Business Context and Reporting Period
Company: First Citizens BancShares, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2002
Operations: The company operates through two primary subsidiaries: First-Citizens Bank & Trust Company (FCB), a mature institution in North Carolina, Virginia, and West Virginia; and Atlantic States Bank (ASB), a de novo thrift expanding in Georgia, Florida, and Texas with plans to enter Arizona and California.
Key Financial Metrics
| Metric | Q3 2002 | Q3 2001 | 9 Months 2002 | 9 Months 2001 |
|---|---|---|---|---|
| Net Income | $22.1 million | $20.8 million | $68.4 million | $65.6 million |
| Diluted EPS | $2.11 | $1.98 | $6.53 | $6.24 |
| Total Assets | $12.08 billion | $11.52 billion | $12.08 billion | $11.52 billion |
| Total Deposits | $10.29 billion | $9.65 billion | $10.29 billion | $9.65 billion |
| Net Interest Income | $95.6 million | $92.2 million | $289.4 million | $276.0 million |
| Noninterest Income | $55.3 million | $53.1 million | $164.8 million | $160.5 million |
| Noninterest Expense | $110.9 million | $107.0 million | $328.6 million | $315.7 million |
| Return on Average Assets (Annualized) | 0.74% | 0.74% | 0.78% | 0.79% |
| Return on Average Equity (Annualized) | 9.38% | 9.82% | 10.00% | 10.47% |
| Shareholders' Equity | $944.9 million | $866.0 million | $944.9 million | $866.0 million |
Material Changes vs. Prior Period
- Profitability Growth: Net income increased 6.6% in Q3 2002 and 4.3% for the nine-month period compared to 2001, driven by higher net interest income and noninterest income.
- Interest Rate Environment: Significant declines in market rates reduced the yield on interest-earning assets by 140 basis points (to 5.55%) in Q3 2002. However, interest expense on liabilities dropped by 153 basis points (to 2.26%), resulting in a net interest income increase of 3.7% for the quarter.
- Asset Composition: Gross loans grew 5.8% year-over-year to $7.52 billion, led by a 29.8% increase in revolving real estate loans (EquityLine). Conversely, 1-4 family residential mortgages declined 12.3% due to refinancing activity.
- Deposit Shifts: Total deposits grew 6.7% year-over-year. Growth was driven by money market accounts and checking accounts, while time deposits declined as customers avoided lower-yielding certificates of deposit.
- Asset Quality: Nonperforming assets rose to $27.0 million (0.36% of loans) from $17.6 million in Q3 2001. Net charge-offs for the nine months ended September 30, 2002, were $14.9 million, up from $12.8 million in the prior year period.
Guidance, Outlook, and Risks
- Accounting Changes (FAS 147): The company is evaluating the impact of Statement of Financial Accounting Standards No. 147. If certain FAS 72 goodwill transactions are deemed business combinations, amortization expense recognized in 2002 (approx. $9.9 million) may be reversed in Q4 2002, potentially boosting year-end earnings.
- Securities Portfolio: The company recorded $360,000 in securities losses in Q3 2002 due to other-than-temporary impairments. Management anticipates further losses in Q4 2002, estimating an evaluation of $866,000 in unrealized losses.
- Expansion Costs: Atlantic States Bank (ASB) continues to expand into Texas, Arizona, and California. This de novo growth is expected to result in higher noninterest expenses in the coming quarters before profitability is realized.
- Interest Rate Risk: The company maintains a liability-sensitive position of $317.3 million (down from $1.06 billion in late 2001), reducing volatility in net interest income. However, management expects interest rate spreads to narrow as fixed-rate loans mature and are replaced by lower-yielding assets.
- Economic Conditions: A sluggish economy has caused commercial customers to delay expansion and retail customers to defer large purchases, potentially impacting loan growth and credit quality.
Investor Verification Checklist
- Goodwill Reversal: Verify the final determination on FAS 147 in Q4 2002 to confirm if the $9.9 million amortization expense will be reversed.
- Securities Impairments: Monitor Q4 2002 results for the anticipated $866,000 in additional securities losses.
- ASB Performance: Track the profitability timeline for Atlantic States Bank's new branches in Texas, Arizona, and California.
- Asset Quality Trends: Review the trend in nonperforming assets and net charge-offs, particularly in commercial and real estate loan segments, given the recessionary environment.
- Net Interest Margin: Assess the impact of the maturing fixed-rate loan portfolio on future net interest margins in a low-rate environment.