Business Context and Reporting Period
Company: First Citizens BancShares, Inc. (BancShares)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: BancShares is a financial holding company operating two primary banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a state-chartered bank with 343 offices in five states, and IronStone Bank (ISB), a federally-chartered thrift with 58 offices in twelve states. The company focuses on commercial and consumer banking, wealth management, and processing services. As of December 31, 2008, the company employed 4,843 people.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Income | $91.1 million | $108.6 million |
| Net Income Per Share | $8.73 | $10.41 |
| Total Assets | $16.75 billion | $16.21 billion |
| Loans and Leases | $11.72 billion | $10.96 billion |
| Deposits | $13.71 billion | $12.93 billion |
| Return on Average Assets (ROA) | 0.56% | 0.68% |
| Return on Average Equity (ROE) | 6.13% | 7.92% |
| Net Interest Income | $499.8 million | $480.3 million |
| Provision for Credit Losses | $65.8 million | $33.6 million |
| Net Charge-offs | $45.3 million | $28.0 million |
| Nonperforming Assets | $71.7 million (0.61% of loans) | $19.9 million (0.18% of loans) |
| Tier 1 Risk-Based Capital Ratio | 13.20% | 13.02% |
| Total Risk-Based Capital Ratio | 15.49% | 15.36% |
Material Changes Versus Prior Period
- Profitability Decline: Net income decreased 16.2% to $91.1 million, driven primarily by a 95.9% increase in the provision for credit losses ($32.2 million increase) and a 5.5% rise in noninterest expense.
- Asset Quality Deterioration: Nonperforming assets surged to $71.7 million from $19.9 million, largely due to significant deterioration in the residential construction loan portfolio in the Atlanta, Georgia, and southwest Florida markets. Net charge-offs rose to $45.3 million.
- Interest Rate Environment: Net interest income increased 4.0% to $499.8 million due to balance sheet growth, despite a decline in the taxable-equivalent net yield on interest-earning assets from 3.41% to 3.40%. Lower market rates reduced interest expense significantly.
- Segment Performance: FCB reported net income of $127.1 million, an increase of 1.5%. Conversely, ISB reported a net loss of $28.9 million, a significant increase from the $7.7 million loss in 2007, attributed to higher provisions and operating expenses associated with its de novo expansion.
Guidance, Outlook, and Risks
- Outlook: Management projects modest loan portfolio growth in 2009 but anticipates continued economic instability. ISB is projected to operate at a loss through 2009 due to the costs of expansion and credit deterioration in specific markets.
- Capital Strategy: The company did not participate in the TARP Capital Purchase Program or the TLGP debt guarantee program, citing strong capital ratios. It did elect to participate in the TLGP expansion of deposit insurance.
- Risk Factors:
- Credit Risk: Significant exposure to residential construction loans in over-developed markets (Atlanta, SW Florida) has led to increased nonperforming assets and charge-offs.
- Interest Rate Risk: A net short-term liability-sensitive balance sheet faces pressure from intense competition for deposits, which kept deposit rates artificially high while asset yields declined.
- Legal Proceedings: A jury verdict in a West Virginia lawsuit awarded a customer $4.1 million against FCB; the company is appealing. A patent infringement lawsuit with DataTreasury was resolved in February 2009 via license acquisition.
Investor Verification Checklist
- Residential Construction Exposure: Verify the specific concentration and collateral values of the $105.1 million in residential construction loans in Atlanta and southwest Florida, which drove the majority of the increase in nonperforming assets.
- ISB Loss Trajectory: Monitor the timeline for ISB to reach profitability, given the $28.9 million loss in 2008 and the continued capital infusions required ($45.8 million in 2008).
- Legal Contingencies: Track the status of the West Virginia appeal regarding the $4.1 million judgment and potential interest accruals.
- Capital Adequacy: Confirm that Tier 1 and Total risk-based capital ratios remain well above regulatory minimums (currently 13.20% and 15.49% respectively) to sustain growth without external capital raises.
- Dividend Sustainability: Review the dependency on dividends from FCB to fund ISB's losses and shareholder dividends, noting the regulatory limits on FCB's dividend capacity to maintain "well-capitalized" status.