Low Profile, Wide Reach

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First Citizens Bancshares Inc. is one of the more peculiar success stories — and for that reason, its small band of followers say, worthy of imitation by struggling peers in need of fresh ideas.

Run under the tight grip of a low-profile North Carolina family, the Raleigh company overcame some earlier missteps and prospered during the financial crisis without taking government aid.

It has grown to $21.1 billion of assets while countless others shrank, making it this year's lone entrant to the ranks of the 50 biggest banking firms. It commanded further attention by snapping up four failed banks in the past year.

Even a former critic of First Citizens' longtime strategy — picky lending, slow growth and opening branches in far-flung markets — says it's worth a second look because it endured where others' strategies flopped.

"Early on, if you had asked me about First Citizens I would have called it one of the worst-run banks in the country from a textbook definition of how to leverage your company," said Laurence Pettit 3rd, who manages the community bank portfolio at Anderson & Strudwick in Richmond, Va.

"In hindsight," Pettit added, "there are a lot of folks wondering if they should have followed the same model."

First Citizens has given industry watchers plenty to second-guess over the years. In 2002 it began opening branches through a thrift affiliate — IronStone Bank — in states such as Arizona, California and Florida. That move contradicted traditional views of economies of scale and efficiency: IronStone generated heavy startup expenses and had credit problems as real estate valuations in many of those states came under pressure.

At the same time, the First Citizens Bank unit — which remained concentrated in the Middle Atlantic — was knocked for being too conservative. It confined its lending mostly to affluent professionals who were also candidates for the bank's wealth management services. Though First Citizens Bank made commercial real estate loans, it largely focused on owner-occupied properties rather than speculative development.

But the company's aptly named controlling shareholders — the Holding family — stayed the course. "They are going to do it their way and stick with it regardless of people criticizing them," said D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte.

"This is a very quirky bank with a private group of people, but they have made it work over long periods of time," Plath said. "It's a great bank, which you can see by how well they have come through the financial crisis and recession."


First Citizens can afford to be independent-minded, given its management and ownership structures. The Holding family's controlling stake goes back three generations, and family members directly or indirectly own more than 90% of the company's voting shares. Four Holding family members are among the company's 18 directors. It is the second-biggest family-owned bank in the country, trailing only the $23.9 billion-asset BOK Financial Inc.

The Holdings have a central-casting feel: affluent and reclusive, with nearly a century of experience in the industry.

Robert Holding became a teller at a rural bank in 1918 and was president of First Citizens when he died in 1957. His sons — Robert Jr., Lewis and Frank — inherited his legacy and further expanded the family's banking operations across the Carolinas. Lewis succeeded his father at First Citizens, spending more than 50 years developing the company's unique culture and honing its strategy.

Frank Holding Jr. took over from his uncle in 2008 and has been responsible for the company's four government-assisted transactions. (Lewis Holding died last August.)

But the Holding enterprise is far bigger than just one bank. The family has large, if not controlling, stakes in First Citizens Bancorp. in Columbia, S.C. and three other North Carolina banks: Fidelity BancShares in Fuquay-Varina, Southern BancShares in Mount Olive and Heritage Bank in Lucama. The five banks have 770 branches, $32.8 billion of assets and at least one Holding on every board. (First Citizens Bancorp has also completed a government-assisted deal for a small bank in Atlanta.)

"That's a huge group of companies owned by such a small number of people," Plath said. "So many decisions could realistically be made on a Friday night around the dinner table."

Such tight control usually worries analysts. "If you look at how family-owned banks have fared historically, it has been horrific," said Brett Scheiner, an analyst at FBR Capital Markets. "There is usually value destruction by the next generation. Instead, First Citizens has benefited from the crisis."


Observers said one reason for the success has been an underlying conservatism with IronStone, which makes up less than 10% of the company's total assets. They said IronStone maintained a manageable CRE portfolio and has predominantly used its Western operations to generate deposits to fund lending in stronger markets.

"Sure, IronStone had credit issues and things got a little hairier with some of the construction loans it made," but the problem was contained, Scheiner said. And "First Citizens Bank is pristinely clean." On the dispersed branch network, he added, "Contiguous markets seem overrated."

Performance metrics seem to support the arguments. The company has remained profitable while others stumbled. Net chargeoffs were just 0.45% of average loans and leases at midyear, excluding loans covered by loss-sharing agreements with the Federal Deposit Insurance Corp. For its handful of institutional investors, First Citizens stock has risen 33% in the past year, closing Tuesday at at $194.77 a share. Though it did not accept funds from the Troubled Asset Relief Program, Tier 1 capital remained solid, at 14.26% at June 30.

There is little reason to believe those trends will change anytime soon. "These guys are crazy about good credit," Scheiner said. "You are considered a steward of this company if you run any of its businesses, and you would be disowned for putting any capital at risk."

"They are encouraged to under-reach," on lending, Plath said. "There are two major faux pas with the Holdings. One, you don't ask too many questions. Second, you don't talk to the media."

The second rule explains why so little is known about First Citizens. For a publicly traded company, First Citizens seldom angles for publicity. Frank Jr. has given only a smattering of interviews since taking over as CEO; a company spokeswoman declined to make him available for this article. Lewis Holding was even more reluctant to interact with analysts or the media.

Scheiner said he has never spoken with a member of the Holding family despite covering First Citizens for years, though he has had conversations with other executives. "They want to talk to depositors, borrowers and internal people to make this the best bank it can be," said Scheiner, who is the only analyst to follow First Citizens.

"Anything else is a distraction to them," he added.


The family's refusal to discuss long-term strategy makes is difficult to forecast the future, leaving observers to look at historical behavior. Scheiner expects more acquisitions; the company bought six failed banks and completed 11 unassisted deals after the savings and loan crisis in the early 1990s. Doing so should help the company build scale in markets where it has only a handful of branches; recent FDIC deals have been in California, Florida and Washington.

Another long-term option could involve merging First Citizens Bancorp into the bigger holding company, Scheiner said. The move would not be unprecedented; in 1970 the family merged Bank of Fuquay and Bank of Biscoe to create Fidelity Bank.

More acquisitions would also allow First Citizens to replace the IronStone signs in such markets with its flagship brand. The company filed to do away with IronStone charter in November 2008 but inexplicably withdrew the application a month later. Some observers argue that it makes sense to keep the charter even if the branches are eventually rebranded.

Pettit said many other banks killed excess charters and, looking back, could have used them to isolate and purge bad loans.

"They have a lot of options under the holding company" if problems do arise, he said. "IronStone at some point could look completely different than what it looks like today. Quite frankly I like the fact that they kept it alive."

For Pettit, the big question mark is the four FDIC deals. Many FDIC loss-sharing agreements still leave the buyer responsible for 20% of the "covered" assets, meaning First Citizens may be responsible for collecting on nearly $900 million of loans. "If they can get spread income from these banks, they could make a lot of money," Pettit said.

"But we don't know how the existing assets will perform," he added. "I hear that a lot of others are having a tough time collecting, which runs up noninterest expenses. There's always a chance that they have bitten off more than they can chew."

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