01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
First Citizens BancShares, Inc. (FCNCA) reported a solid 2006 for its shareholders, with net income of $126.5 milliona, up 12.1% from $112.9 million in 2005, and diluted-equivalent EPS of $12.12 versus $10.82.
Return on average assets improved to 0.83% from 0.81%, and return on average equity rose to 10.19% from 9.98%. Growth was driven by a $1.12 billionb increase in average interest-earning assets, net interest income up 5.3% to $471.5 million, and noninterest income up 5.9% to $279.3 million, led by cardholder and merchant services. Credit quality improved: net charge-offs fell to 0.18% of average loans from 0.28%, and nonperforming assets dropped to 0.20% of loans and other real estate.
Capital remained strong, with the holding company's Tier 1 risk-based ratio at 12.93% and all banking subsidiaries well-capitalized. The main investor considerations are the cost of funding and the drag from the company's de novo expansion. The net yield on interest-earning assets fell 12 basis points to 3.48% amid a flat yield curve, and noninterest expense rose 6.8% to $534.0 millionc, largely from branch expansion.
IronStone Bank (ISB), the Atlanta-born, multi-state thrift, still posted only $2.2 milliond of net income in 2006 after losses in prior years, and management expects it to run near breakeven in 2007 as it enters Dallas, Oklahoma City and Kansas City. Profitability also continues to trail similarly sized peers, which management acknowledges, and the company has deliberately prioritized asset quality and capital conservation over short-term returns.
The company remains closely held: the Class B shares carry 16 votes each, the Holding family and related persons have significant influence, and a meaningful share of processing fee income comes from banks controlled by related persons ($26.1 million in 2006). Management plans to keep paying a $0.275 quarterly dividend, and the company has historically funded growth through retained earnings and non-equity capital rather than issuing stock.
02—Key points
Key Highlights
- Net income rose 12.1% to $126.5 million in 2006 ($12.12 per share), compared with $112.9 million in 2005; ROA 0.83% and ROE 10.19%.
- Net interest income grew 5.3% to $471.5 million, but the net yield on interest-earning assets fell 12 bps to 3.48% due to a prolonged flat yield curve.
- Noninterest income reached $279.3 million (+5.9%), driven by cardholder and merchant services (+14.3% to $86.1 million); deposit service charges fell 6.2%.
- Noninterest expense rose 6.8% to $534.0 million, mainly from personnel and occupancy costs tied to branch expansion; efficiency pressure remains a key watch item.
- Asset quality improved: net charge-offs were 0.18% of average loans (vs. 0.28%), and nonperforming assets were 0.20% of loans and OREO (vs. 0.27%).
- Capital is strong: Tier 1 risk-based ratio of 12.93% and total capital ratio of 15.37% at the holding company; FCB and ISB are both well-capitalized.
- IronStone Bank (de novo, 56 offices across nine states) is still a drag, with 2006 net income of $2.2 million and expected near-breakeven results in 2007 as it expands into Dallas, Oklahoma City and Kansas City.
03—Questions
Frequently Asked Questions
How profitable was First Citizens BancShares in 2006 and how did it compare with 2005?
Net income was $126.5 million in 2006, up 12.1% from $112.9 million in 2005, and EPS was $12.12 versus $10.82. Return on average assets improved slightly to 0.83% and return on average equity to 10.19%. Management notes that these returns have historically compared unfavorably with similarly sized financial holding companies, reflecting its priority on asset quality and capital conservation.
What is driving the company's growth, and what risks come with it?
Average interest-earning assets rose $1.12 billion, with loan growth concentrated in commercial and industrial and commercial mortgage lending, and deposits (especially time deposits) and short-term borrowings funding the expansion. Growth has come with higher funding costs: the blended rate on interest-bearing liabilities climbed to 3.14% from 2.16%, and the net interest yield fell. Branch expansion into new states also raises expense and execution risk, particularly at ISB.
How concentrated is the loan portfolio, and how healthy is credit quality?
Commercial mortgage loans make up 36.4% of total loans, and medical and dental-related borrowers account for 12.4% ($1.26 billion), the only industry above 10%. Loans with loan-to-value ratios above regulatory guidelines were 10.6% of the portfolio. Despite these concentrations, net charge-offs fell to 0.18% and nonperforming assets to 0.20%, and the allowance for credit losses was 1.35% of loans.
Is the dividend secure, and how is the company capitalized?
The Board declared a $0.275 quarterly cash dividend in January 2007 (annual rate $1.10, unchanged since 2004), and management expects comparable dividends to continue. The dividend depends on earnings and capital needs and is funded by dividends from First-Citizens Bank & Trust, which declared $40.0 million to the parent in 2006. Capital ratios are well above minimums, with a holding-company Tier 1 risk-based ratio of 12.93% and a leverage ratio of 9.39%. The company has historically relied on retained earnings and non-equity capital rather than issuing stock.
Who controls the company, and are there related-party considerations for investors?
The company has two classes of common stock: Class A, listed on NASDAQ (FCNCA), and Class B, quoted on the OTC Bulletin Board (FCNCB), with 16 votes per share versus one for Class A. Related persons, including directors and significant shareholders, have material business ties to the company. In 2006 it earned $26.1 million in processing fees from banks controlled by related persons, paid $4.4 million in legal fees to a firm whose senior attorney is a director, and had $34.7 million in loans to related persons.
04—Continue