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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 0-16471
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FIRST CITIZENS BANCSHARES, INC.
(Exact name of Registrant as specified in the charter)
Delaware 56-1528994
(State or other
jurisdiction (I.R.S. Employer
of incorporation or
organization) Identification Number)
3128 Smoketree Court
Raleigh, North Carolina 27604
(Address of Principal Executive Offices, Zip Code)
(919) 716-7000
(Registrant's Telephone Number, including Area Code)
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Securities registered pursuant to:
Section 12(b) of the Act: None
Section 12(g) of the Act: Class A Common Stock, Par Value $1
Class B Common Stock, Par Value $1
(Title of Class)
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on last reported sales prices on March 11, 2002, the aggregate market
value of the Registrant's voting stock held by nonaffiliates of the Registrant
as of such date was $596,839,450.
On March 11, 2002, there were 8,797,154 outstanding shares of the
Registrant's Class A Common Stock and 1,683,575 outstanding shares of the
Registrant's Class B Common Stock.
Portions of the Registrant's definitive Proxy Statement dated March 18, 2002
are incorporated in Part III of this report.
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CROSS REFERENCE INDEX
PART 1 Item 1 Description of Business....................................................... 3
Item 2 Properties.................................................................... 4
Item 3 Legal Proceedings............................................................. 28
Item 4 Submission of Matters to a Vote of Shareholders............................... None
PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters..... 4
Item 6 Selected Financial Data....................................................... 6
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 5-29
Item 7A Quantitative and Qualitative Disclosures about Market Risk.................... 17-18
Item 8 Financial Statements and Supplementary Data
Independent Auditors' Report.................................................. 30
Consolidated Balance Sheets at December 31, 2001 and 2000..................... 31
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2001..................................... 32
Consolidated Statements of Changes in Shareholders' Equity for
each of the years in the three-year period ended December 31, 2001............ 33
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2001..................................... 34
Notes to Consolidated Financial Statements.................................... 35-54
Quarterly Financial Summary for 2001 and 2000................................. 26
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..................................................... None
PART III Item 10 Directors and Executive Officers of Registrant................................ *
Item 11 Executive Compensation........................................................ *
Item 12 Security Ownership of Certain Beneficial Owners and Management................ *
Item 13 Certain Relationships and Related Transactions................................ *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements (see Item 8 for reference)
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable, except as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission and are
available upon written request.
(b) During the quarter ended December 31, 2001, no reports on Form 8-K were filed.
- ----------------------------
* Information required by Item 10 is incorporated herein by reference to the
information that appears under the headings 'Section 16(a) Beneficial
Ownership Reporting Compliance', 'Proposal 1: Election of Directors' and
'Executive Officers' on pages 5-13 of the Registrant's Proxy Statement for
the 2002 Annual Meeting of Shareholders.
Information required by Item 11 is incorporated herein by reference to the
information that appears under the heading 'Director Compensation' on page 7
and under the headings 'Executive Compensation', 'Pension Plan' and
'Employment Contracts, Termination of Employment, and Change-in-Control
Agreements' on pages 10-11 of the Registrant's Proxy Statement for the 2002
Annual Meeting of Shareholders.
Information required by Item 12 is incorporated herein by reference to the
information that appears under the headings 'Beneficial Ownership of Voting
Securities' on pages 2-3 of the Registrant's Proxy Statement for the 2002
Annual Meeting of Shareholders.
Information required by Item 13 is incorporated herein by reference to the
information that appears under the heading 'Salary Committee' on pages 8-9
and under the heading 'Transactions with Related Parties' on pages 12-13 of
Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders.
2
Description of Business
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First Citizens BancShares, Inc. (BancShares) was incorporated under the laws
of Delaware on August 7, 1986, to become the holding company of First-Citizens
Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. On
October 21, 1986 BancShares became the sole shareholder of First Citizens Bank.
On April 28, 1997, BancShares opened Atlantic States Bank (ASB), a
federally-chartered thrift institution, which has continued to open new
branches in the suburban Atlanta, Georgia area. During 1999, ASB expanded its
presence into Florida. At December 31, 2001, ASB had 44 offices with total
assets of $867.2 million.
During 2000, BancShares became a financial holding company, a designation
that allows BancShares to offer products and services that a bank holding
company may not provide. As a first step to exercising the broader powers
available to a financial holding company, during 2000, American Guaranty
Insurance Company ("AGI"), formerly a wholly-owned subsidiary of FCB, became a
wholly-owned subsidiary of BancShares. As a direct subsidiary of BancShares,
AGI has more flexibility in its product offering than it did as a subsidiary of
FCB.
FCB was chartered on March 4, 1893, as the Bank of Smithfield, Smithfield,
North Carolina, and through a series of mergers and name changes, it later
became First-Citizens Bank & Trust Company. As of December 31, 2001, FCB
operated 348 offices in North Carolina, Virginia and West Virginia.
BancShares' executive offices are located at 3128 Smoketree Court, Raleigh,
North Carolina 27604, and its telephone number is (919) 716-7000. At December
31, 2001, BancShares and its subsidiaries employed a full-time staff of 4,205
and a part-time staff of 776 for a total of 4,981 employees.
BancShares' principal assets are its investment in and receivables from its
banking subsidiaries and its investment securities portfolio. Its primary
sources of income are dividends from FCB and interest income on its investment
securities portfolio. Certain legal restrictions exist regarding the ability of
FCB and ASB to transfer funds to BancShares in the form of cash dividends or
loans. For information regarding these restrictions, see Note P of BancShares'
consolidated financial statements, contained in this report.
BancShares' subsidiary banks seek to meet the needs of both consumers and
commercial entities in their respective market areas. These services, offered
at most offices, include normal taking of deposits, cashing of checks, and
providing for individual and commercial cash needs; numerous checking and
savings plans; commercial, business and consumer lending; a full-service trust
department; and other activities incidental to commercial banking. Triangle
Life Insurance Company underwrites and sells credit-related life insurance
products. Nantahala, Inc. owns loans originated by FCB. First Citizens Investor
Services, Inc., a registered broker-dealer in securities, provides various
investment products, including annuities, discount brokerage services and
third-party mutual funds to customers. First-Citizens Bank, A Virginia
Corporation (FCB-AVC) is the issuing and processing bank for BancShares' retail
credit cards. Pisgah, Inc., a wholly-owned subsidiary of FCB-AVC, owns credit
card receivables. Various other subsidiaries are either inactive or not
material to BancShares' consolidated financial position or to consolidated net
income.
As a registered financial holding company, BancShares is subject to the
jurisdiction of the Board of Governors of the Federal Reserve System.
BancShares also is registered as a financial holding company with the North
Carolina Commissioner of Banks and is subject to regulations promulgated by the
Commissioner. The internal affairs of BancShares, including the rights of its
shareholders, are governed by Delaware law and by its Certificate of
Incorporation and Bylaws. BancShares files periodic reports under the
Securities Exchange Act of 1934 and is subject to the jurisdiction of the
Securities and Exchange Commission.
FCB is also regulated by the North Carolina Commissioner of Banks as well as
the Federal Deposit Insurance Corporation. ASB is regulated by the Office of
Thrift Supervision. AGI and Triangle Life Insurance Company are regulated by
the North Carolina Department of Insurance.
3
Properties
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Through its subsidiary financial institutions, as of December 31, 2001,
BancShares operated branch offices at 392 locations in North Carolina,
Virginia, West Virginia, Florida and Georgia. BancShares owns many of the
buildings and leases other facilities from third parties.
Additional information relating to premises, equipment and lease commitments
is set forth in Note E of BancShares' consolidated financial statements.
Market for Registrant's Common Equity and Related Shareholder Matters
- --------------------------------------------------------------------------------
BancShares' Class A and Class B common stock is traded in the
over-the-counter market, and the Class A common stock is quoted on the National
Association of Securities Dealers Automated Quotation National Market System
under the symbol FCNCA. The Class B common stock is quoted on the Over the
Counter Bulletin Board. As of December 31, 2001, there were 2,885 holders of
record of the Class A common stock, and 548 holders of record of the Class B
common stock.
The per share cash dividends paid by BancShares and the high and low sales
prices for each quarterly period during 2001 and 2000 are set forth in Table 18
under the caption 'Per Share of Stock' of this report. A cash dividend of 25
cents per share was declared by the Board of Directors on January 28, 2002,
payable April 1, 2002, to holders of record as of March 18, 2002. Payment of
dividends is made at the discretion of the Board of Directors and is contingent
upon satisfactory earnings as well as projected future capital needs. Subject
to the foregoing, it is currently management's expectation that comparable cash
dividends will continue to be paid in the future.
4
Management's Discussion and Analysis
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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. (BancShares), for the years 2001,
2000 and 1999. Within the accompanying discussion, 'we' and 'our' refer to
BancShares.
BancShares is a financial holding company with two wholly-owned banking
subsidiaries: First-Citizens Bank & Trust Company (First Citizens Bank or FCB),
a North Carolina-chartered bank, and Atlantic States Bank (ASB), a federally
chartered thrift institution. First Citizens Bank operates branches in North
Carolina, West Virginia, and Virginia. Atlantic States Bank operates branches
in Georgia and Florida.
This discussion and related financial data should be read in conjunction
with our audited consolidated financial statements and related footnotes,
presented on pages 30 through 54 of this report, which are prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires that we make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosure of contingent assets and
liabilities. BancShares periodically evaluates its estimates, including those
related to the reserve for loan losses, income taxes and contingencies. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
Certain critical accounting policies affect the more significant judgments
and estimates used in the preparation of the consolidated financial statements.
Our single critical accounting policy relates to our reserve for loan losses,
which reflects the estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our
borrowers were to deteriorate, resulting in an impairment of their ability to
make payments, our estimates would be updated, and additional reserves may be
required. For further discussion of the estimates used, refer to the section
captioned Asset Quality.
SUMMARY
BancShares reported net income of $86.9 million during 2001, compared to
$98.3 million in 2000 and $81.8 million in 1999. Net income for 2001
represented an 11.6 percent decrease when compared to 2000. The $11.4 million
reduction was the result of increased levels of noninterest expense and
provision for loan losses, partially offset by improved levels of noninterest
income and marginally higher net interest income. The improvement in net income
during 2000 over 1999 resulted from nonrecurring gains and growth in net
interest income and noninterest income at levels that exceeded the growth in
noninterest expense. Net income per share for 2001 totaled $8.27, compared to
$9.32 and $7.70 for 2000 and 1999, respectively. Return on average assets
totaled 0.77 percent during 2001, 0.98 percent during 2000 and 0.85 percent
during 1999.
An analysis of our financial condition and growth can be made by examining
the changes and trends in interest-earning assets and interest-bearing
liabilities, and a discussion of these changes and trends follows. The
information presented in Table 5 is useful in making such an analysis. Table 2
details acquisitions and divestitures during 2001, 2000 and 1999. All of the
acquisitions were accounted for as purchases, with the results of operations
included in our Statements of Income since the respective acquisition dates.
Table 13 provides a five-year history of the provision for loan losses. Tables
15 and 16 present five-year histories for the components of noninterest income
and expense, respectively.
5
Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income............................. $ 715,427 $ 708,170 $ 633,891 $ 619,487 $ 572,276
Interest expense............................ 346,510 342,828 281,542 292,071 268,013
----------- ----------- ----------- ----------- -----------
Net interest income......................... 368,917 365,342 352,349 327,416 304,263
Provision for loan losses................... 24,134 15,488 11,672 19,879 8,726
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan
losses.................................... 344,783 349,854 340,677 307,537 295,537
Noninterest income.......................... 215,555 202,190 165,339 145,417 114,914
Noninterest expense......................... 422,597 394,784 375,620 342,213 300,401
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 137,741 157,260 130,396 110,741 110,050
Income taxes................................ 50,805 58,949 48,596 39,732 39,492
----------- ----------- ----------- ----------- -----------
Net income.................................. $ 86,936 $ 98,311 $ 81,800 $ 71,009 $ 70,558
=========== =========== =========== =========== ===========
Net interest income, taxable equivalent..... $ 370,857 $ 368,190 $ 354,566 $ 329,764 $ 306,726
=========== =========== =========== =========== ===========
SELECTED AVERAGE BALANCES
Total assets................................ $11,235,859 $10,005,597 $ 9,622,774 $ 9,173,020 $ 8,304,412
Investment securities....................... 2,196,473 1,618,584 1,908,300 2,305,395 2,300,706
Loans....................................... 7,105,915 6,955,772 6,399,114 5,847,531 5,086,723
Interest-earning assets..................... 10,038,074 8,984,878 8,638,698 8,281,072 7,569,075
Deposits.................................... 9,405,328 8,390,920 8,105,443 7,759,315 7,088,019
Interest-bearing liabilities................ 8,798,893 7,772,889 7,517,483 7,249,290 6,521,818
Long-term obligations....................... 186,636 154,634 157,897 133,935 10,472
Shareholders' equity........................ $ 847,374 $ 763,386 $ 693,559 $ 629,089 $ 638,825
Shares outstanding.......................... 10,507,289 10,551,607 10,625,457 10,626,311 11,341,153
=========== =========== =========== =========== ===========
SELECTED PERIOD-END BALANCES
Total assets................................ $11,864,991 $10,691,617 $ 9,717,099 $ 9,605,787 $ 8,951,109
Investment securities....................... 2,791,296 1,816,720 1,371,894 2,160,329 2,483,294
Loans....................................... 7,196,177 7,109,692 6,751,039 6,195,591 5,445,772
Interest-earning assets..................... 10,489,382 9,357,794 8,596,326 8,588,645 8,010,841
Deposits.................................... 9,961,605 8,971,868 8,173,598 8,112,408 7,579,567
Interest-bearing liabilities................ 9,206,903 8,384,692 7,554,229 7,542,636 7,052,749
Long-term obligations....................... 284,009 154,332 155,683 158,801 10,856
Shareholders' equity........................ $ 885,043 $ 810,728 $ 728,757 $ 660,749 $ 601,640
Shares outstanding.......................... 10,483,456 10,522,836 10,610,399 10,625,559 10,627,453
=========== =========== =========== =========== ===========
PROFITABILITY RATIOS (averages)
Rate of return on:
Total assets............................... 0.77 % 0.98 % 0.85 % 0.77 % 0.85 %
Shareholders' equity....................... 10.26 12.88 11.79 11.29 11.04
Dividend payout ratio....................... 12.09 10.73 12.99 15.11 16.08
=========== =========== =========== =========== ===========
LIQUIDITY AND CAPITAL RATIOS
(averages)
Loans to deposits........................... 75.55 % 82.90 % 78.95 % 75.36 % 71.77 %
Shareholders' equity to total assets........ 7.54 7.63 7.21 6.86 7.69
Time certificates of $100,000 or more to
total deposits............................ 11.43 9.46 9.02 9.21 9.62
=========== =========== =========== =========== ===========
PER SHARE OF STOCK
Net income.................................. $ 8.27 $ 9.32 $ 7.70 $ 6.62 $ 6.22
Cash dividends.............................. 1.00 1.00 1.00 1.00 1.00
Market price at December 31 (Class A)....... 97.75 80.75 69.75 90.00 104.03
Book value at December 31................... 84.42 77.04 68.68 62.18 56.61
Tangible book value at December 31.......... 73.78 65.76 58.13 50.73 47.11
=========== =========== =========== =========== ===========
6
NONRECURRING ITEMS
The after-tax impact of nonrecurring items was net gains of $2.8 million
during 2001, $14.7 million during 2000 and $2.6 million during 1999. The per
share amounts of the nonrecurring items were $0.26, $1.39 and $0.25,
respectively, for 2001, 2000 and 1999. The primary nonrecurring items were:
During 2001:
. Securities gains--BancShares reported after-tax gains of $4.5 million
from the sale of available for sale securities; the pre-tax gain of $7.2
million is included in securities gains;
. Non-credit charge-offs--in addition to the normal and customary levels
of non-credit charge-offs, BancShares recognized $1.1 million in
after-tax losses that management views as unlikely to recur in such
amounts; the pre-tax loss of $1.7 million is included in other expense;
. Provision for branch closings--BancShares recognized net-of-tax expenses
of $843,000 related to in-store branches that management either elected
to close during 2001 or were deemed to be impaired; the pre-tax impact
of $1.3 million is divided between occupancy expense ($323,000) and
other expense ($1.0 million).
During 2000:
. Sale of mortgage servicing rights--FCB recognized $12.6 million in net
income resulting from the sale of mortgage servicing rights; the pre-tax
income of $20.2 million is included in gain on sale of mortgage
servicing rights;
. Sale of branches--FCB recognized $2.6 million in net income from the
sale of four branch offices; the pre-tax gain of $4.1 million is
included in gain on sale of branches;
. Provision for branch closings--BancShares recognized net-of-tax expenses
of $1.9 million related to branches that management elected to close
during 2000; the pre-tax impact of $3.1 million is included in occupancy
expense ($1.1 million) and other expense ($2.0 million);
. Securities gains--BancShares reported $1.1 million in after-tax gains
from the sale of available for sale securities; the pre-tax gain of $1.8
million is included in securities gains.
During 1999:
. Sale of branches--FCB recognized $3.1 million in after-tax gains on the
sale of branches; the pre-tax gain of $5.1 million is included in gain
on sale of branches;
. Securities gains--BancShares reported $1.1 million in after-tax gains
from the sale of available for sale securities; the pre-tax gain of $1.7
million is included in securities gains.
Table 2
SIGNIFICANT ACQUISITIONS AND DIVESTITURES
Total Total
Year Institution and Location Loans Deposits
---- ------------------------------------------------- -------- ---------
(thousands)
2001 Purchase of two branches by First Citizens Bank $ 11,187 $ 50,493
2000 Purchase of six branches by First Citizens Bank 13,569 143,078
2000 Sale of four branches by First Citizens Bank (91,406) (91,810)
1999 Purchase of five branches by Atlantic States Bank 12 27,506
1999 Sale of eight branches by First Citizens Bank (38,735) (123,048)
INTEREST-EARNING ASSETS
Interest-earning assets averaged $10.04 billion during 2001, an increase of
$1.05 billion or 11.7 percent over 2000 levels, compared to a $346.2 million or
4.0 percent increase in 2000 over 1999 levels. Growth among interest-earning
assets during 2001 resulted primarily from increases in investment securities
and overnight investments, while growth during 2000 resulted from higher loan
balances. Loan demand in 2001 was not as robust as either 2000 or 1999 due to
the effects of the economic slowdown in our principal market areas.
7
Loans. As of December 31, 2001, gross loans outstanding were $7.20 billion,
a 1.2 percent increase over the December 31, 2000 balance of $7.11 billion.
Loan balances for the last five years are presented in Table 3. The
$86.5 million increase in loans during 2001 was primarily due to growth of
commercial mortgage loans and revolving loans secured by real estate. The
$238.4 million growth among commercial mortgage loans reflects the strong
demand for these loan products among business customers. The $172.4 million
increase in revolving loans secured by real estate reflects the continued
popularity of the EquityLine product and growth of the Capital Line products
among our business customers. Higher balances in these portfolios were
partially offset by reductions of $211.4 million in residential mortgage loans
and $143.9 million among consumer loans. The reduction in residential mortgage
loans resulted from sales and heavy refinancing of existing portfolio loans,
while the reduction in consumer loans reflects continued reductions in
automobile sales finance activity.
During 2000, the $358.7 million increase in loans resulted from general
growth among loans secured by real estate, which increased $557.2 million. This
growth was partially offset by reductions in consumer loans of $175.1 million
and commercial and industrial loans of $52.2 million.
During 2001, average loans were $7.11 billion, an increase of $150.1 million
or 2.2 percent over 2000, compared to an increase of $556.7 million or 8.7
percent in 2000 when compared to 1999.
Table 3
LOANS
December 31
------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(thousands)
Real estate:
Construction and land development $ 283,968 $ 216,439 $ 186,119 $ 157,603 $ 113,735
Mortgage:
Commercial..................... 2,231,498 1,993,067 1,810,904 1,495,214 1,055,529
1-4 family residential......... 1,338,975 1,550,329 1,326,642 1,299,508 1,411,279
Revolving...................... 1,024,181 851,810 755,342 617,062 603,714
Other.......................... 163,914 186,247 161,652 160,289 136,639
---------- ---------- ---------- ---------- ----------
Total real estate loans.......... 5,042,536 4,797,892 4,240,659 3,729,676 3,320,896
Commercial and industrial......... 918,929 933,515 985,738 845,068 633,580
Consumer.......................... 1,074,202 1,218,134 1,393,227 1,516,712 1,402,093
Lease financing................... 139,966 134,483 123,908 93,680 74,589
Other............................. 20,544 25,668 7,507 10,455 14,614
---------- ---------- ---------- ---------- ----------
Total gross loans................ 7,196,177 7,109,692 6,751,039 6,195,591 5,445,772
Less reserve for loan losses...... 107,087 102,655 98,690 96,115 84,360
---------- ---------- ---------- ---------- ----------
Net loans........................ $7,089,090 $7,007,037 $6,652,349 $6,099,476 $5,361,412
========== ========== ========== ========== ==========
- --------
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
Although the downward pressure on interest rates during 2001 would typically
stimulate customer demand for loans, management anticipates more modest demand
for most loan products due to continued sluggish economic prospects for 2002.
Despite lagging demand among other products, revolving mortgage loans are
expected to continue favorable growth trends. Management projects continued
reductions in consumer loans due to modest volumes of automobile sales finance
originations. All growth projections, however, are subject to uncertainty as a
result of changes in general economic conditions in our market areas.
Investment Securities. At December 31, 2001, and 2000, the investment
securities portfolio totaled $2.79 billion and $1.82 billion, respectively.
Investment securities held to maturity totaled $2.66 billion and $1.78 billion,
respectively, at December 31, 2001 and 2000. The increase in investment
securities held to maturity during 2001 resulted from strong deposit growth,
which significantly exceeded loan demand. In each period, U.S. Treasury and
government agency securities represented substantially all of the
held-to-maturity portfolio. The fair values of investment securities available
8
for sale at December 31, 2001 and 2000 were $132.4 million and $38.6 million,
respectively. The $93.9 million increase in investment securities available for
sale results primarily from short-term securities purchased with a portion of
the proceeds from long-term borrowings that were originated in late 2001.
Although we expect the proceeds from the borrowings will ultimately be used to
support growth of the banking subsidiaries, management elected to temporarily
invest the proceeds in the investment securities portfolio. Investment
securities available for sale include U.S. Treasury obligations and equity
securities. Unrealized gains and losses on available-for-sale securities are
included as a component of shareholders' equity, net of deferred taxes.
Table 4
INVESTMENT SECURITIES
December 31
----------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------- --------------------- ---------------------
Average Taxable
Fair Maturity Equivalent Fair Fair
Cost Value (Yrs./Mos.) Yield Cost Value Cost Value
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
(thousands)
Investment securities held to
maturity:
U. S. Government:
Within one year................... $2,452,587 $2,474,155 0/6 4.74% $1,450,484 $1,452,268 $1,077,354 $1,067,979
One to five years................. 197,174 197,169 1/10 3.14 315,194 318,898 263,009 255,805
Five to ten years................. 148 155 8/0 8.00 210 216 176 178
Over ten years.................... 5,348 5,475 24/11 7.39 7,834 7,891 9,665 9,552
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 2,655,257 2,676,954 0/8 4.63 1,773,722 1,779,273 1,350,204 1,333,514
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
State, county and municipal:
Within one year................... 1,254 1,278 0/7 6.84 700 702 699 703
One to five years................. 500 517 3/3 5.55 1,758 1,800 1,963 1,990
Five to ten years................. 143 149 7/4 5.88 1,681 1,808 150 152
Over ten years.................... 1,412 1,517 16/3 6.02 -- -- -- --
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 3,309 3,461 8/0 6.25 4,139 4,310 2,812 2,845
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Other
Within one year................... 25 25 0/1 5.98 20 20 -- --
One to five years................. 10 10 1/1 6.50 35 35 55 55
Five to ten years................. 250 250 6/7 7.75 250 250 250 250
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 285 285 5/10 7.03 305 305 305 305
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total investment securities held
to maturity....................... 2,658,851 2,680,700 0/9 4.63 1,778,166 1,783,888 1,353,321 1,336,664
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Investment securities available
for sale:
U. S. Government:
Within one year................... $ 51,560 $ 51,563 0/10 2.06% -- -- -- --
One to five years................. 25,695 25,664 1/1 2.13 -- -- -- --
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total............................. 77,255 77,227 0/11 2.08 -- -- -- --
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
State, county and municipal:
Over ten years.................. 1,263 1,281 15/7 5.33 -- -- -- --
Marketable equity securities...... 41,279 53,937 -- -- 28,875 38,554 7,751 18,573
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total investment securities
available for sale 119,797 132,445 1/2 2.13 28,875 38,554 7,751 18,573
---------- ---------- ----- ---- ---------- ---------- ---------- ----------
Total investment securities $2,778,648 $2,813,145 $1,807,041 $1,822,442 $1,361,072 $1,355,237
========== ========== ========== ========== ========== ==========
- --------
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
taxes for all periods and 6.90% for state income taxes for 2001 and 7.00% for
2000 and 1999.
Investment securities averaged $2.20 billion during 2001, $1.62 billion
during 2000 and $1.91 billion during 1999. As a percentage of average
interest-earning assets, investment securities represented 21.9 percent, 18.0
percent and 22.1 percent during 2001, 2000 and 1999, respectively. Table 4
presents detailed information relating to the investment portfolio.
9
Table 5
AVERAGE BALANCE SHEETS
2001 2000
--------------------------------- ---------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Income/Expense Rate Balance Income/Expense Rate
----------- -------------- ------ ----------- -------------- ------
(thousands, taxable equivalent)
Assets
Loans.................................. $ 7,105,915 $568,379 8.00 % $ 6,955,772 $587,192 8.44 %
Investment securities:
U. S. Government...................... 2,147,697 117,608 5.48 1,588,930 96,576 6.08
State, county and municipal........... 4,804 416 8.66 4,212 357 8.48
Other................................. 43,972 2,288 5.20 25,442 764 3.00
----------- -------- ----- ----------- -------- -----
Total investment securities......... 2,196,473 120,312 5.48 1,618,584 97,697 6.04
Overnight investments.................. 735,686 28,676 3.90 410,522 26,129 6.36
----------- -------- ----- ----------- -------- -----
Total interest-earning assets....... 10,038,074 $717,367 7.15 % 8,984,878 $711,018 7.91 %
Cash and due from banks................ 592,270 476,929
Premises and equipment................. 466,549 418,388
Other assets........................... 243,841 225,861
Reserve for loan losses................ (104,875) (100,459)
----------- -----------
Total assets........................ $11,235,859 $10,005,597
=========== ===========
Liabilities and shareholders' equity
Interest-bearing deposits:
Checking With Interest................ $ 1,145,115 $ 6,060 0.53 % $ 1,068,545 $ 6,338 0.59 %
Savings............................... 608,882 6,680 1.10 633,666 9,436 1.49
Money market accounts................. 1,744,389 54,309 3.11 1,477,248 63,386 4.29
Time deposits......................... 4,453,109 243,703 5.47 3,859,946 219,796 5.69
----------- -------- ----- ----------- -------- -----
Total interest-bearing deposits..... 7,951,495 310,752 3.91 7,039,405 298,956 4.25
Short-term borrowings.................. 660,762 20,643 3.12 578,850 31,219 5.39
Long-term obligations.................. 186,636 15,115 8.10 154,634 12,653 8.18
----------- -------- ----- ----------- -------- -----
Total interest-bearing liabilities.. 8,798,893 $346,510 3.94 % 7,772,889 $342,828 4.41 %
Demand deposits........................ 1,453,833 1,351,515
Other liabilities...................... 135,759 117,807
Shareholders' equity................... 847,374 763,386
----------- -----------
Total liabilities and shareholders'
equity............................ $11,235,859 $10,005,597
=========== ===========
Interest rate spread................... 3.21 % 3.50 %
Net interest income and net yield on
interest-earning assets............... $370,857 3.69 % $368,190 4.10 %
======== ===== ======== =====
- --------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income
taxes only, or state income taxes only, are stated on a taxable-equivalent
basis assuming a statutory federal income tax rate of 35% for all periods, and
state income tax rates of 6.90% for 2001 and 7.00% for 2000 and 1999.
10
Table 5
AVERAGE BALANCE SHEETS (continued)
1999 1998 1997
- ------------------------------- -------------------------- --------------------------------
Interest
Average Interest Yield/ Average Income/ Yield/ Average Interest Yield/
Balance Income/Expense Rate Balance Expense Rate Balance Income/Expense Rate
- ---------- -------------- ------ ---------- -------- ------ ---------- -------------- ------
(thousands, taxable equivalent)
$6,399,114. $512,419 8.01 % $5,847,531 $480,741 8.22 % $5,086,723 $430,933 8.47%
1,881,591 106,435 5.66 2,273,579 133,535 5.87 2,267,652 133,007 5.87
2,893. 217 7.50 4,340 318 7.33 5,560 421 7.57
23,816. 548 2.30 27,476 507 1.85 27,494 481 1.75
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
1,908,300. 107,200 5.62 2,305,395 134,360 5.83 2,300,706 133,909 5.82
331,284. 16,489 4.98 128,146 6,734 5.25 181,646 9,897 5.45
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
8,638,698. $636,108 7.36 % 8,281,072 $621,835 7.51 % 7,569,075 $574,739 7.59 %
459,202. 400,896 345,578
382,092. 343,307 251,163
239,833. 237,564 220,828
(97,051). (89,819) (82,232)
- ---------- ---------- ----------
$9,622,774. $9,173,020 $8,304,412
========== ========== ==========
$1,074,885. $ 6,858 0.64 % $1,035,761 $ 10,255 0.99 % $ 928,122 $ 9,909 1.07 %
687,191. 10,730 1.56 697,227 12,954 1.86 704,531 14,121 2.00
1,359,433. 47,881 3.52 1,117,286 39,135 3.50 919,049 34,062 3.71
3,680,867. 179,452 4.88 3,725,818 193,173 5.18 3,489,614 185,657 5.32
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
6,802,376. 244,921 3.60 6,576,092 255,517 3.89 6,041,316 243,749 4.03
557,210. 23,921 4.29 539,263 25,850 4.79 470,030 23,420 4.98
157,897. 12,700 8.04 133,935 10,704 7.99 10,472 844 8.06
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
7,517,483. $281,542 3.75 % 7,249,290 $292,071 4.03 % 6,521,818 $268,013 4.11 %
1,303,067. 1,183,223 1,046,703
108,665. 111,418 97,066
693,559. 629,089 638,825
- ---------- ---------- ----------
$9,622,774. $9,173,020 $8,304,412
========== ========== ==========
3.61 % 3.48 % 3.48 %
$354,566 4.10 % $329,764 3.98 % $306,726 4.05 %
======== ===== ======== ===== ======== =====
11
Overnight Investments. At December 31, 2001 and 2000, overnight
investments, which include federal funds sold and interest-bearing deposits in
other banks, totaled $501.9 million and $431.4 million, respectively. These
investments averaged $735.7 million, $410.5 million and $331.3 million,
respectively, during 2001, 2000 and 1999. The increases relate to higher
balances in interest-bearing accounts, resulting from increased balance sheet
liquidity during 2001.
Income on Interest-Earning Assets. Table 5 analyzes the interest-earning
assets and interest-bearing liabilities for the five years ending December 31,
2001. Table 8 identifies the causes for changes in interest income and interest
expense for 2001 and 2000. Interest income amounted to $715.4 million during
2001, a $7.3 million or 1.0 percent increase from 2000 levels, compared to a
$74.3 million or 11.7 percent increase from 1999 to 2000. The growth in
interest income during 2001 reflected the net impact of higher balances of
interest-earning assets, primarily investment securities, partially offset by
lower yields on such assets. During 2000, loan growth and an improved blended
asset yield were the primary factors for the increase in interest income over
1999.
The taxable-equivalent yield on interest-earning assets was 7.15 percent
during 2001, a 76 basis point decrease from the 7.91 percent reported in 2000.
The average taxable-equivalent yield on the loan portfolio decreased from 8.44
percent in 2000 to 8.00 percent in 2001. The lower loan yield during 2001
reflects the changes in market-driven rates that decreased during 2001 as a
result of reductions in the discount and federal funds rate by the Federal
Reserve. Loan interest income decreased $17.9 million or 3.1 percent from 2000,
the result of lower loan yields. This followed an increase of $74.2 million or
14.5 percent in loan interest income in 2000 over 1999, which resulted from
increased average loans and higher loan yields.
Interest income earned on the investment portfolio amounted to $120.2
million, $97.6 million and $107.1 million during 2001, 2000 and 1999,
respectively. The taxable-equivalent yield on the investment securities
portfolio was 5.48 percent, 6.04 percent and 5.62 percent, respectively, for
2001, 2000 and 1999. The $22.6 million increase in investment interest income
during 2001 reflected growth in the portfolio, net of the impact of a lower
yield. The $9.6 million decrease in investment interest income from 1999 to
2000 was primarily the result of the reduction in the investment securities
portfolio during 2000, partially offset by an improved taxable-equivalent yield
on the investment securities portfolio.
INTEREST-BEARING LIABILITIES
At December 31, 2001 and 2000, interest-bearing liabilities totaled $9.21
billion and $8.38 billion, respectively, an increase of $822.2 million or 9.8
percent. The increase during 2001 results from higher levels of
interest-bearing deposits and long-term obligations. Interest-bearing
liabilities averaged $8.80 billion during 2001, an increase of $1.03 billion or
13.2 percent over 2000 levels. During 2000, interest-bearing liabilities
averaged $7.77 billion, an increase of $255.4 million or 3.40 percent over
1999, with much of that growth resulting from time deposits.
Deposits. At December 31, 2001, deposits totaled $9.96 billion, an increase
of $989.7 million or 11.0 percent from the $8.97 billion in deposits recorded
as of December 31, 2000.
Total deposits averaged $9.41 billion in 2001, an increase of $1.01 billion
or 12.1 percent over 2000. Average interest-bearing deposits were $7.95 billion
during 2001, an increase of $912.1 million or 13.0 percent. Time deposits
averaged $4.45 billion during 2001, an increase of $593.2 million or 15.4
percent over 2000. Money market accounts averaged $1.74 billion during 2001,
compared to $1.48 billion during 2000, an increase of $267.1 million or 18.1
percent. Management attributes much of the deposit growth during 2001 to funds
leaving more volatile equity markets as investors sought the stability of
traditional bank deposit products.
During 2000, total deposits averaged $8.39 billion, an increase of $285.5
million or 3.5 percent over 1999. Average interest-bearing deposits were $7.04
billion during 2000, an increase of $237.0 million or 3.5 percent over 1999.
Time deposits averaged $3.86 billion during 2000, an increase of $179.1 million
or 4.9 percent over 1999. Management attributes the growth in 2000 to higher
market interest rates offered on certificates of deposit and IRAs. Money market
deposits averaged $1.48 billion during 2000, an increase of $117.8 million or
8.7 percent over 1999.
12
During 2001, time deposits in excess of $100,000 averaged 11.4 percent of
total deposits, compared to 9.5 percent in 2000. While we do not accept
brokered deposits or solicit out-of-market deposits, the general growth in time
deposits during 2001 has resulted in a larger percentage of high-dollar
deposits. Table 6 provides a maturity distribution for these deposits.
Table 6
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 2001
-----------------
(thousands)
Less than three months $ 472,071
Three to six months... 252,998
Six to 12 months...... 255,527
More than 12 months... 176,311
----------
Total................. $1,156,907
==========
Management anticipates that deposit growth and retention during 2002 will be
difficult due to extremely low market interest rates and competitive pressure
from other financial institutions in our principal market areas.
Short-Term Borrowings. BancShares has access to various short-term
borrowings, including the purchase of federal funds, overnight repurchase
obligations and credit lines with correspondent banks. At December 31, 2001,
short-term borrowings totaled $611.4 million, compared to $632.4 million one
year earlier. For the year ended December 31, 2001, short-term borrowings
averaged $660.8 million, compared to $578.9 million during 2000 and $557.2
million during 1999. The $81.9 million or 14.2 percent increase from 2000 to
2001 resulted primarily from higher master note and repurchase obligations as
business customers more extensively utilized these forms of cash management
instruments. The $21.6 million or 3.9 percent increase from 1999 to 2000
resulted from higher levels of repurchase agreements, partially offset by
reductions in average master note borrowings and federal funds purchased. Table
7 provides additional information regarding short-term borrowed funds.
Table 7
SHORT-TERM BORROWINGS
2001 2000 1999
------------- ------------- -------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(thousands)
Master notes
At December 31........................ $305,537 0.85% $322,944 5.39% $326,984 4.14%
Average during year................... 329,941 3.16 309,145 5.35 322,154 4.16
Maximum month-end balance during year. 343,886 -- 327,774 -- 355,795 --
Repurchase agreements
At December 31........................ 201,763 0.60 181,404 4.89 125,832 3.89
Average during year................... 213,830 2.50 170,925 4.88 117,681 3.76
Maximum month-end balance during year. 231,353 -- 197,113 -- 132,540 --
Federal funds purchased
At December 31........................ 41,700 1.21 71,825 5.93 53,195 4.06
Average during year................... 63,115 3.97 43,157 6.23 60,077 4.92
Maximum month-end balance during year. 92,850 -- 73,015 -- 88,460 --
Other
At December 31........................ 62,390 2.25 56,199 4.16 62,290 5.39
Average during year................... 53,876 4.39 55,623 6.56 57,298 5.45
Maximum month-end balance during year. 63,408 -- 63,893 -- 67,870 --
Long-Term Obligations. At December 31, 2001 and 2000, long-term obligations
totaled $284.0 million and $154.3 million, respectively. The $129.7 million
increase during 2001 results from the issuance of $100.0 million in trust
preferred securities during the fourth quarter of 2001 and $30.0 million in
borrowings from the Federal Home Loan Bank (FHLB). The trust
13
preferred securities issued during the fourth quarter are thirty year
obligations, callable after the fifth year with interest paid quarterly at a
fixed interest rate of 8.40 percent. We issued these obligations to provide
capital to support our continued growth. Although the trust preferred
securities are classified as long-term obligations on the balance sheet,
current regulatory guidelines allow these securities to be included as Tier I
capital for risk-based capital purposes. For that reason, we view these
securities as an effective way to provide resources for growth. The FHLB
advances are 10- and 20-year fixed rate borrowings that provide additional
long-term liquidity.
During 2001, long-term obligations averaged $186.6 million, compared to
$154.6 million during 2000 and $157.9 million during 1999. The increase from
2000 to 2001 results from the origination of the $100 million in trust
preferred securities and the Federal Home Loan Bank borrowings. The reduction
from 1999 to 2000 results from the reclassification of long-term obligations to
short-term borrowings once the scheduled maturity is less than one year.
Expense of Interest-Bearing Liabilities. Interest expense amounted to
$346.5 million in 2001, a $3.7 million or 1.1 percent increase from 2000. This
followed a $61.3 million or 21.8 percent increase in interest expense during
2000 compared to 1999. The blended rate on all interest-bearing liabilities was
3.94 percent during 2001, compared to 4.41 percent in 2000 and 3.75 percent in
1999. The increase in interest expense during 2001 was the combined result of
large increases in average interest-bearing liabilities, significantly offset
by lower market interest rates. The lower cost of borrowing during 2001
resulted from actions of the Federal Reserve to lower discount and federal
funds rates. The reductions in these key index rates pushed deposit and other
borrowing costs materially lower during 2001. The increase in interest expense
during 2000 was the result of increases in average interest-bearing liabilities
and higher interest rates.
The aggregate rate on interest-bearing deposits was 3.91 percent during
2001, compared to 4.25 percent during 2000 and 3.60 percent during 1999.
Interest expense on interest-bearing deposits amounted to $310.8 million during
2001, a 3.9 percent increase from the $299.0 million recorded during 2000,
which was a 22.1 percent increase over the $244.9 million recorded during 1999.
The growth in interest expense from 2000 to 2001 was the result of higher
average deposits, largely offset by the impact of falling interest rates. From
1999 to 2000, the increase in interest expense was the result of higher
interest rates combined with higher average deposit balances. Interest expense
of time deposits was $243.7 million during 2001, a $23.9 million or 10.9
percent increase over 2000. The $219.8 million in interest expense recorded
during 2000 represents a $40.3 million or 22.5 percent increase over 1999.
Interest expense on short-term borrowings amounted to $20.6 million in 2001,
a decrease of $10.6 million or 33.9 percent from 2000. Interest expense related
to short-term borrowings totaled $31.2 million and $23.9 million, respectively,
in 2000 and 1999. The decrease during 2001 was attributable to lower interest
rates, which more than offset the impact of the 14.2 percent increase in
average short-term borrowings. During 2000, the growth in interest expense
resulted from higher interest rates and higher average short-term borrowings
when compared to 1999.
Interest expense associated with long-term obligations increased $2.5
million or 19.5 percent during 2001 to $15.1 million. The increase resulted
from higher average volume, which occurred due to the long-term obligations
originated during 2001.
NET INTEREST INCOME
Net interest income was $368.9 million during 2001, a $3.6 million or 1.0
percent increase over 2000. The strong deposit growth during 2001 and the
resulting increases in investment securities and overnight investments created
large volume-driven increases in interest income and interest expense. However,
the impact of falling interest rates created large rate-driven reductions in
interest income and expense. These two events largely offset each other,
resulting in the slight increase in net interest income.
14
During 2000, net interest income was $365.3 million, a $13.0 million or 3.7
percent increase over 1999. Taxable-equivalent net interest income totaled
$370.9 million during 2001, an increase of $2.7 million or 0.7 percent over
2000. This followed an increase of $13.6 million or 3.8 percent during 2000.
Table 8 presents the annual changes in net interest income due to changes in
volume, yields and rates. This table is presented on a taxable-equivalent basis
to adjust for the tax-exempt status of income earned on certain loans, leases
and municipal securities.
Table 8
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
2001 2000
-------------------------------- --------------------------------
Change from previous year due to: Change from previous year due t
-------------------------------- --------------------------------
Yield/ Total Yield/ Total
Volume Rate Change Volume Rate Change
------- -------- -------- -------- ------- -------
(thousands)
Assets:
Loans................................ $12,342 $(31,155) $(18,813) $ 44,575 $30,198 $74,773
Investment securities:
U. S. Government..................... 32,280 (11,248) 21,032 (16,555) 6,696 (9,859)
State, county and municipal.......... 51 8 59 99 41 140
Other................................ 760 764 1,524 37 179 216
------- -------- -------- -------- ------- -------
Total investment securities........ 33,091 (10,476) 22,615 (16,419) 6,916 (9,503)
Overnight investments................. 16,685 (14,138) 2,547 3,944 5,696 9,640
------- -------- -------- -------- ------- -------
Total interest-earning assets...... $62,118 $(55,769) $ 6,349 $ 32,100 $42,810 $74,910
======= ======== ======== ======== ======= =======
Liabilities:
Deposits:
Checking With Interest............... $ 430 $ (708) $ (278) $ (40) $ (480) $ (520)
Savings.............................. (320) (2,436) (2,756) (836) (458) (1,294)
Money market accounts................ 9,890 (18,967) (9,077) 4,150 11,355 15,505
Time................................. 33,119 (9,212) 23,907 8,731 31,613 40,344
------- -------- -------- -------- ------- -------
Total interest-bearing deposits.... 43,119 (31,323) 11,796 12,005 42,030 54,035
Short-term borrowings................. 3,488 (14,064) (10,576) 929 6,369 7,298
Long-term obligations................. 2,605 (143) 2,462 (262) 215 (47)
------- -------- -------- -------- ------- -------
Total interest-bearing liabilities. $49,212 $(45,530) $ 3,682 $ 12,672 $48,614 $61,286
======= ======== ======== ======== ======= =======
Change in net interest income...... $12,906 $(10,239) $ 2,667 $ 19,428 $(5,804) $13,624
======= ======== ======== ======== ======= =======
- --------
Changes in income relating to certain loans and investment securities are
stated on a fully tax-equivalent basis at a rate that approximates BancShares'
marginal tax rate. The taxable equivalent adjustment was $1,940, $2,848, and
$2,217 for the years 2001, 2000 and 1999, respectively. Table 5 provides
detailed information on average balances, income/expense, yield/rate by
category and the relevant income tax rates. The rate/volume variance is
allocated equally between the changes in volume and rate.
The interest rate spread was 3.21 percent during 2001, a decrease of 29
basis points from 3.50 during 2000. The interest rate spread was 3.61 percent
in 1999. The net yield on interest-earning assets was 3.69 percent in 2001 and
4.10 percent in 2000 and 1999. The reductions in the interest rate spread and
the net yield on interest-earning assets further reflect the impact of the
simultaneous growth in interest-earning assets and the offsetting reduction in
interest rates that contributed to the slight increase in net interest income
during 2001.
Rate Sensitivity. A principal objective of our asset/liability function is
to manage interest rate risk or the exposure to changes in interest rates.
Management maintains portfolios of interest-earning assets and interest-bearing
liabilities with maturities or repricing opportunities that protect net
interest income against wide interest rate fluctuations, thereby limiting, to
the extent possible, the ultimate interest rate exposure. Table 9 provides
BancShares' interest-sensitivity position as of December 31, 2001, which
reflected a one-year negative interest-sensitivity gap of $1.06 billion. As a
result of this liability-sensitive position, management believes increases in
interest rates could have an unfavorable impact on net interest income.
15
Table 9
INTEREST-SENSITIVITY ANALYSIS
1-30 31-90 91-180 181-365 Total
Days Days Days Days One Year Total
December 31, 2001 Sensitive Sensitive Sensitive Sensitive Sensitive Nonsensitive Total
- ----------------- ----------- --------- --------- ---------- ----------- ------------ -----------
(thousands)
Assets:
Loans.................... $ 2,633,536 $ 147,574 $ 222,326 $ 434,733 $ 3,438,169 $3,758,008 $ 7,196,177
Investment securities.... 186,651 499,974 637,281 1,181,025 2,504,931 286,365 2,791,296
Overnight investments.... 501,909 -- -- -- 501,909 -- 501,909
----------- --------- --------- ---------- ----------- ---------- -----------
Total interest-
earning assets...... $ 3,322,096 $ 647,548 $ 859,607 $1,615,758 $ 6,445,009 $4,044,373 $10,489,382
=========== ========= ========= ========== =========== ========== ===========
Liabilities:
Interest-bearing deposits $ 4,054,964 $ 776,664 $ 967,641 $1,091,035 $ 6,890,304 $1,421,200 $ 8,311,504
Short-term borrowings.... 570,838 40,000 552 -- 611,390 -- 611,390
Long-term obligations.... -- -- -- -- -- 284,009 284,009
----------- --------- --------- ---------- ----------- ---------- -----------
Total interest-
bearing liabilities. $ 4,625,802 $ 816,664 $ 968,193 $1,091,035 $ 7,501,694 $1,705,209 $ 9,206,903
=========== ========= ========= ========== =========== ========== ===========
Interest-sensitivity gap $(1,303,706) $(169,116) $(108,586) $ 524,723 $(1,056,685) $2,339,164 $ 1,282,479
=========== ========= ========= ========== =========== ========== ===========
- --------
Assets and liabilities with maturities of one year or less and those that may
be adjusted within this period are considered interest sensitive. The
interest-sensitivity position has meaning only as of the date for which it was
prepared.
To minimize the potential adverse impact of interest rate fluctuations,
management monitors the maturity and repricing distribution of the loan
portfolio to reduce its interest rate risk. Additionally, much of the
residential mortgage loan production is originated through and immediately sold
on a servicing-released basis to correspondents, thereby protecting BancShares
from the interest rate exposure that is typical in such lending.
Table 10
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
December 31, 2001
--------------------------------------------
Within One One to Five After Five
Year Years Years Total
---------- ----------- ---------- ----------
(thousands)
Real estate:
Construction and land development. $ 121,190 $ 133,689 $ 29,089 $ 283,968
Mortgage:
Commercial...................... 982,562 1,018,265 230,671 2,231,498
1-4 family residential.......... 376,381 509,664 452,930 1,338,975
Revolving....................... 71,414 255,046 697,721 1,024,181
Other........................... 69,952 77,166 16,796 163,914
---------- ---------- ---------- ----------
Total real estate loans........... 1,621,499 1,993,830 1,427,207 5,042,536
Commercial and industrial.......... 343,167 427,061 148,701 918,929
Consumer........................... 293,588 718,977 61,637 1,074,202
Lease financing.................... 34,992 104,974 -- 139,966
Other.............................. 8,842 9,435 2,267 20,544
---------- ---------- ---------- ----------
Total........................... $2,302,088 $3,254,277 $1,639,812 $7,196,177
========== ========== ========== ==========
Loans maturing after one year with:
Fixed interest rates.............. $2,806,746 $ 895,761 $3,702,507
Floating or adjustable rates...... 447,531 744,051 1,191,582
---------- ---------- ----------
Total........................... $3,254,277 $1,639,812 $4,894,089
========== ========== ==========
Table 10 details the maturity and repricing distribution as of December 31,
2001. Of the gross loans outstanding on December 31, 2001, 32.0 percent have
scheduled maturities within one year, 45.2 percent have scheduled maturities in
one to five years, while the remaining 22.8 percent have scheduled maturities
extending beyond five years.
16
Table 11
MARKET RISK DISCLOSURES
Maturing in Years ended December 31,
--------------------------------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
---------- -------- -------- -------- -------- ---------- ---------- ----------
(dollars in thousands)
Assets
Investment securities held to maturity
Fixed rate........................... $2,453,883 $112,004 $ 85,144 $ 515 $ 23 $ 7,282 $2,658,851 $2,680,700
Average rate (%)..................... 4.71% 2.51% 3.86% 5.63% 8.25% 6.84% 4.63%
Investment securities available for sale
Fixed rate........................... 51,560 25,695 -- -- -- 1,253 78,508 78,508
Average rate (%)..................... 2.06% 2.13% 5.33% 2.14% --
Marketable equity securities......... -- -- -- -- -- 53,937 53,937 53,937
Loans
Fixed rate........................... 791,867 732,897 692,278 542,389 615,122 856,656 4,231,209 4,238,562
Average rate (%)..................... 7.96% 7.94% 7.88% 7.88% 7.38% 7.68% 7.79%
Variable rate........................ 813,549 325,388 224,097 183,035 229,547 1,189,352 2,964,968 2,964,968
Average rate (%)..................... 5.53% 6.05% 5.94% 5.74% 5.26% 6.60% 6.04%
Liabilities
Savings and interest-bearing checking
Fixed rate........................... 3,885,118 -- -- -- -- -- 3,885,118 3,885,118
Average rate (%)..................... 0.79% 0.79%
Time deposits
Fixed rate........................... 3,622,121 463,680 101,999 122,331 79,421 174 4,389,726 4,460,509
Average rate (%)..................... 4.15% 5.46% 5.01% 5.21% 5.34% 6.00% 4.37%
Variable rate........................ 26,142 10,518 -- -- -- -- 36,660 36,660
Average rate (%)..................... 1.82% 2.11% 1.90%
Short-term borrowings
Fixed rate........................... 611,390 -- -- -- -- -- 611,390 611,390
Average rate (%)..................... 0.94% 0.94%
Long-term obligations
Fixed rate........................... 600 348 321 2,178 376 280,186 284,009 275,185
Average rate (%)..................... 7.55% 8.12% 8.02% 8.00% 7.50% 7.96% 7.96%
Table 11 provides information regarding the market risk profile of
BancShares at December 31, 2001. Market risk is the potential economic loss
resulting from changes in market prices and interest rates. This risk can
result in diminished current fair values or reduced net interest income or both
in future periods. The more significant changes in our market risk profile from
December 31, 2000 to December 31, 2001 include:
. the fair value of investment securities held to maturity increased $896.8
million or 50.3 percent; all of the increase relates to growth among
fixed-rate securities;
. the fair value of investment securities available for sale increased $93.9
million or 243.5 percent; excluding the marketable equity securities, all of
the increase relates to growth among fixed-rate securities;
. the fair value of fixed rate loans declined $1.0 billion or 19.2 percent,
the result of migration toward variable rate loans and fixed-rate loan sales;
. the fair value of variable rate loans increased $1.20 billion or 68.5
percent, the result of strong growth among variable rate loans, especially
Equity Line and Capital Line loans;
. the fair value of savings and interest-bearing checking deposits increased
$522.8 million or 15.5 percent, the result of general volume increases;
. the fair value of fixed rate time deposits increased $252.6 million or 6.0%
percent; the increase primarily results from growth among fixed rate time
deposits maturing in 2002 and 2003; and
. the fair value of long-term obligations, all of which are fixed-rate,
increased $153.0 million or 125.3 percent; the increase is primarily due to
$130.0 million in new obligations originated during 2001, all of which
mature after 2006.
17
Assuming all other factors remain constant, the reductions in interest rates
during 2001 would have resulted in higher fair values for portfolios of fixed
rate assets and liabilities. However, the impact of the changes in amounts
outstanding also contributes to changes in fair value. Given our
liability-sensitive position, net interest income should have improved as a
result of the interest rate reductions during 2001. However, the magnitude of
the drop in interest rates was so large that our interest-sensitive liabilities
reached effective floors, while the rates on interest-sensitive assets
continued to decline. This resulted in compression of our net interest margin
during 2001.
ASSET QUALITY
Nonperforming Assets. Nonperforming asset balances for the past five years
are presented in Table 12. BancShares' nonperforming assets at December 31,
2001 included nonaccrual loans totaling $14.0 million and $6.3 million in
foreclosed property. Nonperforming assets as of December 31, 2001 represent
0.28 percent of loans outstanding and other real estate, up from 0.25 percent
as of December 31, 2000. Nonperforming assets totaled $17.8 million and $12.3
million, respectively, as of December 31, 2000 and 1999. Management anticipates
that the level of nonperforming assets may continue to increase until economic
conditions in our market areas show signs of recovery. At December 31, 2001,
loans outstanding included $6.3 million in balances classified as impaired. At
December 31, 2000, impaired loans totaled $6.6 million. As of December 31,
2001, BancShares reported accruing loans 90 days or more past due of $13.0
million, compared to $6.7 million at December 31, 2000. The growth in past due
balances is consistent with the growth in the levels of nonperforming assets.
Management continues to closely monitor past due accounts to identify loans
that should be classified as impaired or non-accrual.
With the exception of certain residential mortgage loans, the accrual of
interest on loans is discontinued when we deem that collection of additional
principal or interest is doubtful; loans are returned to an accrual status when
both principal and interest are current and the loan is determined to be
performing in accordance with the applicable loan terms. The accrual of
interest on certain residential mortgage loans is discontinued when a loan is
more than three monthly payments past due; the accrual of interest on these
loans resumes when the loan is less than three monthly payments past due.
Table 12
RISK ELEMENTS
December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(thousands, except ratios)
Nonaccrual loans....................................... $ 13,983 $ 15,933 $ 10,720 $ 12,489 $ 12,681
Other real estate...................................... 6,263 1,880 1,600 1,529 1,462
---------- ---------- ---------- ---------- ----------
Total nonperforming assets.......................... $ 20,246 $ 17,813 $ 12,320 $ 14,018 $ 14,143
========== ========== ========== ========== ==========
Accruing loans 90 days or more past due................ $ 12,981 $ 6,731 $ 3,576 $ 5,721 $ 3,953
Loans at December 31................................... $7,196,177 $7,109,692 $6,751,039 $6,195,591 $5,445,772
Ratio of nonperforming assets to total loans plus other
real estate.......................................... 0.28% 0.25% 0.18% 0.23% 0.26%
---------- ---------- ---------- ---------- ----------
Interest income that would have been earned on
nonperforming loans had they been performing......... $ 1,060 $ 1,209 $ 894 $ 1,108 $ 1,156
Interest income earned on nonperforming loans.......... 333 587 287 409 349
========== ========== ========== ========== ==========
- --------
There are no loan concentrations to any multiple number of borrowers engaged in
similar activities or industries in excess of 10 percent of total loans at
December 31, 2001. There were no foreign loans outstanding in any period.
Reserve for Loan Losses. Management evaluates the risk characteristics of
the loan portfolio under current economic conditions and considers such factors
as the financial condition of the borrower, fair market value of collateral and
other items that, in management's opinion, deserve current recognition in
estimating possible credit losses.
18
At December 31, 2001, BancShares' reserve for loan losses was $107.1 million
or 1.49 percent of loans outstanding. This compares to $102.7 million or 1.44
percent at December 31, 2000, and $98.7 million or 1.46 percent at December 31,
1999.
The provision for loan losses charged to operations was $24.1 million during
2001 compared to $15.5 million during 2000 and $11.7 million during 1999. The
$8.6 million increase in provision for loan losses from 2000 to 2001 resulted
from growth in nonperforming assets and past due loans, increased loss
estimates and higher net charge-offs during 2001.
Table 13
SUMMARY OF LOAN LOSS EXPERIENCE
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(thousands, except ratios)
Balance at beginning of year......................... $ 102,655 $ 98,690 $ 96,115 $ 84,360 $ 81,439
Reserve of acquired institutions..................... -- -- -- -- 481
Adjustment for sale of loans......................... (777) -- -- -- --
Provision for loan losses............................ 24,134 15,488 11,672 19,879 8,726
Charge-offs:
Real estate:
Construction and land development................ (205) -- (7) (2) (7)
Mortgage:
Commercial...................................... (2,758) (280) (111) (112) (245)
1-4 family residential.......................... (1,171) (898) (966) (826) (1,350)
Revolving....................................... (899) (805) (23) (134) (90)
---------- ---------- ---------- ---------- ----------
Total real estate loans....................... (5,033) (1,983) (1,107) (1,074) (1,692)
Commercial and industrial.......................... (6,736) (5,678) (1,800) (2,001) (1,061)
Consumer........................................... (10,101) (8,199) (10,748) (10,789) (11,540)
Lease financing.................................... (422) (46) (32) (203) (38)
---------- ---------- ---------- ---------- ----------
Total charge-offs............................. (22,292) (15,906) (13,687) (14,067) (14,331)
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate:
Construction and land development................ -- 8 42 93 1,723
Mortgage:
Commercial...................................... 504 688 1,262 2,877 1,502
1-4 family residential.......................... 260 347 368 689 2,505
Revolving....................................... 58 33 13 10 3
---------- ---------- ---------- ---------- ----------
Total real estate loans....................... 822 1,076 1,685 3,669 5,733
Commercial and industrial.......................... 755 1,581 835 512 698
Consumer........................................... 1,787 1,726 2,070 1,762 1,614
Lease financing.................................... 3 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total recoveries.............................. 3,367 4,383 4,590 5,943 8,045
---------- ---------- ---------- ---------- ----------
Net charge-offs............................... (18,925) (11,523) (9,097) (8,124) (6,286)
---------- ---------- ---------- ---------- ----------
Balance at end of year............................... $ 107,087 $ 102,655 $ 98,690 $ 96,115 $ 84,360
========== ========== ========== ========== ==========
Historical Statistics
Balances
Average total loans................................ $7,105,915 $6,955,772 $6,399,114 $5,847,531 $5,086,723
Total loans at year-end............................ 7,196,177 7,109,692 6,751,039 6,195,591 5,445,772
Ratios
Net charge-offs to average total loans............. 0.27% 0.17% 0.14% 0.14% 0.12%
Reserve for loan losses to total loans at year-end. 1.49 1.44 1.46 1.55 1.55
---------- ---------- ---------- ---------- ----------
- --------
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
Economic weakness and less favorable business conditions caused charge offs
to increase in 2001. Net charge-offs for 2001 totaled $18.9 million, compared
to $11.5 million during 2000 and $9.1 million during 1999. Gross charge-offs
for 2001 were $22.3 million, compared to $15.9 million in 2000 and $13.7
million in 1999. During 2001, BancShares experienced increases of $3.1 million
in charge-offs of loans secured by real estate, $1.9 million among consumer
loans and $1.1 million among commercial and industrial loans.
19
During 2001, total recoveries were $3.4 million, compared to $4.4 million
during 2000 and $4.6 million during 1999. During 2001, gross recoveries
decreased $1.0 million primarily due to reductions in recoveries of commercial
and industrial loans.
The ratio of net charge-offs to average loans outstanding equaled 0.27
percent during 2001, 0.17 percent during 2000 and 0.14 percent during 1999.
Table 13 provides details concerning the reserve for loan losses and provision
for loan losses for the past five years.
Management considers the established reserve adequate to absorb losses that
relate to loans outstanding at December 31, 2001, although future additions to
the reserve may be necessary based on changes in economic conditions and 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 additions to the reserve based on their
judgments of information available to them at the time of their examination.
Table 14 details our allocation of the reserve among the various loan types.
The process used to allocate the loan loss reserve considers, among other
factors, whether the borrower is a retail or commercial customer, whether the
loan is secured or unsecured, and whether the loan is an open or closed-end
agreement. Generally, loans to commercial customers are evaluated individually
and assigned a credit grade, while loans to retail customers are evaluated
among groups of loans with similar characteristics. Loans evaluated
individually are assigned a credit grade using such factors as the borrower's
cash flow, the value of any underlying collateral and the value of any
guarantee. The rating becomes the basis for the reserve allocation for that
individual loan. Groups of loans are aggregated and probable losses are
estimated based on prior experience and current economic conditions. The amount
of the reserve for loan losses not allocated through these loss models becomes
the unallocated reserve. The growth in the unallocated reserve during 2001 and
2000 results from growth in nonperforming assets, higher net charge-offs in
each period and greater uncertainty resulting from current economic conditions.
Table 14
ALLOCATION OF RESERVE FOR LOAN LOSSES
December 31
--------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- --------------- --------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Reserve Loans Reserve Loans Reserve Loans Reserve Loans Reserve Loans
-------- -------- -------- -------- ------- -------- ------- -------- ------- --------
(thousands)
Real estate:
Construction and land
development........... $ 7,099 3.95% $ 5,411 3.04% $ 4,653 2.76% $ 3,027 2.54% $ 3,235 .2.09
Mortgage:
Commercial............. 32,875 31.01 31,786 28.04 32,198 26.82 26,835 24.13 16,388 19.38
1-4 family residential. 6,498 18.61 6,416. 21.81 5,721 19.65 11,182 20.97 14,779 25.92
Revolving.............. 5,349 14.23 4,600 11.98 4,098 11.19 3,338 9.96 4,257 11.09
Other.................. 2,290 2.28 2,860 2.62 3,232 2.39 3,075 2.59 1,712 2.51
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total real estate........ 54,111 70.08 51,073 67.49 49,902 62.81 47,457 60.19 40,371 60.99
Commercial and industrial 19,833 12.77 19,951 13.13 20,084 14.60 13,591 13.64 9,533 11.63
Consumer................. 23,754 14.91 24,523 17.13 26,279 20.64 32,099 24.49 31,025 25.74
Lease financing.......... 1,624 1.95 1,560 1.89 1,572 1.84 1,123 1.51 992 1.37
Other.................... 151 0.29 254 0.36 190 0.11 180 0.17 324 0.27
Unallocated.............. 7,614 - 5,294 - 663 - 1,665 - 2,115 -
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total.................. $107,087 100.00% $102,655 100.00% $98,690 100.00% $96,115 100.00% $84,360 100.00
======== ====== ======== ====== ======= ====== ======= ====== ======= ======
At December 31, 2001, we had no foreign loans or any loans to finance highly
leveraged transactions. Further, management does not contemplate originating or
participating in such transactions in the future.
20
NONINTEREST INCOME
Total noninterest income was $215.6 million during 2001, an increase of
$13.4 million or 6.6 percent over 2000. Noninterest income during 2000 was
$202.2, which was a $36.9 million or 22.3 percent increase over the $165.3
million recorded during 1999. During 2001, 2000 and 1999, various nonrecurring
items have had a significant impact on noninterest income. These items totaled
$7.5 million in 2001, $26.1 million in 2000 and $6.8 million in 1999. Table 15
presents the major components of noninterest income for the past five years.
Much of the increase in core noninterest income during 2001 can be
attributed to increases in service charges on deposit accounts, mortgage income
and credit card income. Service charge income was $70.1 million during 2001,
compared to $59.4 million in 2000 and $55.2 million in 1999. The $10.7 million
or 18.0 percent increase in service charge income during 2001 results from
higher bad check fees and commercial service charges. The growth in commercial
service charges reflects the impact of lower market interest rates since the
service charge on commercial deposit accounts is typically calculated net of an
earnings credit for deposit balances maintained. During 2001, as the earnings
credit rate declined, the amount of service charges increased.
Table 15
NONINTEREST INCOME
Year ended December 31
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(thousands)
Core noninterest income:
Service charges on deposit accounts...... $ 70,066 $ 59,384 $ 55,169 $ 47,055 $ 41,748
Credit card income....................... 42,759 36,837 30,820 25,558 20,053
Commission-based income:
Investments............................ 12,585 12,974 10,700 9,034 6,407
Insurance.............................. 5,220 3,718 3,072 1,325 351
Other.................................. 1,969 603 -- -- --
-------- -------- -------- -------- --------
Total commission-based income........ 19,774 17,295 13,772 10,359 6,758
Fees from processing services............ 17,452 14,556 12,987 11,652 10,511
Trust income............................. 15,114 14,814 13,848 12,710 11,284
Mortgage income.......................... 12,557 5,172 6,440 8,797 2,106
ATM income............................... 11,192 10,844 10,655 10,397 8,524
Other service charges and fees........... 13,896 12,077 9,935 10,176 7,311
Other.................................... 5,256 5,129 4,944 5,646 6,619
-------- -------- -------- -------- --------
Total core noninterest income........ 208,066 176,108 158,570 142,350 114,914
-------- -------- -------- -------- --------
Nonrecurring items:
Securities transactions.................. 7,189 1,810 1,706 -- --
Gain on sale of mortgage servicing rights 300 20,187 -- -- --
Gain on sale of branches................. -- 4,085 5,063 3,067 --
-------- -------- -------- -------- --------
Total nonrecurring items............. 7,489 26,082 6,769 3,067 --
-------- -------- -------- -------- --------
Total..................................... $215,555 $202,190 $165,339 $145,417 $114,914
======== ======== ======== ======== ========
Mortgage income grew $7.4 million from $5.2 million in 2000 to $12.6 million
in 2001. Higher loan originations during 2001 resulted in an increase in
origination fees and servicing release fees earned. Mortgage income decreased
$1.3 million from 1999 to 2000. This 19.7 percent decrease resulted from losses
sustained on the sales of our marketable residential mortgage loans. Credit
card income grew from $36.8 million in 2000 to $42.8 million during 2001, an
increase of $5.9 million or 16.1 percent, the result of continued growth in
merchant and cardholder interchange income. Income recognized during 2000
represented a $6.0 million or 19.5 percent increase from 1999.
Commission-based income totaled $19.8 million during 2001, an increase of
$2.5 million or 14.3 percent over 2000. BancShares reported $17.3 million in
commission-based income during 2000, an increase of $3.5 million or 25.6 percent
21
over 1999. The increase during 2001 resulted from higher insurance and
factoring commissions, while the growth during 2000 resulted primarily from
growth in fees generated by First Citizens Investor Services, BancShares'
registered broker dealer. Acquisitions of insurance agencies and the growth in
business related to BancShares' insurance agency operation has been a
significant factor in the improvement in insurance commissions.
During 2001, BancShares recognized $17.5 million in fees for providing
processing services to other banks, many of which are considered related
parties. This was an increase of $2.9 million or 19.9 percent over the $14.6
million recognized during 2000. Processing fees earned during 2000 represented
a $1.6 million or 12.1 percent increase over those earned during 1999. Fees
from related parties totaled $17.3 million during 2001 and $14.4 million during
2000.
Among nonrecurring components of noninterest income, securities transactions
provided $7.2 million in noninterest income during 2001, compared to $1.8
million in 2000 and $1.7 million during 1999. In each period, these gains
resulted from sales and exchanges of available for sale securities. The $20.2
million gain on mortgage servicing rights realized in 2000 is a result of the
sale of our then-existing mortgage servicing rights. During 2000 and 1999,
BancShares reported gains on the sale of branch facilities, some of which were
to related parties. These gains were $4.1 million and $5.1 million during the
respective periods. No such gains were recognized during 2001.
NONINTEREST EXPENSE
Noninterest expense for 2001 amounted to $422.6 million, a $27.8 million or
7.0 percent increase over 2000. Noninterest expense in 2000 was $394.8 million,
a $19.2 million or 5.1 percent increase over 1999. Table 16 presents the major
components of noninterest expense for the past five years.
Salary expense was $181.0 million during 2001, compared to $168.8 million
during 2000, an increase of $12.2 million or 7.3 percent, following an $8.3
million or 5.2 percent increase in 2000 over 1999. Increases during each period
resulted from new positions arising from franchise growth and expansion, merit
increases and higher levels of incentive-based compensation.
Employee benefits expense was $35.9 million during 2001, an increase of $3.8
million or 11.7 percent from 2000. The $32.1 million in benefits expense
recorded during 2000 represented an increase of $1.7 million or 5.5 percent
over 1999. During 2001, higher costs related to our pension and employee health
insurance plans contributed to the increase in total employee benefits expense.
The increased 2001 pension expense is attributed to a reduced discount rate and
higher levels of covered payroll. During 2000, higher FICA and employee health
insurance costs contributed to the increase in total employee benefits.
Partially offsetting the increase during 2000 was a reduction in pension
expense due to an increase in the discount rate from 1999.
Table 16
NONINTEREST EXPENSE
Year ended December 31
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(thousands)
Salaries and wages......... $181,018 $168,778 $160,440 $142,020 $126,474
Employee benefits.......... 35,897 32,136 30,455 27,434 23,718
Equipment expense.......... 40,861 38,153 37,745 36,545 32,035
Occupancy expense.......... 35,584 33,835 30,041 28,112 23,338
Credit card expense........ 19,514 16,870 14,712 12,658 11,722
Amortization of intangibles 11,585 10,637 10,963 10,652 8,641
Telecommunication expense.. 11,052 10,799 10,052 9,046 8,032
Postage expense............ 8,055 7,062 7,096 6,826 6,623
Advertising expense........ 6,928 7,277 7,313 5,836 6,522
Consultant expense......... 3,470 5,273 5,840 7,134 5,626
Other...................... 68,633 63,964 60,963 55,950 47,670
-------- -------- -------- -------- --------
Total..................... $422,597 $394,784 $375,620 $342,213 $300,401
======== ======== ======== ======== ========
- --------
For 2001 and 2000, occupancy expense includes $323 and $1,130 related to
provisions for branch closings. For 2001 and 2000, other expense includes
$1,011 and $1,972 related to provisions for branch closings.
22
Equipment expense for 2001 was $40.9 million, an increase of $2.7 million or
7.1 percent over 2000, when total equipment expenses were $38.2 million. The
increase during 2001 resulted from higher levels of depreciation and
maintenance expense related to software. During 2000, equipment expense was
$408,000 or 1.1 percent above the amount recorded during 1999, primarily the
result of higher depreciation expense resulting from new and replacement branch
offices.
BancShares recorded occupancy expense of $35.6 million during 2001, an
increase of $1.7 million or 5.2 percent during 2001. Occupancy expense during
2000 was $33.8 million, an increase of $3.8 million or 12.6 percent over 1999.
During 2001 and 2000, occupancy expense included $323,000 and $1.1 million,
respectively, in provisions for branch closings resulting from management's
decision to discontinue operations at certain branch locations. The occupancy
expenses relate to lease payment obligations arising as a result of the
closings. Ignoring the impact of the provision for branch closings, the
increase in occupancy expense in each period resulted from higher depreciation
expense, the result of continuing expansion in Georgia and Florida and new
buildings in North Carolina and Virginia.
Expenses related to credit card processing were $19.5 million in 2001 and
$16.9 million in 2000. This increase of $2.6 million or 15.7 percent is due to
growth in credit card transaction and merchant volume. In 2000, credit card
processing expense increased $2.2 million or 14.7 percent from 1999, primarily
due to higher merchant volume.
Amortization of intangibles totaled $11.6 million during 2001, an increase
of 8.9 percent over the $10.6 million recorded during 2000, the result of
amortization of intangibles recognized in conjunction with branch acquisitions
completed during late 2000 and early 2001. Postage expense during 2001 was $8.1
million, an increase of 14.1 percent over 2000, the result of higher postage
rates and increased volume. Consultant expense decreased $1.8 million during
2001 following the completion of several earnings enhancement projects
conducted during 2000.
Other expense was $68.6 million during 2001, an increase of $4.7 million or
7.3 percent from 2000. During 2000, other expense was $64.0 million, an
increase of $3.0 million or 4.9 percent over 1999. During 2001 and 2000, other
expense included $1.0 million and $2.0 million, respectively, in provisions for
branch closings resulting from management's decision to discontinue operations
at certain locations. These expenses relate to losses resulting from the
abandonment of fixed assets and resulting impairment charges recognized for
similar branch locations. Ignoring the impact of the provision for branch
closings, the increase in other expense in each period results from higher
general levels of operating expenses.
During 2002, management anticipates increases in various operating expenses
related to the continued growth of the branch network. Personnel, occupancy and
certain equipment costs will increase as new branches are opened and new
delivery channels are established. As a result of changes to the treatment of
purchased goodwill that became effective on January 1, 2002, BancShares will
discontinue the periodic amortization of goodwill for 2002, although goodwill
will be subject to an annual review to determine if its carrying value is
appropriate. During 2001, BancShares recorded $5.1 million in goodwill
amortization. Acquisition-related intangibles will continue to be amortized
over their estimated useful lives. During 2001, BancShares recorded $6.5
million in amortization of acquisition-related intangibles.
INCOME TAXES
During 2001, BancShares recorded total income tax expense of $50.8 million,
compared to $58.9 million in income tax expense during 2000 and $48.6 million
during 1999. BancShares' effective tax rate remained largely unchanged at
36.9 percent in 2001, 37.5 in 2000 and 37.3 percent in 1999.
LIQUIDITY
BancShares has historically maintained a strong focus on liquidity,
maintaining a relatively large and highly liquid investment portfolio with
varying maturities to provide needed cash flows to meet liquidity requirements.
At December 31, 2001, investment securities available for sale totaled $132.4
million compared to $38.6 million at December 31, 2000. Investment securities
held to maturity totaled $2.66 billion at December 31, 2001 and $1.78 billion
at December 31, 2000. The weighted-average maturity of investment securities
held to maturity was 9 months at December 31, 2001, providing a significant
source of liquidity. Total investment securities represent 23.5 percent and
17.0 percent of total assets at December 31, 2001 and 2000, respectively.
23
The ability to generate retail deposits provides an additional source of
liquidity. The rate of growth in average deposits was 12.1 percent during 2001,
3.5 percent during 2000 and 4.5 percent during 1999. Through its extensive
branch network and varying deposit promotions, BancShares has the ability to
stimulate or curtail deposit growth.
In addition to deposits, BancShares maintains additional sources for
borrowed funds through federal funds lines of credit and other borrowing
facilities. At December 31, 2001, BancShares had access to $500.0 million in
unfunded borrowings.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. BancShares' total risk-based capital ratios
were 14.4 percent, 11.7 percent and 11.3 percent, respectively, at December 31,
2001, 2000 and 1999. BancShares' Tier 1 capital ratios for December 31, 2001,
2000 and 1999 were 13.1 percent, 10.4 percent and 10.0 percent, respectively.
The minimum capital ratios established by Federal Reserve guidelines are
8 percent for total capital and 4 percent for Tier 1 capital. At December 31,
2001, BancShares' leverage capital ratio was 8.8 percent compared to 8.1
percent and 7.9 percent at December 31, 2000 and 1999, respectively. The
minimum leverage ratio is 3 percent. Failure to meet certain capital
requirements may result in certain actions by regulatory agencies that could
have a direct material effect on the financial statements. The improved capital
ratios during 2001 reflect the impact of the issuance of $100 million in trust
preferred capital securities, which qualify as Tier 1 capital.
Reflecting the increase in net income during 2000 and the subsequent
reduction in net income during 2001, the rate of return on average
shareholders' equity during 2001, 2000 and 1999 amounted to 10.3 percent, 12.9
percent and 11.8 percent, respectively.
Table 17
ANALYSIS OF BANCSHARES' CAPITAL ADEQUACY
December 31
-------------------------------- Regulatory
2001 2000 1999 Minimum
---------- ---------- ---------- ----------
(dollars in thousands)
Tier 1 capital........... $1,015,804 $ 835,678 $ 760,195
Tier 2 capital........... 102,444 104,582 99,443
---------- ---------- ----------
Total capital............ $1,118,248 $ 940,260 $ 859,638
========== ========== ==========
Risk-adjusted assets..... $7,771,031 $8,057,478 $7,616,890
========== ========== ==========
Risk-based capital ratios
Tier 1 capital........ 13.07% 10.37% 9.98% 4.00%
Total capital......... 14.39% 11.67% 11.29% 8.00%
Tier 1 leverage ratio.... 8.78% 8.11% 7.91% 3.00%
During the fourth quarter of 2001 the Board of Directors of BancShares
reauthorized the purchase of its Class A and Class B common stock. Management
views the purchase of its stock as a good investment and will continue to
repurchase shares when market conditions are favorable for such transactions
and excess capital exists to fund those purchases.
SEGMENT REPORTING
BancShares conducts its banking operations through its 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
has separate management groups. Additionally, the financial results and trends
of ASB reflect the de novo nature of its growth.
Atlantic States Bank. ASB's total assets increased from $678.2 million at
December 31, 2000 to $867.2 million at December 31, 2001, an increase of $189.0
million or 27.9 percent. This growth resulted from an expanding branch network,
as ASB added six new branches during 2001. At December 31, 2001, ASB operated
from 44 branches in Florida
24
and Georgia. ASB's net interest income increased $4.2 million or 29.3 percent
during 2001, the result of balance sheet growth. Provision for loan losses
increased $2.4 million or 139.8 percent due to higher levels of nonperforming
assets, net charge-offs and loan loss estimates.
ASB's noninterest income increased $859,000 or 25.1 percent during 2001,
primarily the result of higher service charge income. Noninterest expense
increased $6.6 million or 27.4 percent during 2001. Higher personnel, occupancy
and equipment costs reflect the impact of the expanded branch network.
ASB recorded a net loss of $7.6 million during 2001 compared to a net loss
of $5.2 million during 2000. This represents a $2.5 million or 47.8 percent
increase in the net loss. 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. As a result of plans for continued expansion, ASB's
net losses could extend into the forseeable future.
First Citizens Bank. FCB's total assets increased from $9.89 billion at
December 31, 2000 to $10.77 billion at December 31, 2001, an increase of $876.2
million or 8.9 percent. This growth resulted from strong deposit growth during
2001. FCB's net interest income declined $3.7 million or 1.0 percent during
2001, the result of interest rate reductions. Provision for loan losses
increased $6.3 million or 45.4 percent due to higher levels of nonperforming
assets, higher historical net charge-offs and higher loan loss estimates.
FCB's noninterest income increased $7.8 million or 3.9 percent during 2001,
primarily the result of higher service charge income. Noninterest expense
increased $22.2 million or 6.0 percent during 2001, primarily due to higher
personnel and equipment costs. FCB recorded net income of $101.0 million during
2001 compared to $115.8 million during 2000. This represents a $14.8 million or
12.8 percent reduction in net income.
FOURTH QUARTER ANALYSIS
BancShares' net income for the fourth quarter of 2001 totaled $21.3 million,
compared to $24.0 million during the same period of 2000, a decrease of $2.7
million or 11.1 percent. The decrease in net income was primarily due to a
$7.6 million increase in noninterest expense and a $2.6 million increase in the
provision for loan losses, partially offset by a $5.6 million increase in
noninterest income. Net income per share during the fourth quarter of 2001 was
$2.03 compared to $2.28 during the same period of 2000.
The after-tax impact of all nonrecurring items was a net loss of $43,000
during 2001, and a net gain of $2.3 million during 2000. The per share amounts
of the nonrecurring items were a $0.01 loss during 2001 and a $0.22 gain for
2000. While the impact of nonrecurring items during the fourth quarter of 2001
was not significant, BancShares recognized a $4.1 million pre-tax gain on the
sale of branches during the fourth quarter of 2000. The net-of-tax impact of
the branch sales was $2.6 million. Thus, excluding the impact of the
nonrecurring items, fourth quarter 2001 net income and net income per share was
essentially unchanged from the prior period. Net interest income for the fourth
quarter of 2001 increased by only 0.4 percent from 2000, which was in turn
caused by a declining interest rate spread.
25
Table 18
SELECTED QUARTERLY DATA
2001 2000
-------------------------------------------------- --------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(thousands, except per share data and ratios)
SUMMARY OF OPERATIONS
Interest income.......... $ 167,032 $ 176,709 $ 182,660 $ 189,026 $ 189,328 $ 182,966 $ 171,890 $ 163,986
Interest expense......... 74,113 84,482 91,472 96,443 96,754 91,509 80,184 74,381
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income...... 92,919 92,227 91,188 92,583 92,574 91,457 91,706 89,605
Provision for loan losses 7,444 5,620 5,394 5,676 4,857 4,197 2,975 3,459
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses............. 85,475 86,607 85,794 86,907 87,717 87,260 88,731 86,146
Noninterest income....... 55,014 53,089 54,641 52,811 49,384 67,358 44,097 41,351
Noninterest expense...... 106,912 106,963 105,922 102,800 99,287 101,257 97,953 96,287
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income