How did First Citizens' 2002 earnings compare with prior years, and what drove the change?

Net income was $92.8 million in 2002, up from $86.9 million in 2001 but below $98.3 million in 2000. Higher net interest income (up $13.2 million) and noninterest income (up $5.8 million) more than offset higher noninterest expense and a larger loan loss provision. Adoption of SFAS 142 eliminated goodwill amortization, which lowered the effective tax rate to 35.4% from 36.9%.

Is the bank's net interest margin under pressure?

Yes. The taxable-equivalent net yield on earning assets fell to 3.63% in 2002 from 3.69% in 2001 and 4.10% in 2000, as falling market rates reduced asset yields faster than management could cut deposit costs. The company was liability-sensitive, with a one-year negative gap of $263.5 million, and management said further rate cuts would reduce net interest income. Management expects the margin to stay under pressure in 2003.

What is the outlook for credit quality and loan growth?

Nonperforming assets rose to $22.9 million from $20.2 million, and management expects them to stay elevated until economic conditions improve. Management anticipates weak business loan demand in 2003 but expects continued growth in revolving real estate loans and modest growth in consumer loans. Loan losses are considered adequate for loans outstanding at year-end 2002, although additional reserves may be needed if the economy weakens.

Is the dividend safe, and how is the company returning capital?

The board declared a 27.5-cent cash dividend in January 2003, payable April 7, 2003, consistent with the $1.00 annual dividend paid in 2000 through 2002. Management expects comparable dividends to continue, subject to earnings and future capital needs. The board also reauthorized share repurchases in late 2002, with authority for up to 300,000 Class A and 100,000 Class B shares, and it repurchased only about 10,000 shares during 2002.

What is the strategic significance of the IronStone Bank expansion?

IronStone Bank, a division of Atlantic States Bank, is the company's growth vehicle outside its core Southeast markets. It opened three Austin, Texas offices in late 2002 and a Scottsdale, Arizona office in early 2003, with plans for San Diego, La Jolla, Newport Beach and Sacramento. ASB had $1.04 billion in assets and 41 offices at year-end 2002, but its net loss of $1.3 million may continue as expansion costs are incurred.

FCNCA 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 14, 2003. Cited figures are marked; the original filing is the authoritative source.

First Citizens BancShares (FCNCA) reported 2002 net income of $92.8 million^a, or $8.85 per share, up 6.7% from $86.9 million ($8.27 per share) in 2001, though below the $98.3 million earned in 2000.

Growth came from higher net interest income (up 3.6% to $382.2 million^b) and noninterest income (up 2.7% to $221.4 million), partially offset by rising noninterest expense (up 2.6% to $433.4 million) and a larger loan loss provision ($26.6 million, up 10%). Return on average assets was 0.78% and return on average equity was 10.03%. Total assets reached $12.23 billion at year-end, with deposits of $10.44 billion (up 4.8%) and gross loans of $7.62 billion (up 5.9%).

The bank's net interest margin compressed sharply as the Federal Reserve cut rates. The taxable-equivalent net yield fell from 4.10%^c in 2000 to 3.69% in 2001 and 3.63% in 2002, and the yield on earning assets dropped 149 basis points to 5.66%. Management partly offset this by shifting deposits from higher-cost time deposits to lower-cost transaction accounts, which widened the interest rate spread to 3.32%.

Credit quality remained sound but was drifting weaker: nonperforming assets rose to $22.9 million^d (0.30% of loans plus OREO) from $20.2 million, and net charge-offs increased to 0.29% of average loans. The reserve for loan losses covered 1.48% of total loans. Capital remained strong, with a Tier 1 risk-based ratio of 13.5%, a total risk-based ratio of 14.8%, and a leverage ratio of 9.2%, all well above regulatory minimums.

The company is a financial holding company with two banks: First-Citizens Bank & Trust (342 branches in NC, VA and WV) and Atlantic States Bank/IronStone Bank (41 offices in GA, FL, TX, with a new Arizona office and planned California expansion). Management expects continued pressure on margins, a slowdown in commercial loan demand, and rising pension and health care costs in 2003, and it declared a 27.5-cent quarterly dividend.

02—Key points

Key Highlights

Net income rose 6.7% to $92.8 million ($8.85 per share) in 2002, but remained below the 2000 peak of $98.3 million.
Net interest margin compressed to 3.63% from 4.10% in 2000 as the Fed's rate cuts cut the yield on earning assets by 149 basis points to 5.66%.
Deposit mix shifted toward money market and checking accounts, lowering the blended cost of interest-bearing liabilities to 2.34% from 3.94% and widening the rate spread to 3.32%.
Total assets grew to $12.23 billion, with deposits up 4.8% to $10.44 billion and gross loans up 5.9% to $7.62 billion, led by revolving real estate (EquityLine) and commercial mortgage loans.
Credit quality is stable but softening: nonperforming assets rose to $22.9 million (0.30% of loans plus OREO), net charge-offs rose to 0.29% of average loans, and the provision increased 10% to $26.6 million.
Capital is strong, with a Tier 1 risk-based ratio of 13.5%, total risk-based ratio of 14.8%, and leverage ratio of 9.2%, well above regulatory minimums.
Growth is focused on the IronStone Bank franchise (Atlantic States Bank), which opened offices in Austin, TX and Scottsdale, AZ and plans expansion into California, though ASB posted a $1.3 million net loss in 2002.

03—Questions

Frequently Asked Questions

How did First Citizens' 2002 earnings compare with prior years, and what drove the change?
Net income was $92.8 million in 2002, up from $86.9 million in 2001 but below $98.3 million in 2000. Higher net interest income (up $13.2 million) and noninterest income (up $5.8 million) more than offset higher noninterest expense and a larger loan loss provision. Adoption of SFAS 142 eliminated goodwill amortization, which lowered the effective tax rate to 35.4% from 36.9%.
Is the bank's net interest margin under pressure?
Yes. The taxable-equivalent net yield on earning assets fell to 3.63% in 2002 from 3.69% in 2001 and 4.10% in 2000, as falling market rates reduced asset yields faster than management could cut deposit costs. The company was liability-sensitive, with a one-year negative gap of $263.5 million, and management said further rate cuts would reduce net interest income. Management expects the margin to stay under pressure in 2003.
What is the outlook for credit quality and loan growth?
Nonperforming assets rose to $22.9 million from $20.2 million, and management expects them to stay elevated until economic conditions improve. Management anticipates weak business loan demand in 2003 but expects continued growth in revolving real estate loans and modest growth in consumer loans. Loan losses are considered adequate for loans outstanding at year-end 2002, although additional reserves may be needed if the economy weakens.
Is the dividend safe, and how is the company returning capital?
The board declared a 27.5-cent cash dividend in January 2003, payable April 7, 2003, consistent with the $1.00 annual dividend paid in 2000 through 2002. Management expects comparable dividends to continue, subject to earnings and future capital needs. The board also reauthorized share repurchases in late 2002, with authority for up to 300,000 Class A and 100,000 Class B shares, and it repurchased only about 10,000 shares during 2002.
What is the strategic significance of the IronStone Bank expansion?
IronStone Bank, a division of Atlantic States Bank, is the company's growth vehicle outside its core Southeast markets. It opened three Austin, Texas offices in late 2002 and a Scottsdale, Arizona office in early 2003, with plans for San Diego, La Jolla, Newport Beach and Sacramento. ASB had $1.04 billion in assets and 41 offices at year-end 2002, but its net loss of $1.3 million may continue as expansion costs are incurred.

04—Continue

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