10-QPeriod: Q2 FY2008

FIRST CITIZENS BANCSHARES INC /DE/ Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 6, 2008For Securities:FCNCAFCNCPFCNCBFCNCOFCNCN

Summary

First Citizens BancShares, Inc. (FCNCA) reported a decrease in net income for the three and six months ended June 30, 2008, compared to the same periods in 2007. This decline was primarily driven by a significant increase in the provision for credit losses and higher noninterest expenses. Despite these pressures, net interest income and noninterest income showed moderate improvement. The company's balance sheet saw a modest increase in total assets, largely due to loan growth, particularly in commercial mortgage and commercial and industrial segments. Deposits also grew, providing a stable funding source. However, the company experienced a notable increase in nonperforming assets, especially residential construction loans in softening real estate markets, which contributed to the elevated provision for credit losses. The company continues to emphasize asset quality, liquidity, and capital conservation over short-term profitability, a strategy that has historically resulted in returns below industry peers. Management is actively managing risks, including credit and interest rate risk, and expects continued competition in deposit gathering.

Key Highlights

  • 1Net income for the second quarter of 2008 decreased to $26.2 million from $30.9 million in the prior year's quarter.
  • 2For the first six months of 2008, net income was $58.6 million, a slight decrease from $59.8 million in the same period of 2007.
  • 3The provision for credit losses significantly increased, contributing to the decline in profitability, particularly due to issues in residential construction loans in certain markets.
  • 4Total assets grew to $16.42 billion at June 30, 2008, up from $16.01 billion at June 30, 2007, driven by a $793.5 million increase in loans and leases.
  • 5Nonperforming assets increased to $47.3 million at June 30, 2008, from $18.8 million at June 30, 2007, primarily due to construction loans in affected real estate markets.
  • 6Noninterest income increased by 14.9% for the first six months of 2008, boosted by an $8.1 million securities gain from the Visa IPO.
  • 7The company's subsidiary, IronStone Bank (ISB), reported a net loss of $10.5 million for the first six months of 2008, compared to a net loss of $1.3 million in the prior year, driven by higher credit loss provisions and noninterest expenses.

Frequently Asked Questions

The decrease in net income for the second quarter of 2008 was primarily due to a significant increase in the provision for credit losses and higher noninterest expenses, which more than offset moderate improvements in net interest income and noninterest income.

The loan portfolio grew by 7.6% year-over-year, with notable increases in commercial mortgage and commercial and industrial loans. However, there is a concern regarding the increase in nonperforming assets, particularly residential construction loans in softening real estate markets (Atlanta and Southwest Florida), leading to higher provisions for credit losses. The company's allowance for credit losses increased to $152.0 million.

IronStone Bank (ISB) reported a net loss of $10.5 million for the first six months of 2008, an increase from a $1.3 million loss in the prior year. This was driven by higher credit loss provisions and increased noninterest expenses associated with its rapid de novo growth. ISB's performance negatively impacts the consolidated results, and management expects it to operate at a loss throughout 2008.

The company manages interest rate risk by simulating future net interest income under various interest rate scenarios, indicating a less than 5% variation with a 200 basis point rate change. They do not extensively use derivative instruments for hedging, except for a five-year interest rate swap related to trust preferred securities. Liquidity is managed through a strong deposit base, supplemented by federal funds lines of credit and other borrowing facilities. Investment securities available for sale also provide immediate liquidity.