10-Q 1 mar0310q.txt MARCH 31, 2003 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 March 31, 2003 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) 3128 Smoketree Court, Raleigh, North Carolina 27604 (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-- 8,792,061 shares Class B Common Stock--$1 Par Value-- 1,677,675 shares (Number of shares outstanding, by class, as of May 13,2003) INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at March 31, 2003, December 31, 2002,and March 31, 2002 Consolidated Statements of Income for the three-month periods ended March 31, 2003 and March 31, 2002 Consolidated Statements of Changes in Shareholders' Equity for the three-month periods ended March 31, 2003, and March 31, 2002 Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2003, and March 31, 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. This review, which occurred within 90 days of this report's filing, found the disclosure controls and procedures to be effective. (b)There were no significant changes in Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the evaluation by Mr. Holding and Mr. Black. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 99 Certification (b) Reports on Form 8-K. During the quarter ended March 31, 2003, Registrant filed no Current Reports 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: May 13, 2003 By:/s/Kenneth A. Black Kenneth A. Black Vice President, Treasurer, and Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries First Quarter 2003 CERTIFICATIONS Certification of Chief Executive Officer I, Lewis R. Holding, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Citizens BancShares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 13, 2003 /s/ Lewis R. Holding _________________________ Lewis R. Holding Chief Executive Officer Certification of Chief Financial Officer I, Kenneth A. Black, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Citizens BancShares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 13, 2003 /s/ Kenneth A. Black ________________________ Kenneth A. Black Chief Financial Officer
Consolidated Balance Sheets First Citizens BancShares, Inc. and Subsidiaries March 31* December 31# March 31* (thousands, except share data) 2003 2002 2002 ------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 753,578 $ 811,657 $ 709,757 Overnight investments 925,255 623,570 597,980 Investment securities held to maturity 1,991,916 2,417,583 2,441,456 Investment securities available for sale 370,214 121,653 134,927 Loans 7,704,492 7,620,263 7,248,088 Less reserve for loan losses 113,382 112,533 108,692 ------------------------------------------------------------------------------------------------------------------------------ Net loans 7,591,110 7,507,730 7,139,396 Premises and equipment 509,733 507,267 481,981 Income earned not collected 41,977 46,959 60,970 Other assets 204,958 195,471 181,511 ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 12,388,741 $ 12,231,890 $ 11,747,978 ============================================================================================================================== Liabilities Deposits: Noninterest-bearing $ 1,992,797 $ 1,857,576 $ 1,615,435 Interest-bearing 8,601,583 8,582,044 8,257,544 ------------------------------------------------------------------------------------------------------------------------------ Total deposits 10,594,380 10,439,620 9,872,979 Short-term borrowings 438,427 462,627 558,003 Long-term obligations 253,386 253,409 283,988 Other liabilities 118,913 108,943 125,101 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 11,405,106 11,264,599 10,840,071 Shareholders' equity Common stock: Class A-$1 par value (8,792,561; 8,794,669 and 8,797,154 shares issued, respectively) 8,792 8,794 8,797 Class B-$1 par value (1,677,675; 1,678,625 and 1,683,470 shares issued, respectively) 1,678 1,678 1,683 Surplus 143,766 143,766 143,766 Retained earnings 819,533 804,397 745,069 Accumulated other comprehensive income 9,866 8,656 8,592 ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 983,635 967,291 907,907 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 12,388,741 $ 12,231,890 $ 11,747,978 ============================================================================================================================== * 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 First Quarter 2003
Consolidated Statements of Income First Citizens BancShares, Inc. and Subsidiaries Three Months Ended March 31 (thousands, except per share data, unaudited) 2003 2002 --------------------------------------------------------------------------------------------------------------------- Interest income (Restated) Loans $ 113,440 $ 124,227 Investment securities: U. S. Government 15,429 29,638 State, county and municipal 38 62 Dividends 377 435 --------------------------------------------------------------------------------------------------------------------- Total investment securities interest and dividend income 15,844 30,135 Overnight investments 1,790 1,786 --------------------------------------------------------------------------------------------------------------------- Total interest income 131,074 156,148 Interest expense Deposits 36,334 52,061 Short-term borrowings 581 1,369 Long-term obligations 5,243 5,707 --------------------------------------------------------------------------------------------------------------------- Total interest expense 42,158 59,137 --------------------------------------------------------------------------------------------------------------------- Net interest income 88,916 97,011 Provision for loan losses 5,563 5,980 --------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 83,353 91,031 Noninterest income Service charges on deposit accounts 18,444 18,448 Cardholder and merchant services income 12,387 11,010 Trust income 3,723 3,994 Fees from processing services 5,138 4,684 Commission-based income 6,018 5,333 ATM income 2,104 2,127 Mortgage income 4,056 3,262 Other service charges and fees 3,905 4,033 Securities gains (losses) (975) 310 Other 1,587 1,014 --------------------------------------------------------------------------------------------------------------------- Total noninterest income 56,387 54,215 Noninterest expense Salaries and wages 48,401 46,935 Employee benefits 11,527 10,585 Occupancy expense 9,722 8,999 Equipment expense 11,968 10,598 Other 29,664 29,789 --------------------------------------------------------------------------------------------------------------------- Total noninterest expense 111,282 106,906 --------------------------------------------------------------------------------------------------------------------- Income before income taxes 28,458 38,340 Income taxes 10,164 13,516 --------------------------------------------------------------------------------------------------------------------- Net income 18,294 24,824 --------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of taxes Unrealized securities gains arising during period 620 1,106 Less: reclassification adjustment for gains (losses) included in net income (590) 186 --------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of taxes 1,210 920 ===================================================================================================================== Comprehensive income $ 19,504 $ 25,744 ===================================================================================================================== Average shares outstanding 10,472,065 10,481,661 Per Share Net income $ 1.75 $ 2.37 Cash dividends 0.275 0.25 --------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003
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, 2001 $ 8,797 $ 1,686 $ 143,766 $ 723,122 $ 7,672 $ 885,043 Net income (restated) 24,824 24,824 Other comprehensive income, net of taxes 920 920 Cash dividends (2,620) (2,620) Redemption of 2,832 shares of Class B common stock (3) (257) (260) =========================================================================================================================== Balance at March 31, 2002 (restated) $ 8,797 $ 1,683 $ 143,766 $ 745,069 $ 8,592 $ 907,907 =========================================================================================================================== Balance at December 31, 2002 $ 8,794 $ 1,678 $ 143,766 $ 804,397 $ 8,656 $ 967,291 Net income 18,294 18,294 Other comprehensive income, net of taxes 1,210 1,210 Cash dividends (2,879) (2,879) Redemption of 2,108 shares of Class A common stock (2) (193) (195) Redemption of 950 shares of Class B common stock (86) (86) =========================================================================================================================== Balance at March 31, 2003 $ 8,792 $ 1,678 $ 143,766 $ 819,533 $ 9,866 $ 983,635 =========================================================================================================================== See accompanying Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003
Consolidated Statements of Cash Flows First Citizens BancShares, Inc. and Subsidiaries Three months ended March 31, (thousands) 2003 2002 ------------------------------------------------------------------------------------------------------------------------ (thousands, unaudited) (Restated) OPERATING ACTIVITIES Net income $ 18,294 $ 24,824 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 666 919 Provision for loan losses 5,563 5,980 Deferred tax expense 2,143 2,974 Change in current taxes payable 12,337 14,164 Depreciation 9,728 9,173 Change in accrued interest payable (7,571) (16,577) Change in income earned not collected 4,982 2,634 Securities losses (gains) 975 (310) Origination of loans held for sale (230,336) (14,205) Proceeds from sale of loans held for sale 230,415 11,716 Gain on loans held for sale (1,951) (301) Net amortization of premiums and discounts 5,473 5,592 Net change in other assets (13,087) (2,760) Net change in other liabilities 5,204 4,570 ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 42,835 48,393 ----------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans outstanding (87,071) (53,496) Purchases of investment securities held to maturity (156,111) (228,347) Purchases of investment securities available for sale (247,535) (1,678) Proceeds from maturities of investment securities held to maturity 576,305 440,150 Proceeds from maturities of investment securities available for sale - 911 Net change in overnight investments (301,685) (96,071) Dispositions of premises and equipment 5,526 4,693 Additions to premises and equipment (17,720) (18,871) ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (228,291) 47,291 ----------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in time deposits (56,236) (244,656) Net change in demand and other interest-bearing deposits 210,996 156,030 Net change in short-term borrowings (24,223) (53,408) Repurchases of common stock (281) (260) Cash dividends paid (2,879) (2,620) ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 127,377 (144,914) ----------------------------------------------------------------------------------------------------------------------------- Change in cash and due from banks (58,079) (49,230) Cash and due from banks at beginning of period 811,657 758,987 ----------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 753,578 $ 709,757 ============================================================================================================================= CASH PAYMENTS FOR: Interest $ 49,729 $ 75,714 Income taxes 27 3,544 ----------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Unrealized securities gains $ 2,001 $ 1,405 Reclassification of premises and equipment to other real estate - 6,108 ----------------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003 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 March 31, 2002, noninterest expense declined $2,516, income tax expense increased $890 and net income increased $1,626. 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. First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003 Note B Operating Segments BancShares conducts its banking operations through its two wholly-owned subsidiaries, FCB and Atlantic States Bank (ASB). Although FCB and ASB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has a separate management group. Additionally, the financial results and trends of ASB reflect the de novo nature of its growth. FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia and West Virginia. ASB began operations in 1997 and currently operates branches in Georgia, Florida, Texas and Arizona under a federal thrift charter. ASB will expand its branch network into California during 2003. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ASB account for more than 90 percent of consolidated assets, revenues and net income. Other includes activities of the parent company, two subsidiaries that are the issuing trusts for outstanding preferred securities, Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company. The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments to interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other services fees paid by one company to another within BancShares' consolidated group.
Segment Disclosures ($ in thousands) March 31, 2003 ASB FCB Other Total Adjustments Consolidated Interest income $ 14,568 $ 116,339 $ 6,152 $ 137,059 $ (5,985) $ 131,074 Interest expense 5,299 32,169 10,675 48,143 (5,985) 42,158 ------------------------------------------------------------------------------------ Net interest income 9,269 84,170 (4,523) 88,916 - 88,916 Provision for loan losses 196 5,367 - 5,563 - 5,563 ------------------------------------------------------------------------------------ Net interest income after 9,073 78,803 (4,523) 83,353 - 83,353 provision for loan losses Noninterest income 1,233 56,796 (538) 57,491 (1,104) 56,387 Noninterest expense 10,189 101,356 841 112,386 (1,104) 111,282 ------------------------------------------------------------------------------------ Income before income taxes 117 34,243 (5,902) 28,458 - 28,458 Income taxes 50 12,200 (2,086) 10,164 - 10,164 ------------------------------------------------------------------------------------ Net income $ 67 $ 22,043 $ (3,816) $ 18,294 $ - $ 18,294 ==================================================================================== Period-end assets $ 1,095,895 $ 11,201,620 $ 1,747,422 $ 14,044,937 $ (1,656,196) $ 12,388,741
March 31, 2002 (Restated) ASB FCB Other Total Adjustments Consolidated Interest income $ 13,072 $ 140,487 $ 8,384 $ 161,943 $ (5,795) $ 156,148 Interest expense 6,399 47,046 11,487 64,932 (5,795) 59,137 ------------------------------------------------------------------------------------ Net interest income 6,673 93,441 (3,103) 97,011 - 97,011 Provision for loan losses 1,065 4,915 - 5,980 - 5,980 ------------------------------------------------------------------------------------ Net interest income after 5,608 88,526 (3,103) 91,031 - 91,031 provision for loan losses Noninterest income 1,218 53,929 305 55,452 (1,237) 54,215 Noninterest expense 8,163 99,783 197 108,143 (1,237) 106,906 ------------------------------------------------------------------------------------ Income before income taxes (1,337) 42,672 (2,995) 38,340 - 38,340 Income taxes (461) 15,047 (1,070) 13,516 - 13,516 ------------------------------------------------------------------------------------ Net income $ (876) $ 27,625 $ (1,925) $ 24,824 $ - $ 24,824 ==================================================================================== Period-end assets $ 880,803 $ 10,622,373 $ 1,739,378 $ 13,242,554 $ (1,494,576) $ 11,747,978
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003
Financial Summary Table 1 2003 2002 First Fourth Third Second First (thousands, except per share data and ratios) Quarter Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------------------------------- Summary of Operations Interest income $ 131,074 $ 140,508 $ 147,742 $ 151,771 $ 156,148 Interest expense 42,158 47,712 52,127 55,042 59,137 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 88,916 92,796 95,615 96,729 97,011 Provision for loan losses 5,563 7,156 5,592 7,822 5,980 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 83,353 85,640 90,023 88,907 91,031 Noninterest income 56,387 56,618 55,282 55,259 54,215 Noninterest expense 111,282 112,496 108,325 105,705 106,906 ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 28,458 29,762 36,980 38,461 38,340 Income taxes 10,164 10,422 13,190 13,659 13,516 ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 18,294 $ 19,340 $ 23,790 $ 24,802 $ 24,824 =================================================================================================================================== Net interest income-taxable equivalent $ 89,200 $ 93,106 $ 95,932 $ 97,074 $ 97,382 ----------------------------------------------------------------------------------------------------------------------------------- Selected Quarterly Averages Total assets $ 12,054,717 $ 12,076,262 $ 11,871,334 $ 11,756,150 $ 11,664,376 Investment securities 2,476,426 2,544,930 2,553,957 2,641,898 2,704,077 Loans 7,642,673 7,543,548 7,450,271 7,312,384 7,207,757 Interest-earning assets 10,741,160 10,771,571 10,592,386 10,491,811 10,353,509 Deposits 10,283,143 10,251,693 10,060,785 9,934,615 9,776,690 Interest-bearing liabilities 9,173,567 9,234,127 9,131,569 9,075,549 9,073,637 Long-term obligations 253,389 253,412 253,973 262,224 283,993 Shareholders' equity $ 979,664 $ 953,606 $ 935,735 $ 916,387 $ 894,689 Shares outstanding 10,472,065 10,475,377 10,477,886 10,480,527 10,481,661 ----------------------------------------------------------------------------------------------------------------------------------- Selected Quarter-End Balances Total assets $ 12,388,741 $ 12,231,890 $ 12,087,152 $ 11,867,758 $ 11,747,978 Investment securities 2,362,130 2,539,236 2,502,026 2,464,779 2,576,383 Loans 7,704,492 7,620,263 7,521,834 7,434,662 7,248,088 Interest-earning assets 10,991,877 10,534,469 10,647,042 10,438,386 10,422,451 Deposits 10,594,380 10,439,620 10,286,825 10,065,180 9,872,979 Interest-bearing liabilities 9,293,396 9,298,080 9,208,776 9,121,010 9,099,535 Long-term obligations 253,386 253,409 253,970 253,979 283,988 Shareholders' equity $ 983,635 $ 967,291 $ 949,871 $ 930,175 $ 907,907 Shares outstanding 10,470,236 10,473,294 10,476,137 10,480,391 10,480,624 ----------------------------------------------------------------------------------------------------------------------------------- Profitability Ratios (averages) Rate of return (annualized) on: Total assets 0.62 % 0.64 % 0.80 % 0.85 % 0.86 % Shareholders' equity 7.61 8.05 10.09 10.86 11.25 Dividend payout ratio 15.71 13.51 11.01 10.55 10.55 ----------------------------------------------------------------------------------------------------------------------------------- Liquidity and Capital Ratios (averages) Loans to deposits 74.32 % 73.58 % 74.05 % 73.61 % 73.72 % Shareholders' equity to total assets 8.13 7.90 7.88 7.79 7.67 Time certificates of $100,000 or more to total deposits 10.44 10.42 10.54 10.90 11.54 ----------------------------------------------------------------------------------------------------------------------------------- Per Share of Stock Net income $ 1.75 $ 1.85 $ 2.27 $ 2.37 $ 2.37 Cash dividends 0.275 0.250 0.250 0.250 0.250 Book value at period end 93.05 92.36 90.67 88.77 86.63 Tangible book value at period end 83.39 81.73 80.23 78.28 76.07 -----------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003
Outstanding Loans by Type Table 2 2003 2002 First Fourth Third Second First (thousands) Quarter Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------- Real estate: Construction and land development $ 834,027 $ 799,278 $ 816,512 $ 801,294 $ 804,517 Mortgage: 1-4 family residential 975,010 1,058,082 1,091,344 1,131,466 1,153,757 Commercial 2,077,633 2,035,646 1,966,433 1,924,087 1,884,616 Revolving 1,404,014 1,335,024 1,259,593 1,175,693 1,080,896 Other 148,684 150,226 158,125 156,817 154,469 ------------------------------------------------------------------------------------------------------------------------- Total real estate 5,439,368 5,378,256 5,292,007 5,189,357 5,078,255 Commercial and industrial 936,387 925,775 937,987 954,369 936,353 Consumer 1,135,622 1,154,280 1,132,406 1,130,753 1,077,265 Lease financing 137,562 141,372 142,695 141,351 137,383 Other 55,553 20,580 16,739 18,832 18,832 ------------------------------------------------------------------------------------------------------------------------- Total loans 7,704,492 7,620,263 7,521,834 7,434,662 7,248,088 Less reserve for loan losses 113,382 112,533 111,577 110,472 108,692 ------------------------------------------------------------------------------------------------------------------------- Net loans $7,591,110 $7,507,730 $7,410,257 $7,324,190 $7,139,396 -------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003
Investment Securities Table 3 March 31, 2003 March 31, 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 $ 1,364,403 $ 1,369,721 0/5 2.42 % $ 2,263,950 $ 2,268,657 0/5 4.27 % One to five years 600,271 608,015 1/5 2.30 169,244 168,081 2/5 4.03 Five to ten years 88 94 6/9 8.00 141 149 7/10 8.00 Ten to twenty years 23,247 24,250 14/1 5.55 - - Over twenty years 1,617 1,690 25/8 7.14 4,676 4,805 24/6 7.38 -------------------------------------------------------------------------------------------------------------------------------- Total 1,989,626 2,003,770 0/11 2.42 2,438,011 2,441,692 0/8 4.26 State, county and municipal: Within one year - - 1,104 1,118 0/5 6.81 One to five years 480 502 2/3 5.55 500 516 3/3 5.55 Five to ten years 144 155 6/1 5.88 143 149 7/1 5.88 Ten to twenty years 1,416 1,555 15/1 6.02 1,413 1,507 15/9 5.69 -------------------------------------------------------------------------------------------------------------------------------- Total 2,040 2,212 11/5 5.90 3,160 3,290 10/3 5.96 Other Within one year - - 35 35 0/8 3.46 One to five years - - - - Five to ten years 250 250 5/4 7.75 250 250 6/4 7.75 -------------------------------------------------------------------------------------------------------------------------------- Total 250 250 5/8 7.54 285 285 4/4 6.25 Total investment securities held to maturity 1,991,916 2,006,232 0/11 2.43 2,441,456 2,445,267 0/7 4.33 -------------------------------------------------------------------------------------------------------------------------------- Investment securities available for sale: U. S. Government: Within one year 292,223 293,238 0/3 3.05 76,661 76,516 0/8 2.08 One to five years 20,446 20,593 1/4 1.90 - - Five to ten years 569 547 8/10 4.48 - - Ten to twenty years - - 1,263 1,276 15/4 5.33 Over twenty years 145 145 29/8 1.15 - - ------------------------------------------------------------------------------------------------------------------------------ Total 313,383 314,523 0/4 2.97 77,924 77,792 0/11 2.13 Marketable equity securities 40,526 55,691 42,950 57,135 Total investment securities available for sale 353,909 370,214 0/4 2.97 % 120,874 134,927 0/11 2.13 % ------------------------------------------------------------------------------------------------------------------------------ Total investment securities $ 2,345,825 $ 2,376,446 $ 2,562,330 $ 2,580,194 -------------------------------------------------------- ---------------------------
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third Quarter Table 4 2003 2002 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 $ 7,642,673 $ 113,714 6.02 % $ 7,207,757 $ 124,568 6.98 % $ 6,846 $ (17,700)$ (10,854) Investment securities: U. S. Government 2,417,337 15,429 2.59 2,644,567 29,638 4.55 (1,989) (12,220) (14,209) State, county and municipal 3,546 48 5.49 4,563 92 8.18 (17) (27) (44) Other 55,543 377 2.75 54,947 435 3.21 5 (63) (58) ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,476,426 15,854 2.60 2,704,077 30,165 4.52 (2,001) (12,310) (14,311) Overnight investments 622,061 1,790 1.17 441,675 1,786 1.64 623 (619) 4 ==================================================================================================================================== Total interest-earning assets $ 10,741,160 $ 131,358 4.95 % $ 10,353,509 $ 156,519 6.11 % $ 5,468 $ (30,629)$ (25,161) ==================================================================================================================================== Liabilities: Deposits: Checking with Interest $ 1,321,761 $ 609 0.19 % $ 1,224,860 $ 947 0.31 % $ 49 $ (387) $ (338) Savings 661,427 715 0.44 623,896 859 0.56 46 (190) (144) Money market accounts 2,569,867 6,935 1.09 2,096,771 8,466 1.64 1,613 (3,144) (1,531) Time deposits 3,938,700 28,075 2.89 4,261,946 41,789 3.98 (2,716) (10,998) (13,714) ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 8,491,755 36,334 1.74 8,207,473 52,061 2.57 (1,008) (14,719) (15,727) Federal funds purchased 35,171 97 1.12 43,562 169 1.57 (28) (44) (72) Repurchase agreements 161,275 130 0.33 200,799 270 0.55 (42) (98) (140) Master notes 226,448 333 0.60 292,766 680 0.94 (128) (219) (347) Other short-term borrowings 5,529 21 1.54 45,044 250 2.25 (185) (44) (229) Long-term obligations 253,389 5,243 8.39 283,993 5,707 8.15 (624) 160 (464) ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities $ 9,173,567 $ 42,158 1.86 % $ 9,073,637 $ 59,137 2.64 % $(2,015) $ (14,964)$ (16,979) ------------------------------------------------------------------------------------------------------------------------------------ Interest rate spread 3.09 % 3.47 % ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and net yield on interest-earning assets $ 89,200 3.37 % $ 97,382 3.81 % $ 7,483 $ (15,665) $ (8,182) ------------------------------------------------------------------------------------------------------------------------------------ Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% for each period, and a state income tax rate of 6.9% for each period. ------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003
Summary of Loan Loss Experience and Risk Elements Table 5 2003 2002 First Fourth Third Second First (thousands, except ratios) Quarter Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------- Reserve balance at beginning of period $ 112,533 $ 111,577 $ 110,472 $ 108,692 $ 107,087 Provision for loan losses 5,563 7,156 5,592 7,822 5,980 Net charge-offs: Charge-offs (5,273) (6,966) (5,319) (7,262) (5,393) Recoveries 559 766 832 1,220 1,018 ------------------------------------------------------------------------------------------------------------------------- Net charge-offs (4,714) (6,200) (4,487) (6,042) (4,375) ========================================================================================================================= Reserve balance at end of period $ 113,382 $ 112,533 $ 111,577 $ 110,472 $ 108,692 ========================================================================================================================= Historical Statistics Average loans $ 7,642,673 $ 7,543,548 $7,450,271 $ 7,312,384 $ 7,207,757 Loans at period-end 7,704,492 7,620,263 7,521,834 7,434,662 7,248,088 ------------------------------------------------------------------------------------------------------------------------- Risk Elements Nonaccrual loans $ 16,988 $ 15,521 $14,944 $ 17,397 $ 17,735 Other real estate 8,155 7,330 12,092 10,563 12,461 ---------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 25,143 $ 22,851 $27,036 $ 27,960 $ 30,196 ---------------------------------------------------------------------------------------------------------------------- Accruing loans 90 days or more past due $ 7,349 $ 9,566 $8,928 $ 9,945 $ 11,012 ------------------------------------------------------------------------------------------------------------------------- Ratios Net charge-offs (annualized) to average total loans 0.25 % 0.33 % 0.24 % 0.33 % 0.25 % Reserve for loan losses to total loans at period-end 1.47 1.48 1.48 1.49 1.50 Nonperforming assets to total loans plus other real estate at period-end 0.33 0.30 0.36 0.38 0.42 -------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries First Quarter 2003 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 BancShares' 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 and Arizona. 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 financial statements and related 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 Consolidated net income during the first quarter of 2003 was $18.3 million, down 26.3% when compared to the $24.8 million earned during the corresponding period of 2002. Net income per share during the first quarter of 2003 totaled $1.75, compared to $2.37 during the first quarter of 2002. The decline in net income for the first quarter resulted from reductions in net interest income and higher noninterest expenses, partially offset by higher noninterest income. Our annualized return on average assets was 0.62 percent for the first quarter of 2003 and 0.86 percent for the first quarter of 2002, while our annualized return on shareholders' equity equaled 7.61% and 11.25% for the respective periods. 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 first three months of 2003 and 2002. INTEREST-EARNING ASSETS At March 31, 2003, interest-earning assets totaled $10.99 billion, an increase of $569.4 million or 5.5 percent from March 31, 2002. This increase results from growth in the loan portfolio and overnight investments, offset by a decline in the investment securities portfolio. Loans. At March 31, 2003 and 2002, gross loans totaled $7.70 billion and $7.25 billion, respectively. As of December 31, 2002, gross loans were $7.62 billion. The $456.4 million growth in loans from March 31, 2002 to March 31, 2003 results from growth within BancShares' revolving real estate-secured loans. This growth has resulted from customer demand for BancShares' retail EquityLine product during both 2002 and 2003. Revolving mortgage loans outstanding increased from $1.08 billion at March 31, 2002 to $1.40 billion at March 31, 2003, an increase of $323.1 million or 29.9 percent. As of March 31, 2003, consumer purpose loans have increased $58.2 million since March 31, 2002, a 5.4 percent increase, caused by growth in indirect automobile loans originated through our sales finance unit. Mortgage loans secured by 1-4 family residences have declined from $1.23 billion at March 31, 2002 to $975.0 million at March 31, 2003, a $254.9 million or 20.7 percent reduction. Although demand for residential mortgage loans surged during 2002 and the first quarter of 2003 due to interest rate reductions, a substantial portion of our residential mortgage loans is originated through correspondents. Consequently, the heightened loan demand did not generate growth in loans outstanding. During the first quarter of 2003, loans averaged $7.64 billion, an increase of $434.9 million or 6.0 percent from the comparable period of 2002. We expect continued growth among revolving real estate loans during 2003, and continued 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 contribute to general uncertainty among business and retail customers and therefore constrain our loan growth estimates for 2003. All growth projections are subject to change as a result of further economic deterioration or improvement. Investment securities. At March 31, 2003 and 2002, the investment portfolio totaled $2.36 billion and $2.58 billion, respectively. At December 31, 2002, the investment portfolio was $2.54 billion. Since March 31, 2002, investment securities decreased $214.3 million, or 8.3 percent. Table 3 presents detailed information relating to the investment securities portfolio. Investment securities held to maturity totaled $1.99 billion at March 31, 2003, compared to $2.42 billion at December 31, 2002 and $2.44 billion at March 31, 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 and overnight investments. This redirection of a portion of the investment securities portfolio enhances the overall liquidity of the balance sheet. All 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 $370.2 million at March 31, 2003, compared to $121.7 million at December 31, 2002 and $134.9 million at March 31, 2002. The $248.5 million increase from March 31, 2002 is attributable to the previously-discussed focus on 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 $2.48 billion during the first quarter of 2003, compared to $2.70 billion during the first quarter of 2002, a reduction of $227.7 million or 8.4 percent. The reduction in average investment securities occurred as loan demand and higher balances of overnight investments absorbed liquidity that resulted from maturing securities. Overnight investments. Overnight investments totaled $925.3 million at March 31, 2003, compared to $623.6 million at December 31, 2002 and $598.0 million at March 31, 2002, the $327.3 million or 48.4 percent growth resulting from higher interest-bearing deposits in other banks. Overnight investments averaged $622.1 million during the first quarter of 2003, an increase of $180.4 million or 40.8 percent from the first quarter of 2002. The higher balance in overnight investments resulted from liquidity management decisions. Income on Interest-Earning Assets. Interest income amounted to $131.1 million during the first quarter of 2003, a $25.1 million or 16.1 percent decrease from the first quarter of 2002. Lower yields triggered the decrease in interest income in the first quarter of 2003 when compared to the same period of 2002. Table 4 analyzes interest-earning assets and interest-bearing liabilities for the first quarter of 2003 and 2002. To help assess the impact of the tax-exempt status of income earned on certain loans, leases and municipal securities, Table 5 is prepared on a taxable-equivalent basis. The taxable-equivalent yield on interest-earning assets for the first quarter of 2003 was 4.95 percent, compared to 6.11 percent for the corresponding period of 2002, a 116 basis point reduction. Loan interest income for the first quarter of 2003 was $113.4 million, a decrease of $10.8 million or 8.7 percent from the first quarter of 2002, the result of lower yields. The taxable-equivalent yield on the loan portfolio was 6.02 percent during the first quarter of 2003, compared to 6.98 percent during the same period of 2002. The reduced loan yields resulted from market-driven rate movements as well as a larger mix of lower-yielding revolving real estate secured loans in 2003. The effect of the decrease in yields on interest income was partially offset by an increase in average loan volume, which increased $434.9 million or 6.0 percent from the first quarter of 2002 to the first quarter of 2003. Income earned on the investment securities portfolio amounted to $15.8 million during the first quarter of 2003 and $30.1 million during the same period of 2002, a decrease of $14.3 million or 47.4 percent. This decrease in income is the result of a 192 basis point reduction in the taxable-equivalent yield and a $227.7 million decrease in average securities. The investment securities portfolio taxable-equivalent yield decreased from 4.52 percent for the quarter ended March 31, 2002, to 2.60 percent for the quarter ended March 31, 2003, the result of lower rates on newly-acquired securities when compared to maturing securities. The short maturity of our investment securities portfolio causes rapid repricing of the portfolio during periods of significant changes in interest rates. Interest income from overnight investments was $1.79 million during the first quarter of 2003, unchanged from the first quarter of 2002. Although average overnight investments increased $180.4 million or 40.8 percent to $622.1 million, the yield on average overnight investments fell 47 basis points to 1.17 percent, offsetting the benefit of the volume growth. The yield reduction was due to lower market interest rates. INTEREST-BEARING LIABILITIES. At March 31, 2003 and 2002, interest-bearing liabilities totaled $9.29 billion and $9.10 billion, respectively, compared to $9.30 billion as of December 31, 2002. During the first quarter of 2003, interest-bearing liabilities averaged $9.17 billion, an increase of $99.9 million or 1.1 percent from the first quarter of 2002. This increase resulted from higher balances of interest-bearing deposits. No deposits have been acquired or divested during 2003. Deposits. At March 31, 2003, total deposits were $10.59 billion, an increase of $721.4 million or 7.3 percent over March 31, 2002. Compared to the December 31, 2002 balance of $10.44 billion, total deposits have increased $154.8 million. Noninterest-bearing deposits equaled $1.99 billion at March 31, 2003, up $377 million or 14.1 percent from March 31, 2002. Interest-bearing deposits averaged $8.49 billion during the first quarter of 2003 compared to $8.21 billion during the first quarter of 2002, an increase of $284.3 million or 3.5 percent, due primarily to growth among money market accounts. Average money market accounts increased $473.1 million or 22.6 percent from first quarter of 2002 to the first quarter of 2003. Average Checking With Interest increased $96.9 million or 7.9 percent for the first quarter of 2002 to the same period of 2003. These increases were offset by lower time deposits. Average time deposits decreased $323.2 million or 7.6 percent to $3.94 billion from March 31, 2002 to March 31, 2003. We attribute the growth in both noninterest-bearing and interest-bearing deposits to our focus on deposit gathering and retention required to fund loan demand in our market areas. Additionally, deposit growth has resulted from investors seeking the safety of traditional bank deposits due to continued volatility within the equity markets. However, the changes within specific types of deposits represent significant shifts in the mix of our interest-bearing deposits. During the first quarter of 2002, average time deposits represented 51.9 percent of total interest-bearing deposits, while average money market accounts housed 25.5 percent of interest-bearing deposits. During the first quarter of 2003, time deposits declined to 46.4 percent, while average money market accounts increased to represent 30.3 percent of total deposits. The shift away from time deposits in favor of less restrictive transaction and money market accounts results from the low market interest rates currently offered on time deposit products. Although it is unclear how long the economic uncertainty will continue to adversely affect the equity markets, we continue to focus our efforts on providing competitive deposit products to attract and retain core deposit relationships. Accordingly, we anticipate continued growth in deposits, although we expect time deposits will continue to contract until interest rates return to more historically normal levels. Time deposits of $100,000 or more averaged 10.44 percent of total deposits during the first quarter of 2003, compared to 11.54 percent during the same period of 2002. Short-term borrowings. At March 31, 2003, short-term borrowings totaled $438.4 million compared to $462.6 million at December 31, 2002 and $558.0 million at March 31, 2002. For the quarters ended March 31, 2003 and 2002, short-term borrowings averaged $428.4 million and $582.2 million, respectively. The decline in short-term borrowings is primarily the result of reductions among master notes and overnight repurchase obligations. Customer interest in these products has diminished due to the very low market rates of interest being paid on these commercial cash management products. Long-term obligations. At March 31, 2003 and 2002, long-term obligations totaled $253.4 million and $284.0 million, respectively. In each case, the outstanding balance includes $250 million in trust preferred capital securities: $150 million that were issued in 1998 and $100 million that were issued in October of 2001. The March 31, 2002 balance also includes $30 million in borrowings that were repaid during the second quarter of 2002. During the first quarter of 2003, long-term obligations averaged $253.4 million, compared to $284.0 million during 2002. Expense on Interest-Bearing Liabilities. BancShares' interest expense amounted to $42.2 million during the first quarter of 2003, a $17.0 million or 28.7 percent decrease from the first quarter of 2002. The lower interest expense was the result of lower market interest rates. The rate on average interest-bearing liabilities was 1.86 percent during 2003, a 78 basis point decrease in the aggregate blended rate on interest-bearing liabilities. The rate on average liabilities was 2.64 percent during the first quarter of 2002. NET INTEREST INCOME Net interest income totaled $88.9 million during the first quarter of 2003, a decrease of $8.1 million or 8.3 percent from the first quarter of 2002. The deterioration in net interest income results from interest rate reductions. Although growth among average interest-earning assets of $388 million contributed to a favorable volume variance during the first quarter of 2003 when compared to the same period of 2002, the unfavorable impact of lower interest rates more than offset the benefit of volume growth. The taxable-equivalent net yield on interest-earning assets was 3.37 percent for the first quarter of 2003, compared to 3.81 percent achieved for the first quarter of 2002. The taxable equivalent interest rate spread for the first quarter of 2003 was 3.09 percent compared to 3.47 percent for the same period of 2002. While downward adjustments 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 in a similar magnitude as that which our interest-earning assets were affected. At current interest rate levels, we anticipate continued reductions in net interest income when compared to 2002. This general trend of declining net interest income is expected to continue until market interest rates begin to increase or until economic conditions improve sufficiently to allow the resumption of high levels of loan growth . Despite the current pressure on net interest income, our asset/liability management function continues to focus on maintaining high levels of balance sheet liquidity and managing our interest rate risk. 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. As of March 31, 2003, BancShares' market risk profile has not changed significantly from December 31, 2002. Changes in fair value that result from movement in market rates can not 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 March 31, 2003, the reserve for loan losses amounted to $113.4 million or 1.47 percent of loans outstanding. This compares to $112.5 million or 1.48 percent at December 31, 2002, and $108.7 million or 1.50 percent at March 31, 2002. The provision for loan losses charged to operations during the first quarter of 2003 was $5.6 million, compared to $6.0 million during the first quarter of 2002. The $417,000 decrease in the provision for loan loss during 2003 primarily resulted from lower loan loss estimates. Net charge-offs of loans during the first quarter of 2003 were $4.7 million compared to $4.4 million during the first quarter of 2002. On an annualized basis, these net charge-offs represent 0.25 percent of average loans outstanding during both periods. Management remains committed to maintaining high levels of credit quality. Table 5 provides details concerning the reserve and provision for loan losses over the past five quarters. Nonperforming assets. At March 31, 2003, BancShares' nonperforming assets amounted to $25.1 million or 0.33 percent of gross loans plus foreclosed properties, compared to $22.9 million at December 31, 2002, and $30.2 million at March 31, 2002. Despite some volatility in the amount of nonperforming assets in recent quarters, we view the current levels of nonperforming assets as evidence of strong asset quality. Management continues to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure to losses. We anticipate that the level of nonperforming assets will not decline until consistently positive trends in economic activity are evident. Management considers the established reserve adequate to absorb estimated probable losses that relate to loans outstanding at March 31, 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. These agencies may require the recognition of adjustments to the reserve based on their judgments of information available to them at the time of their examination. NONINTEREST INCOME During the first three months of 2003, noninterest income was $56.4 million, compared to $54.2 million during the same period of 2002. The $2.2 million or 4.0 percent increase was due to growth in cardholder and merchant services income, mortgage income and commission-based income, partially offset by other than temporary impairment losses recognized on investment securities available for sale during 2003. During the first three months of 2003, cardholder and merchant services income increased $1.4 million or 12.5 percent, reaching $12.4 million compared to $11.0 million during the same period a year ago. This increase resulted from higher interchange income for credit and debit card transactions as well as growing income from merchant services. We continue to project growth in credit and debit card transaction volumes, although we anticipate that recent disputes between card issuers and merchants will result in a lower interchange rate. Our merchant network continues to grow as the number of merchant services providers continues to decline, a trend we expect will continue during 2003. Prompted by the historically low interest rates available for residential mortgage loans, refinance activity remained extremely strong during the first quarter of 2003, and we recorded a 24.3 percent increase in mortgage income. Mortgage income totaled $4.1 million compared to $3.3 million earned during the same period of 2002. Subject to the impact changes in interest rates may have on refinance activity, we anticipate mortgage originations will remain brisk and that income derived from the mortgage operation will continue to exceed 2002 levels. Commission-based income increased $685,000 or 12.8 percent to $6.0 million during the first three months of 2003, compared to $5.3 million during the same period of 2002. First Citizens Investor Services and FCB's insurance agency operations continue to expand their customer bases, generating higher levels of commission income, a trend we expect to continue throughout 2003. Fees from processing services increased 9.7 percent during the first quarter of 2003, primarily due to volume growth among transactions processed for client banks. Subject to continued growth among banks to whom we provide processing services, we expect these revenues will continue to increase. During the first quarter of 2003, we recognized securities losses of $975,000, all of which relates to other than temporary impairment losses recognized on our investment securities available for sale due to sustained reductions in market value. Given continued weakness in equity market values, there may be further other than temporary impairment of investment securities, although we are unable to estimate the likelihood or the possible amount of those losses at this time. Service charge income was unchanged from 2002, and we expect little growth in service charge income during 2003. Trust income declined 6.8 percent during the first quarter of 2003, continuing the 2002 trend. To the extent that our fees derived from many accounts are tied to asset values, the reduction in the market value of assets under management has resulted in an adverse impact on trust income. NONINTEREST EXPENSE Noninterest expense was $111.3 million for the first three months of 2003, a 4.1 percent increase over the $106.9 million recorded during the same period of 2002. Much of the $4.4 million increase in total noninterest expense relates to personnel and equipment expenses. Salaries and wages increased $1.5 million or 3.1 percent during 2003 when compared to the same period of 2002, primarily due to an expanded workforce required in new markets and incentive compensation costs. Employee benefits increased $942,000 to $11.5 million for the first three months of 2003. This 8.9 percent increase in employee benefits was the result of higher pension costs that resulted from a reduction in the discount rate used to estimate future obligations, asset losses and reductions in estimated future returns on pension plan assets. Equipment expense increased $1.4 million or 12.9 percent to $12.0 million for the first quarter of 2003 when compared to the same period in 2002. Much of the increase in equipment expense relates to software costs, including depreciation of capitalized software, maintenance costs and rental expenses. Occupancy expense was $9.7 million during the first quarter of 2003 and $9.0 million during the first quarter of 2002. The $723,000 or 8.0 percent increase resulted from higher building depreciation expense. INCOME TAXES Income tax expense amounted to $10.2 million during the three months ended March 31, 2003, compared to $13.5 million during the same period of 2002. The 24.8 percent decrease in income tax expense was the result of lower pretax income. The effective tax rates for these periods were 35.7 percent and 35.3 percent, respectively. LIQUIDITY Management relies on the investment securities portfolio as a source of liquidity. Those securities designated as available-for-sale may be sold as needed to support liquidity demands, while maturities of held-to-maturity securities are staggered to provide ongoing access to further liquidity. Additionally, deposits generated throughout the branch network provide funding for asset growth. In the event additional liquidity is needed, we maintain readily available sources to borrow funds through our correspondent bank network. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. At March 31, 2003 and 2002, the leverage capital ratios of BancShares were 9.30 percent and 8.99 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares' Tier 1 capital ratios were 13.44 percent at March 31, 2003 and 13.20 percent at March 31, 2002. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratios were 14.77 percent at March 31, 2003 and 14.53 percent as of March 31, 2002. The minimum total capital ratio is 8 percent. BancShares and its subsidiary banks exceed the capital standards established by their respective regulatory agencies. SEGMENT REPORTING BancShares conducts its banking operations through two wholly-owned subsidiaries, FCB and ASB. Although FCB and ASB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has separate management groups. Additionally, the financial results and trends of ASB reflect the de novo nature of its operation. Atlantic States Bank. ASB's total assets increased from $880.8 million at March 31, 2002 to $1.10 billion at March 31, 2003, an increase of $215.1 million or 24.4 percent. This growth resulted from loan growth generated by the expanding geographic presence of its branch network. ASB's net interest income increased $2.6 million or 38.9 percent during the first three 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 $869,000 or 81.6 percent due to reduced loan growth and lower loss estimates during 2003. ASB's noninterest income increased $15,000 or 1.2 percent during the first three months of 2003, the net result of higher service charge income and cardholder and merchant services income, largely offset by reductions in mortgage income. Noninterest expense increased $2.0 million or 24.8 percent during 2003. Higher personnel, occupancy and equipment 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 net income of $67,000 during the first three months of 2003 compared to a net loss of $876,000 during the same period of 2002. This represents a favorable variance of $943,000, primarily the result of ASB's balance sheet growth and lower provision for loan losses . 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' total assets increased from $10.62 billion at March 31, 2002 to $11.20 billion at March 31, 2003, an increase of $580.9 million or 5.5 percent. FCB' net interest income decreased $9.3 million or 9.9 percent during the first three months of 2003, the result of a significant reduction in the net yield on interest-earning assets. Provision for loan losses increased $452,000 or 9.2 percent due to higher net charge-offs. FCB's noninterest income increased $2.9 million or 5.3 percent during the first three months of 2003, primarily the result of higher cardholder and merchant services income and mortgage income. Noninterest expense increased $1.6 million or 1.6 percent during the first three months of 2003, primarily due to higher personnel costs. FCB recorded net income of $22.0 million during the first three months of 2003 compared to $27.6 million during the same period of 2002. This represents a $5.6 million or 20.2 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 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 are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on our consolidated 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 are 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 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. Exhibit 99 CERTIFICATION The undersigned hereby certifies that, to his or her knowledge, (i) the Form 10-Q filed by First Citizens BancShares, Inc. (the "Issuer") for the quarter ended March 31, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein. May 13, 2003 /s/ Lewis R. Holding Lewis R. Holding Chairman and Chief Executive Officer /s/ Kenneth A. Black Kenneth A. Black Vice President and Chief Financial Officer