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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number: 0-16471
First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)
Delaware 56-1528994
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
239 Fayetteville Street, Raleigh, North Carolina 27601
(Address of principal executive offices) (zip code)
(919) 716-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No _____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes X No _____
Class A Common Stock--$1 Par Value-- 8,758,670 shares
Class B Common Stock--$1 Par Value-- 1,677,675 shares
(Number of shares outstanding, by class, as of November 13, 2003)
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2003,
December 31, 2002,and September 30, 2002
Consolidated Statements of Income for the three-month
and nine-month periods ended September 30, 2003 and
September 30, 2002
Consolidated Statements of Changes in Shareholders'
Equity for the nine-month periods ended September 30, 2003,
and September 30, 2002
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2003, and September 30, 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
(a) In conjunction with this filing and their certifications of the
disclosures contained within this filing, Chief Executive Officer
Lewis R. Holding and Chief Financial Officer Kenneth A. Black
evaluated the effectiveness of Registrant's disclosure controls and
procedures as of September 30, 2003. This review found the disclosure
controls and procedures to be effective.
(b) During the quarter, there were no significant changes in Registrant's
internal controls over financial reporting or in other factors that
could significantly affect these controls.
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2003
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certifications of Chief Executive Officer and
Chief Financial Officer
(b) Reports on Form 8-K. During the quarter ended September 30, 2003,
Registrant filed noCurrent Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS BANCSHARES, INC.
(Registrant)
Dated: November 13, 2003 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2003
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
September 30* December 31# September 30*
(thousands, except share data) 2003 2002 2002
- ------------------------------------------------------------------------------------------------------------------------
(restated)
Assets
Cash and due from banks $ 790,166 $ 811,657 $ 801,450
Overnight investments 268,636 623,570 623,182
Investment securities held to maturity 1,474,801 2,417,583 2,351,678
Investment securities available for sale 1,172,028 121,653 150,348
Loans 8,026,502 7,620,263 7,521,834
Less reserve for loan losses 117,747 112,533 111,577
- -----------------------------------------------------------------------------------------------------------------------
Net loans 7,908,755 7,507,730 7,410,257
Premises and equipment 534,339 507,267 502,966
Income earned not collected 42,055 46,959 53,548
Other assets 196,856 195,471 193,723
=======================================================================================================================
Total assets $ 12,387,636 $ 12,231,890 $ 12,087,152
=======================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 2,126,874 $ 1,857,576 $ 1,830,455
Interest-bearing 8,436,261 8,582,044 8,456,370
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 10,563,135 10,439,620 10,286,825
Short-term borrowings 472,631 462,627 498,988
Long-term obligations 256,752 253,409 253,418
Other liabilities 79,440 108,943 98,050
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 11,371,958 11,264,599 11,137,281
Shareholders' Equity
Common stock:
Class A - $1 par value (8,758,670; 8,794,669 and
8,794,669 shares issued, respectively) 8,759 8,794 8,794
Class B - $1 par value (1,677,675; 1,678,625 and
1,681,468 shares issued, respectively) 1,678 1,678 1,681
Surplus 143,766 143,766 143,766
Retained earnings 850,766 804,397 787,955
Accumulated other comprehensive income 10,709 8,656 7,675
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,015,678 967,291 949,871
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 12,387,636 $ 12,231,890 $ 12,087,152
=======================================================================================================================
* 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
Third Quarter 2003
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended Nine Months Ended
September 30 Ended September 30
(thousands, except per share data; unaudited) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Interest income (restated) (restated)
Loans $ 109,395 $ 123,280 $ 334,982 $ 370,494
Investment securities:
U. S. Government 14,226 21,527 44,878 77,223
State, county and municipal 38 46 113 168
Dividends 316 407 1,041 1,272
- -------------------------------------------------------------------------------------------------------------------------
Total investment securities interest and dividend income 14,580 21,980 46,032 78,663
Overnight investments 912 2,482 4,120 6,504
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 124,887 147,742 385,134 455,661
Interest expense
Deposits 28,587 45,741 98,470 146,350
Short-term borrowings 748 1,134 2,044 3,615
Long-term obligations 5,238 5,252 15,722 16,341
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 34,573 52,127 116,236 166,306
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 90,314 95,615 268,898 289,355
Provision for loan losses 6,353 5,592 19,108 19,394
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 83,961 90,023 249,790 269,961
Noninterest income
Service charges on deposit accounts 20,124 19,179 58,034 56,588
Cardholder and merchant services income 14,795 12,921 41,275 36,356
Trust income 3,687 3,774 11,153 11,683
Fees from processing services 5,177 4,757 15,402 14,161
Commission income 6,097 5,426 18,167 16,751
ATM income 2,351 2,434 6,654 6,964
Mortgage income 5,298 2,806 14,391 8,658
Gain on sale of branches to a related party - - 5,710 -
Other service charges and fees 3,537 3,465 11,196 11,209
Securities gains (losses) 179 (360) 309 (446)
Other 1,960 1,169 4,249 3,231
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 63,205 55,571 186,540 165,155
Noninterest expense
Salaries and wages 51,276 47,508 149,213 139,266
Employee benefits 11,621 10,354 35,322 30,897
Occupancy expense 10,657 9,849 31,563 28,687
Equipment expense 13,515 11,493 37,692 33,143
Other 31,878 29,410 92,414 89,342
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 118,947 108,614 346,204 321,335
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 28,219 36,980 90,126 113,781
Income taxes 8,672 13,190 31,513 40,366
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 19,547 $ 23,790 $ 58,613 $ 73,415
- -------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) net of taxes
Unrealized securities gains (losses) arising during period $ (681) $ (1,188) $ 2,240 $ 163
Less: reclassified adjustment for gains (losses) included in net income 108 (159) 187 160
- -------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (789) (1,029) 2,053 3
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 18,758 $ 22,761 $ 60,666 $ 73,418
- -------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 10,436,345 10,477,886 10,457,976 10,480,011
Net income per share $ 1.87 $ 2.27 $ 5.60 $ 7.01
- -------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Consolidated Statements of Changes in Shareholders' Equity
First Citizens BancShares, Inc. and Subsidiaries
Accumulated
Class A Class B Other Total
Common Common Retained Comprehensive Shareholders'
(thousands,except share data, unaudited) Stock Stock Surplus Earnings Income Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 8,797 $ 1,686 $ 143,766 $ 723,122 $ 7,672 $ 885,043
Redemption of 2,485 shares of Class A
common stock (3) (260) (263)
Redemption of 4,834 shares of Class B
common stock (5) (461) (466)
Net income (restated) 73,415 73,415
Unrealized securities gains, net of taxes 3 3
Cash dividends (7,861) (7,861)
================================================================================================================================
Balance at September 30, 2002 (restated) $ 8,794 $ 1,681 $ 143,766 $ 787,955 $ 7,675 $ 949,871
================================================================================================================================
Balance at December 31, 2002 $ 8,794 $ 1,678 $ 143,766 $ 804,397 $ 8,656 $ 967,291
Redemption of 35,999 shares of Class A
common stock (35) (3,530) (3,565)
Redemption of 950 shares of Class B
common stock - (87) (87)
Net income 58,613 58,613
Unrealized securities gains, net of taxes 2,053 2,053
Cash dividends (8,627) (8,627)
================================================================================================================================
Balance at September 30, 2003 $ 8,759 $ 1,678 $ 143,766 $ 850,766 $ 10,709 $ 1,015,678
================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Nine months ended September 30
2003 2002
(restated)
- --------------------------------------------------------------------------------------------------------------
(thousands)
OPERATING ACTIVITIES
Net income $ 58,613 $ 73,415
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of intangibles 2,019 2,175
Provision for loan losses 19,108 19,394
Deferred tax expense 7,206 6,261
Change in current taxes payable 180 (297)
Depreciation 30,702 27,974
Change in accrued interest payable (14,438) (33,064)
Change in income earned not collected 4,904 10,056
Securities losses (gains) (309) 446
Origination of loans held for sale (782,436) (17,171)
Proceeds from sale of loans held for sale 787,214 13,987
Gain on loans held for sale (7,359) (22)
Gain on sale of branches (5,710) -
Net amortization (accretion) of premiums and discounts 14,775 17,882
Net change in other assets (12,949) (19,237)
Net change in other liabilities (15,216) 8,467
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 86,304 110,266
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans outstanding (444,775) (337,355)
Purchases of investment securities held to maturity (695,251) (1,711,561)
Purchases of investment securities available for sale (1,369,426) (19,050)
Proceeds from maturities of investment securities held to maturity 1,623,258 2,000,852
Proceeds from maturities of investment securities available for sale 322,755 911
Net change in overnight investments 354,934 (121,273)
Dispositions of premises and equipment 7,060 8,274
Additions to premises and equipment (66,006) (62,238)
Purchase and sale of branches, net of cash transferred (66,667) -
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (334,118) (241,440)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in time deposits (202,195) (395,225)
Net change in demand and other interest-bearing deposits 427,450 720,445
Net change in short-term borrowings 9,660 (112,993)
Repayment of long-term obligations - (30,000)
Origination of long-term obligations 3,687 -
Repurchases of common stock (3,652) (729)
Cash dividends paid (8,627) (7,861)
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 226,323 173,637
- ---------------------------------------------------------------------------------------------------
Change in cash and due from banks (21,491) 42,463
Cash and due from banks at beginning of period 811,657 758,987
===================================================================================================
Cash and due from banks at end of period $ 790,166 $ 801,450
===================================================================================================
CASH PAYMENTS FOR:
Interest $ 130,674 $ 199,370
Income taxes 21,803 38,343
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains $ 3,395 $ 210
Reclassification of premises and equipment to other real estate - 6,108
- ---------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
In the opinion of management, the consolidated statements contain all
material adjustments necessary to present fairly the financial position of First
Citizens BancShares, Inc. as of and for each of the periods presented, and all
such adjustments are of a normal recurring nature. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates.
These financial statements should be read in conjunction with the financial
statements and notes included in the 2002 First Citizens BancShares, Inc. Annual
Report, which is incorporated by reference on Form 10-K. Certain amounts for
prior periods have been reclassified to conform with statement presentations for
2003. However, except as noted below, the reclassifications have no effect on
shareholders' equity or net income as previously reported.
BancShares adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 147 (Statement 147) during the fourth quarter of 2002.
Statement 147 required that any reclassification of previously recognized
unidentifiable intangible assets as goodwill be retroactively applied to
coincide with the adoption of SFAS No. 142 (Statement 142). As a result,
amortization expense related to assets that were reclassified pursuant to
Statement 147 has been reversed, and the financial statements and related
disclosures made for the first, second and third quarters of 2002 have been
restated. For the quarter ended September 30, 2002, noninterest expense declined
$2,587, income tax expense increased $915 and net income increased $1,672 or
$0.16 per share. For the nine months ended September 30, 2002, noninterest
expense declined $7,690, income tax expense increased $2,721 and net income
increased $4,969 or $0.48 per share.
Note B
Operating Segments
BancShares conducts its banking operations through its two wholly-owned
subsidiaries, First-Citizens Bank & Trust Company (FCB) and Atlantic States Bank
(ASB). Although FCB and ASB offer similar products and services to customers,
each entity operates in distinct geographic markets and each entity has a
separate management group. Additionally, the financial results and trends of ASB
reflect the de novo nature of its growth.
FCB is a mature banking institution that operates from a single charter
from its branch network in North Carolina, Virginia and West Virginia. ASB began
operations in 1997 and currently operates branches in Georgia, Florida, Texas,
Arizona and California under a federal thrift charter.
In the aggregate, FCB and its consolidated subsidiaries, which are integral
to its branch operation, and ASB account for more than 90 percent of
consolidated assets, revenues and net income. Other includes activities of the
parent company, two subsidiaries that are the issuing trusts for outstanding
preferred securities, Neuse, Incorporated, a subsidiary that owns real property
used in the banking operation and American Guaranty Insurance Corporation, a
property insurance company.
The adjustments in the accompanying tables represent the elimination of the
impact of certain inter-company transactions. The adjustments to interest income
and interest expense neutralize the earnings and cost of inter-company
borrowings. The adjustments to noninterest income and noninterest expense
reflect the elimination of management fees and other services fees paid by one
company to another within BancShares' consolidated group.
As of and for the nine months ended September 30, 2003
ASB FCB Other Total Adjustments Consolidated
(thousands)
Interest income $ 43,426 $ 341,028 $ 18,299 $ 402,753 $ (17,619) $ 385,134
Interest expense 14,790 86,944 32,121 133,855 (17,619) 116,236
------------------------------------------------------------------------------------------
Net interest income 28,636 254,084 (13,822) 268,898 - 268,898
Provision for loan losses 1,553 17,555 - 19,108 - 19,108
------------------------------------------------------------------------------------------
Net interest income after 27,083 236,529 (13,822) 249,790 - 249,790
provision for loan losses
Noninterest income 4,110 183,649 2,274 190,033 (3,493) 186,540
Noninterest expense 32,602 314,479 2,616 349,697 (3,493) 346,204
------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,409) 105,699 (14,164) 90,126 - 90,126
Income taxes (255) 36,700 (4,932) 31,513 - 31,513
==========================================================================================
Net income (loss) $ (1,154) $ 68,999 $ (9,232) $ 58,613 $ - $ 58,613
==========================================================================================
Period-end assets $ 1,127,124 $11,126,365 $ 1,733,128 $13,986,617 $(1,599,336) $12,387,281
As of and for the nine months ended September 30, 2002 (restated)
ASB FCB Other Total Adjustments Consolidated
(thousands)
Interest income $ 42,143 $ 409,400 $ 22,560 $ 474,103 $ (18,442) $ 455,661
Interest expense 18,710 132,137 33,901 184,748 (18,442) 166,306
------------------------------------------------------------------------------------------
Net interest income 23,433 277,263 (11,341) 289,355 - 289,355
Provision for loan losses 2,724 16,670 - 19,394 - 19,394
------------------------------------------------------------------------------------------
Net interest income after 20,709 260,593 (11,341) 269,961 - 269,961
provision for loan losses
Noninterest income 3,713 164,522 313 168,548 (3,393) 165,155
Noninterest expense 26,828 297,548 352 324,728 (3,393) 321,335
------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,406) 127,567 (11,380) 113,781 - 113,781
Income taxes (804) 45,225 (4,055) 40,366 - 40,366
==========================================================================================
Net income (loss) $ (1,602) $ 82,342 $ (7,325) $ 73,415 $ - $ 73,415
==========================================================================================
Period-end assets $ 999,629 $10,881,070 $ 1,695,694 $13,576,393 $(1,489,241) $12,087,152
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Financial Summary Table 1
2003 2002 Nine Months Ended
--------------------------------------- ------------------------ September 30
(thousands, except per share data Third Second First Fourth Third ----------------------
and ratios) Quarter Quarter Quarter Quarter Quarter 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Summary of Operations (restated) (restated)
Interest income $ 124,887 $ 129,173 $ 131,074 $ 140,508 $ 147,742 $ 385,134 $ 455,661
Interest expense 34,573 39,505 42,158 47,712 52,127 116,236 166,306
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 90,314 89,668 88,916 92,796 95,615 268,898 289,355
Provision for loan losses 6,353 7,192 5,563 7,156 5,592 19,108 19,394
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 83,961 82,476 83,353 85,640 90,023 249,790 269,961
Noninterest income 63,205 66,948 56,387 56,618 55,282 186,540 165,155
Noninterest expense 118,947 115,975 111,282 112,496 108,325 346,204 321,335
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 28,219 33,449 28,458 29,762 36,980 90,126 113,781
Income taxes 8,672 12,677 10,164 10,422 13,190 31,513 40,366
================================================================================================================================
Net income $ 19,547 $ 20,772 $ 18,294 $ 19,340 $ 23,790 $ 58,613 $ 73,415
================================================================================================================================
Net interest income-taxable equivalent $ 90,568 $ 89,926 $ 89,200 $ 93,106 $ 95,932 $ 269,694 $ 290,388
- --------------------------------------------------------------------------------------------------------------------------------
Selected Quarterly Averages
Total assets $12,287,273 $12,203,618 $12,054,717 $12,076,262 $11,871,334 $12,177,404 $11,764,711
Investment securities 2,665,203 2,594,983 2,476,426 2,544,930 2,553,957 2,579,562 2,632,761
Loans 7,946,501 7,811,739 7,642,673 7,543,548 7,450,271 7,801,418 7,324,359
Interest-earning assets 10,994,308 10,890,420 10,741,160 10,771,571 10,592,386 10,876,224 10,480,111
Deposits 10,441,989 10,394,829 10,283,143 10,251,693 10,060,785 10,373,902 9,925,071
Interest-bearing liabilities 9,126,076 9,177,931 9,173,567 9,234,127 9,131,569 9,159,017 9,093,797
Long-term obligations 253,351 253,379 253,389 253,412 253,973 253,373 266,620
Shareholders' equity $ 1,002,524 $ 991,047 $ 974,900 $ 953,606 $ 935,735 $ 989,046 $ 915,387
Shares outstanding 10,436,345 10,465,909 10,472,065 10,475,377 10,477,886 10,457,976 10,480,011
- --------------------------------------------------------------------------------------------------------------------------------
Selected Quarter-End Balances
Total assets $12,387,281 $12,394,744 $12,388,741 $12,231,890 $12,087,152 $12,387,281 $12,087,152
Investment securities 2,646,829 2,475,821 2,362,130 2,539,236 2,502,026 2,646,829 2,502,026
Loans 8,026,502 7,857,220 7,704,492 7,620,263 7,521,834 8,026,502 7,521,834
Interest-earning assets 10,941,968 10,951,437 10,991,877 10,534,469 10,647,042 10,941,968 10,647,042
Deposits 10,563,135 10,558,616 10,594,380 10,439,620 10,286,825 10,563,135 10,286,825
Interest-bearing liabilities 9,165,645 9,158,867 9,293,396 9,298,080 9,208,776 9,165,645 9,208,776
Long-term obligations 256,752 253,376 253,386 253,409 253,970 256,752 253,970
Shareholders' equity $ 1,015,678 $ 999,789 $ 983,635 $ 967,291 $ 949,871 $ 1,015,678 $ 949,871
Shares outstanding 10,436,345 10,436,345 10,470,236 10,473,294 10,476,137 10,436,345 10,476,137
- --------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.63 % 0.68 % 0.62 % 0.64 % 0.80 % 0.64 % 0.83
Shareholders' equity 7.74 8.41 7.61 8.05 10.09 7.92 10.72
Dividend payout ratio 14.71 13.89 15.71 13.51 11.01 14.73 10.70
- --------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 76.10 % 75.15 % 74.32 % 73.58 % 74.05 % 75.20 % 73.80
Shareholders' equity to total assets 8.16 8.12 8.09 7.90 7.88 8.12 7.78
Time certificates of $100,000 or more to
total deposits 10.22 10.34 10.44 10.42 10.54 10.33 11.00
- --------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $ 1.87 $ 1.98 $ 1.75 $ 1.85 $ 2.27 $ 5.60 $ 7.01
Cash dividends 0.275 0.275 0.275 0.250 0.250 0.825 0.750
Book value at period end 97.32 95.80 93.95 92.36 90.67 97.32 90.67
Tangible book value at period end 86.95 85.36 83.39 81.73 80.23 86.95 80.23
- --------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Outstanding Loans by Type
Table 2
2003 2002
Third Second First Fourth Third
(thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
Real estate:
Construction and land development $ 839,650 $ 835,209 $ 834,027 $ 799,278 $ 816,512
Mortgage:
1-4 family residential 923,691 950,555 975,010 1,058,082 1,091,344
Commercial 2,221,741 2,140,521 2,077,633 2,035,646 1,966,433
Revolving 1,530,096 1,466,454 1,404,014 1,335,024 1,259,593
Other 160,222 157,597 148,684 150,226 158,125
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate 5,675,400 5,550,336 5,439,368 5,378,256 5,292,007
Commercial and industrial 909,314 937,125 936,387 925,775 937,987
Consumer 1,233,856 1,174,807 1,135,622 1,154,280 1,132,406
Lease financing 146,416 140,133 137,562 141,372 142,695
Other 61,516 54,819 55,553 20,580 16,739
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 8,026,502 7,857,220 7,704,492 7,620,263 7,521,834
Less reserve for loan losses 117,747 115,382 113,382 112,533 111,577
- --------------------------------------------------------------------------------------------------------------------------------
Net loans $7,908,755 $7,741,838 $7,591,110 $7,507,730 $7,410,257
================================================================================================================================
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Investment Securities Table 3
September 30, 2003 September 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Average Taxable Average Taxable
Fair Maturity Equivalent Fair Maturity Equivalent
(thousands) Cost Value (Yrs./Mos.) Yield Cost Value (Yrs./Mos.) Yield
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
U. S. Government:
Within one year $ 1,013,551 $ 1,018,269 0/7 1.95 % $ 1,841,554 $ 1,848,946 0/5 3.23 %
One to five years 439,585 443,690 1/3 2.00 479,465 485,297 1/6 2.60
Five to ten years 66 71 6/3 8.00 94 100 7/3 8.00
Ten to twenty years 18,231 18,957 13/7 5.55 25,132 25,990 14/7 5.56
Over twenty years 1,116 1,162 25/2 7.24 2,635 2,750 26/4 7.15
- -----------------------------------------------------------------------------------------------------------------------------------
Total 1,472,549 1,482,149 1/0 2.01 2,348,880 2,363,084 0/8 3.10
State, county and municipal:
Within one year - - 500 503 0/3 7.78
One to five years 440 455 1/9 5.55 480 501 3/0 5.55
Five to ten years 145 154 5/7 5.88 144 157 7/10 5.88
Ten to twenty years 1,417 1,580 14/7 6.02 1,414 1,578 15/10 6.02
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,002 2,189 11/2 5.90 2,538 2,740 9/0 6.27
Other
Within one year - - 110 10 0/4 2.32
One to five years 250 250 4/10 7.75 250 250 5/10 7.75
Five to ten years - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total 250 250 4/10 7.75 260 360 4/2 6.09
Total investment securities
held to maturity 1,474,801 1,484,589 1/0 2.13 2,351,678 2,366,184 0/10 3.13
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale:
U. S. Government:
Within one year 797,940 798,460 0/4 2.72 95,702 95,828 0/4 2.02
One to five years 319,048 318,409 2/3 1.71 - -
Five to ten years - - - -
Ten to twenty years 1,030 1,016 14/10 4.28 - -
Over twenty years - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
1,118,018 1,117,885 0/10 2.43 95,702 95,828 0/4 2.02
State, county and municipal:
Within one year - - - -
One to five years 281 281 4/1 1.58 - -
Five to ten years 567 546 8/7 4.48 - -
Ten to twenty years - - - -
Over twenty years 145 145 29/5 1.15 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total 993 972 0/4 3.17 - -
Marketable equity securities 35,318 53,171 41,787 54,520
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities
available for sale 1,154,329 1,172,028 137,489 150,348
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 2,629,129 $ 2,656,617 $ 2,489,167 $ 2,516,532
- -----------------------------------------------------------------------------------------------------------------------------------
Average maturity assumes callable securities mature on their earliest call date;
yields are based on amortized cost; yields related to securities that are
exempt from federal and/or state income taxes are stated on a taxable-equivalent
basis assuming statutory rates of 35% for federal income tax purposes and 7.0%
for state income taxes for all periods.
First Citizens BancShares, Inc. and Subsidiaries
Third 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/ Total
(thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Total loans $ 7,946,501 $ 109,639 5.47 % $ 7,450,271 $ 123,574 6.58 % $7,530 $ (21,465)$ (13,935)
Investment securities:
U. S. Government 2,606,137 14,226 2.17 2,493,554 21,527 3.43 784 (8,085) (7,301)
State, county and municipal 3,175 48 6.00 3,391 69 8.07 (4) (17) (21)
Other 55,891 316 2.24 57,012 407 2.83 (7) (84) (91)
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,665,203 14,590 2.17 2,553,957 22,003 3.42 773 (8,186) (7,413)
Overnight investments 382,604 912 0.95 588,158 2,482 1.67 (684) (886) (1,570)
===================================================================================================================================
Total interest-earning assets $ 10,994,308 $ 125,141 4.51 % $ 10,592,386 $ 148,059 5.55 % $7,619 $ (30,537)$ (22,918)
===================================================================================================================================
Liabilities
Deposits:
Checking With Interest $ 1,387,252 $ 413 0.12 % $ 1,265,092 $ 847 0.27 % $ 63 $ (497) $ (434)
Savings 700,002 389 0.22 651,110 874 0.53 44 (529) (485)
Money market accounts 2,558,586 4,583 0.71 2,383,130 9,573 1.59 491 (5,481) (4,990)
Time deposits 3,728,003 23,202 2.47 4,063,898 34,447 3.36 (2,495) (8,750) (11,245)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,373,843 28,587 1.35 8,363,230 45,741 2.17 (1,897) (15,257) (17,154)
Federal funds purchased 55,867 118 0.84 38,479 155 1.60 53 (90) (37)
Repurchase agreements 160,993 129 0.32 193,118 277 0.57 (36) (112) (148)
Master notes 219,410 347 0.63 266,912 644 0.96 (95) (202) (297)
Other short-term borrowings 62,612 154 0.98 15,857 58 1.45 143 (47) 96
Long-term obligations 253,351 5,238 8.20 253,973 5,252 8.20 (13) (1) (14)
===================================================================================================================================
Total interest-bearing liabilities $ 9,126,076 $ 34,573 1.50 % $ 9,131,569 $ 52,127 2.26 % $(1,845)$ (15,709)$ (17,554)
===================================================================================================================================
Interest rate spread 3.01 % 3.29 %
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $ 90,568 3.28 % $ 95,932 3.60 % $9,464 $ (14,828) $ (5,364)
- -----------------------------------------------------------------------------------------------------------------------------------
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 $254 for 2003 and
$317 for 2002.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine Months Table 5
2003 2002 Increase (decrease) due to:
- --------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
(thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Total loans $ 7,801,418 $ 335,746 5.75 % $ 7,324,359 $ 371,446 6.77 % $ 18,720 $ (54,420$ (35,700)
Investment securities:
U. S. Government 2,519,844 44,878 2.38 2,572,228 77,223 4.01 (1,278) (31,067) (32,345)
State, county and municipal 3,932 145 4.93 4,088 249 8.14 (8) (96) (104)
Other 55,786 1,041 2.49 56,445 1,272 3.01 (13) (218) (231)
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,579,562 46,064 2.39 2,632,761 78,744 4.00 (1,299) (31,381) (32,680)
Overnight investments 495,244 4,120 1.11 522,990 6,504 1.66 (289) (2,095) (2,384)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 10,876,224$ 385,930 4.74 % $ 10,480,110 $ 456,694 5.82 % $ 17,132 $ (87,896$ (70,764)
================================================================================================================================
Liabilities
Deposits:
Checking with Interest $ 1,360,920 $ 1,500 0.15 % $ 1,248,191 $ 2,662 0.29 % $ 195 $ (1,357) $ (1,162)
Savings 683,862 1,790 0.35 640,895 2,594 0.54 140 (944) (804)
Money market accounts 2,551,789 17,866 0.94 2,240,889 27,482 1.64 2,965 (12,581) (9,616)
Time deposits 3,845,839 77,314 2.69 4,157,794 113,612 3.65 (7,480) (28,818) (36,298)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,442,410 98,470 1.56 8,287,769 146,350 2.36 (4,180) (43,700) (47,880)
Federal funds purchased 45,567 338 0.99 41,132 489 1.59 43 (194) (151)
Repurchase agreements 158,455 380 0.32 196,152 804 0.55 (121) (303) (424)
Master notes 218,787 1,013 0.62 278,409 1,973 0.95 (348) (612) (960)
Other short-term borrowings 40,425 313 1.04 23,715 349 1.97 188 (224) (36)
Long-term obligations 253,373 15,722 8.30 266,620 16,341 8.19 (825) 206 (619)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 9,159,017 $ 116,236 1.70 % $ 9,093,797 $ 166,306 2.45 % $ (5,243)$ (44,827$ (50,070)
================================================================================================================================
Interest rate spread 3.04 % 3.37 %
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $ 269,694 3.32 % $ 290,388 3.70 % $ 22,375 $ (43,069$ (20,694)
- --------------------------------------------------------------------------------------------------------------------------------
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 $796 for 2003 and
$1,033 for 2002.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Summary of Loan Loss Experience and Risk Elements Table 6
Nine Months Ended
2003 2002 September 30
Third Second First Fourth Third ----------------------
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Reserve balance at beginning of period $ 115,382 $ 113,382 $ 112,533 $ 111,577 $ 110,472 $ 112,533 $ 107,087
Provision for loan losses 6,353 7,192 5,563 7,156 5,592 19,108 19,394
Net charge-offs:
Charge-offs (5,050) (6,089) (5,273) (6,966) (5,319) (16,412) (17,974)
Recoveries 1,062 897 559 766 832 2,518 3,070
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (3,988) (5,192) (4,714) (6,200) (4,487) (13,894) (14,904)
====================================================================================================================================
Reserve balance at end of period $ 117,747 $ 115,382 $ 113,382 $ 112,533 $ 111,577 $ 117,747 $ 111,577
====================================================================================================================================
Historical Statistics
Average loans $ 7,946,501 $ 7,811,739 $ 7,642,673 $ 7,543,548 $7,450,271 $ 7,801,418 $ 7,324,359
Loans at period-end 8,026,502 7,857,220 7,704,492 7,620,263 7,521,834 8,026,502 7,521,834
- ------------------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $ 13,494 $ 17,438 $ 16,988 $ 15,521 $14,944 $ 13,494 $ 14,944
Other real estate 6,827 8,147 8,155 7,330 12,092 6,827 12,092
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 20,321 $ 25,585 $ 25,143 $ 22,851 $27,036 $ 20,321 $ 27,036
- ------------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $ 11,840 $ 7,848 $ 7,349 $ 9,566 $ 11,840 $ 8,928 $ 8,928
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios
Net charge-offs (annualized) to average
total loans 0.20% 0.27% 0.25% 0.33% 0.24% 0.24% 0.27%
Reserve for loan losses to total loans
at period-end 1.47 1.47 1.47 1.48 1.48 1.47 1.48
Nonperforming assets to total loans plus other
real estate at period-end 0.25 0.33 0.33 0.30 0.36 0.25 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
INTRODUCTION
Management's discussion and analysis of earnings and related financial data
are presented to assist in understanding the financial condition and results of
operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares).
This discussion and analysis should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes presented within this
report. The focus of this discussion concerns BancShares' two banking
subsidiaries. First-Citizens Bank & Trust Company (FCB) operates branches in
North Carolina, West Virginia, and Virginia. Atlantic States Bank (ASB) operates
offices in Georgia, Florida, Texas, Arizona and California.
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 to goodwill be retroactively applied to
coincide with the adoption of SFAS No. 142 (Statement 142). As a result,
amortization expense related to assets that were reclassified pursuant to
Statement 147 has been reversed, and the disclosures made for the first, second
and third quarters of 2002 have been restated.
In addition, we have reclassified certain other amounts for prior years to
conform with statement presentations for 2003. However, except for the adoption
of Statement 147, the reclassifications had no effect on shareholders' equity or
net income as previously reported. Intercompany accounts and transactions have
been eliminated.
SUMMARY
BancShares realized a decrease in earnings during the third quarter of 2003
compared to the third quarter of 2002. Consolidated net income during the third
quarter of 2003 was $19.5 million, compared to $23.8 million earned during the
corresponding period of 2002. The $4.2 million or 17.8 percent reduction
resulted from lower net interest income and higher noninterest expenses, which
were partially offset by higher noninterest income and a lower effective tax
rate. Net income per share during the third quarter of 2003 totaled $1.87,
compared to $2.27 during the third quarter of 2002, a 17.6 percent reduction.
Return on average assets was 0.63 percent for the third quarter of 2003 and 0.80
percent for the third quarter of 2002. Return on average equity for the third
quarter of 2003 was 7.74 percent compared to 10.09 percent during the third
quarter of 2002.
For the first nine months of 2003, BancShares recorded net income of $58.6
million, compared to $73.4 million earned during the first nine months of 2002.
The $14.8 million or 20.2 percent decrease was the result of a reduction in net
interest income and higher noninterest expense, partially offset by higher
noninterest income and a lower effective tax. Net income per share for the first
nine months of 2003 was $5.60, compared to $7.01 recorded during the same period
of 2002. BancShares returned 0.64 percent on average assets during the first
nine months of 2003 compared to 0.83 percent during the corresponding period of
2002. Return on average equity for the first nine months of 2003 was 7.92
percent compared to 10.72 percent during the same period of 2002.
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 balances presented in Table 4
for the third quarter and Table 5 for the first nine months of 2003 and 2002.
INTEREST-EARNING ASSETS
Interest-earning assets for the third quarter of 2003 averaged $10.99
billion, an increase of $401.9 million or 3.8 percent from the third quarter of
2002. For the nine months ended September 30, 2003, interest-earning assets
averaged $10.88 billion, an increase of $396.1 million or 3.8 percent over the
same period of 2002. These increases primarily resulted from growth in the loan
portfolio.
Loans. At September 30, 2003 and 2002, gross loans totaled $8.03 billion
and $7.52 billion, respectively. As of December 31, 2002, gross loans were $7.62
billion. The $504.7 million growth in loans from September 30, 2002 to September
30, 2003 and the $406.2 million increase from December 31, 2002 through
September 30, 2003 primarily result from growth within BancShares' commercial
and revolving real estate lending. Table 2 details outstanding loans by type for
the past five quarters.
Commercial real estate loans totaled $2.22 billion at September 30, 2003,
representing 27.7 percent of total gross loans. This represents an increase of
$255.3 million or 13.0 percent since September 30, 2002. FCB and ASB have both
seen continuing demand for commercial real estate loans in recent quarters. A
large percentage of our commercial real estate loans are secured by
owner-occupied properties and were underwritten based primarily upon the cash
flow from the operation of the business rather than the value of the real estate
collateral.
Revolving mortgage loans totaled $1.53 billion at September 30, 2003,
representing 19.1 percent of total loans outstanding. This component of the loan
portfolio has increased $270.5 million since September 30, 2002 and $195.1
million since December 31, 2002, the result of continued growth of retail
EquityLines.
Consumer loans totaled $1.23 billion at September 30, 2003, an increase of
$101.5 million or 9.0 percent from September 30, 2002, and an increase of $79.6
million or 6.9 percent from December 31, 2002. This growth results from a
renewed focus on automobile sales finance activity during 2002 and 2003.
The growth among these loan categories was partially offset by a $167.7
million or 15.4 percent reduction in 1-4 family residential mortgage loans since
September 30, 2002. Although the declining interest rate environment has
resulted in strong origination activity, substantially all of the residential
mortgage loans originated through our network have been immediately sold to
various correspondents. As a result, portfolio residential mortgage loans
continue to decline, a trend we expect to continue in the coming quarters.
During the 12-month period ended September 30, 2003, we also experienced a
$28.7 million or 3.1 percent reduction in commercial and industrial loans due to
a general lack of expansion activity by commercial customers, and our emphasis
on originating commercial loans that are secured by real estate rather than
inventory, accounts receivable or other less secure forms of collateral.
During the third quarter of 2003, loans averaged $7.95 billion, an increase
of $496.2 million or 6.7 percent from the comparable period of 2002. For the
year-to-date, gross loans have averaged $7.80 billion for 2003 compared to $7.32
billion for the same period of 2002, an increase of $477.1 million or 6.5
percent increase over the prior year. For the third quarter and the
year-to-date, growth has resulted from demand for commercial real estate and
revolving mortgage loans.
We expect continued growth in revolving real estate loans during 2003, and
reduction in 1-4 family residential mortgage loans as existing loan balances
amortize or are refinanced. Recent improvements in general economic conditions
in certain of our markets may translate into higher levels of loan demand among
our business customers in the fourth quarter of 2003 and during 2004. Consumer
loan demand may continue to be constrained due to weak labor markets. All growth
projections are subject to change as a result of further economic deterioration
or improvement.
Investment securities. At September 30, 2003 and 2002, the investment
securities portfolio totaled $2.65 billion and $2.50 billion, respectively. At
December 31, 2002, the investment securities portfolio was $2.54 billion. Table
3 presents detailed information relating to the investment securities portfolio.
Total investment securities have increased 5.8 percent since September 30,
2002. Additionally, there have been significant changes within components of the
investment securities portfolio. Investment securities held to maturity totaled
$1.47 billion at September 30, 2003, compared to $2.35 billion at September 30,
2002. The $876.9 million reduction in investment securities held to maturity
during 2003 resulted from our decision to reinvest a portion of the proceeds
from maturing held-to-maturity securities in securities classified as
available-for-sale. This redirection of the investment securities portfolio
enhances the overall liquidity and flexibility of the balance sheet. The average
maturity of the held-to-maturity portfolio has extended from ten months at
September 30, 2002 to twelve months at September 30, 2003. Securities that are
classified as held-to-maturity reflect BancShares' ability and positive intent
to hold those investments until maturity.
Investment securities available for sale totaled $1.17 billion at September
30, 2003, compared to $150.3 at September 30, 2002. The $1.02 billion increase
from September 30, 2002 results from the decision to invest in
available-for-sale securities in order to further enhance balance sheet
liquidity and flexibility. Available-for-sale securities are reported at their
aggregate fair value.
Investment securities averaged $2.67 billion during the third quarter of
2003, compared to $2.55 billion during the third quarter of 2002, an increase of
$111.2 million or 4.4 percent. Investment securities averaged $2.58 billion
during the first nine months of 2003, a $53.2 million or 2.0 percent reduction
from the same period of 2002. For both the quarter and the nine-month period
ended September 30, the change in average investment securities resulted from
liquidity needs arising from loan demand and deposit flows.
Overnight investments. Overnight investments totaled $268.6 million at
September 30, 2003, compared to $623.6 million at December 31, 2002 and $623.2
million at September 30, 2002. Overnight investments averaged $382.6 million
during the third quarter of 2003, a reduction of $205.6 million or 34.9 percent
from the third quarter of 2002. For the nine-month periods ended September 30,
overnight investments averaged $495.2 million and $523.0 million, respectively,
for 2003 and 2002. The changes in overnight investments resulted from liquidity
management decisions.
Income on Interest-Earning Assets. Interest income amounted to $124.9
million during the third quarter of 2003, a $22.9 million or 15.5 percent
decrease from the third quarter of 2002. The taxable-equivalent yield on
interest-earning assets declined 104 basis points from 5.55 percent in the third
quarter of 2002 to 4.51 percent in the third quarter of 2003 as market interest
rates continued to decline.
Loan interest income for the third quarter of 2003 was $109.4 million, a
decrease of $13.9 million or 11.3 percent from the third quarter of 2002, due to
a loan yield reduction that more than offset the favorable impact of loan
growth. The taxable-equivalent yield on average loans declined 111 basis points
from 6.58 percent to 5.47 percent from the third quarter of 2002 to the third
quarter of 2003 due to downward repricing of variable rate loans and
rate-induced refinance activity among fixed rate loans.
Within the investment securities portfolio, interest income was $14.6
million during the third quarter of 2003 compared to $22.0 million during the
third quarter of 2002, a reduction of $7.4 million or 33.7 percent. The
reduction in interest income resulted from a 125 basis point reduction in the
taxable-equivalent yield. Investment securities returned a taxable-equivalent
yield of 2.17 percent during the third quarter of 2003 compared to 3.42 percent
during the same period of 2002.
Overnight investments generated interest income of $912,000 during the
third quarter of 2003, compared to $2.5 million during the same period of 2002.
The reduction is the combined result of lower average investments and a 72 basis
point yield reduction. Overnight investments returned 0.95 percent during the
third quarter of 2003 compared to 1.67 percent during the same period of 2002.
Interest income amounted to $385.1 million during the first nine months of
2003, a $70.5 million or 15.5 percent decrease from the same period of 2002, the
net result of an unfavorable rate variance and a favorable volume variance. The
taxable-equivalent yield on interest-earning assets declined 108 basis points
from 5.82 percent for the first nine months of 2002 to 4.74 percent during the
same period of 2003. Lower market interest rates during 2003 have contributed to
the unfavorable rate variance.
For the nine months ended September 30, 2003, loan interest income was
$335.0 million, a decrease of $35.5 million or 9.6 percent from the same period
of 2002. The decrease in interest income reflects the decline in loan yields.
The taxable-equivalent loan yield was 5.75 percent during the first nine months
of 2003, compared to 6.77 percent during the same period of 2002.
For the nine months ended September 30, 2003, income earned on the
investment securities portfolio amounted to $46.0 million, compared to $78.7
million during the same period of 2002, a decrease of $32.6 million or 41.5
percent. This decrease is the result of a 161 basis point decline in the
taxable-equivalent yield, which fell from 4.00 percent in 2002 to 2.39 percent
in 2003. The short overall maturity of our investment securities portfolio
combined with the redemption of significant amounts of callable securities
caused the rapid downward repricing of the portfolio both during the third
quarter and for the nine-month period ended September 30, 2003.
Interest earned on overnight investments totaled $4.1 million during the
first nine months of 2003 compared to $6.5 million during the same period of
2002, a $2.4 million or 36.7 percent reduction. This was the combined result of
lower average overnight investments and a 55 basis point yield reduction.
We anticipate continued reduction in asset yields during the remainder of
2003 as certain variable rate loans continue to reprice and fixed rate loans are
refinanced at lower rates.
INTEREST-BEARING LIABILITIES
At September 30, 2003 and 2002, interest-bearing liabilities totaled $9.17
billion and $9.21 billion, respectively, compared to $9.30 billion as of
December 31, 2002. During the third quarter of 2003, interest-bearing
liabilities averaged $9.13 billion, a slight decrease from the third quarter of
2002. This decrease primarily resulted from reductions in time deposits.
Deposits. At September 30, 2003, total deposits were $10.56 billion, an
increase of $276.3 million or 2.7 percent over September 30, 2002. Compared to
the December 31, 2002 balance of $10.44 billion, total deposits have increased
$123.5 million or 1.2 percent. During the second quarter of 2003, FCB sold four
branches with a total of $114.7 million in deposits to a related party.
Interest-bearing deposits averaged $8.37 billion during the third quarter
of 2003 compared to $8.36 billion during the third quarter of 2002. Although
total interest-bearing deposits were largely unchanged, there were significant
changes in deposit product composition. Average money market accounts increased
$175.5 million from the third quarter of 2002 to the third quarter of 2003, a
7.4 percent increase. Average Checking With Interest increased $122.2 million or
9.7 percent from the third quarter of 2002 to the third quarter of 2003. Average
time deposits decreased $335.9 million or 8.3 percent between the two periods.
For the first nine months of 2003, interest-bearing deposits averaged $8.44
billion compared to $8.29 billion during the same period of 2002. This $154.6
million or 1.9 percent increase results from continued growth among money market
accounts and Checking With Interest, largely offset by lower average time
deposits.
For both the third quarter and the nine-month periods ended September 30,
2003, when compared to the same period of the prior year, average balances of
transaction and money market deposit accounts continue to grow, as customers
retain high levels of liquidity in readily-available deposit products. We
attribute the ongoing run-off of time deposits to falling interest rates, and
expect that time deposit balances will continue to erode until market interest
rates increase significantly.
Short-term borrowings. At September 30, 2003, short-term borrowings totaled
$472.6 million compared to $462.6 million at December 31, 2002 and $499.0
million at September 30, 2002. For the quarters ended September 30, 2003 and
2002, short-term borrowings averaged $498.9 million and $514.4 million,
respectively. The $15.5 million or 3.0 percent decline in average short-term
borrowings is the result of reductions in master notes and overnight repurchase
obligations. Customer interest in these commercial cash management products has
diminished due to the very low market rates of interest currently available.
Partially offsetting these reductions is a $50 million increase in other
short-term borrowings resulting from advances from the Federal Home Loan Bank of
Atlanta originated during 2003. For the nine-month periods ended September 30,
2003 and 2002, short-term borrowings averaged $463.2 million and $539.4 million,
respectively, a reduction of 14.1 percent primarily due to reduced demand for
master notes and overnight repurchase obligations from commercial cash
management customers.
Long-term obligations. At September 30, 2003 and 2002, long-term
obligations totaled $256.8 million and $253.4 million, respectively. In each
case, the outstanding balance includes $250 million in trust preferred capital
securities. During the third quarter of 2003, long-term obligations averaged
$253.4 million, compared to $254.0 million during the same period of 2002. For
the nine-month periods ended September 30, 2003 and 2002, long-term obligations
averaged $253.4 million and $266.6 million, respectively.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $34.6 million during the third quarter of 2003, a $17.6 million or
33.7 percent decrease from the third quarter of 2002. The lower interest expense
was primarily the result of falling market interest rates. The rate on
interest-bearing liabilities was 1.50 percent during the third quarter of 2003
compared to 2.26 percent during the same period of 2002.
For the year-to-date, interest expense was $116.2 million, compared to
$166.3 million for the same period of 2002. The $50.0 million or 30.1 percent
decrease results primarily from lower interest rates and a reduction in average
time deposits. The rate on interest-bearing deposits declined from 2.36 percent
during the first nine months of 2002 to 1.56 percent for the same period of
2003, an 80 basis point reduction. The rate on time deposits fell 96 basis
points from 3.65 percent to 2.69 percent and, when combined with the impact of
the volume reduction, accounted for $36.3 million of the reduction in interest
expense during the first nine months of 2003. The rate on money market accounts
fell 70 basis points, from 1.64 percent to 0.94 percent. Although money market
accounts experienced an increase in volume during the first nine months of 2003,
total interest expense on these deposits declined $9.6 million.
NET INTEREST INCOME
Net interest income totaled $90.3 million during the third quarter of 2003,
a decrease of $5.3 million or 5.5 percent from the $95.6 million recorded during
the third quarter of 2002. The taxable-equivalent net yield on interest-earning
assets was 3.28 percent for the third quarter of 2003, a decrease of 32 basis
points from the 3.60 percent reported for the third quarter of 2002. Despite a
favorable volume variance resulting from loan growth, the adverse impact of
falling market interest rates caused the net yield to decline.
The taxable-equivalent interest rate spread for the third quarter of 2003
was 3.01 percent compared to 3.29 percent for the same period of 2002. The lower
interest rate spread resulted from a larger decline in the yield on
interest-earning assets than was realized on interest-bearing liabilities. While
downward adjustments and lower market interest rates have impacted both the
yield on interest-earning assets and the rate on interest-bearing liabilities,
the extremely low level to which interest rates have fallen has not allowed us
to adjust the interest rates paid on many deposit products to the extent the
yields earned on interest-earning assets have been affected.
Net interest income was $268.9 million and $289.4 million for the
nine-month periods ended September 30, 2003 and 2002, respectively. This
represents a reduction of $20.5 million or 7.1 percent. As with the third
quarter comparison, the year-to-date results demonstrate the impact of lower
interest rates and the resulting unfavorable effect on interest-earning asset
yields and interest-bearing liability rates. Despite a favorable volume variance
generated by loan growth, the adverse impact of the lower interest rates have
contributed to a 38 basis point reduction in the taxable-equivalent net yield on
interest-earning assets, which fell from 3.70 percent during the first nine
months of 2002 to 3.32 percent during the same period of 2003.
Despite the current pressure on net interest income, our asset/liability
management strategy continues to focus on maintaining high levels of balance
sheet liquidity and managing our interest rate risk. We maintain portfolios of
interest-earning assets and interest-bearing liabilities with maturities or
repricing opportunities that will protect against wide interest rate
fluctuations, thereby limiting, to the extent possible, the ultimate interest
rate exposure. Interest rate derivative contracts are not used in managing
interest rate risk. Management is aware of the potential negative impact that
movements in market interest rates may have on net interest income.
Market risk is the potential economic loss resulting from changes in market
prices and interest rates. This risk can either result in diminished current
fair values or reduced net interest income in future periods. As of September
30, 2003, BancShares' market risk profile has not changed significantly from
December 31, 2002. Changes in fair value that result from movement in market
rates cannot be predicted with any degree of certainty. Therefore, the impact
that future changes in market rates will have on the fair values of financial
instruments is uncertain.
ASSET QUALITY
Reserve for loan losses. Management continuously analyzes the growth and
risk characteristics of the total loan portfolio under current economic
conditions in order to evaluate the adequacy of the reserve for loan losses.
Such factors as the financial condition of the borrower, fair market value of
collateral and other considerations are recognized in estimating probable credit
losses. At September 30, 2003, the reserve for loan losses amounted to $117.7
million or 1.47 percent of loans outstanding. This compares to $112.5 million or
1.48 percent at December 31, 2002, and $111.6 million or 1.48 percent at
September 30, 2002.
Management considers the established reserve adequate to absorb losses
inherent in the loan portfolio at September 30, 2003. While management uses
available information to establish provisions for loan losses, future additions
to the reserve may be necessary based on changes in economic conditions or other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the reserve for loan losses. Such
agencies may require the recognition of adjustments to the reserve based on
their judgments of information available to them at the time of their
examination.
The provision for loan losses charged to operations during the third
quarter of 2003 was $6.4 million, compared to $5.6 million during the third
quarter of 2002. For the nine-month periods ended September 30, total provision
for loan losses was $19.1 million for 2003 and $19.4 million for 2002.
Net charge-offs for the three months ended September 30, 2003 totaled $4.0
million, compared to net charge-offs of $4.5 million during the same period of
2002. On an annualized basis, these net charge-offs represent 0.20 percent and
0.24 percent of average loans outstanding during the respective periods. Net
charge-offs for the nine-month period ended September 30, 2003 totaled $13.9
million, compared to $14.9 million during the same period of 2002. As a
percentage of average loans outstanding, these losses represent 0.24 percent for
2003 and 0.27 for 2002 on an annualized basis.
Management remains committed to maintaining high levels of credit quality.
Table 6 provides details concerning the reserve and provision for loan losses
over the past five quarters and for the year-to-date for 2003 and 2002.
Nonperforming assets. At September 30, 2003, BancShares' nonperforming
assets, consisting of nonaccrual loans and other real estate, amounted to $20.3
million or 0.25 percent of gross loans plus foreclosed properties, compared to
$22.9 million at December 31, 2002, and $27.0 million at September 30, 2002.
Nonaccrual loans totaled $13.5 million at September 30, 2003, compared to $15.5
million at December 31, 2002 and $14.9 million at September 30, 2002. Other real
estate totaled $6.8 million at September 30, 2003, compared to $7.3 million at
December 31, 2002 and $12.1 million at September 30, 2002. Management continues
to closely monitor nonperforming assets, taking necessary actions to minimize
potential exposure.
NONINTEREST INCOME
During the first nine months of 2003, noninterest income was $186.5
million, compared to $165.2 million during the same period of 2002. The $21.4
million or 12.9 percent increase was primarily due to gains resulting from the
sale of branches and growth in mortgage income and cardholder and merchant
services income. The second quarter 2003 cash sale of branches to a related
party generated a nonrecurring gain of $5.7 million. There was no branch sale
activity during the first nine months of 2002.
Among other components of noninterest income, mortgage income was $14.4
million during the first nine months of 2003, compared to $8.7 million earned
during the same period of 2002, an increase of $5.7 million or 66.2 percent.
Prompted by lower market interest rates, the increase in refinance activity
resulted in higher origination fee and commitment fee income. Cardholder and
merchant services income increased $4.9 million from $36.4 million earned in the
first nine months of 2002 to $41.3 million in the first nine months of 2003.
This 13.5 percent increase in cardholder income was due to higher credit card
merchant discount and higher interchange fees for debit and credit card
transactions. Cardholder and merchant services income includes the interchange
income that we earn from debit cards issued to our customers. As a result of a
recent out-of-court settlement involving the two major credit card associations,
the interchange rate we earn on signature-based debit card transactions
decreased 24.1 percent effective August 1, 2003. Although the volume of
transactions processed through our debit card products continues to grow, the
reduction in the interchange rate has adversely affected interchange income.
Fees from processing services increased $1.2 million from $14.2 million
during the first nine months of 2002 to $15.4 million earned during the first
nine months of 2003 due to higher transaction volume for processed banks.
Commission income contributed an additional $1.7 million during the first nine
months of 2003 compared to the same period of 2002. This increase represents a
10.1 percent increase over the same period of 2002, primarily the result of
higher annuity fees. Service charge income increased $1.4 million or 2.6 percent
over the $56.6 million earned during the first nine months of 2002.
Partially offsetting the benefit of these increases were reductions in
trust income and ATM income. Trust income declined $530,000 or 4.5 percent
during the first nine months of 2003, primarily due to lower fees collected on
accounts that are charged fees based on the fair value of the managed assets.
ATM income declined $310,000 or 4.5 percent due to a reduction in the number of
ATM transactions.
During the third quarter of 2003, noninterest income was $63.2 million, a
$7.6 million or 13.7 percent increase over the $55.6 million earned during the
third quarter of 2002.
Mortgage income increased $2.5 million or 88.8 percent during the third
quarter of 2003 due to heavy origination activity. Cardholder and merchant
services income increased $1.9 million or 14.5 percent during 2003 due to higher
interchange income for debit and credit transactions. Slight increases were
noted in service charge income and fees from processing services, while ATM
income and trust income both reported modest reductions from the same period of
2002.
NONINTEREST EXPENSE
Noninterest expense was $346.2 million for the first nine months of 2003, a
7.7 percent increase over the $321.3 million recorded during the same period of
2002. The $24.9 million increase in noninterest expense results from higher
personnel and general operating costs. Salary expense increased $9.9 million
during 2003 when compared to the same period of 2002. This 7.1 percent increase
is primarily due to the growth in employee population required to staff new
branch offices as well as higher incentive-based compensation particularly
within the mortgage operation. Employee benefits expense increased $4.4 million
or 14.3 percent during the first nine months of 2003, compared to the
corresponding period of 2002 due to higher pension expense and increased health
insurance costs.
Equipment expense increased $4.5 million or 13.7 percent during the first
nine months of 2003, the result of higher software-related items. Occupancy
expense increased $2.9 million to $31.6 million during the first nine months of
2003. This 10.0 percent increase resulted from higher depreciation expense for
branch facilities and building repairs. The $3.1 million increase in other
expense resulted from higher cardholder processing costs due to transaction
volume growth as well as higher claims expense recognized by American Guaranty,
FCB's property insurance company.
For the third quarter of 2003, noninterest expense totaled $118.9 million,
a $10.3 million or 9.5 percent increase over the same period of 2002. Salary
expense totaled $51.3 million during the third quarter of 2003, an increase of
$3.8 million or 7.9 percent due to higher incentive compensation and new
associates hired to support the ASB expansion. Employee benefits expense
increased $1.3 million due to higher pension and health care costs. Equipment
expense increased $2.0 million or 17.6 percent due to higher software-related
expenses.
INCOME TAXES
Income tax expense was $31.5 million during the first nine months of 2003,
compared to $40.4 million during the same period of 2002, a 21.9 percent
decrease due to lower pre-tax earnings and adjustments to the valuation reserve
for deferred state tax assets. The effective tax rates for these periods were
35.0 percent and 35.5 percent, respectively. For the third quarters of 2003 and
2002, income tax expense was $8.7 million and $13.2 million, respectively. In
addition to lower pre-tax earnings, income tax expense during the third quarter
of 2003 includes adjustments to the valuation reserve for deferred state tax
assets. The effective tax rates were 30.7 percent and 35.7 percent for the
respective periods.
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, 2003 and 2002, the leverage
capital ratio of BancShares was 9.41 percent and 9.22 percent, respectively,
surpassing the minimum level of 3 percent. As a percentage of risk-adjusted
assets, BancShares' Tier 1 capital ratio was 13.30 percent at September 30,
2003, and 13.41 percent as of September 30, 2002. The minimum ratio allowed is 4
percent of risk-adjusted assets. The total risk-adjusted capital ratio was 14.64
percent at September 30, 2003 and 14.73 percent as of September 30, 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 $999.6 million at September 30, 2002 to
$1.13 billion at September 30, 2003, an increase of $127.5 million or 12.8
percent. This growth was generated by the expanding branch network. ASB's net
interest income increased $5.2 million or 22.2 percent during the first nine
months of 2003, when compared to the same period of 2002, the result of balance
sheet growth that more than offset the impact of falling interest rates.
Provision for loan losses declined $1.2 million or 43.0 percent due to changes
in risk characteristics inherent in the loan portfolio during the current year.
ASB's noninterest income increased $397,000 or 10.7 percent during the
first nine months of 2003, the result of higher loan modification fees,
cardholder and merchant income and service charge income. Noninterest expense
increased $5.8 million or 21.5 percent during 2003. Higher personnel, occupancy
and service fee costs reflect the impact of the expanded branch network, much of
which relates to the expansion of ASB into Texas, Arizona and California.
ASB recorded a net loss of $1.2 million during the first nine months of
2003 compared to a net loss of $1.6 million during the same period of 2002. This
represents a favorable variance of $448,000, primarily the result of ASB's
balance sheet growth. Substantially all of ASB's growth has been on a de novo
basis, and ASB continues its efforts to build a customer base in its highly
competitive markets. We continue to seek new growth opportunities for ASB in new
and existing markets. Our initial investments in these markets will result in
higher levels of noninterest expense in ensuing quarters. First Citizens Bank.
FCB's total assets increased from $10.88 billion at September 30, 2002 to $11.13
billion at September 30, 2003, an increase of $245.3 million or 2.3 percent.
FCB's net interest income decreased $23.2 million or 8.4 percent during the
first nine months of 2003, the result of interest rate reductions. Provision for
loan losses increased $885,000 or 5.3 percent.
FCB's noninterest income increased $19.1 million or 11.6 percent during the
first nine months of 2003, primarily the result of higher mortgage income,
cardholder and merchant services income and gains on branch sales. Noninterest
expense increased $16.9 million or 5.7 percent during the first nine months of
2003, primarily due to higher personnel and equipment costs.
FCB recorded net income of $69.0 million during the first nine months of
2003 compared to $82.3 million during the same period of 2002. This represents a
$13.3 million or 16.2 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 June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations (Statement 143).
Statement 143 requires us to record the fair value of an asset retirement
obligation as a liability in the period in which we incur a legal obligation
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or normal use of the assets.
Statement 143 also requires us to record a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. We adopted Statement 143 on January 1,
2003. The adoption of Statement 143 did not have a material impact on our
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(Statement 145). Statement 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary. Statement 145 also amends SFAS No. 13 to require
sale-leaseback accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. The adoption of Statement 145
for transactions occurring after May 15, 2002 did not have a material effect on
our consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (Statement 146), which becomes effective
prospectively for exit or disposal activities initiated after December 31, 2002.
Under Statement 146, we will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be measured at
fair value. In periods after initially recording a liability, we will adjust the
liability to reflect revisions to the expected timing or amount of estimated
cash flows, discounted at the appropriate interest rate originally used to
measure the liability. Statement 146 also establishes accounting standards for
employee and contract termination costs. The impact from the adoption of
Statement 146 is dependent on the nature and extent of exit and disposal
activities. Consequently, at this time, we are unable to estimate the ultimate
impact from the adoption of Statement 146.
In November 2002, the FASB issued Interpretation No.45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34 (Interpretation
45). Interpretation 45 elaborates on the disclosures to be made by a guarantor
in its financial statements about its obligations under guarantees issued.
Interpretation 45 also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of Interpretation
45, which applies to guarantees issued or modified after December 31, 2002, did
not have a material effect on our financial statements. The disclosure
requirements were effective for financial statements of interim and annual
periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No.148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.123
(Statement 148). Statement 148 provides alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications were required for fiscal
years ending after December 15, 2002. As we currently have no stock-based
compensation, the adoption of Statement 148 did not have a material impact on
our consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 (Interpretation 46).
Interpretation 46 addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. Interpretation 46
applies immediately to variable interests in variable interest entities created
after January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. BancShares has no investments in variable
interest entities that will require consolidation under Interpretation 46. The
application of Interpretation 46 will result in the de-consolidation of the two
grantor trusts that have issued the trust preferred capital securities currently
reported in our consolidated financial statements. We currently report the trust
preferred capital securities held by third parties as long-term borrowings. Once
we de-consolidate the grantor trusts, we will instead report the junior
subordinated debentures, which are currently eliminated when the grantor trusts
are consolidated, as long-term borrowings. The impact of this change will not
have a material effect on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (Statement 149), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
Statement is effective for contracts entered into or modified after June 30,
2003, except certain hedging relationships designated after June 30, 2003, as
defined in Statement 149. In addition, except as defined in Statement 149, all
provisions of Statement 149 should be applied prospectively. Statement 149 is
not expected to have a material impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (Statement 150).
Statement 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Statement 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. Statement 150 is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date and still existing at the
beginning of the interim period of adoption. Restatement is not permitted.
Statement 150 did not and is not expected to have a material impact on the
consolidated financial statements.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act, which statements are
inherently subject to risks and uncertainties. Forward-looking statements are
statements that include projections, predictions, expectations or beliefs about
future events or results or otherwise are not statements of historical fact.
Such statements are often characterized by the use of qualifying words (and
their derivatives) such as "expect," "believe," "estimate," "plan," "project,"
"anticipate," or other statements concerning opinions or judgments of BancShares
and its management about future events. Factors that could influence the
accuracy of such forward-looking statements include, but are not limited to, the
financial success or changing strategies of BancShares' customers, actions of
government regulators, the level of market interest rates, and general economic
conditions.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003
Exhibit 31.1
CERTIFICATION
I, Lewis R. Holding, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens
BancShares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 11, 2003
/s/ Lewis R. Holding
Lewis R. Holding
Chief Executive Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2003
Exhibit 31.2
CERTIFICATION
I, Kenneth A. Black, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens
BancShares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 11, 2003
/s/ Kenneth A. Black
Kenneth A. Black
Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2003
Exhibit 32
CERTIFICATION
The undersigned hereby certifies that, to his or her knowledge, (i) the
Form 10-Q filed by First Citizens BancShares, Inc. (the "Issuer") for the
quarter ended September 30, 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.
Novemer 11, 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
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2003