How much of the 2000 earnings increase was driven by one-time items rather than core operations?

Nonrecurring items contributed an estimated $14.7 million after tax, or about $1.39 per share, to 2000 net income. The largest was a $12.1 million after-tax gain from selling mortgage servicing rights, with additional gains from selling four branches and securities. These were partly offset by a $1.9 million after-tax charge for closing 15 branches. Excluding these items, earnings growth would have been considerably lower than the headline 20.2%.

Why did interest expense rise so sharply, and how did it affect margins?

Interest expense increased $61.3 million, or 21.8%, to $342.8 million, because market interest rates rose and the company paid more for time deposits and borrowings. The blended cost of interest-bearing liabilities climbed to 4.41% from 3.75%. Asset yields rose less, so the interest rate spread fell 11 basis points to 3.50%, and net interest income grew only 3.7%.

What risks does the balance sheet pose if interest rates rise further?

At December 31, 2000, the company had a one-year negative interest-sensitivity gap of $924.0 million, meaning more liabilities than assets reprice within a year. Management acknowledges that rising rates could reduce net interest income. The company is offsetting this partly by offering variable-rate loans, and its loan portfolio is 27.2% scheduled to mature within one year.

Is the credit quality deteriorating?

Credit quality remains good by industry standards but is weakening modestly. Net charge-offs were 0.17% of average loans, nonperforming assets rose to 0.25% of loans from 0.18%, and loans 90 days or more past due increased to $6.7 million from $3.6 million. Management increased its unallocated loan loss reserve, citing economic pressures in late 2000, and the reserve covered 1.44% of total loans.

Is the dividend secure and how is capital being returned to shareholders?

The company paid $1.00 per share in cash dividends in 2000 and declared a $0.25 quarterly dividend in January 2001, with management expecting comparable payments to continue, subject to earnings and capital needs. The dividend payout ratio fell to 10.7% from 13.0% as earnings grew. The board also reauthorized repurchases of up to 300,000 Class A and 100,000 Class B shares, and the company bought back about $5.5 million of stock in 2000.

FCNCA 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 19, 2001. Cited figures are marked; the original filing is the authoritative source.

First Citizens BancShares, Inc. (FCNCA) reported a strong 2000 with net income of $98.3 million^a, up 20.2% from $81.8 million in 1999, and diluted EPS of $9.32 versus $7.70.

Return on average assets improved to 0.98% from 0.85%, and return on equity rose to 12.88% from 11.79%. Much of the improvement was helped by nonrecurring items, which the company estimates added $14.7 million^b after tax (about $1.39 per share), including a $12.1 million after-tax gain from selling its mortgage servicing rights, a $2.6 million gain from selling four branches, and securities gains, partially offset by a $1.9 million after-tax charge for closing 15 branches. Investors should therefore view core earnings growth as more modest than the headline figure suggests.

Core operations showed steady but mixed trends. Net interest income grew 3.7% on a GAAP basis to $365.3 million^c, and average loans rose 8.7% to $6.96 billion, driven by commercial real estate and home equity lending. However, interest expense jumped 21.8% as the blended cost of interest-bearing liabilities rose to 4.41% from 3.75%, compressing the interest rate spread to 3.50% from 3.61%.

The company also carries a one-year negative interest-sensitivity gap of $924 million^d, meaning rising rates could hurt net interest income. Noninterest expense rose 5.1% to $394.8 million, and the efficiency of the franchise remains a watch item. Asset quality and capital remain solid.

Net charge-offs were a low 0.17% of average loans, and nonperforming assets were 0.25% of loans, though both nonaccrual loans and 90-day past-due loans increased and management flagged the late-2000 economic slowdown as a risk. The reserve for loan losses covered 1.44% of loans.

Capital is strong, with a Tier 1 risk-based ratio of 10.37%, total risk-based capital of 11.67%, and a leverage ratio of 8.11%, all above well-capitalized thresholds. The company also repurchased shares and declared a $0.25 quarterly dividend for 2001, keeping the annual payout at $1.00 per share.

02—Key points

Key Highlights

Net income rose 20.2% to $98.3 million in 2000, with diluted EPS of $9.32 versus $7.70 in 1999; roughly $14.7 million of after-tax nonrecurring gains (about $1.39 per share) contributed to the increase.
Return on average assets improved to 0.98% from 0.85%, and return on average equity improved to 12.88% from 11.79%.
Average loans grew 8.7% to $6.96 billion, led by commercial real estate and home equity lending, while consumer loans (sales finance) declined as the bank deliberately shrank that lower-margin business.
Net interest income rose 3.7% to $365.3 million, but the interest rate spread narrowed to 3.50% from 3.61% as deposit and borrowing costs rose sharply; interest expense increased 21.8%.
Asset quality remained strong with net charge-offs at 0.17% of average loans, though nonperforming assets rose to $17.8 million and management warned that continued economic weakness could increase problem loans.
Capital was robust, with a Tier 1 risk-based ratio of 10.37%, total risk-based ratio of 11.67%, and leverage ratio of 8.11%, and the board reauthorized share repurchases.
Deposits grew 9.8% to $8.97 billion, while the company's one-year negative interest-sensitivity gap of $924 million signals exposure to rising interest rates.

03—Questions

Frequently Asked Questions

How much of the 2000 earnings increase was driven by one-time items rather than core operations?
Nonrecurring items contributed an estimated $14.7 million after tax, or about $1.39 per share, to 2000 net income. The largest was a $12.1 million after-tax gain from selling mortgage servicing rights, with additional gains from selling four branches and securities. These were partly offset by a $1.9 million after-tax charge for closing 15 branches. Excluding these items, earnings growth would have been considerably lower than the headline 20.2%.
Why did interest expense rise so sharply, and how did it affect margins?
Interest expense increased $61.3 million, or 21.8%, to $342.8 million, because market interest rates rose and the company paid more for time deposits and borrowings. The blended cost of interest-bearing liabilities climbed to 4.41% from 3.75%. Asset yields rose less, so the interest rate spread fell 11 basis points to 3.50%, and net interest income grew only 3.7%.
What risks does the balance sheet pose if interest rates rise further?
At December 31, 2000, the company had a one-year negative interest-sensitivity gap of $924.0 million, meaning more liabilities than assets reprice within a year. Management acknowledges that rising rates could reduce net interest income. The company is offsetting this partly by offering variable-rate loans, and its loan portfolio is 27.2% scheduled to mature within one year.
Is the credit quality deteriorating?
Credit quality remains good by industry standards but is weakening modestly. Net charge-offs were 0.17% of average loans, nonperforming assets rose to 0.25% of loans from 0.18%, and loans 90 days or more past due increased to $6.7 million from $3.6 million. Management increased its unallocated loan loss reserve, citing economic pressures in late 2000, and the reserve covered 1.44% of total loans.
Is the dividend secure and how is capital being returned to shareholders?
The company paid $1.00 per share in cash dividends in 2000 and declared a $0.25 quarterly dividend in January 2001, with management expecting comparable payments to continue, subject to earnings and capital needs. The dividend payout ratio fell to 10.7% from 13.0% as earnings grew. The board also reauthorized repurchases of up to 300,000 Class A and 100,000 Class B shares, and the company bought back about $5.5 million of stock in 2000.

04—Continue

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