Why did First Citizens' net income decline in 2003?

Net income fell $17.6 million, or 18.9%, to $75.2 million. The main cause was a $20.2 million drop in net interest income as falling market interest rates lowered asset yields faster than deposit costs could adjust. Higher noninterest expense, which rose $33.1 million, also contributed, partly offset by higher noninterest income and a lower loan loss provision.

How is the ASB expansion affecting the company's results?

ASB has been a drag on earnings, with net losses of $7.6 million in 2001, $1.3 million in 2002, and $2.0 million in 2003. Management attributes these losses to the costs of opening new de novo branches, which typically take about three years to become profitable. Losses are expected to continue as ASB enters new states such as New Mexico, Colorado, and Oregon, and the company has committed additional capital to fund that growth.

Is the dividend safe, and what are the capital plans?

The Board declared a quarterly cash dividend of 27.5 cents per share, payable April 5, 2004, and management expects comparable dividends to continue. However, the 2003 dividend level from FCB to the holding company depends on FCB's profitability, which management says is doubtful to stay at that level. That could reduce the capital available to fund ASB's expansion. Total risk-based capital stood at 14.2% at year-end 2003, well above the 8% minimum.

What is driving loan growth and where are the credit risks?

Gross loans grew 9.3% to $8.33 billion, led by commercial mortgages (up 15.3%), revolving home-equity lines (up 19.7%), and indirect auto and credit card consumer loans (up 12.9%). Residential mortgages declined 14.6% because they are now sold to correspondents. Credit risk is concentrated in commercial real estate, and nonaccrual loans rose to $18.2 million, though net charge-offs remained low at 0.23% of average loans.

What outlook does management give for 2004?

Management expects loan growth in commercial mortgages and revolving real estate to continue, along with a decline in residential mortgages. It anticipates rates will begin rising after mid-2004, which would help its asset-sensitive balance sheet, though it expects modest near-term pressure on asset yields. Salary expense is expected to rise faster than merit increases because of ASB's expansion, and mortgage income is likely to fall from 2003 levels.

FCNCA 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.

First Citizens BancShares (FCNCA) reported a difficult 2003 in its FY2003 10-K: net income fell 18.9% to $75.2 million^a ($7.19 per share) from $92.8 million ($8.85 per share) in 2002.

The decline was driven mainly by a $20.2 million^b (5.3%) drop in net interest income, as falling market rates compressed the taxable-equivalent net yield on earning assets from 3.63% to 3.32%, and by a 7.6% rise in noninterest expense to $465.1 million. Partial offsets were a 10.8% increase in noninterest income, helped by a $5.7 million gain on branch sales, and a lower provision for loan losses of $24.2 million. The balance sheet grew modestly, with total assets of $12.56 billion and gross loans up 9.3% to $8.33 billion, led by commercial mortgages and revolving home-equity lines.

Deposits rose 2.6% to $10.71 billion^c, but the mix shifted toward demand and money-market accounts as customers avoided low-yielding time deposits. Asset quality stayed strong by industry standards, with nonperforming assets at 0.29% of loans plus other real estate and net charge-offs at 0.23% of average loans, though nonaccrual loans rose to $18.2 million. Capital remained well above minimums, with a total risk-based ratio of 14.2% and a leverage ratio of 9.3%.

The main investor concern is the Atlantic States Bank (ASB) de novo expansion. ASB posted losses in each of 2001 through 2003 ($2.0 million^d in 2003, cumulative $23.4 million), management expects losses to continue, and BancShares has infused $200 million into ASB since 1997, with further infusions planned for 2004 and 2005.

Management also flagged that FCB's ability to upstream dividends at 2003 levels is doubtful, which could limit ASB's expansion. The company's return on average assets was 0.61% and return on equity 7.54%, both of which management acknowledges compare unfavorably with similarly sized peers.

02—Key points

Key Highlights

Net income fell 18.9% to $75.2 million, or $7.19 per share, versus $92.8 million ($8.85) in 2002, mainly due to a $20.2 million decline in net interest income.
Taxable-equivalent net interest margin compressed to 3.32% from 3.63%, reflecting falling yields on earning assets (down 98 basis points on loans and securities) that outpaced the repricing of deposits.
Noninterest income rose 10.8% to $243.9 million, aided by cardholder and merchant services growth and a $5.7 million gain on branch sales, though debit interchange rates fell 24.1% from August 2003 after a settlement.
Noninterest expense rose 7.6% to $465.1 million, driven by salaries, equipment, occupancy, and pension costs tied to ASB's expansion into new markets.
ASB, the de novo thrift expanding into Florida, Georgia, Texas, Arizona, and California, lost $2.0 million in 2003 with cumulative losses of $23.4 million; management expects losses to continue and plans further capital infusions of $35 million in 2004 and $5 million in 2005.
Asset quality remained strong, with nonperforming assets at 0.29% of loans plus other real estate and net charge-offs at 0.23%, though nonaccrual loans increased to $18.2 million.
Capital is solid, with total risk-based capital of 14.2%, Tier 1 of 12.9%, and a leverage ratio of 9.3%, and the Board reauthorized stock repurchases in Q4 2003.

03—Questions

Frequently Asked Questions

Why did First Citizens' net income decline in 2003?
Net income fell $17.6 million, or 18.9%, to $75.2 million. The main cause was a $20.2 million drop in net interest income as falling market interest rates lowered asset yields faster than deposit costs could adjust. Higher noninterest expense, which rose $33.1 million, also contributed, partly offset by higher noninterest income and a lower loan loss provision.
How is the ASB expansion affecting the company's results?
ASB has been a drag on earnings, with net losses of $7.6 million in 2001, $1.3 million in 2002, and $2.0 million in 2003. Management attributes these losses to the costs of opening new de novo branches, which typically take about three years to become profitable. Losses are expected to continue as ASB enters new states such as New Mexico, Colorado, and Oregon, and the company has committed additional capital to fund that growth.
Is the dividend safe, and what are the capital plans?
The Board declared a quarterly cash dividend of 27.5 cents per share, payable April 5, 2004, and management expects comparable dividends to continue. However, the 2003 dividend level from FCB to the holding company depends on FCB's profitability, which management says is doubtful to stay at that level. That could reduce the capital available to fund ASB's expansion. Total risk-based capital stood at 14.2% at year-end 2003, well above the 8% minimum.
What is driving loan growth and where are the credit risks?
Gross loans grew 9.3% to $8.33 billion, led by commercial mortgages (up 15.3%), revolving home-equity lines (up 19.7%), and indirect auto and credit card consumer loans (up 12.9%). Residential mortgages declined 14.6% because they are now sold to correspondents. Credit risk is concentrated in commercial real estate, and nonaccrual loans rose to $18.2 million, though net charge-offs remained low at 0.23% of average loans.
What outlook does management give for 2004?
Management expects loan growth in commercial mortgages and revolving real estate to continue, along with a decline in residential mortgages. It anticipates rates will begin rising after mid-2004, which would help its asset-sensitive balance sheet, though it expects modest near-term pressure on asset yields. Salary expense is expected to rise faster than merit increases because of ASB's expansion, and mortgage income is likely to fall from 2003 levels.

04—Continue

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