10-Q 1 sep0310q.txt SEPTEMBER 30, 2003 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the quarterly period ended September 30, 2003 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-16471 First Citizens BancShares, Inc (Exact name of Registrant as specified in its charter) Delaware 56-1528994 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 239 Fayetteville Street, Raleigh, North Carolina 27601 (Address of principal executive offices) (zip code) (919) 716-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No _____ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes X No _____ Class A Common Stock--$1 Par Value-- 8,758,670 shares Class B Common Stock--$1 Par Value-- 1,677,675 shares (Number of shares outstanding, by class, as of November 13, 2003) Index PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 2003, December 31, 2002,and September 30, 2002 Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2003 and September 30, 2002 Consolidated Statements of Changes in Shareholders' Equity for the nine-month periods ended September 30, 2003, and September 30, 2002 Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2003, and September 30, 2002 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 4. Controls and Procedures (a) In conjunction with this filing and their certifications of the disclosures contained within this filing, Chief Executive Officer Lewis R. Holding and Chief Financial Officer Kenneth A. Black evaluated the effectiveness of Registrant's disclosure controls and procedures as of September 30, 2003. This review found the disclosure controls and procedures to be effective. (b) During the quarter, there were no significant changes in Registrant's internal controls over financial reporting or in other factors that could significantly affect these controls. First Citizens BancShares, Inc and Subsidiaries Third Quarter 2003 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32 Certifications of Chief Executive Officer and Chief Financial Officer (b) Reports on Form 8-K. During the quarter ended September 30, 2003, Registrant filed noCurrent Report on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST CITIZENS BANCSHARES, INC. (Registrant) Dated: November 13, 2003 By:/s/Kenneth A. Black Kenneth A. Black Vice President, Treasurer, and Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries Third Quarter 2003
Consolidated Balance Sheets First Citizens BancShares, Inc. and Subsidiaries September 30* December 31# September 30* (thousands, except share data) 2003 2002 2002 ------------------------------------------------------------------------------------------------------------------------ (restated) Assets Cash and due from banks $ 790,166 $ 811,657 $ 801,450 Overnight investments 268,636 623,570 623,182 Investment securities held to maturity 1,474,801 2,417,583 2,351,678 Investment securities available for sale 1,172,028 121,653 150,348 Loans 8,026,502 7,620,263 7,521,834 Less reserve for loan losses 117,747 112,533 111,577 ----------------------------------------------------------------------------------------------------------------------- Net loans 7,908,755 7,507,730 7,410,257 Premises and equipment 534,339 507,267 502,966 Income earned not collected 42,055 46,959 53,548 Other assets 196,856 195,471 193,723 ======================================================================================================================= Total assets $ 12,387,636 $ 12,231,890 $ 12,087,152 ======================================================================================================================= Liabilities Deposits: Noninterest-bearing $ 2,126,874 $ 1,857,576 $ 1,830,455 Interest-bearing 8,436,261 8,582,044 8,456,370 ----------------------------------------------------------------------------------------------------------------------- Total deposits 10,563,135 10,439,620 10,286,825 Short-term borrowings 472,631 462,627 498,988 Long-term obligations 256,752 253,409 253,418 Other liabilities 79,440 108,943 98,050 ----------------------------------------------------------------------------------------------------------------------- Total liabilities 11,371,958 11,264,599 11,137,281 Shareholders' Equity Common stock: Class A - $1 par value (8,758,670; 8,794,669 and 8,794,669 shares issued, respectively) 8,759 8,794 8,794 Class B - $1 par value (1,677,675; 1,678,625 and 1,681,468 shares issued, respectively) 1,678 1,678 1,681 Surplus 143,766 143,766 143,766 Retained earnings 850,766 804,397 787,955 Accumulated other comprehensive income 10,709 8,656 7,675 ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,015,678 967,291 949,871 ----------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 12,387,636 $ 12,231,890 $ 12,087,152 ======================================================================================================================= * Unaudited # Derived from the Consolidated Balance Sheets included in the 2002 Annual Report on Form 10-K. See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc and Subsidiaries Third Quarter 2003
Consolidated Statements of Income First Citizens BancShares, Inc. and Subsidiaries Three Months Ended Nine Months Ended September 30 Ended September 30 (thousands, except per share data; unaudited) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------------------------- Interest income (restated) (restated) Loans $ 109,395 $ 123,280 $ 334,982 $ 370,494 Investment securities: U. S. Government 14,226 21,527 44,878 77,223 State, county and municipal 38 46 113 168 Dividends 316 407 1,041 1,272 ------------------------------------------------------------------------------------------------------------------------- Total investment securities interest and dividend income 14,580 21,980 46,032 78,663 Overnight investments 912 2,482 4,120 6,504 ------------------------------------------------------------------------------------------------------------------------- Total interest income 124,887 147,742 385,134 455,661 Interest expense Deposits 28,587 45,741 98,470 146,350 Short-term borrowings 748 1,134 2,044 3,615 Long-term obligations 5,238 5,252 15,722 16,341 ------------------------------------------------------------------------------------------------------------------------- Total interest expense 34,573 52,127 116,236 166,306 ------------------------------------------------------------------------------------------------------------------------- Net interest income 90,314 95,615 268,898 289,355 Provision for loan losses 6,353 5,592 19,108 19,394 ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 83,961 90,023 249,790 269,961 Noninterest income Service charges on deposit accounts 20,124 19,179 58,034 56,588 Cardholder and merchant services income 14,795 12,921 41,275 36,356 Trust income 3,687 3,774 11,153 11,683 Fees from processing services 5,177 4,757 15,402 14,161 Commission income 6,097 5,426 18,167 16,751 ATM income 2,351 2,434 6,654 6,964 Mortgage income 5,298 2,806 14,391 8,658 Gain on sale of branches to a related party - - 5,710 - Other service charges and fees 3,537 3,465 11,196 11,209 Securities gains (losses) 179 (360) 309 (446) Other 1,960 1,169 4,249 3,231 ------------------------------------------------------------------------------------------------------------------------- Total noninterest income 63,205 55,571 186,540 165,155 Noninterest expense Salaries and wages 51,276 47,508 149,213 139,266 Employee benefits 11,621 10,354 35,322 30,897 Occupancy expense 10,657 9,849 31,563 28,687 Equipment expense 13,515 11,493 37,692 33,143 Other 31,878 29,410 92,414 89,342 ------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 118,947 108,614 346,204 321,335 ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 28,219 36,980 90,126 113,781 Income taxes 8,672 13,190 31,513 40,366 ------------------------------------------------------------------------------------------------------------------------- Net income $ 19,547 $ 23,790 $ 58,613 $ 73,415 ------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) net of taxes Unrealized securities gains (losses) arising during period $ (681) $ (1,188) $ 2,240 $ 163 Less: reclassified adjustment for gains (losses) included in net income 108 (159) 187 160 ------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) (789) (1,029) 2,053 3 ------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 18,758 $ 22,761 $ 60,666 $ 73,418 ------------------------------------------------------------------------------------------------------------------------- Average shares outstanding 10,436,345 10,477,886 10,457,976 10,480,011 Net income per share $ 1.87 $ 2.27 $ 5.60 $ 7.01 ------------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Consolidated Statements of Changes in Shareholders' Equity First Citizens BancShares, Inc. and Subsidiaries Accumulated Class A Class B Other Total Common Common Retained Comprehensive Shareholders' (thousands,except share data, unaudited) Stock Stock Surplus Earnings Income Equity -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 8,797 $ 1,686 $ 143,766 $ 723,122 $ 7,672 $ 885,043 Redemption of 2,485 shares of Class A common stock (3) (260) (263) Redemption of 4,834 shares of Class B common stock (5) (461) (466) Net income (restated) 73,415 73,415 Unrealized securities gains, net of taxes 3 3 Cash dividends (7,861) (7,861) ================================================================================================================================ Balance at September 30, 2002 (restated) $ 8,794 $ 1,681 $ 143,766 $ 787,955 $ 7,675 $ 949,871 ================================================================================================================================ Balance at December 31, 2002 $ 8,794 $ 1,678 $ 143,766 $ 804,397 $ 8,656 $ 967,291 Redemption of 35,999 shares of Class A common stock (35) (3,530) (3,565) Redemption of 950 shares of Class B common stock - (87) (87) Net income 58,613 58,613 Unrealized securities gains, net of taxes 2,053 2,053 Cash dividends (8,627) (8,627) ================================================================================================================================ Balance at September 30, 2003 $ 8,759 $ 1,678 $ 143,766 $ 850,766 $ 10,709 $ 1,015,678 ================================================================================================================================ See accompanying Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Consolidated Statements of Cash Flows First Citizens BancShares, Inc. and Subsidiaries Nine months ended September 30 2003 2002 (restated) -------------------------------------------------------------------------------------------------------------- (thousands) OPERATING ACTIVITIES Net income $ 58,613 $ 73,415 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 2,019 2,175 Provision for loan losses 19,108 19,394 Deferred tax expense 7,206 6,261 Change in current taxes payable 180 (297) Depreciation 30,702 27,974 Change in accrued interest payable (14,438) (33,064) Change in income earned not collected 4,904 10,056 Securities losses (gains) (309) 446 Origination of loans held for sale (782,436) (17,171) Proceeds from sale of loans held for sale 787,214 13,987 Gain on loans held for sale (7,359) (22) Gain on sale of branches (5,710) - Net amortization (accretion) of premiums and discounts 14,775 17,882 Net change in other assets (12,949) (19,237) Net change in other liabilities (15,216) 8,467 --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 86,304 110,266 --------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans outstanding (444,775) (337,355) Purchases of investment securities held to maturity (695,251) (1,711,561) Purchases of investment securities available for sale (1,369,426) (19,050) Proceeds from maturities of investment securities held to maturity 1,623,258 2,000,852 Proceeds from maturities of investment securities available for sale 322,755 911 Net change in overnight investments 354,934 (121,273) Dispositions of premises and equipment 7,060 8,274 Additions to premises and equipment (66,006) (62,238) Purchase and sale of branches, net of cash transferred (66,667) - --------------------------------------------------------------------------------------------------- Net cash used by investing activities (334,118) (241,440) --------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in time deposits (202,195) (395,225) Net change in demand and other interest-bearing deposits 427,450 720,445 Net change in short-term borrowings 9,660 (112,993) Repayment of long-term obligations - (30,000) Origination of long-term obligations 3,687 - Repurchases of common stock (3,652) (729) Cash dividends paid (8,627) (7,861) --------------------------------------------------------------------------------------------------- Net cash provided by financing activities 226,323 173,637 --------------------------------------------------------------------------------------------------- Change in cash and due from banks (21,491) 42,463 Cash and due from banks at beginning of period 811,657 758,987 =================================================================================================== Cash and due from banks at end of period $ 790,166 $ 801,450 =================================================================================================== CASH PAYMENTS FOR: Interest $ 130,674 $ 199,370 Income taxes 21,803 38,343 --------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Unrealized securities gains $ 3,395 $ 210 Reclassification of premises and equipment to other real estate - 6,108 --------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003 Notes to Consolidated Financial Statements First Citizens BancShares, Inc. and Subsidiaries Note A Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the consolidated statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes included in the 2002 First Citizens BancShares, Inc. Annual Report, which is incorporated by reference on Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2003. However, except as noted below, the reclassifications have no effect on shareholders' equity or net income as previously reported. BancShares adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 147 (Statement 147) during the fourth quarter of 2002. Statement 147 required that any reclassification of previously recognized unidentifiable intangible assets as goodwill be retroactively applied to coincide with the adoption of SFAS No. 142 (Statement 142). As a result, amortization expense related to assets that were reclassified pursuant to Statement 147 has been reversed, and the financial statements and related disclosures made for the first, second and third quarters of 2002 have been restated. For the quarter ended September 30, 2002, noninterest expense declined $2,587, income tax expense increased $915 and net income increased $1,672 or $0.16 per share. For the nine months ended September 30, 2002, noninterest expense declined $7,690, income tax expense increased $2,721 and net income increased $4,969 or $0.48 per share. Note B Operating Segments BancShares conducts its banking operations through its two wholly-owned subsidiaries, First-Citizens Bank & Trust Company (FCB) and Atlantic States Bank (ASB). Although FCB and ASB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has a separate management group. Additionally, the financial results and trends of ASB reflect the de novo nature of its growth. FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia and West Virginia. ASB began operations in 1997 and currently operates branches in Georgia, Florida, Texas, Arizona and California under a federal thrift charter. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ASB account for more than 90 percent of consolidated assets, revenues and net income. Other includes activities of the parent company, two subsidiaries that are the issuing trusts for outstanding preferred securities, Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company. The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments to interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other services fees paid by one company to another within BancShares' consolidated group.
As of and for the nine months ended September 30, 2003 ASB FCB Other Total Adjustments Consolidated (thousands) Interest income $ 43,426 $ 341,028 $ 18,299 $ 402,753 $ (17,619) $ 385,134 Interest expense 14,790 86,944 32,121 133,855 (17,619) 116,236 ------------------------------------------------------------------------------------------ Net interest income 28,636 254,084 (13,822) 268,898 - 268,898 Provision for loan losses 1,553 17,555 - 19,108 - 19,108 ------------------------------------------------------------------------------------------ Net interest income after 27,083 236,529 (13,822) 249,790 - 249,790 provision for loan losses Noninterest income 4,110 183,649 2,274 190,033 (3,493) 186,540 Noninterest expense 32,602 314,479 2,616 349,697 (3,493) 346,204 ------------------------------------------------------------------------------------------ Income (loss) before income taxes (1,409) 105,699 (14,164) 90,126 - 90,126 Income taxes (255) 36,700 (4,932) 31,513 - 31,513 ========================================================================================== Net income (loss) $ (1,154) $ 68,999 $ (9,232) $ 58,613 $ - $ 58,613 ========================================================================================== Period-end assets $ 1,127,124 $11,126,365 $ 1,733,128 $13,986,617 $(1,599,336) $12,387,281
As of and for the nine months ended September 30, 2002 (restated) ASB FCB Other Total Adjustments Consolidated (thousands) Interest income $ 42,143 $ 409,400 $ 22,560 $ 474,103 $ (18,442) $ 455,661 Interest expense 18,710 132,137 33,901 184,748 (18,442) 166,306 ------------------------------------------------------------------------------------------ Net interest income 23,433 277,263 (11,341) 289,355 - 289,355 Provision for loan losses 2,724 16,670 - 19,394 - 19,394 ------------------------------------------------------------------------------------------ Net interest income after 20,709 260,593 (11,341) 269,961 - 269,961 provision for loan losses Noninterest income 3,713 164,522 313 168,548 (3,393) 165,155 Noninterest expense 26,828 297,548 352 324,728 (3,393) 321,335 ------------------------------------------------------------------------------------------ Income (loss) before income taxes (2,406) 127,567 (11,380) 113,781 - 113,781 Income taxes (804) 45,225 (4,055) 40,366 - 40,366 ========================================================================================== Net income (loss) $ (1,602) $ 82,342 $ (7,325) $ 73,415 $ - $ 73,415 ========================================================================================== Period-end assets $ 999,629 $10,881,070 $ 1,695,694 $13,576,393 $(1,489,241) $12,087,152
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Financial Summary Table 1 2003 2002 Nine Months Ended --------------------------------------- ------------------------ September 30 (thousands, except per share data Third Second First Fourth Third ---------------------- and ratios) Quarter Quarter Quarter Quarter Quarter 2003 2002 -------------------------------------------------------------------------------------------------------------------------------- Summary of Operations (restated) (restated) Interest income $ 124,887 $ 129,173 $ 131,074 $ 140,508 $ 147,742 $ 385,134 $ 455,661 Interest expense 34,573 39,505 42,158 47,712 52,127 116,236 166,306 -------------------------------------------------------------------------------------------------------------------------------- Net interest income 90,314 89,668 88,916 92,796 95,615 268,898 289,355 Provision for loan losses 6,353 7,192 5,563 7,156 5,592 19,108 19,394 -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 83,961 82,476 83,353 85,640 90,023 249,790 269,961 Noninterest income 63,205 66,948 56,387 56,618 55,282 186,540 165,155 Noninterest expense 118,947 115,975 111,282 112,496 108,325 346,204 321,335 -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 28,219 33,449 28,458 29,762 36,980 90,126 113,781 Income taxes 8,672 12,677 10,164 10,422 13,190 31,513 40,366 ================================================================================================================================ Net income $ 19,547 $ 20,772 $ 18,294 $ 19,340 $ 23,790 $ 58,613 $ 73,415 ================================================================================================================================ Net interest income-taxable equivalent $ 90,568 $ 89,926 $ 89,200 $ 93,106 $ 95,932 $ 269,694 $ 290,388 -------------------------------------------------------------------------------------------------------------------------------- Selected Quarterly Averages Total assets $12,287,273 $12,203,618 $12,054,717 $12,076,262 $11,871,334 $12,177,404 $11,764,711 Investment securities 2,665,203 2,594,983 2,476,426 2,544,930 2,553,957 2,579,562 2,632,761 Loans 7,946,501 7,811,739 7,642,673 7,543,548 7,450,271 7,801,418 7,324,359 Interest-earning assets 10,994,308 10,890,420 10,741,160 10,771,571 10,592,386 10,876,224 10,480,111 Deposits 10,441,989 10,394,829 10,283,143 10,251,693 10,060,785 10,373,902 9,925,071 Interest-bearing liabilities 9,126,076 9,177,931 9,173,567 9,234,127 9,131,569 9,159,017 9,093,797 Long-term obligations 253,351 253,379 253,389 253,412 253,973 253,373 266,620 Shareholders' equity $ 1,002,524 $ 991,047 $ 974,900 $ 953,606 $ 935,735 $ 989,046 $ 915,387 Shares outstanding 10,436,345 10,465,909 10,472,065 10,475,377 10,477,886 10,457,976 10,480,011 -------------------------------------------------------------------------------------------------------------------------------- Selected Quarter-End Balances Total assets $12,387,281 $12,394,744 $12,388,741 $12,231,890 $12,087,152 $12,387,281 $12,087,152 Investment securities 2,646,829 2,475,821 2,362,130 2,539,236 2,502,026 2,646,829 2,502,026 Loans 8,026,502 7,857,220 7,704,492 7,620,263 7,521,834 8,026,502 7,521,834 Interest-earning assets 10,941,968 10,951,437 10,991,877 10,534,469 10,647,042 10,941,968 10,647,042 Deposits 10,563,135 10,558,616 10,594,380 10,439,620 10,286,825 10,563,135 10,286,825 Interest-bearing liabilities 9,165,645 9,158,867 9,293,396 9,298,080 9,208,776 9,165,645 9,208,776 Long-term obligations 256,752 253,376 253,386 253,409 253,970 256,752 253,970 Shareholders' equity $ 1,015,678 $ 999,789 $ 983,635 $ 967,291 $ 949,871 $ 1,015,678 $ 949,871 Shares outstanding 10,436,345 10,436,345 10,470,236 10,473,294 10,476,137 10,436,345 10,476,137 -------------------------------------------------------------------------------------------------------------------------------- Profitability Ratios (averages) Rate of return (annualized) on: Total assets 0.63 % 0.68 % 0.62 % 0.64 % 0.80 % 0.64 % 0.83 Shareholders' equity 7.74 8.41 7.61 8.05 10.09 7.92 10.72 Dividend payout ratio 14.71 13.89 15.71 13.51 11.01 14.73 10.70 -------------------------------------------------------------------------------------------------------------------------------- Liquidity and Capital Ratios (averages) Loans to deposits 76.10 % 75.15 % 74.32 % 73.58 % 74.05 % 75.20 % 73.80 Shareholders' equity to total assets 8.16 8.12 8.09 7.90 7.88 8.12 7.78 Time certificates of $100,000 or more to total deposits 10.22 10.34 10.44 10.42 10.54 10.33 11.00 -------------------------------------------------------------------------------------------------------------------------------- Per Share of Stock Net income $ 1.87 $ 1.98 $ 1.75 $ 1.85 $ 2.27 $ 5.60 $ 7.01 Cash dividends 0.275 0.275 0.275 0.250 0.250 0.825 0.750 Book value at period end 97.32 95.80 93.95 92.36 90.67 97.32 90.67 Tangible book value at period end 86.95 85.36 83.39 81.73 80.23 86.95 80.23 --------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Outstanding Loans by Type Table 2 2003 2002 Third Second First Fourth Third (thousands) Quarter Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------------------------------------- Real estate: Construction and land development $ 839,650 $ 835,209 $ 834,027 $ 799,278 $ 816,512 Mortgage: 1-4 family residential 923,691 950,555 975,010 1,058,082 1,091,344 Commercial 2,221,741 2,140,521 2,077,633 2,035,646 1,966,433 Revolving 1,530,096 1,466,454 1,404,014 1,335,024 1,259,593 Other 160,222 157,597 148,684 150,226 158,125 -------------------------------------------------------------------------------------------------------------------------------- Total real estate 5,675,400 5,550,336 5,439,368 5,378,256 5,292,007 Commercial and industrial 909,314 937,125 936,387 925,775 937,987 Consumer 1,233,856 1,174,807 1,135,622 1,154,280 1,132,406 Lease financing 146,416 140,133 137,562 141,372 142,695 Other 61,516 54,819 55,553 20,580 16,739 -------------------------------------------------------------------------------------------------------------------------------- Total loans 8,026,502 7,857,220 7,704,492 7,620,263 7,521,834 Less reserve for loan losses 117,747 115,382 113,382 112,533 111,577 -------------------------------------------------------------------------------------------------------------------------------- Net loans $7,908,755 $7,741,838 $7,591,110 $7,507,730 $7,410,257 ================================================================================================================================
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Investment Securities Table 3 September 30, 2003 September 30, 2002 ----------------------------------------------------------------------------------------------------------------------------------- Average Taxable Average Taxable Fair Maturity Equivalent Fair Maturity Equivalent (thousands) Cost Value (Yrs./Mos.) Yield Cost Value (Yrs./Mos.) Yield ----------------------------------------------------------------------------------------------------------------------------------- Investment securities held to maturity: U. S. Government: Within one year $ 1,013,551 $ 1,018,269 0/7 1.95 % $ 1,841,554 $ 1,848,946 0/5 3.23 % One to five years 439,585 443,690 1/3 2.00 479,465 485,297 1/6 2.60 Five to ten years 66 71 6/3 8.00 94 100 7/3 8.00 Ten to twenty years 18,231 18,957 13/7 5.55 25,132 25,990 14/7 5.56 Over twenty years 1,116 1,162 25/2 7.24 2,635 2,750 26/4 7.15 ----------------------------------------------------------------------------------------------------------------------------------- Total 1,472,549 1,482,149 1/0 2.01 2,348,880 2,363,084 0/8 3.10 State, county and municipal: Within one year - - 500 503 0/3 7.78 One to five years 440 455 1/9 5.55 480 501 3/0 5.55 Five to ten years 145 154 5/7 5.88 144 157 7/10 5.88 Ten to twenty years 1,417 1,580 14/7 6.02 1,414 1,578 15/10 6.02 ----------------------------------------------------------------------------------------------------------------------------------- Total 2,002 2,189 11/2 5.90 2,538 2,740 9/0 6.27 Other Within one year - - 110 10 0/4 2.32 One to five years 250 250 4/10 7.75 250 250 5/10 7.75 Five to ten years - - - - ----------------------------------------------------------------------------------------------------------------------------------- Total 250 250 4/10 7.75 260 360 4/2 6.09 Total investment securities held to maturity 1,474,801 1,484,589 1/0 2.13 2,351,678 2,366,184 0/10 3.13 ----------------------------------------------------------------------------------------------------------------------------------- Investment securities available for sale: U. S. Government: Within one year 797,940 798,460 0/4 2.72 95,702 95,828 0/4 2.02 One to five years 319,048 318,409 2/3 1.71 - - Five to ten years - - - - Ten to twenty years 1,030 1,016 14/10 4.28 - - Over twenty years - - - - ----------------------------------------------------------------------------------------------------------------------------------- 1,118,018 1,117,885 0/10 2.43 95,702 95,828 0/4 2.02 State, county and municipal: Within one year - - - - One to five years 281 281 4/1 1.58 - - Five to ten years 567 546 8/7 4.48 - - Ten to twenty years - - - - Over twenty years 145 145 29/5 1.15 - - ----------------------------------------------------------------------------------------------------------------------------------- Total 993 972 0/4 3.17 - - Marketable equity securities 35,318 53,171 41,787 54,520 ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale 1,154,329 1,172,028 137,489 150,348 ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities $ 2,629,129 $ 2,656,617 $ 2,489,167 $ 2,516,532 -----------------------------------------------------------------------------------------------------------------------------------
Average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities that are exempt from federal and/or state income taxes are stated on a taxable-equivalent basis assuming statutory rates of 35% for federal income tax purposes and 7.0% for state income taxes for all periods. First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third Quarter Table 4 2003 2002 Increase (decrease) due to: ----------------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Yield/ Total (thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change ----------------------------------------------------------------------------------------------------------------------------------- Assets Total loans $ 7,946,501 $ 109,639 5.47 % $ 7,450,271 $ 123,574 6.58 % $7,530 $ (21,465)$ (13,935) Investment securities: U. S. Government 2,606,137 14,226 2.17 2,493,554 21,527 3.43 784 (8,085) (7,301) State, county and municipal 3,175 48 6.00 3,391 69 8.07 (4) (17) (21) Other 55,891 316 2.24 57,012 407 2.83 (7) (84) (91) ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,665,203 14,590 2.17 2,553,957 22,003 3.42 773 (8,186) (7,413) Overnight investments 382,604 912 0.95 588,158 2,482 1.67 (684) (886) (1,570) =================================================================================================================================== Total interest-earning assets $ 10,994,308 $ 125,141 4.51 % $ 10,592,386 $ 148,059 5.55 % $7,619 $ (30,537)$ (22,918) =================================================================================================================================== Liabilities Deposits: Checking With Interest $ 1,387,252 $ 413 0.12 % $ 1,265,092 $ 847 0.27 % $ 63 $ (497) $ (434) Savings 700,002 389 0.22 651,110 874 0.53 44 (529) (485) Money market accounts 2,558,586 4,583 0.71 2,383,130 9,573 1.59 491 (5,481) (4,990) Time deposits 3,728,003 23,202 2.47 4,063,898 34,447 3.36 (2,495) (8,750) (11,245) ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 8,373,843 28,587 1.35 8,363,230 45,741 2.17 (1,897) (15,257) (17,154) Federal funds purchased 55,867 118 0.84 38,479 155 1.60 53 (90) (37) Repurchase agreements 160,993 129 0.32 193,118 277 0.57 (36) (112) (148) Master notes 219,410 347 0.63 266,912 644 0.96 (95) (202) (297) Other short-term borrowings 62,612 154 0.98 15,857 58 1.45 143 (47) 96 Long-term obligations 253,351 5,238 8.20 253,973 5,252 8.20 (13) (1) (14) =================================================================================================================================== Total interest-bearing liabilities $ 9,126,076 $ 34,573 1.50 % $ 9,131,569 $ 52,127 2.26 % $(1,845)$ (15,709)$ (17,554) =================================================================================================================================== Interest rate spread 3.01 % 3.29 % ----------------------------------------------------------------------------------------------------------------------------------- Net interest income and net yield on interest-earning assets $ 90,568 3.28 % $ 95,932 3.60 % $9,464 $ (14,828) $ (5,364) -----------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and state income tax rate of 7.00% for each period. The taxable-equivalent adjustment was $254 for 2003 and $317 for 2002. First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine Months Table 5 2003 2002 Increase (decrease) due to: -------------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Yield/ Total (thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change -------------------------------------------------------------------------------------------------------------------------------- Assets Total loans $ 7,801,418 $ 335,746 5.75 % $ 7,324,359 $ 371,446 6.77 % $ 18,720 $ (54,420$ (35,700) Investment securities: U. S. Government 2,519,844 44,878 2.38 2,572,228 77,223 4.01 (1,278) (31,067) (32,345) State, county and municipal 3,932 145 4.93 4,088 249 8.14 (8) (96) (104) Other 55,786 1,041 2.49 56,445 1,272 3.01 (13) (218) (231) -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,579,562 46,064 2.39 2,632,761 78,744 4.00 (1,299) (31,381) (32,680) Overnight investments 495,244 4,120 1.11 522,990 6,504 1.66 (289) (2,095) (2,384) -------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 10,876,224$ 385,930 4.74 % $ 10,480,110 $ 456,694 5.82 % $ 17,132 $ (87,896$ (70,764) ================================================================================================================================ Liabilities Deposits: Checking with Interest $ 1,360,920 $ 1,500 0.15 % $ 1,248,191 $ 2,662 0.29 % $ 195 $ (1,357) $ (1,162) Savings 683,862 1,790 0.35 640,895 2,594 0.54 140 (944) (804) Money market accounts 2,551,789 17,866 0.94 2,240,889 27,482 1.64 2,965 (12,581) (9,616) Time deposits 3,845,839 77,314 2.69 4,157,794 113,612 3.65 (7,480) (28,818) (36,298) -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 8,442,410 98,470 1.56 8,287,769 146,350 2.36 (4,180) (43,700) (47,880) Federal funds purchased 45,567 338 0.99 41,132 489 1.59 43 (194) (151) Repurchase agreements 158,455 380 0.32 196,152 804 0.55 (121) (303) (424) Master notes 218,787 1,013 0.62 278,409 1,973 0.95 (348) (612) (960) Other short-term borrowings 40,425 313 1.04 23,715 349 1.97 188 (224) (36) Long-term obligations 253,373 15,722 8.30 266,620 16,341 8.19 (825) 206 (619) -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 9,159,017 $ 116,236 1.70 % $ 9,093,797 $ 166,306 2.45 % $ (5,243)$ (44,827$ (50,070) ================================================================================================================================ Interest rate spread 3.04 % 3.37 % -------------------------------------------------------------------------------------------------------------------------------- Net interest income and net yield on interest-earning assets $ 269,694 3.32 % $ 290,388 3.70 % $ 22,375 $ (43,069$ (20,694) --------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and state income tax rate of 7.00% for each period. The taxable-equivalent adjustment was $796 for 2003 and $1,033 for 2002. First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003
Summary of Loan Loss Experience and Risk Elements Table 6 Nine Months Ended 2003 2002 September 30 Third Second First Fourth Third ---------------------- (thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2003 2002 ------------------------------------------------------------------------------------------------------------------------------------ Reserve balance at beginning of period $ 115,382 $ 113,382 $ 112,533 $ 111,577 $ 110,472 $ 112,533 $ 107,087 Provision for loan losses 6,353 7,192 5,563 7,156 5,592 19,108 19,394 Net charge-offs: Charge-offs (5,050) (6,089) (5,273) (6,966) (5,319) (16,412) (17,974) Recoveries 1,062 897 559 766 832 2,518 3,070 ------------------------------------------------------------------------------------------------------------------------------------ Net charge-offs (3,988) (5,192) (4,714) (6,200) (4,487) (13,894) (14,904) ==================================================================================================================================== Reserve balance at end of period $ 117,747 $ 115,382 $ 113,382 $ 112,533 $ 111,577 $ 117,747 $ 111,577 ==================================================================================================================================== Historical Statistics Average loans $ 7,946,501 $ 7,811,739 $ 7,642,673 $ 7,543,548 $7,450,271 $ 7,801,418 $ 7,324,359 Loans at period-end 8,026,502 7,857,220 7,704,492 7,620,263 7,521,834 8,026,502 7,521,834 ------------------------------------------------------------------------------------------------------------------------------------ Risk Elements Nonaccrual loans $ 13,494 $ 17,438 $ 16,988 $ 15,521 $14,944 $ 13,494 $ 14,944 Other real estate 6,827 8,147 8,155 7,330 12,092 6,827 12,092 ------------------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 20,321 $ 25,585 $ 25,143 $ 22,851 $27,036 $ 20,321 $ 27,036 ------------------------------------------------------------------------------------------------------------------------------------ Accruing loans 90 days or more past due $ 11,840 $ 7,848 $ 7,349 $ 9,566 $ 11,840 $ 8,928 $ 8,928 ------------------------------------------------------------------------------------------------------------------------------------ Ratios Net charge-offs (annualized) to average total loans 0.20% 0.27% 0.25% 0.33% 0.24% 0.24% 0.27% Reserve for loan losses to total loans at period-end 1.47 1.47 1.47 1.48 1.48 1.47 1.48 Nonperforming assets to total loans plus other real estate at period-end 0.25 0.33 0.33 0.30 0.36 0.25 0.36 ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003 INTRODUCTION Management's discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. The focus of this discussion concerns BancShares' two banking subsidiaries. First-Citizens Bank & Trust Company (FCB) operates branches in North Carolina, West Virginia, and Virginia. Atlantic States Bank (ASB) operates offices in Georgia, Florida, Texas, Arizona and California. BancShares adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 147 (Statement 147) during the fourth quarter of 2002. Statement 147 required that any reclassification of previously recognized unidentifiable intangible assets to goodwill be retroactively applied to coincide with the adoption of SFAS No. 142 (Statement 142). As a result, amortization expense related to assets that were reclassified pursuant to Statement 147 has been reversed, and the disclosures made for the first, second and third quarters of 2002 have been restated. In addition, we have reclassified certain other amounts for prior years to conform with statement presentations for 2003. However, except for the adoption of Statement 147, the reclassifications had no effect on shareholders' equity or net income as previously reported. Intercompany accounts and transactions have been eliminated. SUMMARY BancShares realized a decrease in earnings during the third quarter of 2003 compared to the third quarter of 2002. Consolidated net income during the third quarter of 2003 was $19.5 million, compared to $23.8 million earned during the corresponding period of 2002. The $4.2 million or 17.8 percent reduction resulted from lower net interest income and higher noninterest expenses, which were partially offset by higher noninterest income and a lower effective tax rate. Net income per share during the third quarter of 2003 totaled $1.87, compared to $2.27 during the third quarter of 2002, a 17.6 percent reduction. Return on average assets was 0.63 percent for the third quarter of 2003 and 0.80 percent for the third quarter of 2002. Return on average equity for the third quarter of 2003 was 7.74 percent compared to 10.09 percent during the third quarter of 2002. For the first nine months of 2003, BancShares recorded net income of $58.6 million, compared to $73.4 million earned during the first nine months of 2002. The $14.8 million or 20.2 percent decrease was the result of a reduction in net interest income and higher noninterest expense, partially offset by higher noninterest income and a lower effective tax. Net income per share for the first nine months of 2003 was $5.60, compared to $7.01 recorded during the same period of 2002. BancShares returned 0.64 percent on average assets during the first nine months of 2003 compared to 0.83 percent during the corresponding period of 2002. Return on average equity for the first nine months of 2003 was 7.92 percent compared to 10.72 percent during the same period of 2002. Various profitability, liquidity and capital ratios are presented in Table 1. To understand the changes and trends in interest-earning assets and interest-bearing liabilities, refer to the average balances presented in Table 4 for the third quarter and Table 5 for the first nine months of 2003 and 2002. INTEREST-EARNING ASSETS Interest-earning assets for the third quarter of 2003 averaged $10.99 billion, an increase of $401.9 million or 3.8 percent from the third quarter of 2002. For the nine months ended September 30, 2003, interest-earning assets averaged $10.88 billion, an increase of $396.1 million or 3.8 percent over the same period of 2002. These increases primarily resulted from growth in the loan portfolio. Loans. At September 30, 2003 and 2002, gross loans totaled $8.03 billion and $7.52 billion, respectively. As of December 31, 2002, gross loans were $7.62 billion. The $504.7 million growth in loans from September 30, 2002 to September 30, 2003 and the $406.2 million increase from December 31, 2002 through September 30, 2003 primarily result from growth within BancShares' commercial and revolving real estate lending. Table 2 details outstanding loans by type for the past five quarters. Commercial real estate loans totaled $2.22 billion at September 30, 2003, representing 27.7 percent of total gross loans. This represents an increase of $255.3 million or 13.0 percent since September 30, 2002. FCB and ASB have both seen continuing demand for commercial real estate loans in recent quarters. A large percentage of our commercial real estate loans are secured by owner-occupied properties and were underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral. Revolving mortgage loans totaled $1.53 billion at September 30, 2003, representing 19.1 percent of total loans outstanding. This component of the loan portfolio has increased $270.5 million since September 30, 2002 and $195.1 million since December 31, 2002, the result of continued growth of retail EquityLines. Consumer loans totaled $1.23 billion at September 30, 2003, an increase of $101.5 million or 9.0 percent from September 30, 2002, and an increase of $79.6 million or 6.9 percent from December 31, 2002. This growth results from a renewed focus on automobile sales finance activity during 2002 and 2003. The growth among these loan categories was partially offset by a $167.7 million or 15.4 percent reduction in 1-4 family residential mortgage loans since September 30, 2002. Although the declining interest rate environment has resulted in strong origination activity, substantially all of the residential mortgage loans originated through our network have been immediately sold to various correspondents. As a result, portfolio residential mortgage loans continue to decline, a trend we expect to continue in the coming quarters. During the 12-month period ended September 30, 2003, we also experienced a $28.7 million or 3.1 percent reduction in commercial and industrial loans due to a general lack of expansion activity by commercial customers, and our emphasis on originating commercial loans that are secured by real estate rather than inventory, accounts receivable or other less secure forms of collateral. During the third quarter of 2003, loans averaged $7.95 billion, an increase of $496.2 million or 6.7 percent from the comparable period of 2002. For the year-to-date, gross loans have averaged $7.80 billion for 2003 compared to $7.32 billion for the same period of 2002, an increase of $477.1 million or 6.5 percent increase over the prior year. For the third quarter and the year-to-date, growth has resulted from demand for commercial real estate and revolving mortgage loans. We expect continued growth in revolving real estate loans during 2003, and reduction in 1-4 family residential mortgage loans as existing loan balances amortize or are refinanced. Recent improvements in general economic conditions in certain of our markets may translate into higher levels of loan demand among our business customers in the fourth quarter of 2003 and during 2004. Consumer loan demand may continue to be constrained due to weak labor markets. All growth projections are subject to change as a result of further economic deterioration or improvement. Investment securities. At September 30, 2003 and 2002, the investment securities portfolio totaled $2.65 billion and $2.50 billion, respectively. At December 31, 2002, the investment securities portfolio was $2.54 billion. Table 3 presents detailed information relating to the investment securities portfolio. Total investment securities have increased 5.8 percent since September 30, 2002. Additionally, there have been significant changes within components of the investment securities portfolio. Investment securities held to maturity totaled $1.47 billion at September 30, 2003, compared to $2.35 billion at September 30, 2002. The $876.9 million reduction in investment securities held to maturity during 2003 resulted from our decision to reinvest a portion of the proceeds from maturing held-to-maturity securities in securities classified as available-for-sale. This redirection of the investment securities portfolio enhances the overall liquidity and flexibility of the balance sheet. The average maturity of the held-to-maturity portfolio has extended from ten months at September 30, 2002 to twelve months at September 30, 2003. Securities that are classified as held-to-maturity reflect BancShares' ability and positive intent to hold those investments until maturity. Investment securities available for sale totaled $1.17 billion at September 30, 2003, compared to $150.3 at September 30, 2002. The $1.02 billion increase from September 30, 2002 results from the decision to invest in available-for-sale securities in order to further enhance balance sheet liquidity and flexibility. Available-for-sale securities are reported at their aggregate fair value. Investment securities averaged $2.67 billion during the third quarter of 2003, compared to $2.55 billion during the third quarter of 2002, an increase of $111.2 million or 4.4 percent. Investment securities averaged $2.58 billion during the first nine months of 2003, a $53.2 million or 2.0 percent reduction from the same period of 2002. For both the quarter and the nine-month period ended September 30, the change in average investment securities resulted from liquidity needs arising from loan demand and deposit flows. Overnight investments. Overnight investments totaled $268.6 million at September 30, 2003, compared to $623.6 million at December 31, 2002 and $623.2 million at September 30, 2002. Overnight investments averaged $382.6 million during the third quarter of 2003, a reduction of $205.6 million or 34.9 percent from the third quarter of 2002. For the nine-month periods ended September 30, overnight investments averaged $495.2 million and $523.0 million, respectively, for 2003 and 2002. The changes in overnight investments resulted from liquidity management decisions. Income on Interest-Earning Assets. Interest income amounted to $124.9 million during the third quarter of 2003, a $22.9 million or 15.5 percent decrease from the third quarter of 2002. The taxable-equivalent yield on interest-earning assets declined 104 basis points from 5.55 percent in the third quarter of 2002 to 4.51 percent in the third quarter of 2003 as market interest rates continued to decline. Loan interest income for the third quarter of 2003 was $109.4 million, a decrease of $13.9 million or 11.3 percent from the third quarter of 2002, due to a loan yield reduction that more than offset the favorable impact of loan growth. The taxable-equivalent yield on average loans declined 111 basis points from 6.58 percent to 5.47 percent from the third quarter of 2002 to the third quarter of 2003 due to downward repricing of variable rate loans and rate-induced refinance activity among fixed rate loans. Within the investment securities portfolio, interest income was $14.6 million during the third quarter of 2003 compared to $22.0 million during the third quarter of 2002, a reduction of $7.4 million or 33.7 percent. The reduction in interest income resulted from a 125 basis point reduction in the taxable-equivalent yield. Investment securities returned a taxable-equivalent yield of 2.17 percent during the third quarter of 2003 compared to 3.42 percent during the same period of 2002. Overnight investments generated interest income of $912,000 during the third quarter of 2003, compared to $2.5 million during the same period of 2002. The reduction is the combined result of lower average investments and a 72 basis point yield reduction. Overnight investments returned 0.95 percent during the third quarter of 2003 compared to 1.67 percent during the same period of 2002. Interest income amounted to $385.1 million during the first nine months of 2003, a $70.5 million or 15.5 percent decrease from the same period of 2002, the net result of an unfavorable rate variance and a favorable volume variance. The taxable-equivalent yield on interest-earning assets declined 108 basis points from 5.82 percent for the first nine months of 2002 to 4.74 percent during the same period of 2003. Lower market interest rates during 2003 have contributed to the unfavorable rate variance. For the nine months ended September 30, 2003, loan interest income was $335.0 million, a decrease of $35.5 million or 9.6 percent from the same period of 2002. The decrease in interest income reflects the decline in loan yields. The taxable-equivalent loan yield was 5.75 percent during the first nine months of 2003, compared to 6.77 percent during the same period of 2002. For the nine months ended September 30, 2003, income earned on the investment securities portfolio amounted to $46.0 million, compared to $78.7 million during the same period of 2002, a decrease of $32.6 million or 41.5 percent. This decrease is the result of a 161 basis point decline in the taxable-equivalent yield, which fell from 4.00 percent in 2002 to 2.39 percent in 2003. The short overall maturity of our investment securities portfolio combined with the redemption of significant amounts of callable securities caused the rapid downward repricing of the portfolio both during the third quarter and for the nine-month period ended September 30, 2003. Interest earned on overnight investments totaled $4.1 million during the first nine months of 2003 compared to $6.5 million during the same period of 2002, a $2.4 million or 36.7 percent reduction. This was the combined result of lower average overnight investments and a 55 basis point yield reduction. We anticipate continued reduction in asset yields during the remainder of 2003 as certain variable rate loans continue to reprice and fixed rate loans are refinanced at lower rates. INTEREST-BEARING LIABILITIES At September 30, 2003 and 2002, interest-bearing liabilities totaled $9.17 billion and $9.21 billion, respectively, compared to $9.30 billion as of December 31, 2002. During the third quarter of 2003, interest-bearing liabilities averaged $9.13 billion, a slight decrease from the third quarter of 2002. This decrease primarily resulted from reductions in time deposits. Deposits. At September 30, 2003, total deposits were $10.56 billion, an increase of $276.3 million or 2.7 percent over September 30, 2002. Compared to the December 31, 2002 balance of $10.44 billion, total deposits have increased $123.5 million or 1.2 percent. During the second quarter of 2003, FCB sold four branches with a total of $114.7 million in deposits to a related party. Interest-bearing deposits averaged $8.37 billion during the third quarter of 2003 compared to $8.36 billion during the third quarter of 2002. Although total interest-bearing deposits were largely unchanged, there were significant changes in deposit product composition. Average money market accounts increased $175.5 million from the third quarter of 2002 to the third quarter of 2003, a 7.4 percent increase. Average Checking With Interest increased $122.2 million or 9.7 percent from the third quarter of 2002 to the third quarter of 2003. Average time deposits decreased $335.9 million or 8.3 percent between the two periods. For the first nine months of 2003, interest-bearing deposits averaged $8.44 billion compared to $8.29 billion during the same period of 2002. This $154.6 million or 1.9 percent increase results from continued growth among money market accounts and Checking With Interest, largely offset by lower average time deposits. For both the third quarter and the nine-month periods ended September 30, 2003, when compared to the same period of the prior year, average balances of transaction and money market deposit accounts continue to grow, as customers retain high levels of liquidity in readily-available deposit products. We attribute the ongoing run-off of time deposits to falling interest rates, and expect that time deposit balances will continue to erode until market interest rates increase significantly. Short-term borrowings. At September 30, 2003, short-term borrowings totaled $472.6 million compared to $462.6 million at December 31, 2002 and $499.0 million at September 30, 2002. For the quarters ended September 30, 2003 and 2002, short-term borrowings averaged $498.9 million and $514.4 million, respectively. The $15.5 million or 3.0 percent decline in average short-term borrowings is the result of reductions in master notes and overnight repurchase obligations. Customer interest in these commercial cash management products has diminished due to the very low market rates of interest currently available. Partially offsetting these reductions is a $50 million increase in other short-term borrowings resulting from advances from the Federal Home Loan Bank of Atlanta originated during 2003. For the nine-month periods ended September 30, 2003 and 2002, short-term borrowings averaged $463.2 million and $539.4 million, respectively, a reduction of 14.1 percent primarily due to reduced demand for master notes and overnight repurchase obligations from commercial cash management customers. Long-term obligations. At September 30, 2003 and 2002, long-term obligations totaled $256.8 million and $253.4 million, respectively. In each case, the outstanding balance includes $250 million in trust preferred capital securities. During the third quarter of 2003, long-term obligations averaged $253.4 million, compared to $254.0 million during the same period of 2002. For the nine-month periods ended September 30, 2003 and 2002, long-term obligations averaged $253.4 million and $266.6 million, respectively. Expense on Interest-Bearing Liabilities. BancShares' interest expense amounted to $34.6 million during the third quarter of 2003, a $17.6 million or 33.7 percent decrease from the third quarter of 2002. The lower interest expense was primarily the result of falling market interest rates. The rate on interest-bearing liabilities was 1.50 percent during the third quarter of 2003 compared to 2.26 percent during the same period of 2002. For the year-to-date, interest expense was $116.2 million, compared to $166.3 million for the same period of 2002. The $50.0 million or 30.1 percent decrease results primarily from lower interest rates and a reduction in average time deposits. The rate on interest-bearing deposits declined from 2.36 percent during the first nine months of 2002 to 1.56 percent for the same period of 2003, an 80 basis point reduction. The rate on time deposits fell 96 basis points from 3.65 percent to 2.69 percent and, when combined with the impact of the volume reduction, accounted for $36.3 million of the reduction in interest expense during the first nine months of 2003. The rate on money market accounts fell 70 basis points, from 1.64 percent to 0.94 percent. Although money market accounts experienced an increase in volume during the first nine months of 2003, total interest expense on these deposits declined $9.6 million. NET INTEREST INCOME Net interest income totaled $90.3 million during the third quarter of 2003, a decrease of $5.3 million or 5.5 percent from the $95.6 million recorded during the third quarter of 2002. The taxable-equivalent net yield on interest-earning assets was 3.28 percent for the third quarter of 2003, a decrease of 32 basis points from the 3.60 percent reported for the third quarter of 2002. Despite a favorable volume variance resulting from loan growth, the adverse impact of falling market interest rates caused the net yield to decline. The taxable-equivalent interest rate spread for the third quarter of 2003 was 3.01 percent compared to 3.29 percent for the same period of 2002. The lower interest rate spread resulted from a larger decline in the yield on interest-earning assets than was realized on interest-bearing liabilities. While downward adjustments and lower market interest rates have impacted both the yield on interest-earning assets and the rate on interest-bearing liabilities, the extremely low level to which interest rates have fallen has not allowed us to adjust the interest rates paid on many deposit products to the extent the yields earned on interest-earning assets have been affected. Net interest income was $268.9 million and $289.4 million for the nine-month periods ended September 30, 2003 and 2002, respectively. This represents a reduction of $20.5 million or 7.1 percent. As with the third quarter comparison, the year-to-date results demonstrate the impact of lower interest rates and the resulting unfavorable effect on interest-earning asset yields and interest-bearing liability rates. Despite a favorable volume variance generated by loan growth, the adverse impact of the lower interest rates have contributed to a 38 basis point reduction in the taxable-equivalent net yield on interest-earning assets, which fell from 3.70 percent during the first nine months of 2002 to 3.32 percent during the same period of 2003. Despite the current pressure on net interest income, our asset/liability management strategy continues to focus on maintaining high levels of balance sheet liquidity and managing our interest rate risk. We maintain portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. Interest rate derivative contracts are not used in managing interest rate risk. Management is aware of the potential negative impact that movements in market interest rates may have on net interest income. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values or reduced net interest income in future periods. As of September 30, 2003, BancShares' market risk profile has not changed significantly from December 31, 2002. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain. ASSET QUALITY Reserve for loan losses. Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the reserve for loan losses. Such factors as the financial condition of the borrower, fair market value of collateral and other considerations are recognized in estimating probable credit losses. At September 30, 2003, the reserve for loan losses amounted to $117.7 million or 1.47 percent of loans outstanding. This compares to $112.5 million or 1.48 percent at December 31, 2002, and $111.6 million or 1.48 percent at September 30, 2002. Management considers the established reserve adequate to absorb losses inherent in the loan portfolio at September 30, 2003. While management uses available information to establish provisions for loan losses, future additions to the reserve may be necessary based on changes in economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserve for loan losses. Such agencies may require the recognition of adjustments to the reserve based on their judgments of information available to them at the time of their examination. The provision for loan losses charged to operations during the third quarter of 2003 was $6.4 million, compared to $5.6 million during the third quarter of 2002. For the nine-month periods ended September 30, total provision for loan losses was $19.1 million for 2003 and $19.4 million for 2002. Net charge-offs for the three months ended September 30, 2003 totaled $4.0 million, compared to net charge-offs of $4.5 million during the same period of 2002. On an annualized basis, these net charge-offs represent 0.20 percent and 0.24 percent of average loans outstanding during the respective periods. Net charge-offs for the nine-month period ended September 30, 2003 totaled $13.9 million, compared to $14.9 million during the same period of 2002. As a percentage of average loans outstanding, these losses represent 0.24 percent for 2003 and 0.27 for 2002 on an annualized basis. Management remains committed to maintaining high levels of credit quality. Table 6 provides details concerning the reserve and provision for loan losses over the past five quarters and for the year-to-date for 2003 and 2002. Nonperforming assets. At September 30, 2003, BancShares' nonperforming assets, consisting of nonaccrual loans and other real estate, amounted to $20.3 million or 0.25 percent of gross loans plus foreclosed properties, compared to $22.9 million at December 31, 2002, and $27.0 million at September 30, 2002. Nonaccrual loans totaled $13.5 million at September 30, 2003, compared to $15.5 million at December 31, 2002 and $14.9 million at September 30, 2002. Other real estate totaled $6.8 million at September 30, 2003, compared to $7.3 million at December 31, 2002 and $12.1 million at September 30, 2002. Management continues to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure. NONINTEREST INCOME During the first nine months of 2003, noninterest income was $186.5 million, compared to $165.2 million during the same period of 2002. The $21.4 million or 12.9 percent increase was primarily due to gains resulting from the sale of branches and growth in mortgage income and cardholder and merchant services income. The second quarter 2003 cash sale of branches to a related party generated a nonrecurring gain of $5.7 million. There was no branch sale activity during the first nine months of 2002. Among other components of noninterest income, mortgage income was $14.4 million during the first nine months of 2003, compared to $8.7 million earned during the same period of 2002, an increase of $5.7 million or 66.2 percent. Prompted by lower market interest rates, the increase in refinance activity resulted in higher origination fee and commitment fee income. Cardholder and merchant services income increased $4.9 million from $36.4 million earned in the first nine months of 2002 to $41.3 million in the first nine months of 2003. This 13.5 percent increase in cardholder income was due to higher credit card merchant discount and higher interchange fees for debit and credit card transactions. Cardholder and merchant services income includes the interchange income that we earn from debit cards issued to our customers. As a result of a recent out-of-court settlement involving the two major credit card associations, the interchange rate we earn on signature-based debit card transactions decreased 24.1 percent effective August 1, 2003. Although the volume of transactions processed through our debit card products continues to grow, the reduction in the interchange rate has adversely affected interchange income. Fees from processing services increased $1.2 million from $14.2 million during the first nine months of 2002 to $15.4 million earned during the first nine months of 2003 due to higher transaction volume for processed banks. Commission income contributed an additional $1.7 million during the first nine months of 2003 compared to the same period of 2002. This increase represents a 10.1 percent increase over the same period of 2002, primarily the result of higher annuity fees. Service charge income increased $1.4 million or 2.6 percent over the $56.6 million earned during the first nine months of 2002. Partially offsetting the benefit of these increases were reductions in trust income and ATM income. Trust income declined $530,000 or 4.5 percent during the first nine months of 2003, primarily due to lower fees collected on accounts that are charged fees based on the fair value of the managed assets. ATM income declined $310,000 or 4.5 percent due to a reduction in the number of ATM transactions. During the third quarter of 2003, noninterest income was $63.2 million, a $7.6 million or 13.7 percent increase over the $55.6 million earned during the third quarter of 2002. Mortgage income increased $2.5 million or 88.8 percent during the third quarter of 2003 due to heavy origination activity. Cardholder and merchant services income increased $1.9 million or 14.5 percent during 2003 due to higher interchange income for debit and credit transactions. Slight increases were noted in service charge income and fees from processing services, while ATM income and trust income both reported modest reductions from the same period of 2002. NONINTEREST EXPENSE Noninterest expense was $346.2 million for the first nine months of 2003, a 7.7 percent increase over the $321.3 million recorded during the same period of 2002. The $24.9 million increase in noninterest expense results from higher personnel and general operating costs. Salary expense increased $9.9 million during 2003 when compared to the same period of 2002. This 7.1 percent increase is primarily due to the growth in employee population required to staff new branch offices as well as higher incentive-based compensation particularly within the mortgage operation. Employee benefits expense increased $4.4 million or 14.3 percent during the first nine months of 2003, compared to the corresponding period of 2002 due to higher pension expense and increased health insurance costs. Equipment expense increased $4.5 million or 13.7 percent during the first nine months of 2003, the result of higher software-related items. Occupancy expense increased $2.9 million to $31.6 million during the first nine months of 2003. This 10.0 percent increase resulted from higher depreciation expense for branch facilities and building repairs. The $3.1 million increase in other expense resulted from higher cardholder processing costs due to transaction volume growth as well as higher claims expense recognized by American Guaranty, FCB's property insurance company. For the third quarter of 2003, noninterest expense totaled $118.9 million, a $10.3 million or 9.5 percent increase over the same period of 2002. Salary expense totaled $51.3 million during the third quarter of 2003, an increase of $3.8 million or 7.9 percent due to higher incentive compensation and new associates hired to support the ASB expansion. Employee benefits expense increased $1.3 million due to higher pension and health care costs. Equipment expense increased $2.0 million or 17.6 percent due to higher software-related expenses. INCOME TAXES Income tax expense was $31.5 million during the first nine months of 2003, compared to $40.4 million during the same period of 2002, a 21.9 percent decrease due to lower pre-tax earnings and adjustments to the valuation reserve for deferred state tax assets. The effective tax rates for these periods were 35.0 percent and 35.5 percent, respectively. For the third quarters of 2003 and 2002, income tax expense was $8.7 million and $13.2 million, respectively. In addition to lower pre-tax earnings, income tax expense during the third quarter of 2003 includes adjustments to the valuation reserve for deferred state tax assets. The effective tax rates were 30.7 percent and 35.7 percent for the respective periods. LIQUIDITY Management relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. In the event additional liquidity is needed, BancShares maintains readily available sources to borrow funds through its correspondent network. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. At September 30, 2003 and 2002, the leverage capital ratio of BancShares was 9.41 percent and 9.22 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares' Tier 1 capital ratio was 13.30 percent at September 30, 2003, and 13.41 percent as of September 30, 2002. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratio was 14.64 percent at September 30, 2003 and 14.73 percent as of September 30, 2002. The minimum total capital ratio is 8 percent. BancShares and its subsidiary banks exceed the capital standards established by their respective regulatory agencies. SEGMENT REPORTING BancShares conducts its banking operations through two wholly owned subsidiaries, FCB and ASB. Although FCB and ASB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has separate management groups. Additionally, the financial results and trends of ASB reflect the de novo nature of its operation. Atlantic States Bank. ASB's total assets increased from $999.6 million at September 30, 2002 to $1.13 billion at September 30, 2003, an increase of $127.5 million or 12.8 percent. This growth was generated by the expanding branch network. ASB's net interest income increased $5.2 million or 22.2 percent during the first nine months of 2003, when compared to the same period of 2002, the result of balance sheet growth that more than offset the impact of falling interest rates. Provision for loan losses declined $1.2 million or 43.0 percent due to changes in risk characteristics inherent in the loan portfolio during the current year. ASB's noninterest income increased $397,000 or 10.7 percent during the first nine months of 2003, the result of higher loan modification fees, cardholder and merchant income and service charge income. Noninterest expense increased $5.8 million or 21.5 percent during 2003. Higher personnel, occupancy and service fee costs reflect the impact of the expanded branch network, much of which relates to the expansion of ASB into Texas, Arizona and California. ASB recorded a net loss of $1.2 million during the first nine months of 2003 compared to a net loss of $1.6 million during the same period of 2002. This represents a favorable variance of $448,000, primarily the result of ASB's balance sheet growth. Substantially all of ASB's growth has been on a de novo basis, and ASB continues its efforts to build a customer base in its highly competitive markets. We continue to seek new growth opportunities for ASB in new and existing markets. Our initial investments in these markets will result in higher levels of noninterest expense in ensuing quarters. First Citizens Bank. FCB's total assets increased from $10.88 billion at September 30, 2002 to $11.13 billion at September 30, 2003, an increase of $245.3 million or 2.3 percent. FCB's net interest income decreased $23.2 million or 8.4 percent during the first nine months of 2003, the result of interest rate reductions. Provision for loan losses increased $885,000 or 5.3 percent. FCB's noninterest income increased $19.1 million or 11.6 percent during the first nine months of 2003, primarily the result of higher mortgage income, cardholder and merchant services income and gains on branch sales. Noninterest expense increased $16.9 million or 5.7 percent during the first nine months of 2003, primarily due to higher personnel and equipment costs. FCB recorded net income of $69.0 million during the first nine months of 2003 compared to $82.3 million during the same period of 2002. This represents a $13.3 million or 16.2 percent reduction in net income. CURRENT ACCOUNTING AND REGULATORY ISSUES Effective January 1, 2002, BancShares adopted the provisions of Statement 142, which modified our accounting for goodwill and intangible assets. Previously, our capitalized intangible assets were amortized over their estimated useful lives, and the amortization expense related to those assets was included within noninterest expense. Upon adoption of Statement 142, we discontinued amortization of all amounts that we had previously classified as goodwill. We continued to amortize all other intangible assets over their estimated useful lives. During the fourth quarter of 2002, we adopted Statement 147, although we were required to apply certain provisions of Statement 147 retroactively to the date we adopted Statement 142. Guidance within Statement 147 resulted in the reclassification to goodwill of certain amounts previously recorded as intangible assets. Statement 147 required the reversal of any amortization expense recorded on those reclassified assets since the adoption of Statement 142. Accordingly, amortization expense initially recorded during the first, second and third quarters of 2002 was reversed during the fourth quarter, and prior periods have been restated to reflect that change. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations (Statement 143). Statement 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. Statement 143 also requires us to record a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. We adopted Statement 143 on January 1, 2003. The adoption of Statement 143 did not have a material impact on our consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (Statement 145). Statement 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary. Statement 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The adoption of Statement 145 for transactions occurring after May 15, 2002 did not have a material effect on our consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146), which becomes effective prospectively for exit or disposal activities initiated after December 31, 2002. Under Statement 146, we will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. In periods after initially recording a liability, we will adjust the liability to reflect revisions to the expected timing or amount of estimated cash flows, discounted at the appropriate interest rate originally used to measure the liability. Statement 146 also establishes accounting standards for employee and contract termination costs. The impact from the adoption of Statement 146 is dependent on the nature and extent of exit and disposal activities. Consequently, at this time, we are unable to estimate the ultimate impact from the adoption of Statement 146. In November 2002, the FASB issued Interpretation No.45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34 (Interpretation 45). Interpretation 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under guarantees issued. Interpretation 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of Interpretation 45, which applies to guarantees issued or modified after December 31, 2002, did not have a material effect on our financial statements. The disclosure requirements were effective for financial statements of interim and annual periods ending after December 15, 2002. In December 2002, the FASB issued SFAS No.148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No.123 (Statement 148). Statement 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications were required for fiscal years ending after December 15, 2002. As we currently have no stock-based compensation, the adoption of Statement 148 did not have a material impact on our consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (Interpretation 46). Interpretation 46 addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. Interpretation 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. BancShares has no investments in variable interest entities that will require consolidation under Interpretation 46. The application of Interpretation 46 will result in the de-consolidation of the two grantor trusts that have issued the trust preferred capital securities currently reported in our consolidated financial statements. We currently report the trust preferred capital securities held by third parties as long-term borrowings. Once we de-consolidate the grantor trusts, we will instead report the junior subordinated debentures, which are currently eliminated when the grantor trusts are consolidated, as long-term borrowings. The impact of this change will not have a material effect on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (Statement 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, except certain hedging relationships designated after June 30, 2003, as defined in Statement 149. In addition, except as defined in Statement 149, all provisions of Statement 149 should be applied prospectively. Statement 149 is not expected to have a material impact on the consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (Statement 150). Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Statement 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Statement 150 did not and is not expected to have a material impact on the consolidated financial statements. Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations. FORWARD-LOOKING STATEMENTS This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgments of BancShares and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of BancShares' customers, actions of government regulators, the level of market interest rates, and general economic conditions. First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003 Exhibit 31.1 CERTIFICATION I, Lewis R. Holding, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens BancShares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2003 /s/ Lewis R. Holding Lewis R. Holding Chief Executive Officer First Citizens BancShares, Inc and Subsidiaries Third Quarter 2003 Exhibit 31.2 CERTIFICATION I, Kenneth A. Black, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of First Citizens BancShares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2003 /s/ Kenneth A. Black Kenneth A. Black Chief Financial Officer First Citizens BancShares, Inc and Subsidiaries Third Quarter 2003 Exhibit 32 CERTIFICATION The undersigned hereby certifies that, to his or her knowledge, (i) the Form 10-Q filed by First Citizens BancShares, Inc. (the "Issuer") for the quarter ended September 30, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein. Novemer 11, 2003 /s/ Lewis R. Holding Lewis R. Holding Chairman and Chief Executive Officer /s/ Kenneth A. Black Kenneth A. Black Vice President and Chief Financial Officer First Citizens BancShares, Inc. and Subsidiaries Third Quarter 2003