Business Context and Reporting Period
Company: First Citizens BancShares, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Overview: BancShares operates through two primary subsidiaries: First-Citizens Bank & Trust Company (FCB), a mature state-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift focused on de novo expansion. The company reported a decline in earnings for the third quarter and the first nine months of 2007 compared to the prior year, driven primarily by a significant increase in the provision for credit losses and higher noninterest expenses.
Key Financial Metrics
| Metric (in thousands) | Q3 2007 | Q3 2006 | 9 Months 2007 | 9 Months 2006 |
|---|---|---|---|---|
| Net Income | $22,619 | $32,927 | $82,454 | $93,296 |
| Net Income Per Share | $2.17 | $3.16 | $7.90 | $8.94 |
| Total Assets | $16,311,870 | $15,633,597 | $16,311,870 | $15,633,597 |
| Loans and Leases | $10,763,158 | $10,160,661 | $10,763,158 | $10,160,661 |
| Total Deposits | $12,980,447 | $12,681,150 | $12,980,447 | $12,681,150 |
| Shareholders' Equity | $1,401,575 | $1,276,608 | $1,401,575 | $1,276,608 |
| Net Interest Income | $120,935 | $119,397 | $358,712 | $358,300 |
| Provision for Credit Losses | $17,333 | $3,758 | $21,799 | $13,460 |
| Noninterest Expense | $146,906 | $134,123 | $428,378 | $399,710 |
| Cash Flow from Operating Activities (9mo) | $143,417 (2007) vs $127,824 (2006) |
Material Changes vs. Prior Period
- Earnings Decline: Net income for Q3 2007 decreased by $10.3 million (31.3%) compared to Q3 2006. For the nine-month period, net income fell $10.8 million (11.6%).
- Provision for Credit Losses: The provision increased significantly to $17.3 million in Q3 2007 from $3.8 million in Q3 2006. This was driven by $8.1 million in losses from two individually significant relationships within the commercial and industrial portfolio.
- Noninterest Expense: Expenses rose $12.8 million (9.5%) in Q3 2007, attributed to merit increases, new branch openings, and higher employee benefit costs (specifically executive post-employment benefits).
- Net Interest Income: Despite an inverted yield curve, net interest income increased slightly ($1.5 million or 1.3% in Q3) due to volume growth, though the net yield on interest-earning assets contracted.
- Segment Performance: IronStone Bank (ISB) reported a net loss of $5.2 million for the nine months ended Sept 30, 2007, compared to a net income of $0.7 million in the prior year, due to expansion costs and higher credit provisions. FCB net income declined $9.7 million year-over-year.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates moderate growth in commercial mortgage and commercial/industrial loans in Q4 2007. However, ISB is expected to continue incurring losses in the foreseeable future due to the costs of de novo expansion and credit provisions.
- Interest Rate Risk: The company faces increased exposure to interest rate risk due to growing net one-year liability sensitivity. Simulations indicate net interest income could vary by approximately 4% under rising or declining rate scenarios.
- Credit Risk: Net charge-offs for the nine months of 2007 were $19.6 million, up from $11.0 million in 2006. The allowance for credit losses was 1.31% of total loans at period end.
- Internal Control Deficiencies: Management identified a "significant deficiency" in internal controls related to the Working Capital Finance lending function, specifically regarding credit policy, underwriting, and monitoring of reserve accounts. New processes were instituted in Q3 to address these issues.
- Unusual Items: The company adopted FASB Interpretation No. 48 (FIN 48) on Jan 1, 2007, resulting in a $0.96 million increase to retained earnings. Additionally, the company sold its ownership interest in MasterCard Inc., resulting in a $1.4 million gain in 2007.
Investor Verification Checklist
- Credit Quality: Verify the specific details of the two "individually-significant relationships" that caused $8.1 million in losses and assess the adequacy of the allowance for loan losses given the increased provision.
- Internal Controls: Review the progress of remediation efforts for the significant deficiency identified in the Working Capital Finance function and monitor for future charge-offs in this segment.
- ISB Profitability: Monitor IronStone Bank's path to profitability, as continued losses and capital infusions ($17 million in 9 months 2007) may impact consolidated returns.
- Interest Rate Sensitivity: Assess the impact of the inverted yield curve and liability sensitivity on future net interest margins.
- Expense Management: Track noninterest expense growth, particularly regarding employee benefits and occupancy costs associated with branch expansion.