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| FCNCA > SEC Filings for FCNCA > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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.
OVERVIEW
BancShares is a financial holding company with 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 North Carolina, Virginia, West Virginia, Maryland, Tennessee, Washington, California, and Washington, DC. ISB operates in Georgia, Florida, Texas, New Mexico, Arizona, California, Oregon, Washington, Colorado, Oklahoma, Missouri and Kansas. FCB and ISB offer similar banking products and services to customers through branch operations under separate charters. Each entity operates in different geographic markets, with the exception of the states of California and Washington where ISB and FCB both operate. ISB has maintained a focus on providing products and services to commercial and business customers, while FCB has a broader customer base, including commercial and retail relationships. FCB offers a wide array of wealth management services through its trust department and a wholly-owned broker-dealer subsidiary. The financial results and trends of ISB reflect the impact of the de-novo nature of its growth.
BancShares' earnings and cash flows are derived primarily from the commercial banking activities conducted by its banking subsidiaries. These activities include commercial and consumer lending, deposit and treasury services products, cardholder, merchant, wealth management services as well as various other products and services typically offered by commercial banks. FCB and ISB gather interest-bearing and noninterest-bearing 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 various types of interest-earning assets including loans and leases, investment securities and overnight investments. We also invest in 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. In an effort to stimulate and control the rate of growth of economic activity, monetary actions by the Federal Reserve are significant to the interest rate environment in which we operate. At any point in time, both the existing level and anticipated movement of interest rates have a material impact on customer demand for our products, our pricing of those products and our profitability. In addition to the interest rate environment, the general strength of the economy influences the demand for as well as the quality and collectibility of our loan and lease portfolio. External economic indicators such as consumer bankruptcy rates and business debt service capacity closely follow trends in the economic cycle.
Although we are unable to control the external factors that influence our business, through the utilization of various liquidity, interest rate and credit risk management tools, we seek to minimize the potentially adverse risks of unforeseen and potentially unfavorable economic trends and take advantage of favorable economic conditions when appropriate.
Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability and measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders' equity. Historically, we have placed primary emphasis upon asset quality, balance sheet liquidity and capital conservation, even when those priorities may be detrimental to short-term profitability.
In recent years, our growth has resulted through de novo expansion. However, during 2009, the increase in the number of bank failures has led the FDIC to offer significant loss protection to acquirers. We believe that expansion opportunities exist and continue to evaluate potential acquisition targets. Our expansion considerations focus on geographic markets with long-term growth potential.
We also continue to focus on organic growth. We believe that through competitive products and superior customer service, we can increase our business volumes and profitability. While offering products and services appropriate for customers with varying needs, we generally focus our efforts on businesses owners, medical and other professionals and financially active individuals.
We seek to increase fee income within our key business units including cardholder and merchant services, insurance, treasury services, wealth management and other private banking services. We also remain focused on opportunities to generate income by providing various processing services to other banks.
As a result of costs arising from recent and projected failures of insured banks, the reserve level of the FDIC's 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, and as a result increased deposit insurance rates and imposed a special assessment on all insured banks during 2009. Additional special assessments and further increases in FDIC insurance premiums could have a material negative impact upon our earnings.
ACQUISITIONS
Temecula Valley Bank. On July 17, 2009, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of Temecula Valley Bank (TVB) of Temecula, California. Immediately prior to the effectiveness of the acquisition, the FDIC had been appointed Receiver of TVB by the California Department of Financial Institutions.
Table 1 identifies the assets acquired and liabilities assumed, the fair value adjustments, the amounts recorded by FCB, and the calculation of the gain recognized on the acquisition.
Acquisition of Temecula Valley Bank Table 1
As recorded by Fair value As recorded by
July 17, 2009 TVB adjustment FCB
(thousands)
Cash and due from banks $ 19,299 $ - $ 19,299
Overnight investments 27,040 - 27,040
Investment securities 20,931 - 20,931
Loans and leases 1,215,986 (360,214 ) 855,772
Other real estate owned 66,117 (6,682 ) 59,435
FDIC receivable for loss sharing agreements - 103,558 103,558
Core deposit intangible - 1,376 1,376
Other assets 27,611 (3,090 ) 24,521
Total assets $ 1,376,984 $ (265,052 ) $ 1,111,932
Deposits $ 965,431 $ - $ 965,431
Short-term borrowings 78,542 554 79,096
Other liabilities 4,749 3,928 8,677
Total liabilities $ 1,048,722 $ 4,482 $ 1,053,204
Excess of assets acquired over liabilities
assumed $ 328,262
Aggregate fair value adjustments $ (269,534 )
Gain on acquisition of TVB $ 58,728
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The loans and other real estate acquired through foreclosure are covered by loss sharing agreements that provide for the FDIC to absorb 80 percent of losses incurred on covered loans and other real estate in excess of $193.3 million. The 80 percent coverage ratio applies to losses up to $464.0 million with losses in excess of $464.0 million covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $103.6 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss sharing agreements.
The $58.7 million gain is included within noninterest income in the Consolidated Statements of Income. Our operating results for the period ended September 30, 2009 include the results of the acquired assets and liabilities for the period from July 18, 2009 through September 30, 2009. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the third quarter.
Venture Bank. On September 11, 2009, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of Venture Bank (VB) of Lacey, Washington. Immediately prior to the effectiveness of the acquisition, the FDIC had been appointed Receiver of VB by the Washington Department of Financial Institutions.
Table 2 identifies the assets acquired and liabilities assumed, the fair value adjustments, the amounts recorded by FCB, and the calculation of the gain recognized on the acquisition.
Acquisition of Venture Bank Table 2
As recorded Fair value As recorded by
September 11, 2009 by Venture adjustment FCB
(thousands)
Cash and due from banks $ 12,676 $ - $ 12,676
Overnight investments 104,232 - 104,232
Investment securities 27,193 - 27,193
Loans and leases 647,175 (190,699 ) 456,476
Other real estate owned 51,862 (8,868 ) 42,994
Receivable from FDIC for loss sharing agreements - 138,963 138,963
Core deposit intangible - 3,021 3,021
Other assets 8,005 (183 ) 7,822
Total assets $ 851,143 $ (57,766 ) $ 793,377
Deposits $ 709,091 $ - $ 709,091
Long-term obligations 50,078 5,540 55,618
Other liabilities 1,379 453 1,832
Total liabilities $ 760,548 $ 5,993 $ 766,541
Excess of assets acquired over liabilities assumed $ 90,595
Aggregate fair value adjustments $ (63,759 )
Cash received from the FDIC $ 19,406
Gain on acquisition of VB $ 46,242
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The loans and other real estate acquired through foreclosure are covered by loss sharing agreements that provide for the FDIC to absorb 80 percent of all losses incurred on covered loans and other real estate up to $235.0 million. Losses in excess of $235.0 million are covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $139.0 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss sharing agreements.
The $46.2 million gain is included within noninterest income in the Consolidated Statements of Income. Our operating results for the period ended September 30, 2009 include the results of the acquired assets and liabilities for the period from September 11, 2009 through September 30, 2009. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the third quarter.
PERFORMANCE SUMMARY
Weak economic conditions in our principal market areas continue to have an adverse impact on our financial condition and results of operations through soft demand for our loan products, reduced noninterest income, a low net yield on interest-earning assets and high provisions for credit losses. In many of our markets, unfavorable measures such as increased unemployment, falling real estate prices and increased default and bankruptcy rates demonstrate the difficult business conditions affecting the general economy and our operating results.
BancShares' earnings increased significantly during the third quarter of 2009 compared to the third quarter of 2008 due to $105.0 million of gain on the acquisitions of TVB and VB. The after-tax impact of the gains totaled $63.9 million or $6.12 per share. Consolidated net income during the third quarter of 2009 equaled $82.5 million, compared to $19.6 million earned during the corresponding period of 2008. The annualized return on average assets was 1.83 percent during the third quarter of 2009, compared to 0.47 percent during the same period of 2008. The annualized return on average equity was 22.45 percent during the third quarter of 2009, compared to 5.20 percent during the same period of 2008. Net income per share during the third quarter of 2009 totaled $7.90, compared to $1.87 during the third quarter of 2008.
For the first nine months of 2009, BancShares recorded net income of $97.3 million, compared to $78.2 million earned during the first nine months of 2008. The $19.2 million or 24.5 percent increase was the result of gains associated with bank acquisitions. Net income per share for the first nine months of 2009 amounted to $9.33, compared to $7.49 during the same period of 2008. On an annualized basis, BancShares returned 0.75 percent on average assets during the first nine months of 2009, compared to 0.64 percent from the corresponding period of 2008. Annualized return on average equity for the first nine months of 2009 was 9.01 percent, compared to 7.05 percent during the same period of 2008.
Excluding nonperforming assets covered by FDIC loss sharing agreements, asset quality measurements were favorable during the third quarter. The provision for credit losses for the third quarter of 2009 equaled $18.3 million, down $2.5 million from the second quarter of 2009 and $1.7 million from the third quarter of 2008. Net charge-offs decreased to $15.3 million, down $5.5 million compared to the previous quarter. As a percentage of average loans not covered by loss sharing agreements, net charge-offs for the third quarter of 2009 equaled 0.50 percent, down from 0.72 percent in the second quarter of 2009. Nonperforming assets not covered by loss sharing agreements amounted to $106.3 million at September 30, 2009, 0.92 percent of loans not covered by loss sharing agreements, up $7.5 million from June 30, 2009 and $44.2 million from September 30, 2008. In addition, there are $205.1 million of nonperforming assets covered by loss sharing agreements. Net charge-offs for the nine month period ended September 30, 2009 amounted to $50.0 million or 0.57 percent of average loans not covered by loss sharing agreements, up $22.7 million for the comparable period in 2008. The provision for credit losses increased $14.5 million from the prior year to $57.7 million.
Net interest income for the third quarter 2009 increased $8.0 million from the comparable period of 2008 caused by a significant growth in interest-earning assets. The net yield on interest-earning assets for the third quarter of 2009 increased by 39 basis points from last quarter. Net interest income for the nine month period ended September 30, 2009 declined $6.1 million from the prior years due to a contraction in the net yield on interest-earning assets.
Noninterest income excluding the $105.0 million gain on acquisitions was $77.7 million during the third quarter of 2009, unchanged from the comparable period of 2008. For the nine month period ended September 30, 2009, noninterest income excluding the gain on acquisitions equaled $222.4 million, down $18.9 million from the nine month period ended September 30, 2008. The unfavorable trends in 2009 are due to lower levels of service charge income, wealth management services, securities gains, and cardholder and merchant services.
Noninterest expenses increased $10.5 million and $32.4 million in the third quarter and nine month period ended September 30, 2009 versus the comparable periods of 2008. Higher FDIC insurance, employee benefits costs, occupancy costs and expenses related to the maintenance, writedown and resolution of other real estate caused the higher current year expenses.
Financial Summary Table 3
2009 2008 Nine months ended September 30
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter 2009 2008
(thousands, except share data and ratios)
Summary of Operations
Interest income $ 189,690 $ 176,841 $ 179,652 $ 195,366 $ 199,080 $ 546,183 $ 617,985
Interest expense 54,413 59,809 63,847 71,211 71,761 178,069 243,734
Net interest income 135,277 117,032 115,805 124,155 127,319 368,114 374,251
Provision for credit losses 18,265 20,759 18,723 22,142 20,008 57,747 43,286
Net interest income after
provision for credit losses 117,012 96,273 97,082 102,013 107,311 310,367 330,965
Noninterest income 182,631 73,164 71,541 72,182 77,536 327,336 241,302
Noninterest expense 166,277 160,868 156,342 155,800 155,746 483,487 451,058
Income before income taxes 133,366 8,569 12,281 18,395 29,101 154,216 121,209
Income taxes 50,898 2,369 3,618 5,502 9,547 56,885 43,044
Net income $ 82,468 $ 6,200 $ 8,663 $ 12,893 $ 19,554 $ 97,331 $ 78,165
Net interest income-taxable
equivalent $ 136,426 $ 118,350 $ 117,225 $ 125,779 $ 128,872 $ 372,001 $ 379,372
Per Share of Stock
Net income $ 7.90 $ 0.59 $ 0.83 $ 1.24 $ 1.87 $ 9.33 $ 7.49
Cash dividends 0.300 0.300 0.300 0.275 0.275 0.900 0.825
At period-end:
Market price (Class A) 159.10 133.65 131.80 152.80 179.00 159.10 179.00
Book value 145.16 137.45 137.65 138.33 144.17 145.16 144.17
Tangible book value 134.66 127.32 127.48 128.13 133.92 134.66 133.92
Selected Quarterly Averages
Total assets $ 17,892,599 $ 17,309,656 $ 16,945,383 $ 16,741,696 $ 16,377,570 $ 17,385,950 $ 16,362,573
Investment securities 3,596,422 3,578,604 3,246,898 3,147,906 2,957,353 3,506,187 3,105,268
Loans and leases (covered
and not covered) 12,078,390 11,621,450 11,659,873 11,665,522 11,440,563 11,788,104 11,186,487
Interest-earning assets 15,862,964 15,725,319 15,373,383 15,247,645 14,773,446 15,686,614 14,748,235
Deposits 14,792,449 14,316,103 13,897,701 13,544,762 13,003,821 14,338,639 12,961,679
Interest-bearing liabilities 13,137,412 12,840,612 12,596,452 12,471,757 12,187,085 12,860,140 12,259,025
Long-term obligations 810,049 734,042 733,087 730,360 613,046 759,341 566,198
Shareholders' equity $ 1,457,599 $ 1,433,427 $ 1,438,109 $ 1,497,619 $ 1,496,573 $ 1,444,605 $ 1,481,519
Shares outstanding 10,434,453 10,434,453 10,434,453 10,434,453 10,434,453 10,434,453 10,434,453
Selected Quarter-End
Balances
Total assets $ 18,512,878 $ 17,317,880 $ 17,214,265 $ 16,745,662 $ 16,665,605 $ 18,512,878 $ 16,665,605
Investment securities 3,287,309 3,749,525 3,324,770 3,225,853 2,934,934 3,287,309 2,934,934
Loans and leases (covered
and not covered) 12,778,161 11,638,965 11,497,079 11,649,886 11,563,711 12,778,161 11,563,711
Deposits 15,348,955 14,358,149 14,229,548 13,713,763 13,372,468 15,348,955 13,372,468
Shareholders' equity 1,514,684 1,434,213 1,436,277 1,443,375 1,504,334 1,514,684 1,504,334
Selected Ratios and other
data
Rate of return on average
assets (annualized) 1.83 % 0.14 % 0.21 % 0.31 % 0.47 % 0.75 % 0.64
Rate of return on average
shareholders' equity
(annualized) 22.45 1.73 2.44 3.43 5.20 9.01 7.05
Net yield on
interest-earning assets
(taxable equivalent) 3.41 3.02 3.09 3.28 3.47 3.17 3.44
Tier 1 risk-based capital
ratio 13.33 13.30 13.29 13.20 13.02 13.33 13.02
Total risk-based capital
ratio 15.58 15.59 15.57 15.49 15.34 15.58 15.34
Leverage capital ratio 9.73 9.68 9.83 9.88 10.02 9.73 10.02
Dividend payout ratio 3.80 50.85 36.14 22.18 14.71 9.65 11.01
Average loans and leases to
average deposits 81.65 % 81.18 % 83.90 % 86.13 % 87.98 % 82.21 % 86.30
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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 maturity of the underlying asset. Riskier investments typically carry a higher interest rate, but expose the investor to potentially higher levels of default. We have historically focused on maintaining strong asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. United States Treasury and U.S. government agency securities represent 80.1 percent of our investment securities portfolio. Debt obligations guaranteed by the Temporary Liquidity Guarantee Program represent 14.8 percent of the investment securities portfolio. Residential mortgage-backed securities designated as available for sale and carried at fair value represent only 3.6 percent of total investment securities.
Generally, the investment securities portfolio grows and shrinks based on loan, lease and deposit trends. When deposit growth exceeds loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan and lease demand exceeds deposit growth, we use proceeds from maturing securities to fund loan and lease demand. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.
Loans and leases not covered by loss sharing agreements. At September 30, 2009 and 2008, loans and leases not covered by loss sharing agreements totaled $11.52 billion and $11.56 billion, respectively. The $43.0 million or 0.4 percent reduction from September 30, 2008 to September 30, 2009 resulted from declines within the construction and land development and consumer portfolios, partially offset by growth in the commercial and revolving mortgage portfolios.
Commercial mortgage loans totaled $4.51 billion at September 30, 2009, 39.2 percent of the noncovered loan and lease portfolio. This represents an increase of $249.1 million or 5.8 percent since September 30, 2008 and $117.3 million since June 30, 2009. Competition for high-quality loans secured by owner-occupied medical and professional facilities remains intense. Our commercial mortgage loans, the majority of which are owner occupied, are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.
At September 30, 2009, revolving mortgage loans totaled $2.11 billion, 18.3 percent of noncovered loans and leases outstanding, an increase of $320.8 million or 17.9 percent since September 30, 2008. Revolving mortgage loans increased $61.1 million from June 30, 2009. Attractive interest rates have stimulated line utilization during 2009.
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