FCNCA

Business Context and Reporting Period

Company: First Citizens BancShares, Inc. (BancShares)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Operations: BancShares is a financial holding company operating primarily through two banking subsidiaries: First-Citizens Bank & Trust Company (FCB), with 342 offices in North Carolina, Virginia, and West Virginia; and Atlantic States Bank (ASB), a federally chartered thrift with 41 offices in Florida, Georgia, Texas, and Arizona. The company also holds interests in insurance and investment services subsidiaries.

Key Financial Metrics (Year Ended Dec 31, 2002)

Material Changes vs. Prior Period

• Profitability: Net income increased 6.7% to $92.8 million, driven by higher net interest income and noninterest income, partially offset by increased noninterest expenses and loan loss provisions.
• Interest Rates: The taxable-equivalent yield on interest-earning assets declined 149 basis points to 5.66% due to Federal Reserve rate cuts. However, the cost of interest-bearing liabilities fell more sharply (from 3.94% to 2.34%), resulting in a net interest income increase of 3.6%.
• Asset Growth: Total assets grew 3.1% to $12.23 billion. Gross loans increased 5.9%, led by growth in revolving real estate loans (EquityLine) and commercial mortgages. Residential mortgage loans declined due to refinancing activity.
• Deposit Mix: Total deposits grew 4.8%. There was a shift from time deposits (down 7.4%) to money market and checking accounts as customers sought safety in volatile equity markets.
• Asset Quality: Nonperforming assets rose to $22.9 million (0.30% of loans) from $20.2 million (0.28%) in 2001. Net charge-offs increased to $21.1 million (0.29% of average loans) from $18.9 million.
• Accounting Changes: Adoption of SFAS No. 142 eliminated goodwill amortization, reducing noninterest expense by approximately $8.8 million compared to 2001.

Guidance, Outlook, and Risks

• Outlook: Management anticipates general weakness in business loan demand for 2003 due to sluggish economic prospects. However, they expect continued growth in revolving real estate loans and modest growth in consumer loans.
• Expansion: ASB continues de novo expansion, with new branches in Texas (IronStone Bank) and plans for Arizona and California markets.
• Interest Rate Risk: The company holds a liability-sensitive position (negative interest-sensitivity gap of $263.5 million). Management believes rising rates would likely have a favorable effect on net interest income, while further rate cuts could be detrimental.
• Risks:
  • Economic Conditions: Continued economic weakness could lead to higher nonperforming assets and charge-offs.
  • Investment Portfolio: Fair value of fixed-rate securities and loans has declined due to rising yields (falling prices). Further "other than temporary" impairments are possible if equity markets remain turbulent.
  • Expense Pressures: Rising health care costs and pension expenses (due to lower discount rates) are expected to increase noninterest expenses in 2003.

Investor Verification Checklist

• Asset Quality Trends: Verify the trajectory of nonperforming assets and net charge-off ratios against the backdrop of the weak economy.
• Net Interest Margin Sustainability: Assess the ability to maintain net interest income as the yield curve remains compressed and deposit costs are near zero.
• ASB Performance: Monitor Atlantic States Bank's path to profitability, as it recorded a net loss of $1.3 million in 2002 despite a significant reduction from the prior year's loss.
• Goodwill Impairment: Review the annual goodwill impairment testing results, as the company holds significant goodwill ($97.4 million) that is no longer amortized but subject to impairment charges.
• Related Party Transactions: Note the $36.6 million in loans to related parties and $18.6 million in fees from processing services for related parties.