01—Abstract
Summary
Summary of the 10-K filed March 14, 2006. Cited figures are marked; the original filing is the authoritative source.
First Citizens BancShares (FCNCA) reported a strong 2005 with net income of $112.9 milliona, up 50.8% from $74.8 million in 2004, and diluted-equivalent EPS of $10.82 versus $7.17.
The improvement was driven mainly by a 15.6% increase in net interest income to $447.8 millionb, as the net interest margin widened to 3.60% from 3.38% on higher market rates. Noninterest income rose 4.9% to $263.4 million, led by cardholder and merchant services, while noninterest expense grew 4.1% to $499.4 million. Total assets reached $14.64 billion at year-end, and the Class A stock closed at $174.42.
The company's main growth and risk story is IronStone Bank (ISB), its de novo subsidiary operating in 53 offices across nine western and southeastern states. ISB posted a $2.9 millionc net loss in 2005 and cumulative losses since 1997 of $29.2 million, and BancShares has injected $250 million of capital into it. Management plans a further $30 million infusion in 2006 and expects ISB to keep weighing on earnings as it expands.
Parent-level capital remains solid, with a total risk-based capital ratio of 15.1%d and a Tier 1 leverage ratio of 9.2%, and all banking subsidiaries are well-capitalized. Credit quality remained sound, with nonperforming assets at 0.27% of loans and other real estate and net charge-offs at 0.28% of average loans.
Investors should weigh several concentrations: medical-related loans are 13.7% of the portfolio, 11.2% of loans exceed regulatory loan-to-value guidelines, and the balance sheet is liability-sensitive by $1.23 billion within one year. The company also relies on related-party processing revenue of about $24 million a year and carries a substantial share of Class B shares with 16 votes each.
02—Key points
Key Highlights
- Net income rose 50.8% to $112.9 million in 2005, and EPS increased to $10.82 from $7.17, with return on average equity of 9.98% versus 7.10% in 2004.
- Net interest income grew 15.6% to $447.8 million, and the net interest margin expanded 22 basis points to 3.60%, reflecting higher rates on earning assets.
- Noninterest income increased 4.9% to $263.4 million, driven by cardholder and merchant services ($72.9 million, up 13.7%), while noninterest expense rose 4.1% to $499.4 million.
- IronStone Bank (ISB) lost $2.9 million in 2005, with cumulative losses of $29.2 million since inception, and BancShares plans a $30 million capital infusion into ISB in 2006.
- Deposits grew 7.3% to $12.17 billion, and time deposits rose 11.4% on average as customers shifted out of money market and interest-bearing checking accounts in a rising-rate environment.
- Capital ratios remain strong, with a total risk-based capital ratio of 15.1%, a Tier 1 ratio of 12.6%, and a leverage ratio of 9.2%, and the subsidiaries are well-capitalized; a $125 million subordinated note was issued in 2005.
- Asset quality is solid, with nonperforming assets at 0.27% of loans and other real estate and net charge-offs at 0.28%, though medical-related loans represent 13.7% of the portfolio.
03—Questions
Frequently Asked Questions
What drove the large increase in 2005 earnings?
The main driver was net interest income, which rose $60.5 million (15.6%) as the Federal Reserve's rate increases lifted asset yields faster than funding costs, expanding the net yield on earning assets to 3.60%. Higher cardholder and merchant services income and gains from a $256.2 million revolving mortgage securitization also contributed, partly offset by higher noninterest expense and a higher effective tax rate of 36.8%.
How much is the IronStone Bank expansion costing shareholders?
ISB has absorbed $250 million of capital from BancShares since 1997 and produced cumulative losses of $29.2 million through 2005, with 2005 losses of $2.9 million. Management expects continued losses as it opens new branches in 2006 and plans a $30 million capital infusion that year. The company states that the $12.9 million rise in ISB noninterest expense in 2005 reflects branch build-out costs.
Is the dividend secure, and how is it funded?
The Board declared a quarterly dividend of 27.5 cents per share in January 2006, and management expects comparable dividends to continue. The dividend is paid mainly from dividends received from First-Citizens Bank & Trust Company, whose ability to pay is restricted by banking regulations. FCB declared $32.2 million of dividends to the parent in 2005, down from $50.2 million in 2004, which reduces the parent's flexibility.
What are the main risks flagged in the filing?
Key risks include interest rate sensitivity, since the company is liability-sensitive by $1.23 billion over one year and expects only modest further Fed tightening. Other concerns are concentration in medical-related lending (13.7% of loans), 11.2% of loans exceeding regulatory loan-to-value guidelines, rapid loan growth in new markets, and ISB's continuing losses. Economic downturns and credit deterioration in its loan book are also cited as material risks.
How concentrated is ownership and control of the company?
The company has two classes of stock: Class A, traded on Nasdaq as FCNCA with one vote per share, and Class B, traded on the OTC Bulletin Board as FCNCB with 16 votes per share. As of year-end 2005 there were 2,348 holders of record of Class A and 436 of Class B. The Holding family's voting influence is significant given the high vote weight of the Class B shares, which the filing does not quantify in detail; ownership details are incorporated by reference to the 2006 proxy statement.
04—Continue