-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BtM7ByozsTb9cMkI+84QrMkmoWn/zT5Zmrn6ZoOmFxTTqG1/yyeMPHbV5kUuJnJN m4ZXpZ/pcNkMAMBqB3wHBQ== 0000798941-01-500015.txt : 20020412 0000798941-01-500015.hdr.sgml : 20020412 ACCESSION NUMBER: 0000798941-01-500015 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CITIZENS BANCSHARES INC /DE/ CENTRAL INDEX KEY: 0000798941 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 561528994 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-16715 FILM NUMBER: 1805515 BUSINESS ADDRESS: STREET 1: 239 FAYETTEVILLE STREET MALL CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9197557000 MAIL ADDRESS: STREET 1: PO BOX 27131 STREET 2: CTWO7 CITY: RALEIGH STATE: NC ZIP: 27611-7131 10-Q/A 1 sep0110q.txt AMENDED SEPTEMBER 30, 2001 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the period ended September 30, 2001 Commission File Number: 0-16471 First Citizens BancShares, Inc (Exact name of Registrant as specified in its charter) Delaware 56-1528994 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 239 Fayetteville Street, Raleigh, North Carolina 27601 (Address of principal executive offices) (zip code) (919) 716-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No _____ Class A Common Stock--$1 Par Value-- 8,797,154 shares Class B Common Stock--$1 Par Value-- 1,692,899 shares (Number of shares outstanding, by class, as of November 13,2001) INDEX PART I. FINANCIAL INFORMATION PAGES Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 2001, December 31, 2000,and September 30, 2000 4 Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2001 and September 30, 2000 5 Consolidated Statements of Changes in Shareholders' Equity for the nine-month periods ended September 30, 2001, and September 30, 2000 6 Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2001, and September 30, 2000 7 Note to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-20 Item 3. Market Risk Disclosure 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. During the quarter ended September 30, 2001, 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: November 13, 2001 By:/s/Kenneth A. Black Kenneth A. Black Vice President, Treasurer, and Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries Third Quarter 2001
Consolidated Balance Sheets First Citizens BancShares, Inc. and Subsidiaries September 30* December 31# September 30* (thousands, except share data) 2001 2000 2000 - ----------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $691,594 $755,930 $529,897 Overnight investments 625,576 431,382 450,446 Investment securities held to maturity 2,430,718 1,778,166 1,693,741 Investment securities available for sale 51,405 38,554 36,698 Loans 7,109,584 7,109,692 7,097,773 Less reserve for loan losses 105,775 102,655 101,565 - ------------------------------------------------------------------------------------------------------------------------------ Net loans 7,003,809 7,007,037 6,996,208 Premises and equipment 477,218 444,731 427,245 Income earned not collected 64,747 62,580 59,708 Other assets 177,458 173,237 167,353 ============================================================================================================================== Total assets $11,522,525 $10,691,617 $10,361,296 ============================================================================================================================== Liabilities Deposits: Noninterest-bearing $1,497,606 $1,373,880 $1,387,406 Interest-bearing 8,147,620 7,597,988 7,281,236 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 9,645,226 8,971,868 8,668,642 Short-term borrowings 676,351 632,372 632,318 Long-term obligations 184,018 154,332 154,687 Other liabilities 150,967 122,317 116,308 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 10,656,562 9,880,889 9,571,955 Shareholders' Equity Common stock: Class A - $1 par value (8,797,154; 8,813,454 and 8,813,454 shares issued, respectively) 8,797 8,813 8,813 Class B - $1 par value (1,693,549; 1,709,382 and 1,720,360 shares issued, respectively) 1,694 1,709 1,720 Surplus 143,766 143,766 143,766 Retained earnings 705,067 650,148 629,543 Accumulated other comprehensive income 6,639 6,292 5,499 - ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 865,963 810,728 789,341 - ------------------------------------------------------------------------------------------------------------------------------ ============================================================================================================================== Total liabilities and shareholders' equity $11,522,525 $10,691,617 $10,361,296 ============================================================================================================================== * Unaudited # Derived from the Consolidated Balance Sheets included in the 2000 Annual Report on Form 10-K. See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc and Subsidiaries Third Quarter 2001
Consolidated Statements of Income First Citizens BancShares, Inc. and Subsidiaries Three Months Ended September 30 Nine Months Ended September 30 (thousands, except per share data; unaudited) 2001 2000 2001 2000 Interest income Loans $138,711 $150,083 $434,837 $431,376 Investment securities: U. S. Government 28,958 24,953 86,379 69,192 State, county and municipal 64 60 200 163 Other 1,187 118 1,820 373 - ------------------------------------------------------------------------------------------------------------------------------ Total investment securities interest income 30,209 25,131 88,399 69,728 Overnight investments 7,789 7,752 25,159 17,738 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 176,709 182,966 548,395 518,842 Interest expense Deposits 76,630 79,944 244,528 214,414 Short-term borrowings 4,618 8,397 18,289 22,184 Long-term obligations 3,234 3,168 9,580 9,476 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 84,482 91,509 272,397 246,074 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 92,227 91,457 275,998 272,768 Provision for loan losses 5,620 4,197 16,690 10,631 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 86,607 87,260 259,308 262,137 Noninterest income Service charges on deposit accounts 17,818 14,898 51,162 43,674 Credit card income 11,518 9,990 31,361 26,915 Trust income 3,848 3,660 11,588 11,062 Fees from processing services 4,483 3,683 12,784 10,635 Commission income 4,955 5,538 14,797 13,587 ATM income 2,920 2,824 8,545 8,143 Gain on sale of mortgage servicing rights - 20,187 - 20,187 Mortgage income 2,937 704 8,813 3,704 Other service charges and fees 3,302 2,874 10,117 9,112 Securities gains 150 1,776 7,188 2,268 Other 1,158 1,224 4,186 3,519 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 53,089 67,358 160,541 152,806 Noninterest expense Salaries and wages 46,372 43,485 134,547 126,106 Employee benefits 9,162 7,880 27,178 24,957 Occupancy expense 9,119 9,246 26,780 25,628 Equipment expense 10,379 9,730 30,403 28,189 Other 31,931 30,916 96,777 90,617 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 106,963 101,257 315,685 295,497 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 32,733 53,361 104,164 119,446 Income taxes 11,977 20,006 38,545 45,123 ============================================================================================================================== Net income $20,756 $33,355 $65,619 $74,323 ============================================================================================================================== Other comprehensive income (loss), net of taxes Unrealized securities gains (losses) arising during period $337 $795 $1,867 $43 Less: reclassification adjustment for gains included in net income 95 1,110 1,520 1,124 - ------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), net of taxes 242 (315) 347 (1,081) - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income $20,998 $33,040 $65,966 $73,242 ============================================================================================================================== Average shares outstanding 10,508,330 10,534,049 10,513,488 10,559,305 - ------------------------------------------------------------------------------------------------------------------------------ Per Share Net income $1.98 $3.17 $6.24 $7.04 Cash dividends 0.25 0.25 0.75 0.75 ============================================================================================================================== See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Consolidated Statements of Changes in Shareholders' Equity First Citizens BancShares, Inc. and Subsidiaries Accumulated Class A Class B Other Common Common Retained Comprehensive Total (thousands, except share data, unaudited) Stock Stock Surplus Earnings Income Equity - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $8,890 $1,720 $143,766 $567,801 $6,580 $728,757 Redemption of 76,585 shares of Class A common stock (77) (4,652) (4,729) Net income 74,323 74,323 Unrealized securities losses, net of taxes (1,081) (1,081) Cash dividends (7,929) (7,929) ======================================================================================================================== Balance at September 30, 2000 $8,813 1,720 $143,766 $629,543 $5,499 $789,341 ======================================================================================================================== Balance at December 31, 2000 $8,813 1,709 $143,766 $650,148 $6,292 $810,728 Redemption of 16,300 shares of Class A common stock (16) (1,408) (1,424) Redemption of 15,833 shares of Class B common stock (15) (1,408) (1,423) Net income 65,619 65,619 Unrealized securities losses, net of taxes 347 347 Cash dividends (7,884) (7,884) ======================================================================================================================== Balance at September 30, 2001 $8,797 1,694 $143,766 $705,067 $6,639 $865,963 ======================================================================================================================== See accompanying Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Consolidated Statements of Cash Flows First Citizens BancShares, Inc. and Subsidiaries Nine months ended September 30 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ (thousands, unaudited) OPERATING ACTIVITIES Net income $65,619 $74,323 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 8,682 8,706 Provision for loan losses 16,690 10,631 Deferred tax expense (benefit) 2,183 (1,296) Change in current taxes payable 16,837 9,006 Depreciation 25,152 22,566 Change in accrued interest payable (4,128) 14,011 Change in income earned not collected (2,167) (7,087) Securities gains (7,188) (2,268) Gain on sale of mortgage servicing rights - (20,187) Provision for branches to be closed 895 2,681 Origination of loans held for sale (220,124) (109,578) Proceeds from sale of loans held for sale 419,002 103,631 Loss (gain) on loans held for sale (1,858) 225 Net amortization of premiums 3,498 72 Net change in other assets (16,031) (2,172) Net change in other liabilities 15,046 (150) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 322,108 $103,114 - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Net change in loans outstanding (210,482) (348,768) Purchases of investment securities held to maturity (1,762,855) (1,088,398) Purchases of investment securities available for sale (11,295) (20,352) Maturities of investment securities held to maturity 1,106,805 747,906 Sales and maturities of investment secruities available for sale 6,924 2,337 Proceeds from sale of mortgage servicing rights - 26,513 Net change in overnight investments (194,194) 22,947 Dispositions of premises and equipment 4,800 2,971 Additions to premises and equipment (62,439) (55,385) - ------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (1,122,736) (710,229) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net change in time deposits 305,869 504,242 Net change in demand and other interest-bearing deposits 367,489 (9,198) Net change in short-term borrowings 43,143 63,021 Originations of long-term obligations 30,522 - Repurchases of common stock (2,847) (4,729) Cash dividends paid (7,884) (7,929) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 736,292 545,407 - ------------------------------------------------------------------------------------------------------------------------ Change in cash and due from banks (64,336) (61,708) Cash and due from banks at beginning of period 755,930 591,605 - ------------------------------------------------------------------------------------------------------------------------ Cash and due from banks at end of period $691,594 $ 529,897 ======================================================================================================================== CASH PAYMENTS FOR: Interest $276,525 $ 232,063 Income taxes 40,248 36,597 - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Unrealized securities gains (losses) 6,924 (1,735) Reclassification of loans to available for sale 177,817 - - ------------------------------------------------------------------------------------------------------------------------ See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001 Notes to Consolidated Financial Statements First Citizens BancShares, Inc. and Subsidiaries Note A Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete statements. In the opinion of management, the consolidated statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes included in the 2000 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 2001. However, the reclassifications have no effect on shareholders' equity or net income as previously reported. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"), which establishes accounting and reporting standards for derivative instruments and for hedging activities. BancShares adopted the provisions of Statement 133 on January 1, 2001, but, as a result of BancShares' limited use of derivative instruments, the adoption of Statement 133 did not have a material impact on its consolidated financial statements. Note B Subsequent Event On October 10, 2001, BancShares issued $100 million in trust preferred capital securities through its subsidiary FCB/NC Capital Trust II. The securities earn interest at an annual rate of 8.40 percent and mature on October 31, 2031. For regulatory capital purposes, the securities qualify as Tier 1 capital. First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Financial Summary Table 1 2001 2000 Nine Months Ended (thousands, except per share data Third Second First Fourth Third September 30 and ratios) Quarter Quarter Quarter Quarter Quarter 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ C> C> Summary of Operations Interest income $176,709 $182,660 $189,026 $189,328 $182,966 $548,395 $518,842 Interest expense 84,482 91,472 96,443 96,754 91,509 272,397 246,074 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 92,227 91,188 92,583 92,574 91,457 275,998 272,768 Provision for loan losses 5,620 5,394 5,676 4,857 4,197 16,690 10,631 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 86,607 85,794 86,907 87,717 87,260 259,308 262,137 Noninterest income 53,089 54,641 52,811 49,384 67,358 160,541 152,806 Noninterest expense 106,963 105,922 102,800 99,287 101,257 315,685 295,497 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 32,733 34,513 36,918 37,814 53,361 104,164 119,446 Income taxes 11,977 12,509 14,059 13,826 20,006 38,545 45,123 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $20,756 $22,004 $22,859 $23,988 $33,355 $65,619 $74,323 ==================================================================================================================================== Net interest income-taxable equivalent $92,698 $91,678 $93,091 $93,240 $92,162 $277,468 $274,950 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Averages Total assets $11,333,123 $11,128,229 $10,785,178 $10,420,204 $10,167,665 $11,083,960 $9,866,386 Investment securities 2,195,064 2,042,987 1,854,401 1,747,536 1,633,653 2,032,072 1,575,286 Loans 7,054,247 7,139,623 7,101,238 7,077,991 7,036,622 7,098,197 6,914,735 Interest-earning assets 10,126,568 9,952,752 9,616,497 9,365,530 9,142,585 9,900,481 8,867,141 Deposits 9,496,699 9,337,298 9,037,155 8,693,634 8,524,930 9,291,841 8,289,283 Interest-bearing liabilities 8,851,916 8,721,873 8,470,303 8,126,969 7,886,410 8,683,102 7,654,004 Long-term obligations 161,587 154,831 154,639 154,609 154,979 157,044 154,642 Shareholders' equity $857,417 $838,806 $819,289 $799,234 $770,418 $838,262 $751,643 Shares outstanding 10,508,330 10,511,028 10,521,253 10,528,679 10,534,049 10,513,488 10,559,305 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Period-End Balances Total assets $11,522,525 $11,289,166 $11,145,917 $10,691,617 $10,361,296 $11,522,525 $10,361,296 Investment securities 2,482,123 1,987,085 1,868,886 1,816,720 1,730,439 2,482,123 1,730,439 Loans 7,109,584 7,058,070 7,124,535 7,109,692 7,097,773 7,109,584 7,097,773 Interest-earning assets 10,217,283 9,981,549 9,870,346 9,357,794 9,278,658 10,217,283 9,278,668 Deposits 9,645,226 9,480,108 9,365,356 8,971,868 8,668,642 9,645,226 8,668,642 Interest-bearing liabilities 9,007,989 8,807,409 8,730,946 8,384,692 8,068,241 9,007,989 8,068,241 Long-term obligations 184,018 154,829 154,836 154,332 154,687 184,018 154,687 Shareholders' equity $865,963 $849,297 $830,135 $810,728 $789,341 $865,963 $789,341 Shares outstanding 10,490,703 10,509,956 10,513,475 10,522,836 10,533,814 10,490,703 10,533,814 - ------------------------------------------------------------------------------------------------------------------------------------ Profitability Ratios (averages) Rate of return (annualized) on: Total assets 0.74% 0.79% 0.86% 0.92% 1.31% 0.79% 1.01% Shareholders' equity 9.82 10.52 11.32 11.94 17.22 10.47 13.21 Dividend payout ratio 12.63 11.96 11.52 10.96 7.89 12.02 10.65 - ------------------------------------------------------------------------------------------------------------------------------------ Liquidity and Capital Ratios (averages) Loans to deposits 74.28% 76.46% 78.58% 81.42% 82.54% 76.39% 83.42% Shareholders' equity to total assets 7.57 7.54 7.60 7.67 7.58 7.56 7.62 Time certificates of $100,000 or more to total deposits 11.92 11.37 10.60 9.92 9.54 11.28 9.29 - ------------------------------------------------------------------------------------------------------------------------------------ Per Share of Stock Net income $1.98 $2.09 $2.17 $2.28 $3.17 $6.24 $7.04 Cash dividends 0.25 0.25 0.25 0.25 0.25 0.75 0.75 Book value at period end 82.55 80.81 78.96 77.04 74.93 82.55 74.93 Tangible book value at period end 71.64 69.65 67.52 65.76 64.77 71.64 64.77 - ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Outstanding Loans by Type Table 2 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- Third Second First Fourth Third (thousands) Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------- Real estate: Construction and land development $638,927 $638,751 $237,354 $216,439 $209,592 Mortgage: 1-4 family residential 1,338,655 1,384,449 1,596,920 1,550,329 1,515,694 Commercial 1,798,157 1,702,115 1,997,798 1,993,067 1,980,802 Equity Line 970,295 913,759 862,231 851,810 838,198 Other 169,948 177,787 186,740 186,247 201,107 - ----------------------------------------------------------------------------------------------------------------------------- Total real estate 4,915,982 4,816,861 4,881,043 4,797,892 4,745,393 Commercial and industrial 931,850 948,098 943,722 933,515 942,507 Consumer 1,096,775 1,132,118 1,140,407 1,218,134 1,248,793 Lease financing 142,305 136,806 134,352 134,483 134,655 Other 22,672 24,187 25,011 25,668 26,425 - ----------------------------------------------------------------------------------------------------------------------------- Total loans 7,109,584 7,058,070 7,124,535 7,109,692 7,097,773 Less reserve for loan losses 105,775 105,025 103,825 102,655 101,565 - ----------------------------------------------------------------------------------------------------------------------------- Net loans $7,003,809 $ 6,953,045 $ 7,020,710 $ 7,007,037 $ 6,996,208 - -----------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Investment Securities Table 3 September 30, 2001 September 30, 2000 - -------------------------------------------------------------------------------------------------------------------------------- Average Taxable Average Taxable Book Fair Maturity Equivalent Book Fair Maturity Equivalent (thousands) Value Value (Yrs./Mos.) Yield Value Value (Yrs./Mos.) Yield - -------------------------------------------------------------------------------------------------------------------------------- U. S. Government: Within one year $2,048,934 $2,076,706 0/7 5.11 % $1,363,229 $1,353,193 0/6 6.22 % One to five years 371,974 376,703 1/5 3.74 317,202 317,700 1/6 6.91 Five to ten years 179 188 7/10 8.03 222 224 8/8 8.04 Over ten years 6,027 6,234 25/3 7.40 8,336 8,279 26/3 7.37 - -------------------------------------------------------------------------------------------------------------------------------- Total 2,427,114 2,459,831 0/8 4.90 1,688,989 1,679,396 0/8 6.35 State, county and municipal: Within one year 753 761 0/8 6.20 1,150 1,154 0/4 7.20 One to five years 1,002 1,036 2/5 6.67 1,759 1,774 2/8 7.42 Five to ten years 143 151 7/7 5.88 Over ten years 1,411 1,534 15/1 5.47 1,538 1,588 17/6 8.58 - -------------------------------------------------------------------------------------------------------------------------------- Total 3,309 3,482 10/4 6.00 4,447 4,516 7/3 7.76 Other Within one year 35 35 0/4 6.02 10 10 0/4 5.88 One to five years 10 10 1/4 6.50 45 45 1/7 6.64 Five to ten years 250 250 6/10 7.75 250 250 8/1 4.50 - -------------------------------------------------------------------------------------------------------------------------------- Total 295 295 4/6 7.13 305 305 5/1 5.11 - -------------------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 2,430,718 2,463,608 0/9 4.90 % 1,693,741 1,684,217 0/10 6.36 % Marketable equity securities 41,697 51,405 - - 24,500 36,698 - - - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities $2,472,415 $2,515,013 - - $1,718,241 $1,720,915 - - - --------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third Quarter Table 4 2001 2000 Increase (decrease) due to: Interest Interest Average Income Yield Average Income Yield Yield (thousands) Balance Expense /Rate Balance Expense /Rate Volume /Rate Total - ------------------------------------------------------------------------------------------------------------------------------------ Assets Total loans $7,054,247 $139,146 7.83 % $7,036,622 $150,752 8.52 % $488 ($12,094) ($11,606) Investment securities: U. S. Government 2,149,139 28,958 5.35 1,600,409 24,953 6.20 7,988 (3,983) 4,005 State, county and municipal 4,675 100 8.49 4,461 96 8.56 5 (1) 4 Other 41,250 1,187 11.42 28,783 118 1.63 206 863 1,069 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 2,195,064 30,245 5.47 1,633,653 25,167 6.13 8,199 (3,121) 5,078 Overnight investments 877,257 7,789 3.52 472,310 7,752 6.53 5,129 (5,092) 37 ==================================================================================================================================== Total interest-earning assets $10,126,568 $177,180 6.95 % $9,142,585 $183,671 7.99 % $13,816 ($20,307) ($6,491) ==================================================================================================================================== Liabilities Deposits: Checking With Interest $1,145,737 $1,348 0.47 % $1,051,003 $1,555 0.59 % $125 ($332) ($207) Savings 610,378 1,611 1.05 628,857 2,363 1.49 (63) (689) (752) Money market accounts 1,757,093 13,088 2.96 1,455,076 16,487 4.51 2,847 (6,246) (3,399) Time deposits 4,506,419 60,583 5.33 4,012,339 59,539 5.90 7,060 (6,016) 1,044 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 8,019,627 76,630 3.79 7,147,275 79,944 4.45 9,969 (13,283) (3,314) Federal funds purchased 58,941 505 3.40 38,365 645 6.69 262 (402) (140) Repurchase agreements 226,348 1,224 2.15 181,891 2,360 5.16 408 (1,544) (1,136) Master notes 336,660 2,398 2.83 308,841 4,448 5.73 301 (2,351) (2,050) Other short-term borrowings 48,753 491 4.00 55,059 944 6.82 (85) (368) (453) Long-term obligations 161,587 3,234 7.94 154,979 3,168 8.13 138 (72) 66 ==================================================================================================================================== Total interest-bearing liabilities $8,851,916 $84,482 3.79 % $7,886,410 $91,509 4.62 % $10,993 ($18,020) ($7,027) ==================================================================================================================================== Interest rate spread 3.16 % 3.37 % - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and net yield on interest-earning assets $92,698 3.64 % $92,162 4.01 % $2,823 ($2,287) $536 - ------------------------------------------------------------------------------------------------------------------------------------ Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and state income tax rate of 7.00% for each period. The taxable-equivalent adjustment was $471 for 2001 and $705 for 2000.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine Months Table 5 2001 2000 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 $7,098,196 $436,191 8.21 % $6,914,735 $433,463 8.37 % $11,244 ($8,516) $2,728 Investment securities: U. S. Government 1,985,650 86,379 5.82 1,549,675 69,192 5.96 19,122 (1,935) 17,187 State, county and municipal 4,892 316 8.64 4,057 258 8.49 53 5 58 Other 41,531 1,820 5.86 21,554 373 2.31 610 837 1,447 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,032,073 88,515 5.82 1,575,286 69,823 5.92 19,785 (1,093) 18,692 Overnight investments 770,212 25,159 4.37 377,120 17,738 6.28 15,636 (8,215) 7,421 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $9,900,481 $549,865 7.42 % $8,867,141 $521,024 7.85 % $46,665 ($17,824)$28,841 ================================================================================================================================ Liabilities Deposits: Checking with Interest $1,129,054 $4,966 0.59 % $1,063,527 $4,669 0.59 % $293 $4 $297 Savings 608,646 5,429 1.19 642,781 7,392 1.54 (337) (1,626) (1,963) Money market accounts 1,693,769 44,694 3.53 1,463,926 46,039 4.20 6,606 (7,951) (1,345) Time deposits 4,434,486 189,439 5.71 3,770,027 156,314 5.54 27,932 5,193 33,125 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 7,865,955 244,528 4.16 6,940,261 214,414 4.13 34,494 (4,380) 30,114 Federal funds purchased 68,075 2,259 4.44 36,113 1,674 6.19 1,269 (684) 585 Repurchase agreements 210,970 4,808 3.05 163,181 5,923 4.85 1,408 (2,523) (1,115) Master notes 329,139 9,295 3.78 303,394 11,859 5.22 854 (3,418) (2,564) Other short-term borrowings 51,919 1,927 4.96 56,413 2,728 6.46 (193) (608) (801) Long-term obligations 157,044 9,580 8.16 154,642 9,476 8.19 143 (39) 104 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $8,683,102 $272,397 4.19 % $7,654,004 $246,074 4.29 % $37,975 ($11,652)$26,323 ================================================================================================================================ Interest rate spread 3.23 % 3.56 % - -------------------------------------------------------------------------------------------------------------------------------- Net interest income and net yield on interest-earning assets $277,468 3.75 % $274,950 4.14 % $8,690 ($6,172) $2,518 - -------------------------------------------------------------------------------------------------------------------------------- Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and state income tax rate of 7.00% for each period. The taxable-equivalent adjustment was $1,470 for 2001 and $2,182 for 2000.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001
Summary of Loan Loss Experience and Risk Elements Table 6 2001 2000 ----------------------------------------- ---------------------------- Nine Months Ended Third Second First Fourth Third September 30 (thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Reserve balance at beginning of period $105,025 $ 103,825 $ 102,655 $ 101,565 $ 100,515 $102,655 $98,690 Adjustment for sale of loans (777) - - - (777) Provision for loan losses 5,620 5,394 5,676 4,857 4,197 16,690 10,631 Net charge-offs: Charge-offs (5,462) (4,386) (5,273) (5,232) (3,989 (15,121) (10,674) Recoveries 592 969 767 1,465 842 2,328 2,918 - ----------------------------------------------------------------------------------------------------------------------------------- Net charge-offs (4,870) (3,417) (4,506) (3,767) (3,147) (12,793) (7,756) =================================================================================================================================== Reserve balance at end of period $105,775 $ 105,025 $ 103,825 $ 102,655 $ 101,565 $105,775 $101,565 =================================================================================================================================== Historical Statistics Balances Average total loans $7,054,247 $ 7,139,623 $7,101,238 $7,077,991 $ 7,036,622 $7,098,196 $6,914,735 Total loans at period-end 7,109,584 7,058,069 7,124,535 7,109,692 7,097,773 7,109,584 7,097,773 - ----------------------------------------------------------------------------------------------------------------------------------- Risk Elements Nonaccrual loans $13,349 $ 12,658 $ 12,830 $ 15,933 $ 13,918 $13,349 $13,918 Other real estate acquired through foreclosure 4,242 2,798 3,082 1,880 2,079 4,242 2,079 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $17,591 $ 15,456 $ 15,912 $ 17,813 $ 15,997 $17,591 $15,997 - ----------------------------------------------------------------------------------------------------------------------------------- Accruing loans 90 days or more past due $14,993 $ 10,371 $ 6,413 $ 6,731 $ 6,866 $14,993 $6,866 - ----------------------------------------------------------------------------------------------------------------------------------- Ratios Net charge-offs (annualized) to average total loans 0.27% 0.19% 0.26% 0.21% 0.18% 0.24% 0.15% Reserve for loan losses to total loans at period-end 1.49 1.49 1.46 1.44 1.43 1.49 1.43 Nonperforming assets to total loans plus foreclosed real estate at period-end 0.25 0.22 0.22 0.25 0.23 0.25 0.23 - -----------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2001 INTRODUCTION Management's discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries ("BancShares"). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. The focus of this discussion concerns BancShares' two banking subsidiaries. First-Citizens Bank & Trust Company ("FCB") operates branches in North Carolina, West Virginia, and Virginia. Atlantic States Bank ("ASB") operates offices in Georgia and Florida. SUMMARY BancShares realized a decrease in earnings during the third quarter of 2001 compared to the third quarter of 2000. Consolidated net income during the third quarter of 2001 was $20.8 million, compared to $33.4 million earned during the corresponding period of 2000, a reduction of $12.6 million or 37.8 percent. Net income per share during the third quarter of 2001 totaled $1.98, compared to $3.17 during the third quarter of 2000. Much of the decrease in earnings can be attributed to the nonrecurring gain recognized on the sale of mortgage servicing rights and higher securities gains recorded during the third quarter of 2000. The sale of mortgage servicing rights and the securities transactions contributed after-tax gains of $13.7 million during the third quarter of 2000. Ignoring the impact of the non-recurring items during both periods, net income for the third quarter of 2001 would have been $20.7 million, compared to $19.6 million during 2000, an increase of 5.3 percent. Return on average assets was 0.74 percent for the third quarter of 2001 compared to 1.31 percent during the same period of 2000. Return on average equity was 9.82 percent for the third quarter of 2001 compared to 17.22 percent for the same quarter of 2000. Adjusting for the impact of the nonrecurring items, net income per share was $1.97 during the third quarter of 2001, compared to $1.86 per share during the same period of 2000. The adjusted annualized return on average assets was 0.72 percent for the third quarter of 2001, compared to 0.77 percent for the third quarter of 2000. The adjusted return on average shareholders' equity was 9.56 percent for the third quarter of 2001, compared to 10.11 percent for the same period of 2000. For the first nine months of 2001, BancShares recorded net income of $65.6 million, compared to $74.3 million earned during the first nine months of 2000, a reduction of $8.7 million or 11.7 percent. Net income per share for the first nine months of 2001 was $6.24, compared to $7.04 during the same period of 2000. BancShares returned 0.79 percent on average assets during the first nine months of 2001 compared to 1.01 percent during the corresponding period of 2000. The return on average equity for 2001 was 10.47 percent, compared to 13.21 percent for the same period in 2000. The reduction in year-to-date net income was the result of higher noninterest expense and provision for loan losses, partially offset by higher noninterest income and net interest income. For the nine-month period ended September 30, 2001, gains on securities transactions contributed $4.5 million after tax to net income. In addition to the $12.6 million after tax gain from the sale of mortgage servicing rights recorded during 2000, securities transactions during the first nine months of 2000 contributed $1.4 million after tax to net income. Adjusting for the impact of all nonrecurring gains, net income would have been $61.1 million during 2001 and $60.3 million during 2000, a 1.3 percent increase in 2001. Adjusted net income per share would have been $5.81 for 2001 and $5.71 for 2000. The adjusted annualized return on average assets and average equity would have been 0.74 percent for the nine months ended September 30, 2001, compared to 0.82 percent for the same period of 2000. Adjusting for nonrecurring items, the return on average equity would have been 9.70 percent and 10.72 percent, respectively, for the nine months ended September 30, 2001 and 2000. Various profitability, liquidity and capital ratios are presented in Table 1. To understand the changes and trends in interest-earning assets and interest-bearing liabilities, refer to the average balance sheets presented in Table 4 for the third quarter and Table 5 for the first nine months of 2001 and 2000. INTEREST-EARNING ASSETS Interest-earning assets for the third quarter of 2001 averaged $10.13 billion, an increase of $984.0 million or 10.8 percent from the third quarter of 2000. For the nine months ended September 30, 2001, earning assets averaged $9.90 billion, an increase of $1.03 billion or 11.7 percent over the same period of 2000. These increases result primarily from growth in the investment securities portfolio and overnight investments. Loans. At September 30, 2001 and 2000, gross loans totaled $7.11 billion and $7.10 billion, respectively. As of December 31, 2000, gross loans were $7.11 billion. Loan growth among business loans essentially offset the impact of the sale of $177.9 million in residential mortgage loans during the second quarter of 2001. Loans secured by real estate totaled $4.92 billion at September 30, 2001, compared to $4.75 billion at September 30, 2000, an increase of $170.6 million or 3.6 percent. This growth results primarily from strong growth among business lending and retail EquityLine lending. Consumer loans were $1.10 billion at September 30, 2001, a $152.0 million or 12.2 percent reduction from the $4.75 billion outstanding at September 30, 2000. The reduction among consumer loans has primarily resulted from lower sales finance loan activity during late 2000 and early 2001. Table 2 details outstanding loans by type for the past five quarters. During the third quarter of 2001, loans averaged $7.05 billion, an increase of $17.6 million or 0.3 percent from the comparable period of 2000. Loan growth during 2001 has suffered due to current economic conditions. For the year-to-date, loans have averaged $7.10 billion for 2001 compared to $6.91 billion for the same period of 2000. This $183.5 million or 2.7 percent increase is due to growth among business and retail real estate lending. Despite the recent downward pressure on interest rates, management anticipates diminished customer demand for business loan products due to the economic uncertainty confronting many customers. Management projects continued reductions in retail installment loans, and growth prospects among business customers appear uncertain. All growth projections, however, are subject to change as a result of further economic deterioration or improvement. Investment securities. At September 30, 2001 and 2000, the investment portfolio totaled $2.48 billion and $1.73 billion, respectively. At December 31, 2000, the investment portfolio was $1.82 billion. The $751.7 million growth in the securities portfolio since September 30, 2000 results from deposit growth, which has significantly outpaced the growth in loan demand. The additional liquidity generated by deposit growth has been invested in the securities portfolio. Average investment securities increased by $561.4 million or 34.4 percent from the third quarter ended in 2000 to the third quarter ended in 2001, the result of strong deposit growth. All securities that are classified as held-to-maturity reflect BancShares' ability and positive intent to hold those investments until maturity. Marketable equity securities are classified as available-for-sale and are reported at their aggregate fair value. Table 3 presents detailed information relating to the investment securities portfolio. Income on Interest-Earning Assets. Interest income amounted to $176.7 million during the third quarter of 2001, a 3.4 percent decrease from the third quarter of 2000. The unfavorable impact of lower asset yields more than offset the benefit resulting from growth among interest-earning assets, causing the reduction in interest income in the third quarter of 2001 when compared to the same period of 2000. The taxable-equivalent yield on interest-earning assets for the third quarter of 2001 was 6.95 percent, compared to 7.99 percent for the corresponding period of 2000. The lower yield on earning assets during 2001 results primarily from a decrease in the taxable-equivalent loan yield, the result of decreased market rates. Additionally, substantially all of the growth among interest-earning assets has been among the lower-yielding assets - investment securities and overnight investments. Investment securities and overnight investments represented 30.3 percent of average interest-earning assets during the third quarter of 2001, compared to 23.0 percent during the same period of 2000. Loan interest income for the third quarter of 2001 was $138.7 million, a decrease of $11.4 million or 7.6 percent from the third quarter of 2000, due to decreased yields. The taxable-equivalent yield on the loan portfolio was 7.83 percent during the third quarter of 2001, compared to 8.52 percent during the same period of 2000, the decrease resulting from lower market rates. For the nine months ended September 30, 2001, loan interest income was $434.8 million, an increase of $3.5 million or 0.8 percent over the same period of 2000. The modest increase in interest income during the nine-month period reflects the sluggish growth in the loan portfolio, the impact of which was largely offset by lower asset yields. Income earned on the investment securities portfolio amounted to $30.2 million during the third quarter of 2001 and $25.1 million during the same period of 2000, an increase of $5.1 million or 20.2 percent. This increase is the result of a $561.4 million or 34.4 percent increase in the average securities portfolio. The investment securities portfolio taxable-equivalent yield fell to 5.47 percent for the quarter ended September 30, 2001, compared to 6.13 percent for the quarter ended September 30, 2000, the lower yields reflecting general market conditions. For the nine months ended September 30, 2001, interest income from investment securities was $88.4 million, compared to $69.7 million during the same period of 2000, an increase of $18.7 million or 26.8 percent. The higher income is the result of a 29.0 percent increase in the average securities portfolio. The yield on average investment securities dropped from 5.92 percent for the nine month period ended September 30, 2000 to 5.82 for the same period of 2001. As existing securities continue to mature, given the low level of current loan demand, management expects that substantially all of the proceeds will be reinvested in the investment securities portfolio. Based on current market conditions, management believes this will result in continued reductions in the portfolio's taxable-equivalent yield. INTEREST-BEARING LIABILITIES At September 30, 2001 and 2000, interest-bearing liabilities totaled $9.01 billion and $8.07 billion, respectively, compared to $8.38 billion as of December 31, 2000. During the third quarter of 2001, interest-bearing liabilities averaged $8.85 billion, an increase of $965.5 million or 12.2 percent from the third quarter of 2000. Total interest-bearing liabilities averaged $8.68 billion during the first nine months of 2001, compared to $7.65 billion during the same period of 2000, an increase of $1.03 billion or 13.4 percent. Growth in the third quarter and the year-to-date both result from strong growth among interest-bearing deposits. Deposits. At September 30, 2001, total deposits were $9.65 billion, an increase of $976.6 million or 11.3 percent over September 30, 2000. Compared to the December 31, 2000 balance of $8.97 billion, total deposits have increased $673.4 million or 7.5 percent. Average interest-bearing deposits were $8.02 billion during the third quarter of 2001 compared to $7.15 billion during the third quarter of 2000, an increase of $872.4 million or 12.2 percent. During the third quarter of 2001, average time deposits increased $494.1 million or 12.3 percent. Average money market accounts increased $302.0 million, an increase of 20.8 percent. Average interest-bearing liabilities increased $1.03 billion from $7.65 billion during the first nine months of 2000 to $8.68 billion during the first nine months of 2001. The 13.4 percent increase in average interest-bearing liabilities included a $664.5 million or 17.6 percent increase in average time deposits. Further growth resulted from higher average money market accounts, which increased $229.8 million or 15.7 percent. Although some of the growth in deposits during the third quarter relates to seasonal factors, management attributes much of the growth during 2001 to continuing volatility in equity markets, which has caused many investors to seek the safety of traditional bank deposits. Short-term Borrowings. At September 30, 2001, short-term borrowings totaled $676.4 million compared to $632.4 million at December 31, 2000 and $632.3 million at September 30, 2000. For the quarters ended September 30, 2001 and 2000, short-term borrowings averaged $670.7 million and $584.2 million, respectively. This $86.5 million or 14.8 percent increase resulted primarily from growth among overnight repurchase agreements and master notes. Long-term Obligations. At September 30, 2001, long-term obligations totaled $184.0 million, an increase of $29.3 million or 19.0 percent over September 30, 2000. The increase results from $30 million in debt incurred by ASB during the third quarter. As a result of favorable borrowing conditions and a need for long-term borrowings for more effective interest rate management, ASB entered into a 10-year and 20-year borrowing arrangement during the third quarter. During the third quarter of 2001, long-term obligations averaged $161.6 million, compared to $155.0 million during the same period of 2000. For the nine-month period ended September 30, long-term borrowings averaged $157.0 million in 2001 and $154.6 million in 2000. On October 10, 2001, BancShares issued $100 million in trust preferred capital securities. These 30-year borrowings were issued at a rate of 8.40 percent. These securities qualify for Tier 1 capital for regulatory purposes, and management expects that the proceeds from these long-term obligations will be used to support future expansion at FCB and ASB. Expense on Interest-Bearing Liabilities. BancShares' interest expense amounted to $84.5 million during the third quarter of 2001, a $7.0 million or 7.7 percent reduction from the third quarter of 2000. The lower interest expense was the result of lower market rates, partially offset by higher average volume. The average rate on these liabilities decreased 83 basis points from the 4.62 percent during the third quarter of 2000 compared to 3.79 percent during the same period of 2001. For the third quarter, the rate on average money market accounts decreased 155 basis points from 4.51 percent during the third quarter of 2000 to 2.96 percent during the third quarter of 2001, while the average rate on time deposits decreased 57 basis points from 5.90 percent during the third quarter of 2000 to 5.33 percent during the third quarter of 2001. Many of BancShares' non-deposit funding sources are indexed to federal funds rates. As a result of the significant reductions in federal funds rates during 2001, the rate on these borrowings has dropped. The rate on average master notes for the third quarter of 2001 was 2.83 percent, while the rate was 5.73 percent during the same period in 2000. The rate on overnight repurchase obligations has dropped from 5.16 percent during the third quarter of 2000 to 2.15 percent during the third quarter of 2001. For the year-to-date, interest expense was $272.4 million, compared to $246.1 million for the same period of 2000. The $26.3 million or 10.7 percent increase results from higher average volume, the impact of which was partially offset by lower interest rates. The rate on all interest-bearing liabilities fell from 4.29 percent during the first nine months of 2000 to 4.19 percent during the same period of 2001. The rate on average interest-bearing deposits increased three basis points to 4.16 percent during 2001, the impact of which was more than offset by the reduction in the rate on short-term borrowings tied to federal funds rates. NET INTEREST INCOME Net interest income totaled $92.2 million during the third quarter of 2001, an increase of $770,000 or 0.8 percent from the third quarter of 2000. The taxable-equivalent net yield on interest-earning assets was 3.64 percent for the third quarter of 2001, a decrease of 37 basis points from the 4.01 percent reported for the third quarter of 2000. The taxable equivalent interest rate spread for the third quarter of 2001 was 3.16 percent compared to 3.37 percent for the same period of 2000. The lower net yield on interest-earning assets resulted from the yields on interest-earning assets declining more than the rate on interest-bearing liabilities. A principal objective of BancShares' asset/liability management function is to manage interest rate risk or the exposure to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. Management is aware of the potential negative impact that movements in market interest rates may have on net interest income. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values or reduced net interest income in future periods. Despite the interest rate volatility during 2001 and the changes in asset composition, BancShares' portfolios of assets and liabilities that are sensitive to changes in interest rates have not changed significantly since December 31, 2000. Therefore, as of September 30, 2001, BancShares' market risk profile has not changed significantly from December 31, 2000. BancShares continues to experience a liability-sensitive position which results in lower net interest income during periods of rising interest rates. However, as a result of asset growth rates at levels that exceed deposit growth rates, the liability sensitive position as a percentage of interest-earning assets has narrowed since December 31, 2000. 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. Management periodically reviews the assumptions imbedded within the models used to calculate the loan loss reserve. Business loans are generally graded, and those credit grades become the basis for the loss estimates based on historical experience. For all other loans, loss estimates are made by management based on historical data, current trends and estimated repayment frequencies. Based on the model, at September 30, 2001, the reserve for loan losses amounted to $105.8 million or 1.49 percent of loans outstanding. This compares to $102.7 million or 1.44 percent of loans outstanding at December 31, 2000, and $101.6 million or 1.43 percent of loans outstanding at September 30, 2000. Management considers the established reserve adequate to absorb losses that relate to loans outstanding at September 30, 2001. 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 third quarter of 2001 was $5.6 million, compared to $4.2 million during the third quarter of 2000. For the nine month periods ended September 30, total provision for loan losses was $16.7 million for 2001 and $10.6 million for 2000. The $6.1 million increase reflects recognition of probable losses due to the current economic environment and the resulting increases in nonperforming assets and delinquencies. Net charge-offs for the nine month period ended September 30, 2001 totaled $12.8 million, compared to $7.8 million during the same period of 2000. As a percentage of average loans outstanding, the losses represent 0.24 percent for the nine months ended September 30, 2001, compared to 0.15 percent for the same period of 2000. Gross charge-offs totaled $15.1 million for the nine month period ended September 30, 2001 and $10.7 million for the nine month period ended September 30, 2000. Recoveries were $2.3 million and $2.9 million for the respective periods. The increased levels of charge-offs during 2001 primarily result from higher business and credit card charge-offs. 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 2001 and 2000. Nonperforming assets. At September 30, 2001, BancShares' nonperforming assets amounted to $17.6 million or 0.25 percent of gross loans plus foreclosed properties, compared to $17.8 million at December 31, 2000, and $16.0 million at September 30, 2000. Loans past due more than 90 days increased from $6.9 million at September 30, 2000 to $15.0 million at September 30, 2001, primarily due to higher past dues among residential mortgage loans. Management continues to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure. NONINTEREST INCOME During the first nine months of 2001, noninterest income was $160.5 million, compared to $152.8 million during the same period of 2000. The $7.7 million or 5.1 percent increase was due to increases in service charges on deposit accounts, securities gains and credit card income. Excluding nonrecurring gains, noninterest income for 2001 would have been $153.4 million, compared to $130.4 million in 2000, an increase of $23.0 million or 17.6 percent. During 2001, noninterest income benefited from an additional $7.5 million in service charges on deposit accounts. This represents a 17.1 percent increase during the first nine months of 2001 compared to the first nine months of 2000, the result of higher commercial service charges and bad check fees. BancShares reported $7.2 million in securities gains during the first nine months of 2001 compared to $2.3 million during 2001, a $4.9 million or 216.9 percent increase over 2000. These gains resulted from the sale and exchange of available-for-sale securities. Noninterest income from the credit card operation contributed an additional $4.4 million during the first nine months of 2001 compared to the same period of 2000. This represents a 16.5 percent increase over the first nine months of 2000, the result of higher merchant income and interchange income generated by card usage. Mortgage noninterest income contributed an additional $5.1 million during the first nine months of 2001 compared to the same period of 2000. This increase represents a 137.9 percent increase over the same period of 2000, primarily the result of gains recognized on the sale of $177.9 million in residential mortgage loans during the second quarter of 2001. During 2001, fees from processing services were $12.8 million compared to $10.6 million during 2000, an increase of $2.1 million or 20.2 percent from the same period in 2000. This growth resulted from growth in transactions processed on behalf of client banks. While the amounts of the variances are different, the reasons for the changes in components of noninterest income during the three-month periods ended September 30 are the same as the explanations for the changes in the nine-month periods ended September 30, except where otherwise noted. NONINTEREST EXPENSE Noninterest expense was $315.7 million for the first nine months of 2001, a 6.8 percent increase over the $295.5 million recorded during the same period of 2000. Much of the $20.2 million increase in noninterest expense relates to higher personnel costs. Salaries and wages increased $8.4 million from $126.1 million for the first nine months of 2000 to $134.5 million for same period in 2001. Employee benefits expense increased $2.2 million or 8.9 percent during the first nine months of 2001, compared to the corresponding period of 2000 due to the larger employee population, increased insurance costs and higher pension expenses. Equipment expense was $30.4 million and $28.2 million for the first nine months of 2001 and 2000, respectively. The $2.2 million increase resulted from higher software depreciation, maintenance contract costs and depreciation on hardware. Occupancy expense increased $1.2 million or 4.5 percent during the first nine months of 2001, the result of higher depreciation and utility expenses. During 2001, occupancy expense benefited from an $807,000 reduction in the provision for branches to be closed, an accrual established for lease payments relating to branches that management has elected to close prior to the lease maturity. The $6.2 million, or 6.8 percent, increase in other expenses resulted from higher credit card processing costs, net other charge offs and core deposit amortization. The increase in other expense during 2001 was partially offset by a $979,000 reduction in impairment losses recorded for branches to be closed. While the amounts of the variances are different, the reasons for the changes in components of noninterest expense during the three-month periods ended September 30 are the same as the explanations for the changes in the nine-month periods ended September 30, except where otherwise noted. INCOME TAXES Income tax expense amounted to $38.5 million during the first nine months of 2001, compared to $45.1 million during the same period of 2000, a 14.6 percent decrease resulting from lower pre-tax income. The effective tax rates for these periods were 37.0 percent and 37.8 percent, respectively. LIQUIDITY Management relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. In the event additional liquidity is needed, BancShares maintains readily available sources to borrow funds through its correspondent network. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. At September 30, 2001 and 2000, the leverage capital ratio of BancShares was 7.98 percent and 8.22 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares' Tier 1 capital ratio was 11.71 percent at September 30, 2001, and 10.35 percent as of September 30, 2000. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratio was 13.02 percent at September 30, 2001 and 11.64 percent as of September 30, 2000. The minimum total capital ratio is 8 percent. BancShares and its subsidiary banks exceed the capital standards established by their respective regulatory agencies. CURRENT ACCOUNTING AND REGULATORY ISSUES In July 2001, the Financial Accounting Standards Board (FASB) released two new accounting standards related to business combinations, goodwill and intangible assets. Statement No.141 "Business Combinations" (Statement 141) requires that the purchase method of accounting be used for all business combinations initiated after June 30,2001. Statement No.141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill. Statement No.142 "Goodwill and Other Intangible Assets" (Statement 142) is effective on January 1, 2002 and will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Statement 142 also will require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and be reviewed for impairment in accordance with FASB's Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In connection with Statement 142's transitional goodwill impairment evaluation, an assessment will be required to determine whether there is an indication that goodwill is impaired as of the date of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our statement of earnings. Because of the extensive effort needed to comply with adopting Statement 141 and Statement 142 and continuing interpretative guidance, it is not possible at this time to reasonably estimate the impact of adopting these Statements on our financial statements, including whether we will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 provides guidance on differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. Statement 144 supersedes FASB Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Statement 144 also supersedes Accounting Principals Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This statement is effective for fiscal years beginning after December 15, 2001. At this time, BancShares is assessing the impact of Statement 144 on its financial condition and results of operations. Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations. FORWARD-LOOKING STATEMENTS This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgment of BancShares and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of BancShares' customers, actions of government regulators, the level of market interest rates, and general economic conditions. of 2001 compared to 1.01 percent during the corresponding period of 2000. The return on average equity for 2001 was 10.47 percent, compared to 13.21 percent for the same period in 2000. The reduction in year-to-date net income was the result of higher noninterest expense and provision for loan losses, partially offset by higher noninterest income and net interest income. For the nine-month period ended September 30, 2001, gains on securities transactions contributed $4.5 million after tax to net income. In addition to the $12.6 million after tax gain from the sale of mortgage servicing rights recorded during 2000, securities transactions during the first nine months of 2000 contributed $1.4 million after tax to net income. Adjusting for the impact of all nonrecurring gains, net income would have been $61.1 million during 2001 and $60.3 million during 2000, a 1.3 percent increase in 2001. Adjusted net income per share would have been $5.81 for 2001 and $5.71 for 2000. The adjusted annualized return on average assets and average equity would have been 0.74 percent for the nine months ended September 30, 2001, compared to 0.82 percent for the same period of 2000. Adjusting for nonrecurring items, the return on average equity would have been 9.70 percent and 10.72 percent, respectively, for the nine months ended September 30, 2001 and 2000. Various profitability, liquidity and capital ratios are presented in Table 1. To understand the changes and trends in interest-earning assets and interest-bearing liabilities, refer to the average balance sheets presented in Table 4 for the third quarter and Table 5 for the first nine months of 2001 and 2000. -----END PRIVACY-ENHANCED MESSAGE-----