UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the period ended March 31, 2002 Commission File Number: 0-16471 First Citizens BancShares, Inc (Exact name of Registrant as specified in its charter) Delaware 56-1528994 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 239 Fayetteville Street, Raleigh, North Carolina 27601 (Address of principal executive offices) (zip code) (919) 716-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No _____ Class A Common Stock--$1 Par Value-- 8,797,154 shares Class B Common Stock--$1 Par Value-- 1,683,470 shares (Number of shares outstanding, by class, as of May 13, 2002) <Page> INDEX PART I. FINANCIAL INFORMATION PAGES Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at March 31, 2002, December 31, 2001,and March 31, 2001 5 Consolidated Statements of Income for the three-month periods ended March 31, 2002, and March 31, 2001 6 Consolidated Statements of Changes in Shareholders' Equity for the three-month periods ended March 31, 2002, and March 31, 2001 7 Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2002, and March 31, 2001 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-21 Item 3. Market Risk Disclosure 10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a vote of Security Holders Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. During the quarter ended March 31, 2002, Registrant filed no Current Report on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST CITIZENS BANCSHARES, INC. (Registrant) Dated: May 13, 2002 By:/s/Kenneth A. Black Kenneth A. Black Vice President, Treasurer, and Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Consolidated Balance Sheets First Citizens BancShares, Inc. and Subsidiaries March 31* December 31# March 31* (thousands, except share data) 2002 2001 2001 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Assets Cash and due from banks $ 709,757 $ 758,987 $ 690,080 Overnight investments 597,980 501,909 876,925 Investment securities held to maturity 2,441,456 2,658,851 1,821,648 Investment securities available for sale 134,927 132,445 47,238 Loans 7,248,088 7,196,177 7,124,535 Less reserve for loan losses 108,692 107,087 103,825 - --------------------------------------------------------------------------------------------------------------------------------- Net loans 7,139,396 7,089,090 7,020,710 Premises and equipment 481,981 483,084 453,793 Income earned not collected 60,970 63,604 60,134 Other assets 179,885 177,021 175,389 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 11,746,352 $ 11,864,991 $ 11,145,917 ================================================================================================================================= Liabilities Deposits: Noninterest-bearing $ 1,615,435 $ 1,650,101 $ 1,457,456 Interest-bearing 8,257,544 8,311,504 7,907,900 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits 9,872,979 9,961,605 9,365,356 Short-term borrowings 558,003 611,390 668,209 Long-term obligations 283,988 284,009 154,837 Other liabilities 125,101 122,944 127,380 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 10,840,071 10,979,948 10,315,782 Shareholders' equity Common stock: Class A-$1 par value (8,797,154; 8,797,154 and 8,813,454 shares issued, respectively) 8,797 8,797 8,813 Class B-$1 par value (1,683,470; 1,686,302 and 1,700,021 shares issued, respectively) 1,683 1,686 1,700 Surplus 143,766 143,766 143,766 Retained earnings 743,443 723,122 669,571 Accumulated other comprehensive income 8,592 7,672 6,285 - --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 906,281 885,043 830,135 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 11,746,352 $ 11,864,991 $ 11,145,917 ================================================================================================================================= * Unaudited # Derived from the Consolidated Balance Sheets included in the 2001 Annual Report on Form 10-K. See accompanying Notes to Consolidated Financial Statements. </Table> First Citizens BancShares, Inc and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Consolidated Statements of Income First Citizens BancShares, Inc. and Subsidiaries Three Months Ended March 31 (thousands, except per share data, unaudited) 2002 2001 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest income Loans $ 124,227 $ 151,022 Investment securities: U. S. Government 29,638 28,398 State, county and municipal 62 71 Dividend 435 512 - ---------------------------------------------------------------------------------------------------------- Total investment securities interest and dividend income 30,135 28,981 Overnight investments 1,786 9,023 - ---------------------------------------------------------------------------------------------------------- Total interest income 156,148 189,026 Interest expense Deposits 52,061 85,496 Short-term borrowings 1,369 7,776 Long-term obligations 5,707 3,171 - ---------------------------------------------------------------------------------------------------------- Total interest expense 59,137 96,443 - ---------------------------------------------------------------------------------------------------------- Net interest income 97,011 92,583 Provision for loan losses 5,980 5,676 - ---------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 91,031 86,907 Noninterest income Service charges on deposit accounts 18,448 15,931 Cardholder and merchant services income 10,642 9,400 Trust income 3,994 3,893 Fees from processing services 4,684 3,929 Commission-based income 5,333 4,952 ATM income 2,495 2,637 Mortgage income 3,262 1,278 Other service charges and fees 4,032 3,522 Securities gains 310 5,451 Other 1,030 1,818 - ---------------------------------------------------------------------------------------------------------- Total noninterest income 54,230 52,811 Noninterest expense Salaries and wages 46,935 43,834 Employee benefits 10,585 8,940 Occupancy expense 8,999 9,010 Equipment expense 10,158 9,686 Other 32,760 31,330 - ---------------------------------------------------------------------------------------------------------- Total noninterest expense 109,437 102,800 - ---------------------------------------------------------------------------------------------------------- Income before income taxes 35,824 36,918 Income taxes 12,626 14,059 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Net income 23,198 22,859 - ---------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of taxes Unrealized securities gains (losses) arising during period 1,106 (553) Less: reclassification adjustment for gains included in net income (186) (546) - ---------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of taxes 920 (7) - ---------------------------------------------------------------------------------------------------------- ========================================================================================================== Comprehensive income $ 24,118 $ 22,852 ========================================================================================================== Average shares outstanding 10,481,661 10,521,253 Per Share Net income $ 2.21 $ 2.17 Cash dividends 0.25 0.25 - ---------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Consolidated Statements of Changes in Shareholders' Equity First Citizens BancShares, Inc. and Subsidiaries Accumulated Class A Class B Other Common Common Retained Comprehensive Total (thousands, except share data, unaudited) Stock Stock Surplus Earnings Income Equity - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 2000 $ 8,813 $ 1,709 $143,766 $ 650,148 $ 6,292 $ 810,728 Net income 22,859 22,859 Other comprehensive loss, net of taxes (7) (7) Cash dividends (2,628) (2,628) Redemption of 9,361 shares of Class B common stock (9) (808) (817) =================================================================================================================================== Balance at March 31, 2001 $ 8,813 $ 1,700 $143,766 $ 669,571 $ 6,285 $ 830,135 =================================================================================================================================== Balance at December 31, 2001 $ 8,797 $ 1,686 $143,766 $ 723,122 $ 7,672 $ 885,043 Net income 23,198 23,198 Other comprehensive income, net of taxes 920 920 Cash dividends (2,620) (2,620) Redemption of 2,832 shares of Class B common stock (3) (257) (260) =================================================================================================================================== Balance at March 31, 2002 $ 8,797 $ 1,683 $143,766 $ 743,443 $ 8,592 $ 906,281 =================================================================================================================================== See accompanying Notes to Consolidated Financial Statements. </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Consolidated Statements of Cash Flows First Citizens BancShares, Inc. and Subsidiaries Three months ended March 31 --------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- (thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $ 23,198 $ 22,859 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 3,435 2,865 Provision for loan losses 5,980 5,676 Deferred tax expense 2,084 2,235 Change in current taxes payable 14,164 15,787 Depreciation 9,173 7,941 Change in accrued interest payable (16,577) (12,680) Change in income earned not collected 2,634 2,446 Securities gains (310) (5,451) Origination of loans held for sale (14,205) (102,161) Proceeds from sale of loans held for sale 11,716 77,368 Loss (gain) on loans held for sale (301) 2 Net amortization (accretion) of premiums and discounts 5,592 (151) Net change in other assets (2,760) (3,907) Net change in other liabilities 4,570 1,956 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 48,393 14,785 - ---------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans outstanding (53,496) 16,623 Purchases of investment securities held to maturity (228,347) (409,041) Purchases of investment securities available for sale (1,678) (2,680) Proceeds from maturities of investment securities held to maturity 440,150 365,710 Proceeds from maturities of investment securities available for sale 911 - Net change in overnight investments (96,071) (445,543) Dispositions of premises and equipment 4,693 2,007 Additions to premises and equipment (18,871) (18,183) Purchase and sale of branches, net of cash transferred - 28,552 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 47,291 (462,555) - ---------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in time deposits (244,656) 156,458 Net change in demand and other interest-bearing deposits 156,030 192,565 Net change in short-term borrowings (53,408) 35,820 Net change in long-term obligations - 522 Repurchases of common stock (260) (817) Cash dividends paid (2,620) (2,628) - ---------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by financing activities (144,914) 381,920 - ---------------------------------------------------------------------------------------------------------------------------- Change in cash and due from banks (49,230) (65,850) Cash and due from banks at beginning of period 758,987 755,930 ============================================================================================================================ Cash and due from banks at end of period $ 709,757 $ 690,080 ============================================================================================================================ CASH PAYMENTS FOR: Interest $ 75,714 $ 109,123 Income taxes 3,544 74 - ---------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Unrealized securities gains (losses) 1,405 (553) Reclassification of premises and equipment to other real estate 6,108 - - ---------------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002
Notes to Consolidated Financial State (Dollars in thousands, except per share amounts) Note A Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete statements. In the opinion of management, the consolidated statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes included in the 2001 First Citizens BancShares, Inc. Annual Report, which is incorporated by reference on Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2002. However, the reclassifications have no effect on shareholders' equity or net income as previously reported. At January 1, 2002, management reviewed the estimated useful lives of all amortizing intangible assets, including intangibles accounted for pursuant to Statement of Financial Accounting Standards No. 72 (FAS 72 goodwill). As a result of this review, management determined that, in certain instances, a shorter life was appropriate. Accordingly, the estimated useful lives were shortened, and the carrying value of FAS 72 goodwill is being amortized over the respective asset's estimated remaining useful life. First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002
Note B New Accounting Standards On January 1, 2002, BancShares fully adopted the provisions of Statement of Financial Accounting Standards No. 142 (Statement 142), which provides guidance for the accounting for goodwill and intangible assets. Statement 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. Statement 142 also requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their estimated residual values and be reviewed for impairment in accordance with existing accounting guidance. Certain provisions of Statement 142 were effective on July 1, 2001, and the statement was fully adopted by BancShares on January 1, 2002. In connection with Statement 142's transitional goodwill impairment evaluation, an assessment will determine whether there is an indication that goodwill is impaired as of the date of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the statement of income. In accordance with the provisions of Statement 142, BancShares discontinued the amortization of goodwill effective January 1, 2002. BancShares will complete an initial evaluation of its goodwill by June 30, 2002 and will record any impairment at that time. In the future, BancShares will annually review goodwill for impairment under the provisions of Statement 142. Set forth below is a summary of goodwill activity during the three-month periods ended March 31, 2002 and 2001, all of which relates to a single reporting unit, FCB: <TABLE> <CAPTION> 2002 2001 ----------------------------- ----------------------------- <S> <C> <C> Balance, January 1 $ 41,240 $ 46,340 Amortization - 1,275 ----------------------------- ============================= Balance, March 31 $ 41,240 $ 45,065 ============================= </TABLE> The following information relates to other intangible assets, all of which are being amortized: <TABLE> <CAPTION> March 31, December 31, March 31, 2002 2001 2001 ------------------------------------------- <S> <C> <C> <C> Amortized intangible assets $ 66,892 $ 70,328 $ 75,157 </TABLE> During the three month periods ended March 31, 2002 and 2001, BancShares recorded amortization expense of $3,435 and $1,590 related to these intangible assets. Based on current estimated useful lives and current carrying values, BancShares anticipates amortization expense for intangible assets in subsequent periods to be: <TABLE> <CAPTION> Projected amortization expense: <S> <C> Year ended December 31, 2002 $ 13,080 Year ended December 31, 2003 12,195 Year ended December 31, 2004 10,859 Year ended December 31, 2005 9,490 Year ended December 31, 2006 8,283 </TABLE> The following table describes the impact of the adoption of Statement 142 on net income and net income per share. <TABLE> <CAPTION> Three months ended March 31, Net income 2002 2001 ----------------------------- <S> <C> <C> Addition of goodwill amortization $ 23,198 $ 22,859 Adjusted net income - 1,275 ============================= $ 23,198 $ 24,134 ============================= Net income per share Addition of goodwill amortization $ 2.21 $ 2.17 Adjusted net income per share - 0.12 ============================= $ 2.21 $ 2.29 ============================= </TABLE> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002
Note C Operating Segments 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 each entity has a separate management group. Additionally, the financial results and trends of ASB reflect the de novo nature of its growth. FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia and West Virginia. ASB began operations in 1997 and operates from a thrift charter in Florida and Georgia. ASB's significance to BancShares' consolidated financial results continues to grow. Accordingly, management has determined that FCB and ASB are reportable business segments. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ASB account for more than 90 percent of consolidated assets, revenues and net income. Other includes activities of the parent company, two subsidiaries that are the issuing trusts for outstanding preferred securities, Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company. The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments to interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other services fees paid by one company to another within BancShare's consolidated group. <TABLE> <CAPTION> March 31, 2002 ASB FCB Other Total Adjustments Consolidated <S> <C> <C> <C> <C> <C> <C> Interest income $ 13,072 $ 140,487 $ 8,384 $ 161,943 $ (5,795) $ 156,148 Interest expense 6,399 47,046 11,487 64,932 (5,795) 59,137 -------------------------------------------------------------------------------------------- Net interest income 6,673 93,441 (3,103) 97,011 - 97,011 Provision for loan losses 1,065 4,915 - 5,980 - 5,980 -------------------------------------------------------------------------------------------- Net interest income after 5,608 88,526 (3,103) 91,031 - 91,031 provision for loan losses Noninterest income 1,218 53,944 305 55,467 (1,237) 54,230 Noninterest expense 8,163 102,314 197 110,674 (1,237) 109,437 -------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,337) 40,156 (2,995) 35,824 - 35,824 Income taxes (461) 14,157 (1,070) 12,626 - 12,626 ============================================================================================ Net income (loss) $ (876) $ 25,999 $ (1,925) $ 23,198 $ - $ 23,198 ============================================================================================ Period-end assets $ 880,803 $ 10,620,746 $ 1,739,378 $ 13,240,927 $ (1,494,575) $ 11,746,352 March 31, 2001 ASB FCB Other Total Adjustments Consolidated Interest income $ 12,997 $ 174,424 $ 8,526 $ 195,947 $ (6,921) $ 189,026 Interest expense 8,827 83,928 10,609 103,364 (6,921) 96,443 -------------------------------------------------------------------------------------------- Net interest income 4,170 90,496 (2,083) 92,583 - 92,583 Provision for loan losses 442 5,234 - 5,676 - 5,676 -------------------------------------------------------------------------------------------- Net interest income after 3,728 85,262 (2,083) 86,907 - 86,907 provision for loan losses Noninterest income 987 47,316 5,644 53,947 (1,136) 52,811 Noninterest expense 7,161 95,049 1,726 103,936 (1,136) 102,800 -------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,446) 37,529 1,835 36,918 - 36,918 Income taxes (860) 13,604 1,315 14,059 - 14,059 ============================================================================================ Net income (loss) $ (1,586) $ 23,925 $ 520 $ 22,859 $ - $ 22,859 ============================================================================================ Period-end assets $ 742,432 $ 10,302,996 $ 1,495,838 $ 12,541,266 $ (1,395,349) $ 11,145,917 </TABLE> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Financial Summary Table 1 2002 2001 First Fourth Third Second First (thousands, except per share data and ratios) Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Summary of Operations Interest income $ 156,148 $ 167,032 $ 176,709 $ 182,660 $ 189,026 Interest expense 59,137 74,113 84,482 91,472 96,443 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 97,011 92,919 92,227 91,188 92,583 Provision for loan losses 5,980 7,444 5,620 5,394 5,676 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 91,031 85,475 86,607 85,794 86,907 Noninterest income 54,230 55,014 53,089 54,641 52,811 Noninterest expense 109,437 106,912 106,963 105,922 102,800 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 35,824 33,577 32,733 34,513 36,918 Income taxes 12,626 12,260 11,977 12,509 14,059 ==================================================================================================================================== Net income $ 23,198 $ 21,317 $ 20,756 $ 22,004 $ 22,859 ==================================================================================================================================== Net interest income-taxable equivalent $ 97,382 $ 93,389 $ 92,698 $ 91,678 $ 93,091 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Quarterly Averages Total assets $ 11,664,376 $ 11,674,273 $ 11,333,123 $ 11,128,229 $10,785,178 Investment securities 2,704,077 2,684,315 2,195,064 2,042,987 1,854,401 Loans 7,207,757 7,128,818 7,054,247 7,139,623 7,101,238 Interest-earning assets 10,353,509 10,446,364 10,126,568 9,952,752 9,616,497 Deposits 9,776,690 9,742,153 9,496,699 9,337,298 9,037,155 Interest-bearing liabilities 9,073,637 9,142,487 8,851,916 8,721,873 8,470,303 Long-term obligations 283,993 274,445 161,587 154,831 154,639 Shareholders' equity $ 894,689 $ 874,801 $ 857,417 $ 838,806 $ 819,289 Shares outstanding 10,481,661 10,488,894 10,508,330 10,511,028 10,521,253 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Quarter-End Balances Total assets $ 11,746,352 $ 11,864,991 $ 11,522,525 $ 11,289,166 $11,145,917 Investment securities 2,576,383 2,791,296 2,482,123 1,987,085 1,868,886 Loans 7,248,088 7,196,177 7,109,584 7,058,070 7,124,535 Interest-earning assets 10,422,451 10,489,382 10,217,283 9,981,549 9,870,346 Deposits 9,872,979 9,961,605 9,645,226 9,480,108 9,365,356 Interest-bearing liabilities 9,099,535 9,206,903 9,007,989 8,807,409 8,730,946 Long-term obligations 283,988 284,009 184,018 154,829 154,836 Shareholders' equity $ 906,281 $ 885,043 $ 865,963 $ 849,297 $ 830,135 Shares outstanding 10,480,624 10,483,456 10,490,703 10,509,956 10,513,475 - ------------------------------------------------------------------------------------------------------------------------------------ Profitability Ratios (averages) Rate of return (annualized) on: Total assets 0.81 % 0.72 % 0.74 % 0.79 % 0.86 % Shareholders' equity 10.52 9.67 9.82 10.52 11.32 Dividend payout ratio 11.31 12.32 12.63 11.96 11.52 - ------------------------------------------------------------------------------------------------------------------------------------ Liquidity and Capital Ratios (averages) Loans to deposits 73.72 % 73.17 % 74.28 % 76.46 % 78.58 % Shareholders' equity to total assets 7.67 7.49 7.57 7.54 7.60 Time certificates of $100,000 or more to total deposits 11.54 11.97 11.92 11.37 10.60 - ------------------------------------------------------------------------------------------------------------------------------------ Per Share of Stock Net income $ 2.21 $ 2.03 $ 1.98 $ 2.09 $ 2.17 Cash dividends 0.25 0.25 0.25 0.25 0.25 Book value at period end 86.47 84.42 82.55 80.81 78.96 Tangible book value at period end 76.15 73.78 71.64 69.65 67.52 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Outstanding Loans by Type Table 2 2002 2001 First Fourth Third Second First (thousands) Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Real estate: Construction and land development $ 293,185 $ 283,968 $ 274,972 $ 257,407 $ 237,354 Mortgage: 1-4 family residential 1,246,245 1,338,975 1,354,476 1,401,051 1,596,920 Commercial 2,284,309 2,231,498 2,135,201 2,055,483 1,997,798 Equity Line 1,080,896 1,024,181 970,295 913,759 862,231 Other 171,459 163,914 181,038 189,161 186,740 - ------------------------------------------------------------------------------------------------------------------------- Total real estate 5,076,094 5,042,536 4,915,982 4,816,861 4,881,043 Commercial and industrial 938,349 918,929 931,850 948,098 943,722 Consumer 1,077,412 1,074,202 1,096,775 1,132,118 1,140,407 Lease financing 137,383 139,966 142,305 136,806 134,352 Other 18,850 20,544 22,672 24,187 25,011 - ------------------------------------------------------------------------------------------------------------------------- Total loans 7,248,088 7,196,177 7,109,584 7,058,070 7,124,535 Less reserve for loan losses 108,692 107,087 105,775 105,025 103,825 - ------------------------------------------------------------------------------------------------------------------------- Net loans $7,139,396 $7,089,090 $7,003,809 $6,953,045 $7,020,710 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Investment Securities Table 3 March 31, 2002 March 31, 2001 Average Taxable Average Taxable Book Fair Maturity Equivalent Book Fair Maturity Equivalent (thousands) Value Value (Yrs./Mos.) Yield Value Value (Yrs./Mos.) Yield - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> - ------------------------------------------------------------------------------------------------------------------------------------ U. S. Government: Within one year $2,263,950 $2,268,657 0/5 4.27 % $1,506,877 $1,518,839 0/6 6.18 One to five years 169,244 168,081 2/5 4.03 303,006 307,373 1/4 5.76 Five to ten years 141 149 7/9 8.00 199 207 8/3 8.04 Over 10 years 4,676 4,805 24/6 7.38 7,331 7,448 25/8 7.30 - ------------------------------------------------------------------------------------------------------------------------------------ Total 2,438,011 2,441,692 0/8 4.26 1,817,413 1,833,867 0/8 6.11 State, county and municipal: Within one year 1,104 1,118 0/5 6.81 650 653 0/3 7.41 One to five years 500 516 3/3 5.55 1,607 1,664 2/4 6.68 Five to ten years 143 149 7/1 5.88 142 151 8/1 5.88 Over ten years 1,413 1,507 15/9 5.69 1,541 1,712 15/3 5.85 - ------------------------------------------------------------------------------------------------------------------------------------ Total 3,160 3,141 10/3 5.96 3,940 4,029 9/11 6.30 Other: Within one year 35 35 0/8 3.46 10 10 0/9 5.36 One to five years - - - - 35 35 1/4 6.96 Five to ten years 250 250 6/4 7.75 250 250 7/4 4.50 - ------------------------------------------------------------------------------------------------------------------------------------ Total 285 285 4/4 6.25 295 295 5/0 4.96 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities held to maturity 2,441,456 2,445,118 0/7 4.33 1,821,648 1,838,191 0/10 6.11 Investment securities available for sale 120,874 134,927 36,855 47,238 ==================================================================================================================================== Total investment securities $2,562,330 $2,580,045 $1,858,503 $1,885,429 ==================================================================================================================================== </TABLE> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002 <Page> <Table> <Caption> Consolidated Taxable Equivalent Rate/Volume Variance Analysis - First Quarter Table 4 2002 2001 Increase (decrease) due to: Interest Interest Average Income Yield Average Income Yield Yield (thousands) Balance Expense /Rate Balance Expense /Rate Volume /Rate Total - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets: Total loans $ 7,207,757 $ 124,568 6.98 % $7,101,238 $151,489 8.61 % $ 1,412 $(28,333) $ (26,921) Investment securities: U. S. Government 2,644,567 29,638 4.55 1,811,204 28,398 6.36 11,284 (10,044) 1,240 State, county and municipal 4,563 92 8.18 5,210 112 8.72 (14) (6) (20) Other 54,947 435 3.21 37,987 512 5.47 184 (261) (77) - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 2,704,077 30,165 4.52 1,854,401 29,022 6.35 11,454 (10,311) 1,143 Overnight investments 441,675 1,786 1.64 660,859 9,023 5.54 (1,924) (5,313) (7,237) ==================================================================================================================================== Total interest-earning assets $ 10,353,509 $ 156,519 6.11 % $9,616,498 $189,534 7.96 % $ 10,942 $(43,957) $ (33,015) ==================================================================================================================================== Liabilities: Deposits: Checking with Interest $ 1,224,860 $ 947 0.31 % $1,096,526 $ 1,920 0.71 % $ 172 $(1,145) $ (973) Savings 623,896 859 0.56 601,946 1,985 1.34 57 (1,183) (1,126) Money market accounts 2,096,771 8,466 1.64 1,643,742 16,958 4.18 3,299 (11,791) (8,492) Time deposits 4,261,946 41,789 3.98 4,329,409 64,633 6.05 (788) (22,056) (22,844) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 8,207,473 52,061 2.57 7,671,623 85,496 4.52 2,740 (36,175) (33,435) Federal funds purchased 43,562 169 1.57 74,151 1,003 5.49 (264) (570) (834) Repurchase agreements 200,799 270 0.55 189,556 1,997 4.27 73 (1,800) (1,727) Master notes 292,766 680 0.94 325,452 3,961 4.94 (223) (3,058) (3,281) Other short-term borrowings 45,044 250 2.25 54,885 815 6.02 (99) (466) (565) Long-term obligations 283,993 5,707 8.15 154,639 3,171 8.32 2,639 (103) 2,536 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities$ 9,073,637 $ 59,137 2.64 % $8,470,306 $96,443 4.62 % $ 4,866 $(42,172) $ (37,306) - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate spread 3.47 % 3.34 % - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and net yield on interest-earning assets $ 97,382 3.81 % $93,091 3.93 % $ 6,076 $(1,785) $ 4,291 - ------------------------------------------------------------------------------------------------------------------------------------ Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% for each period, and a state income tax rate of 6.9% for 2002 and 6.9% for 2001. - -------------------------------- </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002
<Table> <Caption> Summary of Loan Loss Experience and Risk Elements Table 5 2002 2001 First Fourth Third Second First (thousands, except ratios) Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Reserve balance at beginning of period $ 107,087 $ 105,775 $ 105,025 $ 103,825 $ 102,655 Adjustment for sale of loans - - - (777) - Provision for loan losses 5,980 7,444 5,620 5,394 5,676 Net charge-offs: Charge-offs (5,393) (7,171) (5,462) (4,386) (5,273) Recoveries 1,018 1,039 592 969 767 - ----------------------------------------------------------------------------------------------------------------------------- Net charge-offs (4,375) (6,132) (4,870) (3,417) (4,506) ============================================================================================================================= Reserve balance at end of period $ 108,692 $ 107,087 $ 105,775 $ 105,802 $ 103,825 ============================================================================================================================= Historical Statistics Average loans $ 7,207,757 $7,128,818 $7,054,247 $7,139,623 $7,101,238 Loans at period-end 7,248,088 7,196,177 7,109,584 7,058,069 7,124,535 - ----------------------------------------------------------------------------------------------------------------------------- Risk Elements Nonaccrual loans $ 17,735 $ 13,983 $ 13,349 $ 12,658 $ 12,830 Other real estate 12,461 6,263 4,242 2,798 3,082 - ----------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 30,196 $ 20,246 $ 17,591 $ 15,456 $ 15,912 - ----------------------------------------------------------------------------------------------------------------------------- Accruing loans 90 days or more past due $ 11,012 $ 12,981 $ 14,993 $ 10,371 $ 6,413 - ----------------------------------------------------------------------------------------------------------------------------- Ratios Net charge-offs (annualized) to average total loans 0.25 % 0.34 % 0.27 % 0.19 % 0.26 % Reserve for loan losses to total loans at period-end 1.50 1.49 1.49 1.49 1.46 Nonperforming assets to total loans plus other real estate at period-end 0.42 0.28 0.25 0.22 0.22 - ----------------------------------------------------------------------------------------------------------------------------- </Table> First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002
INTRODUCTION Management's discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries, referred to in this document as BancShares. Within this document, 'we' or 'our' also refer to BancShares. This discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and related notes presented elsewhere in this report. The focus of this discussion concerns our two banking subsidiaries. First-Citizens Bank & Trust Company ("FCB") operates branches in North Carolina, Virginia, and West Virginia. Atlantic States Bank ("ASB") operates offices in Georgia and Florida. SUMMARY BancShares realized increased earnings during the first quarter of 2002 compared to the first quarter of 2001. Consolidated net income during the first quarter of 2002 was $23.2 million, compared to $22.9 million earned during the corresponding period of 2001. Net income per share during the first quarter of 2002 totaled $2.21, compared to $2.17 during the first quarter of 2001. Annualized return on average assets was 0.81 percent for the first quarter of 2002 and 0.86 percent for the first quarter of 2001. The higher net income and net income per share resulted from improved net interest income, noninterest income and a lower effective tax rate. These improvements were partially offset by higher noninterest expense during the first quarter of 2002. Various profitability, liquidity and capital ratios are presented in Table 1. To understand the changes and trends in interest-earning assets and interest-bearing liabilities, refer to the average balance sheets presented in Table 4 for the first three months of 2002 and 2001. INTEREST-EARNING ASSETS At March 31, 2002, interest-earning assets totaled $10.42 billion, an increase of $552.1 million or 5.6 percent from March 31, 2001. This increase results from growth in investment securities and the loan portfolio. Loans. At March 31, 2002 and 2001, gross loans totaled $7.25 billion and $7.12 billion, respectively. As of December 31, 2001, gross loans were $7.20 billion. The $123.6 million growth in loans from March 31, 2001 to March 31, 2002 results from growth within our commercial and revolving real estate loans. This growth has resulted from customer demand and from our continued focus on these products during this period. Traditional 1-4 family residential mortgage loans decreased from March 31, 2001 to March 31, 2002, the result of refinance activity and sales of portfolio loans during the second quarter of 2001. Although demand for residential mortgage loans has surged due to interest rate reductions, most of our residential mortgage loan production is originated on a correspondent basis, which does not generate growth in loans outstanding. Consumer loans and commercial and industrial loans are down slightly from their March 31, 2001 balances. As a result of only modest demand for most loan products during 2002, loans outstanding have increased less than 1 percent since December 31, 2001. Although the downward pressure on interest rates during 2001 would typically stimulate loan demand, sluggish economic conditions continue to restrain loan demand. Although demand for revolving real estate and commercial real estate loans has improved slightly, we anticipate other loan products will experience limited growth until economic conditions improve in our market areas. During the first quarter of 2002, loans averaged $7.21 billion, an increase of $106.5 million or 1.5 percent from the comparable period of 2001. Investment securities. At March 31, 2002 and 2001, the investment portfolio totaled $2.58 billion and $1.87 billion, respectively. At December 31, 2001, the investment portfolio was $2.79 billion. During the first quarter of 2002, the investment securities portfolio averaged $2.70 billion, an $849.7 million or 45.8 percent increase over the first quarter of 2001. Investment securities held to maturity totaled $2.44 billion at March 31, 2002, a $619.8 million or 34.0 percent increase over the $1.82 billion portfolio outstanding at March 31, 2001. The increase reflects the impact of the robust growth in customer deposits during 2001, which occurred during a time of minimal loan growth. Much of the excess liquidity generated by the deposit growth was invested in investment securities held to maturity. All securities that are classified as held-to-maturity reflect our ability and positive intent to hold those investments until maturity. Investment securities available for sale totaled $134.9 million at March 31, 2002, compared to $47.2 million at March 31, 2001. The $87.7 million increase resulted from purchases of securities with the liquidity generated during the fourth quarter of 2001 with the proceeds from the issuance of $100 million in trust preferred securities. Available-for-sale securities are reported at their aggregate fair value. Table 3 presents detailed information relating to the investment securities portfolio at March 31, 2002 and 2001. We anticipate reductions among investment securities held to maturity during much of 2002 as maturing securities are used to fund a seasonal reduction in deposits. Sales of investment securities available for sale are likely as BancShares begins to deploy to its banking subsidiaries the capital generated through the trust preferred securities issued during 2001. Overnight investments. Overnight investments totaled $598.0 million at March 31, 2002, compared to $501.9 million at December 31, 2001 and $876.9 million at March 31, 2001. These investments, which include federal funds sold and interest-bearing deposits in other banks, averaged $441.7 million during the first quarter of 2002, a decrease of $219.2 million or 33.2 percent from the first quarter of 2001. Income on Interest-Earning Assets. Interest income amounted to $156.1 million during the first quarter of 2002, a $32.9 million or 17.4 percent decrease from the first quarter of 2001. Lower yields more than offset the impact of asset growth, resulting in the decrease in interest income in the first quarter of 2002 when compared to the same period of 2001. The taxable-equivalent yield on interest-earning assets for the first quarter of 2002 was 6.11 percent, compared to 7.96 percent for the corresponding period of 2001, a 185 basis point reduction, the result of falling market rates. Loan interest income for the first quarter of 2002 was $124.2 million, a decrease of $26.8 million or 17.7 percent from the first quarter of 2001, the result of lower yields. The taxable-equivalent yield on the loan portfolio was 6.98 percent during the first quarter of 2002, compared to 8.61 percent during the same period of 2001. The lower loan yields resulted from market-driven rate movements. The decrease in loan interest income resulting from lower yields was partially offset by an increase in average volume. Average loans increased $106.5 million or 1.5 percent from the first quarter of 2001 to the first quarter of 2002. Income earned on the investment securities portfolio amounted to $30.1 million during the first quarter of 2002 and $29.0 million during the same period of 2001, an increase of $1.2 million or 4.0 percent. The impact of an $849.7 million increase in the average securities portfolio more than offset the 183 basis point yield reduction. The investment securities portfolio taxable-equivalent yield decreased from 6.35 percent for the quarter ended March 31, 2001, to 4.52 percent for the quarter ended March 31, 2002, the result of lower market rates. Interest income from overnight investments decreased $7.2 million from the first quarter of 2001 to the same period of 2002, an 80.2 percent decrease. This large decrease results from lower average invested balances and a 390 basis point yield reduction. INTEREST-BEARING LIABILITIES At March 31, 2002 and 2001, interest-bearing liabilities totaled $9.10 billion and $8.73 billion, respectively, compared to $9.21 billion as of December 31, 2001. During the first quarter of 2002, interest-bearing liabilities averaged $9.07 billion, an increase of $603.3 million or 7.1 percent from the first quarter of 2001. This increase primarily resulted from an increase in interest-bearing deposits and long-term obligations. No deposits have been acquired or divested during 2002. Deposits. At March 31, 2002, total deposits were $9.87 billion, an increase of $507.6 million or 5.4 percent over March 31, 2001. Compared to the December 31, 2001 balance of $9.96 billion, total deposits have decreased $88.6 million, reflecting the seasonal reduction in total deposits during the first and second quarters. Average interest-bearing deposits were $8.21 billion during the first quarter of 2002 compared to $7.67 billion during the first quarter of 2001, an increase of $535.9 million, due primarily to growth among money market accounts. Average money market accounts increased $453.0 million or 27.6 percent from first quarter of 2001 to the first quarter of 2002. Average Checking With Interest increased $128.3 million or 11.7 percent for the first quarter of 2001 compared to the same period of 2002. These increases were partially offset by lower average time deposits. Average time deposits decreased $67.5 million or 1.6 percent to $4.26 billion from March 31, 2001 to March 31, 2002. Management attributes the growth in interest-bearing deposits from the first quarter of 2001 to the first quarter of 2002 to several factors. FCB and ASB continue to focus on deposit gathering and retention in their respective market areas. In addition, some of the deposit growth in recent quarters has resulted from investors seeking the safety of traditional bank deposits as equity markets remain extraordinarily volatile. Although it is unclear how long the economic uncertainty will continue to adversely affect the equity markets, we continue to provide attractive products at reasonable rates to attract and retain core deposit relationships. Management attributes the reduction in average time deposits to a general reluctance by customers to invest in fixed-rate certificates of deposit and IRAs when interest rates on many of these products are very similar to rates offered on money market accounts. Short-term Borrowings. At March 31, 2002, short-term borrowings totaled $558.0 million compared to $611.4 million at December 31, 2001 and $668.2 million at March 31, 2001. For the quarters ended March 31, 2002 and 2001, short-term borrowings averaged $582.2 million and $644.0 million, respectively. The lower average short-term borrowings is primarily the result of reductions among federal funds purchased and master notes. Long-term Obligations. Long-term obligations averaged $284.0 million during the first quarter of 2002, an increase of $129.4 million or 83.6 percent over the first quarter of 2001. The growth in average long-term obligations relates to the October 2001 issuance of $100.0 million in trust preferred securities and $30.0 million borrowed from the Federal Home Loan Bank during the third quarter of 2001. The rate on average long-term borrowings decreased 17 basis points to 8.15 percent. Expense on Interest-Bearing Liabilities. BancShares' interest expense amounted to $59.1 million during the first quarter of 2002, a $37.3 million or 38.7 percent decrease from the first quarter of 2001. The lower interest expense was the result of substantially lower rates, partially offset by higher average volume. The rate on average interest-bearing liabilities during the first quarter of 2002 was 2.64 percent, a 198 basis point decrease in the aggregate blended rate on interest-bearing liabilities. The rate on these liabilities was 4.62 percent during the first quarter of 2001. The large rate reduction resulted from falling market rates. The impact of the rate reduction was partially offset by higher average interest-bearing liabilities, which increased $603.3 million to $9.07 billion during the first quarter of 2002. Among short-term borrowings, the combined impact of lower interest rates and reductions in average balances outstanding contributed to lower interest expense. For long-term obligations, total interest expense increased $2.5 million, the result of an increase in average outstandings, which more than offset the impact of a 17 basis point rate reduction. NET INTEREST INCOME Net interest income totaled $97.0 million during the first quarter of 2002, an increase of $4.4 million or 4.8 percent from the first quarter of 2001. The improvement in net interest income results from balance sheet growth, the impact of which more than offset the result of decreases in interest rates. The favorable impact of the growth among interest-earning assets was greater than the incremental cost resulting from the growth of interest-bearing liabilities, resulting in a favorable volume variance for the first quarter of 2002. However, the unfavorable impact of changing interest rates partially offset the benefit of volume growth. The taxable-equivalent net yield on interest-earning assets was 3.81 percent for the first quarter of 2002, compared to the 3.93 percent achieved for the first quarter of 2001. The taxable equivalent interest rate spread for the first quarter of 2002 was 3.47 percent compared to 3.34 percent for the same period of 2001. A principal objective of our asset/liability management function is to manage interest rate risk or the exposure to changes in interest rates. We maintain portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. Management is aware of the potential negative impact that movements in market interest rates may have on net interest income. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values or reduced net interest income in future periods. As of March 31, 2002, our market risk profile has not changed significantly from December 31, 2001. Changes in fair value that result from movement in market rates can not be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain. ASSET QUALITY Reserve for loan losses. Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the reserve for loan losses. Such factors as the financial condition of the borrower, fair market value of collateral and other considerations are considered in estimating probable credit losses. Management periodically reviews the assumptions imbedded within the model used to calculate the loan loss reserve. Business loans are generally graded, and those credit grades become the basis for the loss estimates based on historical experience. For all other loans, loss estimates are made by management based on historical data, current trends and estimated repayment frequencies. Based on the model, at March 31, 2002, the reserve for loan losses amounted to $108.7 million or 1.50 percent of loans outstanding. This compares to $107.1 million or 1.49 percent at December 31, 2001, and $103.8 million or 1.46 percent at March 31, 2001. Management considers the established reserve adequate to absorb losses that relate to loans outstanding at March 31, 2002, although future adjustments 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. These agencies may require the recognition of adjustments to the reserve based on their judgments of information available to them at the time of their examination. The provision for loan losses charged to operations during the first quarter of 2002 was $6.0 million, compared to $5.7 million during the first quarter of 2001. The $304,000 increase in the provision for loan loss during 2002 primarily resulted from loan growth, continued economic pressures and higher levels of nonperforming assets. Net charge-offs of loans during the first quarter of 2002 were $4.4 million compared to $4.5 million during the first quarter of 2001. On an annualized basis, these net charge-offs represent 0.25 percent and 0.26 percent of average loans outstanding during the respective periods. We remain committed to maintaining high levels of credit quality. Table 5 provides details concerning the reserve and provision for loan losses over the past five quarters. Nonperforming assets. At March 31, 2002, our nonperforming assets amounted to $30.2 million or 0.42 percent of gross loans plus foreclosed properties, compared to $20.2 million at December 31, 2001, and $15.9 million at March 31, 2001. The $3.8 million increase in nonaccrual loans from December 31, 2001 to March 31, 2002 results from higher level of commercial nonaccrual loans. At March 31, 2002, the balance of other real estate includes $6.1 million that was transferred from premises and equipment to other real estate during the first quarter when management elected to classify the property as held for sale. FCB has entered into an agreement to sell this property, subject to the satisfaction of various contingencies, during the third quarter of 2002. Despite the volatility in recent quarters, we view these levels of nonperforming assets as further evidence of strong asset quality. Management continues to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure. NONINTEREST INCOME During the first three months of 2002, noninterest income was $54.2 million, compared to $52.8 million during the same period of 2001. During the first three months of 2002, service charges on deposit accounts totaled $18.4 million, compared to $15.9 million earned during the same period of 2001, an increase of $2.5 million or 15.8 percent. This increase resulted from higher service charges on commercial accounts and an increase in fees collected for bad checks and our overdraft protection plan. We recorded mortgage income of $3.3 million during the first quarter of 2002, compared to $1.3 million earned during the same period of 2001. The $2.0 million or 55.2 percent increase resulted from higher mortgage originations, most of which are now originated on a correspondent basis, resulting in immediate recognition of origination fees. Cardholder and merchant services income was $10.6 million during the first quarter of 2002, an increase of $1.2 million or 13.2 percent, the result of continued growth among merchant services and higher interchange income resulting from debit card transactions. Fees from processing services increased $755,000 or 19.2 percent during the first quarter of 2002, the result of higher rates that became effective January 1, 2002. Partially offsetting the benefit of these increases was a $5.2 million reduction in securities gains recognized during the first quarter of 2002. During the first quarter of 2001, we recognized $5.5 million in securities gains on equity investments that were triggered by acquisitions of the issuers. NONINTEREST EXPENSE Noninterest expense was $109.4 million for the first three months of 2002, a 6.5 percent increase over the $102.8 million recorded during the same period of 2001. Much of the $6.6 million increase in total noninterest expense relates to personnel expenses. Salaries and wages increased $3.1 million or 7.1 percent during 2002 when compared to the same period of 2001. This increase includes merit increases that became effective after the first quarter of 2001. Employee benefits increased $1.6 million to $10.6 million for the first three months of 2002. This 18.4 percent increase was the result of higher life and health insurance expenses. Occupancy expense was $9.0 million during both the first quarter of 2001 and 2002. Higher depreciation expense was offset by lower repairs expense and rent expense. Equipment expense was $10.2 million for the first three months of 2002, a 4.9 percent increase over the $9.7 million recorded during the same period of 2001. Much of the increase was the result of higher hardware and software depreciation and maintenance costs. Other expenses increased $1.4 million or 4.6 percent from the first quarter of 2001 to the first quarter of 2002. In accordance with the provisions of Statement of Financial Accounting Standards No. 142 (Statement 142), which we fully adopted on January 1, 2002, we discontinued the amortization of goodwill. During the first quarter of 2001, BancShares recognized goodwill amortization expense of $1.3 million. Concurrent with the adoption of Statement 142, we also reviewed the estimated useful lives of our other intangible assets, including goodwill accounted for under the provisions of Statement of Financial Accounting Standards No. 72 (FAS 72 goodwill). As a result of adjustments to shorten the estimated useful lives of FAS 72 goodwill, during the first quarter of 2002, we recorded amortization expense of $3.4 million, compared to $1.6 million during the same period of 2001. During the first quarter of 2002, we also designated $6.1 million in premises and equipment as held for sale. As a result of this reclassification, these assets were written down to their fair value less selling costs, which required that we record a $765,000 writedown. INCOME TAXES Income tax expense amounted to $12.6 million during the three months ended March 31, 2002, compared to $14.1 million during the same period of 2001. The effective tax rates for these periods were 35.2 percent and 38.1 percent, respectively. The decrease in effective tax rate resulted from the adoption of Statement 142 at January 1, 2002, at which time we discontinued the amortization of goodwill. Since this amortization expense was non-deductible for income tax purposes, the benefit resulting from the change did not generate any additional income tax expense. LIQUIDITY Management relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. In the event additional liquidity is needed, we maintain readily available sources to borrow funds through its correspondent network. Loan growth during the first quarter was funded by liquidity generated from maturity of investment securities. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. At March 31, 2002 and 2001, our leverage capital ratios were 8.99 percent and 7.97 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, our Tier 1 capital ratios were 13.20 percent at March 31, 2002 and 10.43 percent at March 31, 2001. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratios were 14.53 percent at March 31, 2002 and 11.77 percent as of March 31, 2001. The minimum total capital ratio is 8 percent. BancShares and our subsidiary banks exceed the capital standards established by their respective regulatory agencies. 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 each entity 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 $742.4 million at March 31, 2001 to $880.8 million at March 31, 2002, an increase of $138.4 million or 18.6 percent. This growth resulted from loan growth and an expanding branch network. ASB's net interest income increased $2.5 million or 60.0 percent during the first quarter of 2002, when compared to the same period of 2001, the result of balance sheet growth. Provision for loan losses increased $623,000 due to higher level of nonperforming assets, higher historical net charge-offs and higher loan loss projections. ASB's noninterest income increased $231,000 or 23.4 percent during 2001, primarily the result of higher service charge income. Noninterest expense increased $1.0 million or 14.0 percent during 2001. Higher personnel, occupancy and equipment costs reflect the impact of the expanded branch network. ASB recorded a net loss of $876,000 during the first quarter of 2002 compared to a net loss of $1.6 million during the same period of 2001. This represents a $710,000 or 44.8 percent reduction 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. Once a sufficient level of volume is established, management anticipates ASB will become profitable. First Citizens Bank. FCB's total assets increased from $10.30 billion at March 31, 2001 to $10.62 billion at March 31, 2002, an increase of $317.8 million or 3.1 percent. This growth resulted from strong deposit growth during 2001, much of which was invested in the securities portfolio due to weak loan demand. FCB's net interest income increased $2.9 million or 3.3 percent during the first quarter of 2002, the result of growth in interest-earning assets. Provision for loan losses decreased $319,000 or 6.1 percent due to stabilizing levels of nonperforming assets and net charge-offs. FCB's noninterest income increased $6.6 million or 14.0 percent during the first quarter of 2002, primarily the result of higher service charge income. Noninterest expense increased $7.3 million or 7.6 percent during the first quarter of 2002, primarily due to higher personnel and equipment costs. FCB recorded net income of $26.0 million during the first quarter of 2002 compared to $23.9 million during the same period of 2001. This represents a $2.1 million or 8.7 percent increase in net income. ACCOUNTING MATTERS Except for those provisions that became effective and were adopted by BancShares during 2001, we adopted the provisions of Statements of Financial Accounting Standards No. 142 on January 1, 2002. Further discussion related to the adoption of Statement 142 is found under the caption Noninterest Expense and in the notes to the consolidated financial statements. Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios, or results of operations. FORWARD-LOOKING STATEMENTS This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgments of BancShares and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of BancShares' customers, actions of government regulators, the level of market interest rates, and general economic conditions. First Citizens BancShares, Inc. and Subsidiaries First Quarter 2002