Business Context and Reporting Period
Company: First Citizens BancShares, Inc. (BancShares)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: BancShares is a financial holding company operating two primary banking subsidiaries: First-Citizens Bank & Trust Company (FCB), with 348 offices in North Carolina, Virginia, and West Virginia; and Atlantic States Bank (ASB), a federally-chartered thrift with 44 offices in Georgia and Florida. The company also operates insurance, investment services, and credit card processing subsidiaries.
Key Financial Metrics
| Metric (in thousands, except per share) | 2001 | 2000 | 1999 |
|---|---|---|---|
| Net Income | $86,936 | $98,311 | $81,800 |
| Net Income Per Share | $8.27 | $9.32 | $7.70 |
| Total Assets (Period End) | $11,864,991 | $10,691,617 | $9,717,099 |
| Total Deposits (Period End) | $9,961,605 | $8,971,868 | $8,173,598 |
| Net Interest Income | $368,917 | $365,342 | $352,349 |
| Noninterest Income | $215,555 | $202,190 | $165,339 |
| Noninterest Expense | $422,597 | $394,784 | $375,620 |
| Provision for Loan Losses | $24,134 | $15,488 | $11,672 |
| Return on Average Assets | 0.77% | 0.98% | 0.85% |
| Return on Average Equity | 10.26% | 12.88% | 11.79% |
| Shareholders' Equity (Period End) | $885,043 | $810,728 | $728,757 |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 11.6% to $86.9 million in 2001 compared to $98.3 million in 2000. This reduction was driven by a $8.6 million increase in the provision for loan losses and a $27.8 million increase in noninterest expenses, partially offset by higher noninterest income.
- Asset Growth: Total assets grew 11.0% to $11.86 billion, primarily due to a $989.7 million increase in deposits and a significant expansion of the investment securities portfolio (up $974.6 million).
- Loan Portfolio: Gross loans increased only 1.2% to $7.20 billion. Growth in commercial mortgage and revolving real estate loans was offset by declines in residential mortgage and consumer loans due to refinancing and reduced auto sales financing.
- Interest Rate Environment: The net yield on interest-earning assets fell 76 basis points to 7.15% (taxable equivalent) due to Federal Reserve rate cuts. While interest expense decreased due to lower rates, the compression of the net interest margin (spread decreased 29 basis points to 3.21%) limited net interest income growth to just 1.0%.
- Asset Quality Deterioration: Nonperforming assets rose to $20.2 million (0.28% of loans) from $17.8 million in 2000. Net charge-offs increased to $18.9 million from $11.5 million, reflecting economic weakness in market areas.
Guidance, Outlook, and Risks
- Outlook: Management anticipates modest loan demand in 2002 due to sluggish economic prospects. Deposit growth and retention are expected to be difficult due to extremely low market interest rates and competitive pressure.
- Segment Performance: Atlantic States Bank (ASB) recorded a net loss of $7.6 million in 2001 (up from a $5.2 million loss in 2000) due to the costs of de novo expansion. First Citizens Bank (FCB) net income declined 12.8% to $101.0 million.
- Capital Adequacy: The company maintains a strong capital position, exceeding all regulatory minimums. Total risk-based capital ratio was 14.4% and Tier 1 capital ratio was 13.1% at year-end 2001. The company issued $100 million in trust preferred securities in late 2001 to support growth.
- Risks and Contingencies:
- Interest Rate Risk: The company held a negative interest-sensitivity gap of $1.06 billion for the one-year period, meaning rising rates could negatively impact net interest income.
- Credit Risk: Management expects nonperforming assets to continue increasing until economic conditions recover.
- Accounting Changes: Adoption of SFAS No. 142 (Goodwill) in 2002 will discontinue goodwill amortization, though goodwill will be subject to annual impairment testing.
Investor Verification Checklist
- Loan Loss Reserve Adequacy: Verify if the 1.49% reserve coverage ratio is sufficient given the rising trend in net charge-offs and nonperforming assets.
- Interest Rate Sensitivity: Assess the impact of the $1.06 billion negative one-year gap on future earnings if interest rates rise.
- ASB Profitability Timeline: Monitor Atlantic States Bank's path to profitability, as it continues to incur losses due to expansion costs.
- Noninterest Expense Control: Review the trajectory of salary and equipment expenses, which increased significantly in 2001.
- Deposit Stability: Evaluate the sustainability of deposit growth in a low-interest-rate environment where customers may seek higher yields elsewhere.