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| FCNCA > SEC Filings for FCNCA > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
INTRODUCTION
Management's discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2009, the reclassifications have no effect on shareholders' equity or net income as previously reported. Unless otherwise noted, the terms we, us and BancShares refer to the consolidated financial position and consolidated results of operations for BancShares.
OVERVIEW
BancShares is a financial holding company headquartered in Raleigh, North Carolina that offers full-service banking through two wholly-owned banking subsidiaries, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift institution. FCB operates branches in five states and has announced plans to open an office in Washington, D.C. ISB operates branches in urban areas of twelve states. Beyond the traditional branch network, we offer customer sales and service through telephone, online banking and our extensive ATM network.
BancShares' earnings and cash flows are primarily derived from the commercial banking activities conducted by its banking subsidiaries. We offer commercial and consumer loans, deposit and treasury services products, cardholder and merchant services, wealth management services as well as various other products and services typically offered by commercial banks. FCB and ISB gather deposits from retail and commercial customers. BancShares and its subsidiaries also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets such as loans and leases, investment securities and overnight investments. We also invest in the bank premises, furniture and equipment used to conduct the subsidiaries' commercial banking business.
Various external factors influence customer demand for our loan, lease and deposit products and ultimately affect the quality of our assets and our profitability. Recessionary economic conditions have caused higher rates of unemployment, and a growing inability for some businesses and consumers to meet their debt service obligations. In addition, real estate demand in many of our markets remains weak, resulting in a decline in real estate values that has adversely affected collateral values for certain of our loans. Further, the current and anticipated instability in alternative investment markets has influenced demand for our deposit and treasury services products.
Economic conditions during 2008 and early 2009 have had a significant impact on virtually all financial institutions in the United States, including BancShares. The widespread non-availability of capital has created significant disruptions, causing financial institutions to curtail growth and in some cases to seek merger partners under distressed conditions. As a result of the inter-connectivity of the global financial markets, the failure and acquisition of troubled entities have created challenges throughout the industry. In addition to the various actions announced by governmental agencies, it is likely that further regulatory actions will arise as the Federal government attempts to provide liquidity, stability and capital to strengthen the financial services sector.
As a result of costs arising from recent and projected failures of insured banks, the reserve level of the Federal Deposit Insurance Corporation's (FDIC) Deposit Insurance Fund (DIF) has declined to less than the amount mandated by the Federal Deposit Insurance Reform Act of 2005. The FDIC has a legally-imposed duty to adopt a plan to restore the DIF to a specific level, an amount that could require the payment of a material assessment by all insured banks. It is unclear at this time if or when such an assessment will be payable or whether alternative sources of funding will be found.
Financial Summary
2009 2008
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
(thousands, except share data and ratios)
Summary of Operations
Interest income $ 179,652 $ 195,366 $ 199,080 $ 202,000 $ 216,905
Interest expense 63,847 71,211 71,761 77,147 94,826
Net interest income 115,805 124,155 127,319 124,853 122,079
Provision for credit losses 18,723 22,142 20,195 13,350 10,118
Net interest income after
provision for credit losses 97,082 102,013 107,124 111,503 111,961
Noninterest income 71,541 72,182 77,536 79,600 84,166
Noninterest expense 156,342 155,800 155,559 149,481 145,641
Income before income taxes 12,281 18,395 29,101 41,622 50,486
Income taxes 3,618 5,502 9,547 15,396 18,101
Net income $ 8,663 $ 12,893 $ 19,554 $ 26,226 $ 32,385
Net interest income-taxable
equivalent $ 117,225 $ 125,779 $ 128,872 $ 126,568 $ 123,932
Per Share of Stock
Net income $ 0.83 $ 1.24 $ 1.87 $ 2.51 $ 3.10
Cash dividends 0.300 0.275 0.275 0.275 0.275
Market price at period end
(Class A) 131.80 152.80 179.00 139.49 139.35
Book value at period end 137.65 138.33 144.17 142.54 142.42
Tangible book value at period
end 127.48 128.13 133.92 132.24 132.07
Selected Quarterly Averages
Total assets $ 16,945,383 $ 16,741,696 $ 16,377,570 $ 16,396,288 $ 16,307,994
Investment securities 3,246,898 3,147,906 2,956,398 3,197,849 3,144,446
Loans and leases 11,659,873 11,665,522 11,440,563 11,154,400 10,961,706
Interest-earning assets 15,373,382 15,247,645 14,772,491 14,801,252 14,651,951
Deposits 13,897,701 13,544,762 13,003,821 12,969,423 12,905,651
Interest-bearing liabilities 12,596,452 12,471,757 12,187,085 12,281,649 12,309,132
Long-term obligations 733,087 730,360 613,046 609,301 475,732
Shareholders' equity $ 1,438,109 $ 1,497,619 $ 1,496,573 $ 1,484,143 $ 1,466,411
Shares outstanding 10,434,453 10,434,453 10,434,453 10,434,453 10,434,453
Selected Quarter-End Balances
Total assets $ 17,214,265 $ 16,745,662 $ 16,665,605 $ 16,422,674 $ 16,746,518
Investment securities 3,324,770 3,225,853 2,935,593 2,973,253 3,166,947
Loans and leases 11,621,334 11,719,285 11,627,635 11,313,155 11,029,937
Interest-earning assets 15,706,732 15,119,754 14,891,934 14,681,858 15,000,384
Deposits 14,229,548 13,713,763 13,372,468 13,075,411 13,226,991
Interest-bearing liabilities 12,827,449 12,441,025 12,383,450 12,147,269 12,566,799
Long-term obligations 733,056 733,132 649,214 609,277 609,335
Shareholders' equity $ 1,436,277 $ 1,443,375 $ 1,504,334 $ 1,487,282 $ 1,486,034
Shares outstanding 10,434,453 10,434,453 10,434,453 10,434,453 10,434,453
Selected Ratios and other
data
Rate of return on average
assets (annualized) 0.21 % 0.31 % 0.64 % 0.64 % 0.80 %
Rate of return on average
shareholders' equity
(annualized) 2.44 3.43 7.11 7.11 8.88
Net yield on interest-earning
assets (taxable equivalent) 3.09 3.28 3.47 3.44 3.40
Allowance for loan and lease
losses to total loans and
leases at period end 1.39 1.34 1.32 1.28 1.28
Nonperforming assets to loans
and leases plus other real
estate at period end 0.85 0.61 0.53 0.42 0.39
Tier 1 risk-based capital
ratio 13.29 13.20 13.01 13.14 13.12
Total risk-based capital
ratio 15.57 15.49 15.33 15.48 15.47
Leverage capital ratio 9.83 9.88 10.01 9.89 9.80
Dividend payout ratio 36.14 22.18 14.71 10.96 8.87
Average loans and leases to
average deposits 83.90 86.13 87.98 86.01 84.94
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In addition to the various regulatory efforts to stabilize the economic turbulence during 2008, ongoing management of monetary policy and interest rates by the Federal Reserve has significantly impacted the pricing of and demand for loan, deposit and treasury services products. During the fourth quarter of 2008, the Federal Reserve dropped the federal funds rate to near zero percent. The impact of these lower rates has had a significant adverse impact on our net interest income during 2009.
Financial institutions have typically focused their strategic and operating emphasis on maximizing profitability, and therefore have measured their relative success by reference to profitability measures such as return on average assets or return on average shareholders' equity. BancShares' return on average assets and return on average equity have historically compared unfavorably to the returns of similar-sized financial holding companies. We have consistently placed primary strategic emphasis upon balance sheet liquidity, asset quality and capital conservation, even when those priorities may be detrimental to short-term profitability. While we have not been immune from adverse influences arising from economic weaknesses and financial market disruptions, our long-standing focus on balance sheet strength has continued to serve us well.
Once economic conditions begin to improve, we believe that we will be positioned to resume favorable growth and profitability trends. We operate in diverse geographic markets and can increase our business volumes and profitability by offering competitive products and superior customer service. We continue to concentrate our marketing efforts on business owners, medical and other professionals and financially-active individuals. We seek to increase fee income in areas such as wealth management, cardholder and merchant services, insurance and treasury services. Leveraging on our investments in technology, we also focus on opportunities to generate income by providing various processing services to other banks.
PERFORMANCE SUMMARY
BancShares' consolidated net income during the first quarter of 2009 equaled $8.7 million, a significant reduction from the $32.4 million earned during the corresponding period of 2008. The annualized return on average assets amounted to 0.21 percent during the first quarter of 2009, compared to 0.80 percent during the same period of 2008. The annualized return on average equity was 2.44 percent during 2009, down from the 8.88 percent recorded in 2008. Net income per share during the first quarter of 2009 totaled $0.83, compared to $3.10 during the first quarter of 2008.
The $23.7 million or 73.2 percent earnings decrease resulted primarily from the adverse impact of economic weakness and financial market disruptions which in turn caused the following unfavorable variances:
• $12.1 million or 14.5 percent reduction in noninterest income;
• $10.7 million or 7.3 percent increase in noninterest expense;
• $8.6 million or 85.0 percent increase in provision for credit losses
• $6.8 million or 5.5 percent reduction in net interest income;
INTEREST-EARNING ASSETS
Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate, but expose us to potentially increased levels of default.
We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. That focus on asset quality also influences the composition of our investment securities portfolio. At March 31, 2009, United States Treasury and government agency securities represent 90.2 percent of our investment securities portfolio; corporate bonds issued under the FDIC's Treasury Liquidity Guaranty Program represent 6.2 percent; and mortgage-backed securities represent 3.0 percent of the total portfolio. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.
Loans and Leases
2009 2008
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
(thousands)
Real estate:
Construction and land
development $ 735,619 $ 778,315 $ 803,935 $ 815,005 $ 817,832
Commercial mortgage 4,336,382 4,343,809 4,265,501 4,164,592 4,053,773
Residential mortgage 986,892 964,201 961,105 985,513 1,027,469
Revolving mortgage 1,984,249 1,911,852 1,793,178 1,638,049 1,521,191
Other mortgage 152,561 149,478 152,764 147,424 147,082
Total real estate loans 8,195,703 8,147,655 7,976,483 7,750,583 7,567,347
Commercial and industrial 1,857,092 1,885,358 1,886,847 1,797,042 1,721,927
Consumer 1,132,059 1,233,075 1,317,421 1,337,820 1,308,269
Lease financing 344,054 353,933 346,757 335,877 340,620
Other 92,426 99,264 100,127 91,833 91,774
Total loans and leases 11,621,334 11,719,285 11,627,635 11,313,155 11,029,937
Less allowance for loan and
lease losses 161,572 157,569 152,946 144,533 141,591
Net loans and leases $ 11,459,762 $ 11,561,716 $ 11,474,689 $ 11,168,622 $ 10,888,346
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Changes in our interest-earning assets reflect the impact of liquidity generated by deposits and short-term borrowings, the majority of which arises from various treasury services products. The size of the investment securities portfolio changes principally based on trends among loans and leases, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand.
During the first quarter of 2009, interest-earning assets averaged $15.37 billion, an increase of $721.4 million or 4.9 percent from the first quarter of 2008. This increase primarily reflects growth in the loan and lease portfolio.
Loans and leases. At March 31, 2009 and 2008, loans and leases totaled $11.62 billion and $11.03 billion, respectively. The $591.4 million or 5.4 percent growth from March 31, 2008 to March 31, 2009 resulted from growth within the commercial mortgage, revolving mortgage and commercial and industrial loan portfolios. Total loans and leases declined by $98.0 million during the first quarter of 2009 versus December 31, 2008 as a result of soft demand for credit.
Commercial real estate loans totaled $4.34 billion at March 31, 2009, representing 37.3 percent of total loans and leases. This balance represents an increase of $282.6 million or 7.0 percent since March 31, 2008. Demand for loans secured by owner-occupied medical and professional facilities remained reasonably strong through December 31, 2008, but weakened during the first quarter of 2009. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.
At March 31, 2009, revolving mortgage loans totaled $1.98 billion, representing 17.1 percent of total loans outstanding, an increase of $463.1 million or 30.4 percent compared to March 31, 2008, resulting from robust origination of new credit lines during 2008 and attractive rates stimulating line utilization.
Commercial and industrial loans equaled $1.86 billion or 16.0 percent of total loans and leases outstanding. These loans have increased $135.2 million or 7.8 percent since March 31, 2008. Customer demand and expansion markets supported the growth of these loans throughout 2008.
Construction and land development loans totaled $735.6 million or 6.3 percent of total loans at March 31, 2009, a decrease of $82.2 million or 10.1 percent since March 31, 2008. Of the $735.6 million outstanding as of March 31, 2009, $97.1 million was in the Atlanta, Georgia and southwest Florida markets. Both of these market areas experienced significant reductions in real estate values during 2008. The majority of the remaining $638.6 million of construction and land development loans are in North Carolina and Virginia where real estate values have declined more modestly.
Consumer loans totaled $1.13 billion at March 31, 2009, down $176.2 million or 13.5 percent from March 31, 2008. This decline results from our decision during 2008 to discontinue originations of sales finance loans through our dealer network.
Due to the generally weak demand for loans and widespread customer desire to deleverage, our projections for 2009 anticipate modest change in our loan portfolio. Loan projections are subject to change due to further economic deterioration or improvement and other external factors.
Investment securities. Investment securities available for sale equaled $3.32 billion at March 31, 2009, compared to $3.16 billion at March 31, 2008. The $159.3 million or 5.0 percent increase resulted from growth in deposits and borrowings that was not absorbed by loan and lease growth. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. Investment securities held to maturity totaled $5.7 million at March 31, 2009, compared to $7.2 million at March 31, 2008. Securities that are classified as held to maturity reflect BancShares' ability and positive intent to hold those investments until maturity.
Income on interest-earning assets. Interest income amounted to $179.7 million during the first quarter of 2009, a $37.3 million or 17.2 percent decrease from the first quarter of 2008. During the first quarter of 2009, the impact of lower asset yields more than offset the impact of balance sheet growth when compared to the same period of 2008. The taxable-equivalent yield on interest-earning assets equaled 4.76 percent for the first quarter of 2009, compared to 6.00 percent for the corresponding period of 2008.
Loan and lease interest income for the first quarter of 2009 equaled $156.6 million, a decrease of $20.6 million from the first quarter of 2008, the combined result of lower yields offset by favorable growth in average loan and lease balances. The taxable-equivalent yield was 5.45 percent during the first quarter of 2009, a 106 basis point reduction from the same period of 2008. The reduced yield resulted from new loans and leases originated at current market rates and repricing of outstanding variable-rate loans. Average loans and leases increased $698.2 million or 6.4 percent from 2008 to 2009.
Interest income earned on the investment securities portfolio amounted to $22.8 million during the first quarter of 2009 and $35.7 million during the same period of 2008, a decrease of $12.8 million or 35.9 percent. This decrease in income is the result of higher average volume more than offset by the impact of lower yields, caused by extraordinarily low market interest rates for all investment securities as well as our decision in 2008 to invest all available liquidity solely in U.S. Treasury securities. The taxable-equivalent yield declined 177 basis points from 4.72 percent in the first quarter of 2008 to 2.95 percent in the first quarter of 2009. Average investment securities increased $102.5 million from $3.14 billion during the first quarter of 2008 to $3.25 billion during the first quarter of 2009. Due to continuing historically low interest rates, we anticipate the yield on investment securities will decline further during the remainder of 2009.
Interest income from overnight investments amounted to $225,000 during the first quarter of 2009, a decrease of $3.9 million from the $4.1 million earned during the first quarter of 2008, the result of a 281 basis point yield reduction.
Investment Securities
March 31, 2009 March 31, 2008
Average Taxable Average Taxable
Maturity Equivalent Maturity Equivalent
Cost Fair Value (Yrs./Mos.) Yield Cost Fair Value (Yrs./Mos.) Yield
(thousands)
Investment securities
available for sale:
U. S. Government:
Within one year $ 1,313,362 $ 1,330,179 0/6 3.79 % $ 1,575,484 $ 1,596,864 0/6 4.86 %
One to five years 1,646,345 1,669,183 1/7 1.65 1,407,246 1,443,194 1/7 3.77
Five to ten years - - - - 4,050 4,065 5/4 4.85
Total 2,959,707 2,999,362 1/1 2.60 2,986,780 3,044,123 1/8 4.35
Mortgage-backed securities
One to five years 29 26 2/4 5.39 47 44 3/4 5.43
Five to ten years 761 769 9/0 4.55 312 311 9/9 4.70
Over ten years 91,062 93,826 27/8 5.23 75,168 75,776 26/9 5.47
Total 91,852 94,621 27/1 5.22 75,527 76,131 26/9 5.47
State, county and municipal:
Within one year 1,672 1,678 0/4 4.12 1,072 1,075 0/6 3.81
One to five years 1,111 1,121 3/1 4.65 1,875 1,877 2/4 4.23
Five to ten years - - - - 356 373 5/0 4.95
Over ten years 10 10 11/8 4.97 66 66 20/8 4.44
Total 2,793 2,809 1/6 4.33 3,369 3,391 2/4 4.15
Corporate bonds
One to five years 204,478 205,148 2/9 1.95 - - - -
Total 204,478 205,148 2/9 1.95 - - - -
Other
Five to ten years 3,006 5,008 9/5 11.05 - - - -
Over ten years - - - - 7,053 8,672 12/1 11.13
Total 3,006 5,008 9/5 11.05 7,053 8,672 12/1 11.13
Equity securities 3,949 12,077 3,523 27,441
Total investment securities
available for sale 3,265,785 3,319,025 3,076,252 3,159,758
Investment securities held to
maturity:
U. S. Government:
Five to ten years - - - - 5,163 5,267 9/0 5.54 %
Over ten years - - - - 191 226 19/3 6.31
Total - - - - 5,354 5,493 9/5 5.56
Mortgage-backed securities
Five to ten years 3,992 4,179 8/0 5.54 % - - - -
Over ten years 161 196 18/7 6.45 - - - -
4,153 4,375 8/5 5.57 - - - -
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