01—Abstract
Summary
Summary of the 10-K filed March 11, 2005. Cited figures are marked; the original filing is the authoritative source.
First Citizens BancShares (FCNCA) reported 2004 net income of $74.8 milliona, or $7.17 per share, down 0.5% from $75.2 million in 2003 and well below $92.8 million in 2002.
The decline came despite improved net interest income and noninterest income, which were offset by higher noninterest expense ($479.6 millionb, up 3.1%), a larger loan loss provision ($34.5 million, up 42.5%), and a higher effective tax rate of 39.7%, which included a $5.0 million North Carolina tax settlement. Return on average assets was 0.58% and return on average equity was 7.10%, both weaker than prior years and, per management, unfavorable versus similar-sized peers. Balance sheet growth was driven by loans, which rose 12.3% to $9.35 billion, with commercial mortgages up 23.6% and ISB (IronStone Bank, the de novo thrift expanding into Western and Sunbelt markets) loans up 26.4%.
Deposits grew 6.0% to $11.35 billionc. Asset quality remained strong: nonperforming assets were 0.25% of loans plus other real estate, and net charge-offs were 0.26% of average loans. The allowance for loan losses covered 1.40% of loans.
The main investor concern is the ISB expansion. ISB has lost money every year since its 1997 launch, with cumulative losses of $26.3 milliond, BancShares has injected $230 million of capital into it, and management expects losses to continue for the foreseeable future.
Capital remains solid, with a Tier 1 risk-based ratio of 12.1% and a leverage ratio of 9.3%, and all banking subsidiaries are well capitalized. The company also declared a 27.5-cent quarterly dividend for April 2005 and expects rising interest rates in 2005 to benefit its asset-sensitive balance sheet.
02—Key points
Key Highlights
- Net income of $74.8M ($7.17/share) was roughly flat versus 2003 ($75.2M) but down 19% from 2002 ($92.8M), with ROA falling to 0.58% from 0.61%.
- Loans grew 12.3% to $9.35B, led by commercial mortgages (+23.6%) and ISB (+26.4%), while deposits rose 6.0% to $11.35B.
- Net interest income rose 7.0% to $387.3M, supported by loan growth and a 6 bp improvement in net yield to 3.38%.
- Noninterest expense rose 3.1% to $479.6M, and the effective tax rate increased to 39.7% from 35.5%, partly from a $5.0M North Carolina tax settlement.
- ISB, the de novo thrift, lost $3.0M in 2004 with cumulative losses of $26.3M since 1997; management expects losses to continue as it expands into new markets.
- Asset quality stayed strong, with nonperforming assets at 0.25% of loans plus OREO and net charge-offs at 0.26% of average loans, though the provision rose 42.5% to $34.5M.
- Capital is solid, with a Tier 1 risk-based ratio of 12.1%, a total risk-based ratio of 13.5%, and a 9.3% leverage ratio; the quarterly dividend is 27.5 cents, and the board reauthorized share repurchases.
03—Questions
Frequently Asked Questions
Why did net income stay flat in 2004 even though net interest income grew?
Net interest income rose $25.4M, and noninterest income rose $7.0M, but these gains were offset by a $14.5M increase in noninterest expense, a $10.3M higher loan loss provision, and a $9.9M increase in income tax expense. The tax increase reflected higher pretax income and a $5.0M North Carolina settlement, which pushed the effective rate to 39.7%.
How significant is the IronStone Bank (ISB) drag on earnings?
ISB's net losses have been small in dollar terms ($3.0M in 2004), but they are growing and are expected to continue as the bank opens new branches in Florida, Georgia, Texas, Arizona, California, Colorado, New Mexico, Oregon and Washington. Each new market typically takes about three years to become profitable. BancShares has injected $230M into ISB since 1997, and management warned that future capital infusions could slow ISB's growth if FCB's dividend capacity does not improve.
Is the bank's loan growth creating credit risk?
Management acknowledges that rapid growth in new markets can add lending risk, and the provision for loan losses rose to $34.5M from $24.2M. However, credit metrics remain strong: nonaccrual loans fell to $14.3M from $18.2M, NPAs were 0.25% of loans plus OREO, and net charge-offs were 0.26% of average loans. Commercial mortgages, now 35.6% of loans, are underwritten mainly on the cash flow of owner-occupied businesses.
How well positioned is the company for rising interest rates?
The company is asset-sensitive, with a one-year positive gap of $981.2M. Management expects rates to keep rising in 2005, which should lift net interest income. Variable-rate loans reprice with market rates, and the company has increasingly favored variable-rate lending. The company does not use derivatives to hedge rate risk.
04—Continue