANCSHARES, INC.
(Registrant)
Dated: August 11, 2003 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2003
Exhibit 31.1
CERTIFICATION
I, Lewis R. Holding, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens
BancShares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 11, 2003
/s/ Lewis R. Holding
Lewis R. Holding
Chief Executive Officer
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2003
Exhibit 31.2
CERTIFICATION
I, Kenneth A. Black, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens
BancShares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 11, 2003
/s/ Kenneth A. Black
Kenneth A. Black
Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2003
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
June 30# December 31* June 30#
(thousands, except share data) 2003 2002 2002
- -------------------------------------------------------------------------------------------------------------------------------
Assets (Restated)
Cash and due from banks $ 810,546 $ 811,657 $ 814,540
Overnight investments 618,396 623,570 538,945
Investment securities held to maturity 1,601,061 2,417,583 2,330,337
Investment securities available for sale 874,760 121,653 134,442
Loans 7,857,220 7,620,263 7,434,662
Less reserve for loan losses 115,382 112,533 110,472
- -------------------------------------------------------------------------------------------------------------------------------
Net loans 7,741,838 7,507,730 7,324,190
Premises and equipment 519,096 507,267 489,811
Income earned not collected 40,060 46,959 56,159
Other assets 188,987 195,471 179,334
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,394,744 $ 12,231,890 $ 11,867,758
===============================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 2,152,689 $ 1,857,576 $ 1,705,131
Interest-bearing 8,405,927 8,582,044 8,360,049
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 10,558,616 10,439,620 10,065,180
Short-term borrowings 499,564 462,627 506,982
Long-term obligations 253,376 253,409 253,979
Other liabilities 83,399 108,943 111,441
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,394,955 11,264,599 10,937,582
Shareholders' Equity
Common stock:
Class A - $1 par value (8,758,670; 8,794,669;
and 8,797,154 shares issued, respectively) 8,759 8,794 8,797
Class B - $1 par value (1,677,675; 1,678,625;
and 1,683,237 shares issued, respectively) 1,678 1,678 1,683
Surplus 143,766 143,766 143,766
Retained earnings 834,088 804,397 767,226
Accumulated other comprehensive income 11,498 8,656 8,704
- -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 999,789 967,291 930,176
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 12,394,744 $ 12,231,890 $ 11,867,758
===============================================================================================================================
* Unaudited
# Derived from the Consolidated Balance Sheets included in the 2002 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 2003
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended June 30 Six Months Ended June 30
(thousands, except per share data; unaudited) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Interest income (Restated) (Restated)
Loans $ 112,147 $ 122,987 $ 225,587 $ 247,214
Investment securities:
U. S. Government 15,223 26,058 30,652 55,696
State, county and municipal 37 60 75 122
Dividends 348 430 725 865
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities interest and dividend income 15,608 26,548 31,452 56,683
Overnight investments 1,418 2,236 3,208 4,022
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 129,173 151,771 260,247 307,919
Interest expense
Deposits 33,549 48,548 69,883 100,609
Short-term borrowings 715 1,112 1,296 2,481
Long-term obligations 5,241 5,382 10,484 11,089
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 39,505 55,042 81,663 114,179
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 89,668 96,729 178,584 193,740
Provision for loan losses 7,192 7,822 12,755 13,802
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 82,476 88,907 165,829 179,938
Noninterest income
Service charges on deposit accounts 19,466 18,961 37,910 37,409
Cardholder and merchant services income 14,093 12,425 26,480 23,435
Trust income 3,743 3,915 7,466 7,909
Fees from processing services 5,087 4,720 10,225 9,404
Commission income 6,052 5,992 12,070 11,325
ATM income 2,199 2,403 4,303 4,530
Mortgage income 5,037 2,590 9,093 5,852
Gain on sale of branches to a related party 5,710 - 5,710 -
Other service charges and fees 3,754 3,712 7,659 7,744
Securities gains (losses) 1,105 (396) 130 (86)
Other 702 1,047 2,289 2,062
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 66,948 55,369 123,335 109,584
Noninterest expense
Salaries and wages 49,536 44,823 97,937 91,758
Employee benefits 12,174 9,958 23,701 20,543
Occupancy expense 11,184 9,839 20,906 18,838
Equipment expense 12,209 11,052 24,177 21,650
Other 30,872 30,143 60,536 59,932
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 115,975 105,815 227,257 212,721
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,449 38,461 61,907 76,801
Income taxes 12,677 13,659 22,841 27,175
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 20,772 $ 24,802 $ 39,066 $ 49,626
===============================================================================================================================
Other comprehensive income (loss) net of taxes
Unrealized securities gains (losses) arising during period $ 2,301 $ (13) $ 2,921 $ 1,193
Less: reclassified adjustment for gains (losses) included
in net income 669 (125) 79 161
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 1,632 112 2,842 1,032
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 22,404 $ 24,914 $ 41,908 $ 50,658
- -------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 10,465,909 10,480,527 10,468,970 10,481,091
Net income per share $ 1.98 $ 2.37 $ 3.73 $ 4.73
===============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Consolidated Statements of Changes in Shareholders' Equity
First Citizens BancShares, Inc. and Subsidiaries
Accumulated
Class A Class B Other Total
Common Common Retained Comprehensive Shareholders'
(thousands, except share data, unaudited) Stock Stock Surplus Earnings Income Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 8,797 $ 1,686 $ 143,766 $ 723,122 $ 7,672 $ 885,043
Net income (restated) 49,626 49,626
Cash dividends (5,240) (5,240)
Redemption of 3,065 shares of Class B
common stock (3) (282) (285)
Other comprehensive income, net of taxes 1,032 1,032
================================================================================================================================
Balance at June 30, 2002 (restated) $ 8,797 $ 1,683 $ 143,766 $ 767,226 $ 8,704 $ 930,176
================================================================================================================================
Balance at December 31, 2002 $ 8,794 $ 1,678 $ 143,766 $ 804,397 $ 8,656 $ 967,291
Net income 39,066 39,066
Cash dividends (5,758) (5,758)
Redemption of 35,999 shares of Class A
common stock (35) (3,530) (3,565)
Redemption of 950 shares of Class B
common stock - (87) (87)
Other comprehensive income, net of taxes 2,842 2,842
================================================================================================================================
Balance at June 30, 2003 $ 8,759 $ 1,678 $ 143,766 $ 834,088 $ 11,498 $ 999,789
================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Six months ended June 30
2003 2002
(restated)
- ----------------------------------------------------------------------------------------------------------------------------
(thousands)
OPERATING ACTIVITIES
Net income $ 39,066 $ 49,626
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of intangibles 1,332 1,547
Provision for loan losses 12,755 13,802
Deferred tax benefit 5,531 5,345
Change in current taxes payable (2,587) 1,007
Depreciation 20,014 18,450
Change in accrued interest payable (5,628) (16,670)
Change in income earned not collected 6,899 7,445
Securities losses (gains) (130) 86
Origination of loans held for sale (493,186) (14,611)
Proceeds from sale of loans held for sale 496,400 11,716
Gain on loans held for sale (4,727) (301)
Gain on sale of branches to a related party (5,710) -
Net amortization (accretion) of premiums and discounts 10,488 (11,563)
Net change in other assets (3,232) (3,947)
Net change in other liabilities (17,300) 4,161
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 59,985 66,093
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans outstanding (272,573) (245,706)
Purchases of investment securities held to maturity (536,511) (851,933)
Purchases of investment securities available for sale (752,495) (1,113)
Proceeds from maturities of investment securities held to maturity 1,342,545 1,192,010
Proceeds from maturities of investment securities available for sale 4,216 911
Net change in overnight investments 5,174 (37,036)
Dispositions of premises and equipment 4,884 6,148
Additions to premises and equipment (37,899) (37,433)
Purchase and sale of branches, net of cash transferred (66,667) -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (309,326) 25,848
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in time deposits (156,721) (319,311)
Net change in demand and other interest-bearing deposits 377,457 422,886
Net change in short-term borrowings 36,904 (104,438)
Repayments of long-term obligations - (30,000)
Repurchases of common stock (3,652) (285)
Cash dividends paid (5,758) (5,240)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 248,230 (36,388)
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash and due from banks (1,111) 55,553
Cash and due from banks at beginning of period 811,657 758,987
============================================================================================================================
Cash and due from banks at end of period $ 810,546 $ 814,540
============================================================================================================================
CASH PAYMENTS FOR:
Interest $ 87,291 $ 71,712
Income taxes 19,617 27,901
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses) $ 4,698 1,881
Reclassification of premises and equipment to other real estate - 6,108
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
In the opinion of management, the consolidated 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 2002 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
2003. However, except as noted below, the reclassifications have no effect on
shareholders' equity or net income as previously reported.
BancShares adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 147 (Statement 147) during the fourth quarter of 2002.
Statement 147 required that any reclassification of previously recognized
unidentifiable intangible assets as goodwill be retroactively applied to
coincide with the adoption of SFAS No. 142 (Statement 142). As a result,
amortization expense related to assets that were reclassified pursuant to
Statement 147 has been reversed, and the financial statements and related
disclosures made for the first, second and third quarters of 2002 have been
restated. For the quarter ended June 30, 2002, noninterest expense declined
$2,587, income tax expense increased $915 and net income increased $1,672. For
the six months ended June 30, 2002, noninterest expense declined $5,103, income
tax expense increased $1,805 and net income increased $3,298.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34 (Interpretation
45). Interpretation 45 elaborates on the disclosures to be made by a guarantor
in its financial statements about its obligations under guarantees issued.
Interpretation 45 also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of Interpretation
45 were applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements were effective for financial statements of interim and
annual periods ending after December 31, 2002. The adoption of Interpretation 45
did not have a material impact on BancShares' consolidated financial statements.
Note B
Operating Segments
BancShares conducts its banking operations through its two wholly-owned
subsidiaries, First-Citizens Bank & Trust Company (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, Texas,
Arizona and California under a federal thrift charter.
In the aggregate, FCB and its consolidated subsidiaries, which are integral
to its branch operation, and 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.
As of and for the six months ended June 30, 2003
ASB FCB Other Total Adjustments Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income $ 29,097 $ 230,711 $ 12,274 $ 272,082 $ (11,835) $ 260,247
Interest expense 10,322 61,779 21,397 93,498 (11,835) 81,663
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 18,775 168,932 (9,123) 178,584 - 178,584
Provision for loan losses 933 11,822 - 12,755 - 12,755
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 17,842 157,110 (9,123) 165,829 - 165,829
Noninterest income 2,724 121,542 1,371 125,637 (2,302) 123,335
Noninterest expense 21,032 206,709 1,818 229,559 (2,302) 227,257
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (466) 71,943 (9,570) 61,907 - 61,907
Income taxes 41 26,129 (3,329) 22,841 - 22,841
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (507) $ 45,814 $ (6,241) $ 39,066 $ - $ 39,066
=================================================================================================================================
Period-end assets $ 1,113,005 $ 11,160,144 $ 1,748,867 $ 14,022,016 $ (1,627,272) $ 12,394,744
=================================================================================================================================
As of and for the six months ended June 30, 2002 (restated)
ASB FCB Other Total Adjustments Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income $ 26,995 $ 277,480 $ 15,780 $ 320,255 $ (12,336) $ 307,919
Interest expense 12,424 91,227 22,864 126,515 (12,336) 114,179
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 14,571 186,253 (7,084) 193,740 - 193,740
Provision for loan losses 2,282 11,520 - 13,802 - 13,802
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,289 174,733 (7,084) 179,938 - 179,938
Noninterest income 2,372 109,618 213 112,203 (2,619) 109,584
Noninterest expense 17,231 197,850 259 215,340 (2,619) 212,721
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,570) 86,501 (7,130) 76,801 - 76,801
Income taxes (888) 30,619 (2,556) 27,175 - 27,175
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,682) $ 55,882 $ (4,574) $ 49,626 $ - $ 49,626
=================================================================================================================================
Period-end assets $ 1,009,382 $ 10,736,194 $ 1,707,627 $ 13,453,203 $ (1,585,445) $ 11,867,758
=================================================================================================================================
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Financial Summary
2003 2002 Six Months Ended June 30
------------------------ ---------------------------------------------------------------
------------------------ ---------------------------------------------------------------
Second First Fourth Third Second
(thousands, except per share data and ratios) Quarter Quarter Quarter Quarter Quarter 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
C> C>
Summary of Operations
Interest income $ 129,173 $ 131,074 $ 140,508 $ 147,742 $ 151,771 $ 260,247 $ 307,919
Interest expense 39,505 42,158 47,712 52,127 55,042 81,663 114,179
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 89,668 88,916 92,796 95,615 96,729 178,584 193,740
Provision for loan losses 7,192 5,563 7,156 5,592 7,822 12,755 13,802
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 82,476 83,353 85,640 90,023 88,907 165,829 179,938
Noninterest income 66,948 56,387 56,618 55,282 55,369 123,335 109,584
Noninterest expense 115,975 111,282 112,496 108,325 105,815 227,257 212,721
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,449 28,458 29,762 36,980 38,461 61,907 76,801
Income taxes 12,677 10,164 10,422 13,190 13,659 22,841 27,175
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 20,772 $ 18,294 $ 19,340 $ 23,790 $ 24,802 $ 39,066 $ 49,626
====================================================================================================================================
Net interest income-taxable equivalent $ 89,926 $ 89,200 $ 93,106 $ 95,932 $ 97,074 $ 179,126 $ 194,456
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Quarterly Averages
Total assets $ 12,203,618 $ 12,054,717 $ 12,076,262 $ 11,871,334 $ 11,756,150 $ 12,129,579 $11,710,516
Investment securities 2,594,983 2,476,426 2,544,930 2,553,957 2,641,898 2,536,032 2,672,816
Loans 7,811,739 7,642,673 7,543,548 7,450,271 7,312,384 7,727,674 7,260,359
Interest-earning assets 10,890,420 10,741,160 10,771,571 10,592,386 10,491,811 10,816,203 10,423,042
Deposits 10,394,829 10,283,143 10,251,693 10,060,785 9,934,615 10,339,295 9,856,089
Interest-bearing liabilities 9,177,931 9,173,567 9,234,127 9,131,569 9,075,549 9,175,761 9,074,598
Long-term obligations 253,379 253,389 253,412 253,973 262,224 253,384 273,048
Shareholders' equity $ 991,047 $ 974,900 $ 953,606 $ 935,735 $ 916,387 $ 982,879 $ 905,432
Shares outstanding 10,465,909 10,472,065 10,475,377 10,477,886 10,480,527 10,468,970 10,481,091
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Quarter-End Balances
Total assets $ 12,394,744 $ 12,388,741 $ 12,231,890 $ 12,087,152 $ 11,867,758 $ 12,394,744 $11,867,758
Investment securities 2,475,821 2,362,130 2,539,236 2,502,026 2,464,779 2,475,821 2,464,779
Loans 7,857,220 7,704,492 7,620,263 7,521,834 7,434,662 7,857,220 7,434,662
Interest-earning assets 10,951,437 10,991,877 10,534,469 10,647,042 10,438,386 10,951,437 10,438,386
Deposits 10,558,616 10,594,380 10,439,620 10,286,825 10,065,180 10,558,616 10,065,180
Interest-bearing liabilities 9,158,867 9,293,396 9,298,080 9,208,776 9,121,010 9,158,867 9,121,010
Long-term obligations 253,376 253,386 253,409 253,970 253,979 253,376 253,979
Shareholders' equity $ 999,789 $ 983,635 $ 967,291 $ 949,871 $ 930,176 $ 999,789 $ 930,176
Shares outstanding 10,436,345 10,470,236 10,473,294 10,476,137 10,480,391 10,436,345 10,480,391
- ------------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.68 % 0.62 % 0.64 % 0.80 % 0.85 % 0.65 % 0.85 %
Shareholders' equity 8.41 7.61 8.05 10.09 10.86 8.02 11.05
Dividend payout ratio 13.89 15.71 13.51 11.01 10.55 14.75 10.57
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 75.15 % 74.32 % 73.58 % 74.05 % 73.61 % 74.74 % 73.66 %
Shareholders' equity to total assets 8.12 8.09 7.90 7.88 7.79 8.10 7.73
Time certificates of $100,000 or more to total
deposits 10.34 10.44 10.42 10.54 10.90 10.40 11.23
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $ 1.98 $ 1.75 $ 1.85 $ 2.27 $ 2.37 $ 3.73 $ 4.73
Cash dividends 0.275 0.275 0.250 0.250 0.250 0.55 0.50
Book value at period end 95.80 93.95 92.36 90.67 88.77 95.80 88.77
Tangible book value at period end 85.36 83.39 81.73 80.23 78.28 85.36 78.28
- ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Outstanding Loans by Type
Table 2
2003 2002
Second First Fourth Third Second
(thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Real estate:
Construction and land development $ 835,209 $ 834,027 $ 799,278 $ 816,512 $ 801,294
Mortgage:
1-4 family residential 950,555 975,010 1,058,082 1,091,344 1,131,466
Commercial 2,140,521 2,077,633 2,035,646 1,966,433 1,924,087
Revolving 1,466,454 1,404,014 1,335,024 1,259,593 1,175,693
Other 157,597 148,684 150,226 158,125 156,817
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate 5,550,336 5,439,368 5,378,256 5,292,007 5,189,357
Commercial and industrial 937,125 936,387 925,775 937,987 954,369
Consumer 1,174,807 1,135,622 1,154,280 1,132,406 1,130,753
Lease financing 140,133 137,562 141,372 142,695 141,351
Other 54,819 55,553 20,580 16,739 18,832
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 7,857,220 7,704,492 7,620,263 7,521,834 7,434,662
Less reserve for loan losses 115,382 113,382 112,533 111,577 110,472
- --------------------------------------------------------------------------------------------------------------------------------
Net loans $7,741,838 $7,591,110 $7,507,730 $7,410,257 $7,324,190
================================================================================================================================
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Investment Securities
Table 3
June 30, 2003 June 30, 2002
- -------------------------------------------------------------------------------------------------------------------------------
Average Taxable Average Taxable
Fair Maturity Equivalent Fair Maturity Equivalent
(thousands) Cost Value (Yrs./Mos.) Yield Cost Value (Yrs./Mos.) Yield
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
U. S. Government:
Within one year $ 1,037,291 $ 1,041,794 0/6 2.00 % $ 2,067,594 $ 2,079,456 0/5 3.82 %
One to five years 538,602 545,995 1/4 2.23 230,661 233,856 2/2 3.87
Five to ten years 85 90 6/6 8.00 115 123 7/6 8.00
Ten to twenty years 21,534 22,582 13/10 5.54 28,924 29,380 16/0 7.41
Over twenty years 1,298 1,348 25/5 7.17 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 1,598,810 1,611,809 1/0 2.13 2,327,294 2,342,815 0/9 3.85
State, county and municipal:
Within one year - - 741 749 0/3 7.18
One to five years 440 458 2/3 5.55 485 501 3/0 5.55
Five to ten years 144 156 6/1 5.88 143 153 7/10 5.88
Ten to twenty years 1,417 1,599 15/1 6.02 1,414 1,535 15/10 6.02
- -------------------------------------------------------------------------------------------------------------------------------
Total 2,001 2,214 11/8 5.90 2,783 2,938 9/0 6.24
Other
Within one year - - 10 0/7 6.90
One to five years - - - -
Five to ten years 250 250 5/4 7.75 250 250 6/1 7.75
- -------------------------------------------------------------------------------------------------------------------------------
Total 250 250 5/4 7.75 260 260 5/10 7.54
Total investment securities
held to maturity 1,601,061 1,614,273 1/0 2.13 2,330,337 2,346,013 0/9 3.91
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale:
U. S. Government:
Within one year 598,019 600,310 0/4 2.95 76,057 76,203 0/5 2.08
One to five years 213,653 214,125 2/3 1.69 - -
Five to ten years - - - -
Ten to twenty years 1,043 1,040 14/10 4.28 - -
Over twenty years - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 812,715 815,475 0/10 2.62 76,057 76,203 0/5 2.08
State, county and municipal:
Within one year - -
One to five years 281 282 4/1 1.58 - -
Five to ten years 568 555 8/7 4.48 - -
Ten to twenty years - - 1,263 1,306 15/1 5.33
Over twenty years 145 145 29/5 1.15 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 994 982 0/4 3.17 1,263 1,306 15/1 5.33
Marketable equity securities 42,049 58,303 42,593 56,933
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities
available for sale 855,759 874,760 119,913 134,442
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 2,456,819 $ 2,489,033 $ 2,450,250 $ 2,480,455
- -------------------------------------------------------------------------------------------------------------------------------
Average maturity assumes callable securities mature on their earliest call date;
yields are based on amortized cost; yields related to securities that are
exempt from federal and/or state income taxes are stated on a taxable-equivalent
basis assuming statutory rates of 35% for federal income tax purposes and 6.9%
for state income taxes for all periods.
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Second Quarter
Table 4
2003 2002 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 $ 7,811,739 $112,393 5.77 % $7,312,384 $ 123,304 6.76 % $7,777 $ (18,688) $(10,911)
Investment securities:
U. S. Government 2,534,486 15,223 2.41 2,580,223 26,058 4.05 (373) (10,462) (10,835)
State, county and municipal 5,079 49 3.87 4,322 88 8.17 11 (50) (39)
Other 55,418 348 2.52 57,353 430 3.01 (13) (69) (82)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,594,983 15,620 2.41 2,641,898 26,576 4.03 (375) (10,581) (10,956)
Overnight investments 483,698 1,418 1.18 537,529 2,236 1.67 (193) (625) (818)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 10,890,420 $129,431 4.77 % $10,491,811 $ 152,116 5.81 % $7,209 $ (29,894) $(22,685)
====================================================================================================================================
Liabilities
Deposits:
Checking With Interest $ 1,373,028 $ 478 0.14 % $1,254,177 $ 868 0.28 % $ 65 $ (455) $ (390)
Savings 689,735 686 0.40 647,382 861 0.53 45 (220) (175)
Money market accounts 2,527,037 6,348 1.01 2,239,620 9,443 1.69 956 (4,051) (3,095)
Time deposits 3,873,129 26,037 2.70 4,149,715 37,376 3.61 (2,207) (9,132) (11,339)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,462,929 33,549 1.59 8,290,894 48,548 2.35 (1,141) (13,858) (14,999)
Federal funds purchased 45,435 123 1.09 41,410 165 1.60 13 (55) (42)
Repurchase agreements 153,101 121 0.32 194,625 257 0.53 (44) (92) (136)
Master notes 210,581 333 0.63 275,833 649 0.94 (128) (188) (316)
Other short-term borrowings 52,506 138 1.05 10,563 41 1.56 137 (40) 97
Long-term obligations 253,379 5,241 8.30 262,224 5,382 8.23 (184) 43 (141)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 9,177,931 $39,505 1.73 $9,075,549 $ 55,042 2.43 % $(1,347) $ (14,190) $(15,537)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.04 % 3.38 %
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $89,926 3.31 % $ 97,074 3.71 % $8,556 $ (15,704) $(7,148)
====================================================================================================================================
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income
taxes only, or state income taxes only are stated on a taxable-equivalent
basis assuming a statutory federal income tax rate of 35% and a state income
tax rate of 6.9% for each period. The taxable-eqivalent adjustment was $258
and $345 for 2003 and 2002, respectively.
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Six Months
Table 5
2003 2002 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 $7,727,674 $ 226,107 5.90 % $ 7,260,359 $ 247,872 6.86 % $14,398 $(36,163) $(21,765)
Investment securities:
U. S. Government 2,476,109 30,652 2.50 2,612,217 55,696 4.30 (2,291) (22,753) (25,044)
State, county and municipal 4,317 97 4.53 4,442 180 8.17 (4) (79) (83)
Other 55,606 725 2.63 56,157 865 3.11 (7) (133) (140)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,536,032 31,474 2.50 2,672,816 56,741 4.28 (2,302) (22,965) (25,267)
Overnight investments 552,497 3,208 1.17 489,867 4,022 1.66 445 (1,259) (814)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $10,816,203 $ 260,789 4.86 % $ 10,423,042 $ 308,635 5.96 % $12,541 $(60,387) $(47,846)
====================================================================================================================================
Liabilities
Deposits:
Checking With Interest $1,347,536 $ 1,087 0.16 % $ 1,239,600 $ 1,815 0.30 % $ 138 $ (866) $ (728)
Savings 675,659 1,401 0.42 635,704 1,720 0.55 103 (422) (319)
Money market accounts 2,548,334 13,283 1.05 2,168,590 17,909 1.67 2,587 (7,213) (4,626)
Time deposits 3,905,733 54,112 2.79 4,205,520 79,165 3.80 (4,860) (20,193) (25,053)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,477,262 69,883 1.66 8,249,414 100,609 2.46 (2,032) (28,694) (30,726)
Federal funds purchased 40,331 220 1.10 42,480 334 1.59 (14) (100) (114)
Repurchase agreements 157,165 251 0.32 197,695 527 0.54 (85) (191) (276)
Master notes 218,471 666 0.61 284,253 1,329 0.94 (256) (407) (663)
Other short-term borrowings 29,148 159 1.10 27,708 291 2.12 12 (144) (132)
Long-term obligations 253,384 10,484 8.34 273,048 11,089 8.19 (806) 201 (605)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $9,175,761 $ 81,663 1.79 % $ 9,074,598 $ 114,179 2.54 % $ (3,181) $(29,335) $(32,516)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.07 % 3.42 %
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $ 179,126 3.34 % $ 194,456 3.76 % $15,722 $(31,052) $(15,330)
====================================================================================================================================
- --------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income taxes
only, or state income taxes only are stated on a taxable-equivalent basis
assuming a statutory federal income tax rate of 35% and a state income tax rate
of 6.9% for each period. The taxable-eqivalent adjustment was $542 and $716 for
2003 and 2002, respectively.
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
Summary of Loan Loss Experience and Risk Elements Table 6
2003 2002
Second First Fourth Third Second Six months ended June 30,
-------------------------
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve balance at beginning of period $ 113,382 $ 112,533 $ 111,577 $ 110,472 $ 108,692 $ 112,533 $ 107,087
Provision for loan losses 7,192 5,563 7,156 5,592 7,822 12,755 13,802
Net charge-offs:
Charge-offs (6,089) (5,273) (6,966) (5,319) (7,262) (11,362) (12,655)
Recoveries 897 559 766 832 1,220 1,456 2,238
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (5,192) (4,714) (6,200) (4,487) (6,042) (9,906) (10,417)
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve balance at end of period $ 115,382 $ 113,382 $ 112,533 $ 111,577 $ 110,472 $ 115,382 $ 110,472
==================================================================================================================================
Historical Statistics
Average loans $7,811,739 $7,642,673 $7,543,548 $7,450,271 $7,312,384 $7,727,674 $7,260,359
Loans at period-end 7,857,220 7,704,492 7,620,263 7,521,834 7,434,662 7,857,220 7,434,662
- ----------------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $ 17,438 $ 16,988 $ 15,521 $14,944 $ 17,397 $ 17,438 $ 17,397
Other real estate 8,147 8,155 7,330 12,092 10,563 8,147 10,563
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 25,585 $ 25,143 $ 22,851 $27,036 $ 27,960 $ 25,585 $ 27,960
==================================================================================================================================
Accruing loans 90 days or more past due $ 7,848 $ 7,349 $ 9,566 $8,928 $ 9,945 $ 7,848 $ 9,945
==================================================================================================================================
Ratios
Net charge-offs (annualized) to average
total loans 0.27 % 0.25 % 0.33 % 0.24 % 0.33 % 0.26 % 0.29
Reserve for loan losses to total loans
at peroid end 1.47 1.47 1.48 1.48 1.49 1.47 1.49
Nonperforming assets to total loans
plus other real estate at period-end 0.33 0.33 0.30 0.36 0.38 0.33 0.38
- ----------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 2003
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. This discussion primarily focuses on our
two banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a North
Carolina-chartered bank that operates branches in North Carolina, Virginia and
West Virginia, and Atlantic States Bank (ASB), a federally-chartered thrift
institution that operates offices in Georgia, Florida, Texas, Arizona and
California.
We adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 147 (Statement 147) during the fourth quarter of 2002.
Statement 147 required that any reclassification of previously recognized
unidentifiable intangible assets to goodwill be retroactively applied to
coincide with the adoption of SFAS No. 142 (Statement 142). As a result,
amortization expense related to assets that were reclassified pursuant to
Statement 147 has been reversed, and the disclosures made for the first,
second and third quarters of 2002 have been restated.
In addition, we have reclassified certain other amounts for prior
years to conform with statement presentations for 2003. However, except for
the adoption of Statement 147, the reclassifications had no effect on
shareholders' equity or net income as previously reported. Intercompany
accounts and transactions have been eliminated.
SUMMARY
BancShares realized a decrease in earnings during the second quarter
of 2003 compared to the second quarter of 2002. Consolidated net income
during the second quarter of 2003 was $20.8 million, compared to $24.8 million
earned during the corresponding period of 2002, a $4.0 million or 16.2 percent
reduction. Net income per share during the second quarter of 2003 totaled
$1.98, compared to $2.37 during the second quarter of 2002. The annualized
return on average assets was 0.68 percent for the second quarter of 2003 and
0.85 percent for the same period in 2002. The annualized return on average
equity for the second quarter of 2003 was 8.41 percent compared to 10.86
percent during the second quarter of 2002.
For the first six months of 2003, BancShares recorded net income of
$39.1 million, compared to $49.6 million earned during the first six months of
2002. Net income per share for the first six months of 2003 was $3.73,
compared to $4.73 during the same period of 2002. On an annualized basis,
BancShares returned 0.65 percent on average assets during the first six months
of 2003 compared to 0.85 percent during the corresponding period of 2002.
Annualized return on average equity for the first six months of 2003 was 8.02
percent compared to 11.05 percent during the same period of 2002.
The earnings reductions for both the second quarter and the first six
months were the result of lower net interest income and higher noninterest
expense, partially offset by higher noninterest income. Noninterest income
for the second quarter included a $5.7 million nonrecurring gain on the sale
of branch offices.
Various profitability, liquidity and capital ratios are presented in
Table 1. To understand the changes and trends in interest-earning assets and
interest-bearing liabilities, refer to the average balance sheets presented in
Table 4 for the second quarter and Table 5 for the first six months of 2003
and 2002.
INTEREST-EARNING ASSETS
Interest-earning assets for the second quarter of 2003 averaged
$10.89 billion, an increase of $398.6 million or 3.8 percent from the second
quarter of 2002. For the six months ended June 30, 2003, interest-earning
assets averaged $10.82 billion, an increase of $393.2 million or 3.8 percent
over the same period of 2002. These increases resulted from growth in the
loan portfolio.
Loans. At June 30, 2003 and 2002, gross loans totaled $7.86 billion
and $7.43 billion, respectively. The $422.6 million growth in loans from June
30, 2002 to June 30, 2003 represents a 5.7 percent annual growth rate. Table 2
details outstanding loans by type for the past five quarters.
During the twelve-month period from June 30, 2002 to June 30, 2003,
several trends affected the loan portfolio. Revolving real estate mortgage
loans continued to display strong growth, increasing from $1.18 billion at
June 30, 2002 to $1.47 billion at June 30, 2003, a $290.8 million or 24.7
percent growth rate. Revolving real estate-secured lines of credit continue
to be in great demand, fueled largely by the current low interest rate
environment. During the same period, commercial real estate loans increased
$216.4 million or 11.2 percent, totaling $2.14 billion at June 30, 2003.
Consumer purpose loans, which totaled $1.17 billion at June 30, 2003,
increased $44.1 million or 3.9 percent, due to a renewed focus on automobile
sales finance activity during 2002 and 2003.
The growth among these loan categories was partially offset by a
$180.9 million or 16.0 percent reduction in 1-4 family residential mortgage
loans. Although the declining interest rate environment has resulted in
strong origination activity, substantially all of the residential mortgage
loans originated through our network have been immediately sold to various
correspondents. As a result, portfolio residential mortgage loans continue to
decline, a trend we expect to continue in the coming quarters. During the
12-month period ended June 30, 2003, we also experienced a $17.2 million or
1.8 percent reduction in commercial and industrial loans due to a general lack
of expansion activity by commercial customers and our emphasis on originating
commercial loans that are secured by real estate rather than inventory,
accounts receivable or other forms of collateral.
During the second quarter of 2003, loans averaged $7.81 billion, an
increase of $499.4 million or 6.8 percent from the comparable period of
2002. For the year-to-date, gross loans have averaged $7.73 billion for 2003
compared to $7.26 billion for the same period of 2002, an increase of $467.3
million or 6.4 percent. For both the second quarter and the year-to-date,
loan growth has primarily resulted from demand for revolving real estate and
commercial mortgage loans.
We expect continued growth among revolving real estate loans during
2003, and reduction in 1-4 family residential mortgage loans as existing loan
balances amortize or are refinanced. Despite the current low level of
interest rates, which would normally stimulate loan demand and business
growth, current weak economic conditions continue to create uncertainty among
business and retail customers, constraining our loan growth estimates for
other loan types during 2003. All growth projections are subject to change as
a result of further economic deterioration or improvement.
Investment securities. At June 30, 2003 and 2002, the investment
portfolio totaled $2.48 billion and $2.46 billion, respectively. At December
31, 2002, the investment portfolio was $2.54 billion. The 2.5 percent
decrease in the investment portfolio since December 31, 2002 resulted from the
growth in loans outpacing the increase in deposits. Table 3 presents detailed
information relating to the investment securities portfolio.
Although total investment securities have been stable since June 30,
2002, there have been changes within components of the portfolio. Investment
securities held to maturity totaled $1.60 billion at June 30, 2003, compared
to $2.42 billion at December 31, 2002 and $2.33 billion at June 30, 2002. The
reduction in investment securities held to maturity during 2003 resulted from
our decision to reinvest a portion of the proceeds from maturing
held-to-maturity securities in securities classified as available for sale.
This redirection of the investment securities portfolio enhances the overall
liquidity of the balance sheet. The average maturity of the held-to-maturity
portfolio has extended from nine months at June 30, 2002 to twelve months at
June 30, 2003. Securities that are classified as held-to-maturity reflect
BancShares' ability and positive intent to hold those investments until
maturity.
Investment securities available for sale totaled $874.8 million at
June 30, 2003, compared to $121.7 million at December 31, 2002 and $134.4
million at June 30, 2002. The $740.3 million increase from June 30, 2002
results from the decision to invest in available-for-sale securities in order
to further enhance balance sheet liquidity. We anticipate that the amount of
available-for-sale securities will continue to increase in 2003.
Available-for-sale securities are reported at their aggregate fair value.
Investment securities averaged $2.59 billion during the second
quarter of 2003, compared to $2.64 billion during the second quarter of 2002,
a reduction of $46.9 million or 1.8 percent. Investment securities averaged
$2.54 billion during the first six months of 2003, a $136.8 million or 5.1
percent reduction from the same period of 2002. For both the quarter and the
six-month period ended June 30, the reduction in average investment securities
was caused by loan demand slightly exceeding deposit growth rates.
Overnight investments. Overnight investments totaled $618.4 million
at June 30, 2003, compared to $623.6 million at December 31, 2002 and $538.9
million at June 30, 2002. Overnight investments averaged $483.7 million
during the second quarter of 2003, a reduction of $53.8 million or 10.0
percent from the second quarter of 2002. For the six-month periods ended June
30, overnight investments averaged $552.5 million and $489.9 million,
respectively, for 2003 and 2002. The changes in overnight investments
resulted from liquidity management decisions.
Income on Interest-Earning Assets. Interest income amounted to
$129.2 million during the second quarter of 2003, a $22.6 million or 14.9
percent decrease from the second quarter of 2002. The taxable-equivalent
yield on interest-earning assets declined 104 basis points from 5.81 percent
in the second quarter of 2002 to 4.77 percent in the second quarter of 2003 as
market interest rates continued to decline.
Loan interest income for the second quarter of 2003 was $112.1
million, a decrease of $10.8 million or 8.8 percent from the second quarter of
2002, due to a loan yield reduction that more than offset the favorable impact
of loan growth. The taxable-equivalent yield on average loans declined 99
basis points from 6.76 percent to 5.77 percent from the end of the second
quarter of 2002 to the end of the second quarter of 2003 due to downward
repricing of variable rates loans and rate-induced refinance activity among
fixed rates loans.
Within the investment securities portfolio, interest income was $15.6
million during the second quarter of 2003 compared to $26.5 million during the
second quarter of 2002, a reduction of $10.9 million or 41.2 percent. While
there was a slight reduction in the average investment securities portfolio
during the second quarter of 2003, the reduction in interest income primarily
resulted from a 162 basis point reduction in the taxable-equivalent yield.
Investment securities returned a taxable-equivalent yield of 2.41 percent
during the second quarter of 2003 compared to 4.03 percent during the same
period of 2002. Overnight investments generated interest income of $1.4
million during the second quarter of 2003, compared to $2.2 million during the
same period of 2002. The reduction is the combined result of lower average
investments and a 49 basis points yield reduction. Overnight investments
returned 1.18 percent during the second quarter of 2003 compared to 1.67
percent during the same period of 2002.
Interest income amounted to $260.2 million during the first six
months of 2003, a $47.7 million or 15.5 percent decrease from the same period
of 2002, the net result of an unfavorable rate variance and a favorable volume
variance. The taxable-equivalent yield on interest-earning assets declined
110 basis points from 5.96 percent for the first six months of 2002 to 4.86
percent during the same period of 2003. Lower market interest rates during
2003 have contributed to the unfavorable rate variance.
For the six months ended June 30, 2003, loan interest income was
$225.6 million, a decrease of $21.6 million or 8.7 percent from the same
period of 2002. The decrease in interest income reflects the decline in loan
yields. The taxable-equivalent loan yield was 5.90 percent during the first
six months of 2003, compared to 6.86 percent during the same period of 2002.
For the six months ended June 30, 2003, income earned on the
investment securities portfolio amounted to $31.5 million, compared to $56.7
million during the same period of 2002, a decrease of $25.2 million or 44.5
percent. This decrease is the result of a 178 basis point decline in the
taxable-equivalent yield, which fell from 4.28 percent in 2002 to 2.50 percent
in 2003. The short overall maturity of our investment securities portfolio
combined with the redemption of callable securities caused the rapid downward
repricing of the portfolio both during the second quarter and for the
six-month period ended June 30, 2003.
Interest earned on overnight investments totaled $3.2 million during
the first six months of 2003 compared to $4.0 million during the same period
of 2002, an $814,000 or 20.2 percent reduction. This was the net result of
higher average overnight investments and a 49 basis point yield reduction.
As a result of further interest rate reductions that occurred late in
the second quarter of 2003, we anticipate continued reduction in asset yields
during the remainder of 2003 as variable rate loans continue to reprice and
fixed rate loans are refinanced at lower rates. Without the benefit of
substantially stronger loan growth to offset the unfavorable rate variance, we
believe interest income will continue to remain below 2002 levels through the
rest of 2003.
INTEREST-BEARING LIABILITIES
At June 30, 2003 and 2002, interest-bearing liabilities totaled $9.16
billion and $9.12 billion, respectively, compared to $9.30 billion as of
December 31, 2002. During the second quarter of 2003, interest-bearing
liabilities averaged $9.18 billion, an increase of $102.4 million or 1.1
percent from the second quarter of 2002. This increase primarily resulted
from growth in money market accounts, which more than offset the reduction in
time deposits. During the second quarter of 2003, deposits totaling $114.7
million were divested while $13.0 million in deposits were acquired.
Deposits. At June 30, 2003, total deposits were $10.56 billion, an
increase of $493.4 million or 4.9 percent over June 30, 2002. Compared to the
December 31, 2002 balance of $10.44 billion, total deposits have increased
$119.0 million or 1.1 percent.
Interest-bearing deposits averaged $8.46 billion during the second
quarter of 2003 compared to $8.29 billion during the second quarter of 2002,
an increase of $172.0 million or 2.1 percent. Average money market accounts
increased $287.4 million from the second quarter of 2002 to the second quarter
of 2003, a 12.8 percent increase. Average Checking With Interest increased
$118.9 million or 9.5 percent from the second quarter of 2002 to the second
quarter of 2003. Average time deposits decreased $276.6 million or 6.7
percent between the two periods.
For the first six months of 2003, interest-bearing deposits averaged
$8.48 billion compared to $8.25 billion during the same period of 2002. This
$227.8 million or 2.8 percent increase results from continued growth among
money market accounts and Checking With Interest, partially offset by lower
average time deposits.
For both the second quarter and the six-month periods ended June 30,
2003, when compared to the same period of the prior year, average balances of
transaction and money market deposit accounts continue to grow, as customers
remain wary of non-bank investments in the continuing economic downturn. We
attribute the ongoing run-off of time deposits to falling interest rates, and
expect that time deposit balances will continue to erode until market interest
rates increase significantly.
Time deposits of $100,000 or more averaged 10.34 percent of total
average deposits during the second quarter of 2003, compared to 10.90 percent
during the same period of 2002. For the six month-periods ended June 30, time
deposits in excess of $100,000 averaged 10.40 percent and 11.23 percent of
average deposits for 2003 and 2002, respectively.
Short-term borrowings. At June 30, 2003, short-term borrowings
totaled $499.6 million compared to $462.6 million at December 31, 2002 and
$507.0 million at June 30, 2002. For the quarters ended June 30, 2003 and
2002, short-term borrowings averaged $461.6 million and $522.4 million,
respectively. The $60.8 million or 11.6 percent decline in short-term
borrowings is the result of reductions in master notes and overnight
repurchase obligations. Customer interest in these commercial cash management
products has diminished due to the very low market rates of interest.
Partially offsetting these reductions is a $50 million increase in other
short-term borrowings resulting from advances from the Federal Home Loan Bank
of Atlanta originated during 2003.
For the six month periods ended June 30, 2003 and 2002, short-term
borrowings averaged $445.1 million and $552.1 million, respectively, a
reduction of 19.4 percent primarily due to reduced demand for master notes and
overnight repurchase obligations from commercial cash management customers.
Long-term obligations. At June 30, 2003 and 2002, long-term
obligations totaled $253.4 million and $254.0 million, respectively. In each
case, the outstanding balance includes $250 million in trust preferred capital
securities. During the second quarter of 2003, long-term obligations averaged
$253.4 million, compared to $262.2 million during the same period of 2002.
For the six month periods ended June 30, 2003 and 2002, long-term obligations
averaged $253.4 million and $273.0 million, respectively, a reduction of 7.2
percent that resulted from the repayment of FHLB borrowings during the second
quarter of 2002.
Expense on Interest-Bearing Liabilities. BancShares' interest
expense amounted to $39.5 million during the second quarter of 2003, a $15.5
million or 28.2 percent decrease from the second quarter of 2002. The lower
interest expense was the result of falling market interest rates. The rate on
interest-bearing liabilities was 1.73 percent during the second quarter of
2003 compared to 2.43 percent during the same period of 2002.
For the year-to-date, interest expense was $81.7 million, compared to
$114.2 million for the same period of 2002. The $32.5 million or 28.5 percent
decrease results primarily from lower interest rates and a reduction in
average time deposits. The rate on interest-bearing deposits declined from
2.46 percent during the first six months of 2002 to 1.66 percent for the same
period of 2003, an 80 basis point reduction. The rate on time deposits fell
101 basis points from 3.80 percent to 2.79 percent and, when combined with the
impact of the volume reduction, accounted for $25.1 million of the reduction
in interest expense during the first six months of 2003. The rate on money
market accounts fell 62 basis points, from 1.67 percent to 1.05 percent.
Although money market accounts experienced an increase in volume during the
first six months of 2003, total interest expense on these deposits declined
$4.6 million.
NET INTEREST INCOME
Net interest income totaled $89.7 million during the second quarter
of 2003, a decrease of $7.1 million or 7.3 percent from the $96.7 million
recorded during the second quarter of 2002. The taxable-equivalent net yield
on interest-earning assets was 3.31 percent for the second quarter of 2003, a
decrease of 40 basis points from the 3.71 percent reported for the second
quarter of 2002. Despite a favorable volume variance resulting from loan
growth, the adverse impact of falling market interest rates caused the net
yield to decline.
The taxable-equivalent interest rate spread for the second quarter of
2003 was 3.04 percent compared to 3.38 percent for the same period of 2002.
The lower interest rate spread resulted from a larger decline in the yield on
interest-earning assets than was realized on interest-bearing liabilities.
While downward adjustments and lower market interest rates have impacted both
the yield on interest-earning assets and the rate on interest-bearing
liabilities, the extremely low level to which interest rates have fallen has
not allowed us to adjust the interest rates paid on many deposit products as
much as the yields earned on interest-earning assets have been affected.
Net interest income was $178.6 million and $193.7 million for the
six-month periods ended June 30, 2003 and 2002, respectively. This represents
a reduction of $15.2 million or 7.8 percent. As with the second quarter
comparison, the year-to-date results demonstrate the impact of lower interest
rates and the resulting unfavorable effect on interest-earning asset yields
and interest-bearing liability rates. Despite a favorable volume variance
generated by loan growth, the adverse impact of the lower interest rates have
contributed to a 42 basis point reduction in the taxable-equivalent net yield
on interest-earning assets, which fell from 3.76 percent during the first six
months of 2002 to 3.34 percent during the same period of 2003.
Despite the current pressure on net interest income, our
asset/liability management strategy continues to focus on maintaining high
levels of balance sheet liquidity and managing our interest rate risk. We
maintain portfolios of interest-earning assets and interest-bearing
liabilities with maturities or repricing opportunities that will protect
against wide interest rate fluctuations, thereby limiting, to the extent
possible, the ultimate interest rate exposure. Interest rate derivative
contracts are not used in managing interest rate risk. Management is aware of
the potential negative impact that movements in market interest rates may have
on net interest income.
Market risk is the potential economic loss resulting from changes in
market prices and interest rates. This risk can either result in diminished
current fair values or reduced net interest income in future periods. As of
June 30, 2003, BancShares' market risk profile has not changed significantly
from December 31, 2002. Changes in fair value that result from movement in
market rates cannot be predicted with any degree of certainty. Therefore, the
impact that future changes in market rates will have on the fair values of
financial instruments is uncertain.
ASSET QUALITY
Reserve for loan losses. Management continuously analyzes the growth
and risk characteristics of the total loan portfolio under current economic
conditions in order to evaluate the adequacy of the reserve for loan losses.
Such factors as the financial condition of the borrower, fair market value of
collateral and other considerations are recognized in estimating probable
credit losses. At June 30, 2003, the reserve for loan losses amounted to
$115.4 million or 1.47 percent of loans outstanding. This compares to $112.5
million or 1.48 percent at December 31, 2002, and $110.5 million or 1.49
percent at June 30, 2002.
Management considers the established reserve adequate to absorb
losses that relate to loans outstanding at June 30, 2003. While management
uses available information to establish provisions for loan losses, future
additions to the reserve may be necessary based on changes in economic
conditions or other factors. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the reserve
for loan losses. Such agencies may require the recognition of adjustments to
the reserve based on their judgments of information available to them at the
time of their examination.
The provision for loan losses charged to operations during the second
quarter of 2003 was $7.2 million, compared to $7.8 million during the second
quarter of 2002. For the six-month periods ended June 30, total provision for
loan losses was $12.8 million for 2003 and $13.8 million for 2002. The $1.0
million decrease primarily results from the lower net charge offs during
2003.
Net charge-offs for the three months ended June 30, 2003 totaled $5.2
million, compared to net charge-offs of $6.0 million during the same period of
2002. On an annualized basis, these net charge-offs represent 0.27 percent
and 0.33 percent of average loans outstanding during the respective periods.
Net charge-offs for the six-month period ended June 30, 2003 totaled $9.9
million, compared to $10.4 million during the same period of 2002. As a
percentage of average loans outstanding, these losses represent 0.26 percent
for 2003 and 0.29 for 2002 on an annualized basis. Gross charge-offs totaled
$11.4 million and $12.7 million for the six-month periods ended June 30, 2003
and 2002 respectively.
Management remains committed to maintaining high levels of credit
quality. Table 6 provides details concerning the reserve and provision for
loan losses over the past five quarters and for the year-to-date for 2003 and
2002.
Nonperforming assets. At June 30, 2003, BancShares' nonperforming
assets, consisting of nonaccrual loans and other real estate, amounted to
$25.6 million or 0.33 percent of gross loans plus foreclosed properties,
compared to $22.9 million at December 31, 2002, and $28.0 million at June 30,
2002. Nonaccrual loans totaled $17.4 million at June 30, 2003, compared to
$15.5 million at December 31, 2002 and $17.4 million at June 30, 2002. Other
real estate totaled $8.1 million at June 30, 2003, compared to $7.3 million
at December 31, 2002 and $10.6 million at June 30, 2002. Management continues
to closely monitor nonperforming assets, taking necessary actions to minimize
potential exposure.
NONINTEREST INCOME
During the first six months of 2003, noninterest income was $123.3
million, compared to $109.6 million during the same period of 2002. The $13.8
million or 12.5 percent increase was primarily due to the sale of branches and
growth in mortgage income and cardholder and merchant services income.
The second quarter 2003 sale of branches generated a nonrecurring
gain of $5.7 million. FCB sold four branch offices to a related party in a
cash transaction. There was no branch sale activity during the first six
months of 2002.
Among other components of noninterest income, mortgage income was
$9.1 million during the first six months of 2003, compared to $5.9 million
earned during the same period of 2002, an increase of $3.2 million or 55.4
percent. Prompted by lower interest rates, the increase in refinance activity
resulted in higher origination fee and commitment fee income. Cardholder and
merchant services income increased $3.0 million from $23.4 million earned in
the first six months of 2002 to $26.5 million in the first six months of
2003. This 13.0 percent increase in cardholder income was due to higher
credit card merchant discount and higher interchange fees for debit and credit
card transactions. Cardholder and merchant services income includes the
interchange income that we earn from debit cards we have issued to our
customers. As a result of a recent out-of-court settlement involving the two
major credit card associations, the interchange rate we earn on
signature-based debit card transactions decreased 24.1 percent effective
August 1, 2003. Although the volume of transactions processed through our
debit card products continues to grow, the reduction in the interchange rate
will adversely impact interchange income.
Fees from processing increased $821,000 from $9.4 million during the
first six months of 2002 to $10.2 million earned during the first six months
of 2003 due to higher transaction volume for processed banks. Commission
income contributed an additional $745,000 during the first six months of 2003
compared to the same period of 2002. This increase represents a 6.6 percent
increase over the same period of 2002, the result of higher annuity fees.
Service charge income increased $501,000 or 1.3 percent over the $37.4 million
during the first half of 2002.
Partially offsetting the benefit of these increases were reductions
in trust income and ATM income. Trust income declined $443,000 or 5.6 percent
during the first six months of 2003, primarily due to lower fees collected on
accounts that are charged based on the fair value of the managed assets. ATM
income declined $227,000 or 5.0 percent due to a reduction in the number of
ATM transactions.
During the second quarter of 2003, noninterest income was $66.9
million, an $11.6 million or 20.9 percent increase over the $55.4 million
earned during the second quarter of 2002. Much of the increase results from
the $5.7 million gain recognized on the sale of branch offices and a $1.5
million favorable variance resulting from securities transactions. Sales of
available-for-sale securities generated $1.1 million in gains during the
second quarter of 2003, as compared to $396,000 in losses during the second
quarter of 2002 resulting from other than temporary impairment charges.
Among other components of noninterest income, mortgage income
increased $2.4 million or 94.5 percent during the second quarter of 2003 due
to heavy origination activity. Cardholder and merchant services income
increased $1.7 million or 13.4 percent during 2003 due to higher interchange
income for debit and credit transactions. Slight increases were noted in
service charge income and fees from processing services, while ATM income and
trust income both reported modest reductions from the same period of 2002.
NONINTEREST EXPENSE
Noninterest expense was $227.3 million for the first six months of
2003, a 6.8 percent increase over the $212.7 million recorded during the same
period of 2002. The $14.5 million increase in noninterest expense results
from higher personnel and general operating costs. Salary expense increased
$6.2 million during 2003 when compared to the same period of 2002. This 6.7
percent increase is primarily due to the growth in employee population
required to staff new branch offices as well as higher incentive-based
compensation particularly within the mortgage operation. Employee benefits
expense increased $3.2 million or 15.4 percent during the first six months of
2003, compared to the corresponding period of 2002 due to higher pension
expense and increased health insurance costs.
Equipment expense increased $2.5 million or 11.7 percent during the
first six months of 2003, the result of higher software-related items.
Occupancy expense increased $2.1 million to $20.9 million during the first six
months of 2003. This 11.0 percent increase resulted from higher depreciation
expense for branch facilities and building repairs. The $604,000 increase in
other expense resulted from higher cardholder processing costs due to
transaction volume growth as well as higher claims expense recognized by
American Guaranty, FCB's property insurance company.
For the second quarter of 2003, noninterest expense totaled $116.0
million, a $10.2 million or 9.6 percent increase over the same period of
2002. Salary expense totaled $49.5 million during the second quarter of 2003,
an increase of $4.7 million or 10.5 percent due to higher incentive
compensation and new associates hired to support the ASB expansion. Employee
benefits expense increased $2.2 million due to higher pension and health care
costs.
INCOME TAXES
Income tax expense was $22.8 million during the first six months of
2003, compared to $27.2 million during the same period of 2002, a 15.9 percent
decrease due to lower pre-tax earnings. The effective tax rates for these
periods were 36.9 percent and 35.4 percent, respectively. For the second
quarters of 2003 and 2002, income tax expense was $12.7 million and $13.7
million, respectively. The effective tax rates were 37.9 percent and 35.5
percent for the respective periods.
The higher effective tax rates during 2003 for the second quarter and
the year-to-date result from higher state income tax expense primarily
resulting from ASB expansion.
LIQUIDITY
Management relies on the investment portfolio as a source of
liquidity, with maturities designed to provide needed cash flows. Further,
retail deposits generated throughout the branch network have enabled
management to fund asset growth and maintain liquidity. In the event
additional liquidity is needed, BancShares maintains readily available sources
to borrow funds through its correspondent network.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all
minimum regulatory capital requirements. At June 30, 2003 and 2002, the
leverage capital ratio of BancShares was 9.33 percent and 9.12 percent,
respectively, surpassing the minimum level of 3 percent. As a percentage of
risk-adjusted assets, BancShares' Tier 1 capital ratio was 13.40 percent at
June 30, 2003, and 13.24 percent as of June 30, 2002. The minimum ratio
allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital
ratio was 14.73 percent at June 30, 2003 and 14.56 percent as of June 30,
2002. The minimum total capital ratio is 8 percent. BancShares and each of
its subsidiary banks meet the requirements for well-capitalized status
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 operation.
Atlantic States Bank. ASB's total assets increased from $1.01
billion at June 30, 2002 to $1.11 billion at June 30, 2003, an increase of
$103.6 million or 10.3 percent. This growth resulted from loan growth
generated by the expanding branch network. ASB's net interest income
increased $4.2 million or 28.9 percent during the first six months of 2003,
when compared to the same period of 2002, the result of balance sheet growth
that more than offset the impact of falling interest rates. Provision for
loan losses declined $1.3 million or 59.1 percent due to reduced loan growth
in the current year.
ASB's noninterest income increased $352,000 or 14.8 percent during
the first six months of 2003, the result of higher loan modification fees,
cardholder and merchant income and service charge income. Noninterest expense
decreased $3.8 million or 22.1 percent during 2003. Higher personnel,
occupancy and service fee costs reflect the impact of the expanded branch
network, much of which relates to the expansion of ASB into Texas, Arizona and
California.
ASB recorded a net loss of $507,000 during the first six months of
2003 compared to a net loss of $1.7 million during the same period of 2002.
This represents a favorable variance of $1.2 million, primarily the result of
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, in new and existing markets. Our initial investments in these markets
will result in higher levels of noninterest expense in ensuing quarters.
First Citizens Bank. FCB's total assets increased from $10.74
billion at June 30, 2002 to $11.16 billion at June 30, 2003, an increase of
$427.2 million or 4.0 percent. FCB's net interest income decreased $17.2
million or 9.2 percent during the first six months of 2003, the result of
interest rate reductions. Provision for loan losses increased $302,000 or 2.6
percent.
FCB's noninterest income increased $11.9 million or 10.9 percent
during the first six months of 2003, primarily the result of gains on branch
sales, higher cardholder and merchant services income and mortgage income.
Noninterest expense increased $9.0 million or 4.5 percent during the first six
months of 2003, primarily due to higher personnel and equipment costs.
FCB recorded net income of $45.8 million during the first six months
of 2003 compared to $55.9 million during the same period of 2002. This
represents a $10.1 million or 18.0 percent reduction in net income.
CURRENT ACCOUNTING AND REGULATORY ISSUES
Effective January 1, 2002, BancShares adopted the provisions of
Statement 142, which modified our accounting for goodwill and intangible
assets. Previously, our capitalized intangible assets were amortized over
their estimated useful lives, and the amortization expense related to those
assets was included within noninterest expense. Upon adoption of Statement
142, we discontinued amortization of all amounts that we had previously
classified as goodwill. We continued to amortize all other intangible assets
over their estimated useful lives.
During the fourth quarter of 2002, we adopted Statement 147, although
we were required to apply certain provisions of Statement 147 retroactively to
the date we adopted Statement 142. Guidance within Statement 147 resulted in
the reclassification to goodwill of certain amounts previously recorded as
intangible assets. Statement 147 required the reversal of any amortization
expense recorded on those reclassified assets since the adoption of Statement
142. Accordingly, amortization expense initially recorded during the first,
second and third quarters of 2002 was reversed during the fourth quarter, and
prior periods have been restated to reflect that change.
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations (Statement 143).
Statement 143 requires us to record the fair value of an asset retirement
obligation as a liability in the period in which we incur a legal obligation
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or normal use of the assets.
Statement 143 also requires us to record a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement
of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. We adopted Statement 143 on
January 1, 2003. The adoption of Statement 143 did not have a material
impact on our consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement 145). Statement 145 amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary. Statement 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The adoption of Statement 145 for transactions occurring after
May 15, 2002 did not have a material effect on our consolidated financial
statements.
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.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34 (Interpretation
45). Interpretation 45 elaborates on the disclosures to be made by a
guarantor in its financial statements about its obligations under guarantees
issued. Interpretation 45 also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken. The initial recognition and measurement provisions
of Interpretation 45, which applies to guarantees issued or modified after
December 31, 2002, did not have a material effect on our financial
statements. The disclosure requirements were effective for financial
statements of interim and annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123 (Statement 148). Statement 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
modifications were required for fiscal years ending after December 15, 2002.
As we currently have no stock-based compensation, the adoption of Statement
148 did not have a material impact on our consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51 (Interpretation
46). Interpretation 46 addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. Interpretation 46
applies immediately to variable interests in variable interest entities
created after January 31, 2003, and to variable interests in variable interest
entities obtained after January 31, 2003. The application of this
Interpretation 46 is not expected to have a material effect on our financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (Statement 149), which
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is effective for contracts entered into or
modified after June 30, 2003, except certain hedging relationships designated
after June 30, 2003, as defined in Statement 149. In addition, except as
defined in Statement 149, all provisions of Statement 149 should be applied
prospectively. Statement 149 is not expected to have a material impact on the
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(Statement 150). Statement 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. Statement 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. Statement 150 is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. Statement 150 is not expected to have a material impact on the
consolidated financial statements.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations
or beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgments of BancShares and its management about future events.
Factors that could influence the accuracy of such forward-looking statements
include, but are not limited to, the financial success or changing strategies
of BancShares' customers, actions of government regulators, the level of
market interest rates, and general economic conditions.