Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FCNCA > SEC Filings for FCNCA > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for FIRST CITIZENS BANCSHARES INC /DE/

Form 10-Q for FIRST CITIZENS BANCSHARES INC /DE/


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

Management's discussion and analysis (MD&A) 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 along with our financial statements and related MD&A of financial condition and results of operations included in our 2013 Annual Report in Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2014, the reclassifications have no material 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.

BancShares is a financial holding company headquartered in Raleigh, North Carolina, that offers full-service banking through its wholly-owned banking subsidiary, First-Citizens Bank & Trust Company (FCB). FCB is a state-chartered bank organized under the laws of the state of North Carolina. As of May 7, 2014, FCB operated 401 branches in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Washington, California, Florida, Georgia, Texas, Arizona, New Mexico, Oregon, Colorado, Oklahoma, Kansas, Missouri, and Washington, DC.

EXECUTIVE OVERVIEW AND EARNINGS SUMMARY

BancShares' earnings and cash flows are primarily derived from its commercial banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks.

Beginning in 2009, leveraging on our strong capital and liquidity positions, we participated in six FDIC-assisted transactions involving distressed financial institutions. Each of the FDIC-assisted transactions include indemnification assets, or loss share agreements, that protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. Under accounting principles generally accepted in the United States of America (GAAP), acquired assets, assumed liabilities and the indemnification asset are recorded at their fair values as of the acquisition date. Subsequent to the acquisition date, the amortization and accretion of premiums and discounts, the recognition of post-acquisition improvement and deterioration, and the related accounting for the FDIC loss share agreements have contributed to significant income statement volatility.

On January 1, 2014, FCB completed its merger with1st Financial Services Corporation (1st Financial) and its wholly-owned banking subsidiary Mountain 1st Bank & Trust Company. In accordance with the acquisition method of accounting, all assets and liabilities were recorded at their fair value as of the acquisition date. As a result of the 1st Financial transaction, during the first quarter of 2014, FCB recorded loans with a fair value of $316.3 million, investment securities with a fair value of $237.4 million and other real estate with a fair value of $11.6 million. The fair value of deposits assumed totaled $631.9 million. FCB paid $10.0 million to acquire 1st Financial, including $8.0 million to acquire and subsequently retire the 1st Financial securities that had been issued under the Troubled Asset Relief Program. As a result of the transaction, FCB recorded $24.5 million of goodwill and $3.8 million in core deposit intangibles. BancShares and FCB remain well-capitalized following the 1st Financial merger.

Various external factors influence the focus of our business efforts, and the results of our operations can change significantly based on those external factors. US economic conditions are improving, but unemployment rates remain high. The rate of economic growth continued at a modest rate in the first quarter of 2014. Consumer confidence continues to improve, with consumer spending at the highest level of growth in three years. Continued growth in household net worth, driven by increases in home, stock and other asset values, is believed to have positively influenced consumer confidence. As a result of perceived strength in the economy, the Federal Reserve has begun to taper its bond-buying program during the first quarter of 2014. The target asset purchase amount has continued to decline as the Federal Reserve seeks to gradually reduce stimulus efforts.


Table of Contents

We believe improved economic stability has contributed to modest loan growth during the first quarter of 2014. However, low interest rates and competitive loan and deposit pricing continue to constrain interest margins. Additionally, we have experienced improved loan demand during late 2013 and early 2014, as well as improved credit quality quarter over quarter.

BancShares' consolidated net income during the first quarter of 2014 equaled $22.4 million, a decrease of $4.9 million from the $27.2 million earned during the fourth quarter of 2013 and a decrease of $33.2 million from the $55.6 million earned during the first quarter of 2013. The annualized returns on average assets and equity amounted to 0.41 percent and 4.33 percent, respectively, during the first quarter of 2014, compared to 0.50 percent and 5.37 percent during the fourth quarter of 2013 and 1.07 percent and 12.01 percent during the first quarter of 2013. Net income per share during the first quarter of 2014 totaled $2.33, compared to $2.83 and $5.78 during the fourth and first quarters of 2013, respectively. The decrease in net income during 2014 was primarily a result of lower net interest income driven by nonrecurring adjustments and expected declining loan balances within the FDIC-assisted loan portfolio. This decrease was partially offset by improved investment yields and the reduction of funding costs.

As discussed more fully under the caption Business Combinations-Income statement impact, net income during the first quarter of 2014 has been influenced by various post-acquisition events affecting acquired loans. These events, which are not predictable, include unexpected repayments of loans outstanding and improvements in future cash flow projections. Reductions in acquired loan balances have led to a reduction in accretion income when compared to the first quarter of 2013. Unscheduled repayments have also resulted in credits to provision for loan and lease losses due to reversal of previously-identified impairment, although the first quarter 2014 credits were significantly less than those recorded during the first quarter of 2013. Lower amortization of the FDIC receivable during 2014, when compared to the first quarter of 2013, has contributed to a favorable variance in noninterest income.

Net income generated by our non-acquired bank operations has been positive during the first quarter of 2014. Originated loan provision for loan and lease losses declined significantly for the first quarter of 2014 compared to the sequential quarter and the same quarter in the prior year due to credit quality improvements in the originated portfolio and lower net charge-offs. Originated loan growth with declining provision expense and improved yield on investments contributed to higher net interest income after provision, despite a reduction in originated loan yields for the current quarter compared to the fourth and first quarters of 2013.

Net interest income decreased $15.7 million to $160.9 million in the first quarter of 2014 from $176.6 million in the fourth quarter of 2013 and decreased $44.0 million from $204.9 million in the first quarter of 2013, primarily due to FDIC-assisted loan portfolio changes including sustained loan runoff over all periods and nonrecurring acquisition accounting adjustments recognized during the first quarter of 2013. The taxable-equivalent yield on interest-earning assets was 3.26 percent during the first quarter of 2014, compared to 3.55 percent for the fourth quarter of 2013, a decline of 29 basis points, and 4.35 percent for the first quarter of 2013, a decline of 109 basis points. The yield on interest-earning assets remains volatile due to the unpredictable nature of unscheduled repayments of acquired loans.

BancShares recorded a $1.9 million credit to provision for loan and lease losses during the first quarter of 2014, compared to provision expense of $7.3 million in the fourth quarter of 2013 and a credit to provision of $18.6 million during the first quarter of 2013. The credit for acquired loans totaled $2.3 million during the first quarter of 2014, compared to credits of $0.8 million and $22.6 million during the fourth and first quarters of 2013, respectively, the result of loan runoff, repayment and other adjustments. Provision expense for originated loans totaled $0.4 million during the first quarter of 2014 compared to $8.1 million and $4.0 million during the fourth and first quarters of 2013, respectively, the result of credit quality improvements in the originated loan portfolio.

During the first quarter of 2014, noninterest income decreased $8.0 million compared to the fourth quarter of 2013, and increased $3.7 million compared to the first quarter of 2013. The $8.0 million decrease is the result of lower fees from processing services, reductions in other noninterest income and net adjustments to the FDIC receivable in the fourth quarter of 2013, compared to the current quarter. The increase when compared to the first quarter of 2013 is due to improved merchant and cardholder services and net adjustments to the FDIC receivable, partially offset by lower mortgage income and reductions in other income.

Noninterest expense totaled $191.0 million in the first quarter of 2014, a decrease of $5.3 million compared to the fourth quarter of 2013, due to lower collection costs and advertising and other expenses, partially offset by increased third party processing fees. Noninterest expense decreased $3.3 million in the first quarter of 2014 compared to the first quarter of 2013, the result of reductions in employee benefits, collections and a fixed asset write-offs that were recorded in the first quarter of 2013 related to the client bank processing relationships that were sold, partially offset by higher salaries and wages.


Table of Contents

Income tax expense in the first quarter of 2014 totaled $10.6 million compared to $15.0 million for the fourth quarter and $31.1 million for the first quarter of 2013, representing effective tax rates of 32.2 percent, 35.5 percent and 35.8 percent during the respective periods. The decreased effective tax rate for the first quarter of 2014 is a result of the impact of permanent differences on lower pre-tax earnings.

Investment securities available for sale totaled $5.7 billion at March 31, 2014, an increase of $288.5 million or 5.4 percent compared to December 31, 2013. Investment securities acquired in the 1st Financial merger totaled $237.4 million. Acquired loans and leases increased $241.4 million since December 31, 2013, the result of the acquisition of $316.3 million in the 1st Financial merger. Originated loans and leases increased $95.9 million, or 0.8 percent, since December 31, 2013 to $12.2 billion at March 31, 2014.

Total deposits increased $889.5 million during the first quarter of 2014, with increases in both demand and time deposit balances. Deposits resulting from the 1st Financial merger totaled $593.3 million at March 31, 2014.

BancShares remains well-capitalized, with a tier 1 leverage ratio of 9.66 percent at March 31, 2014, compared to 9.82 percent at December 31, 2013, both comfortably above the published well-capitalized minimum of 5.00 percent. The total risk-based capital ratio was 16.05 percent at March 31, 2014, compared to 16.42 percent at December 31, 2013, both of which compare favorably to the published well-capitalized minimum of 10.00 percent. The risk-based capital ratio decrease during the first quarter was primarily driven by the addition of $24.5 million in goodwill and $3.8 million in core deposit intangibles from the 1st Financial merger.


Table of Contents

Table 1
SELECTED QUARTERLY DATA
                                      2014                                       2013
                                      First            Fourth           Third            Second           First
(Dollars in thousands, except
share data)                          Quarter          Quarter           Quarter         Quarter           Quarter
SUMMARY OF OPERATIONS
Interest income                  $     173,394     $    189,640     $    192,634     $    193,926     $    220,604
Interest expense                        12,463           13,047           13,451           14,398           15,722
Net interest income                    160,931          176,593          179,183          179,528          204,882
Provision (credit) for loan and
lease losses                            (1,903 )          7,276           (7,683 )        (13,242 )        (18,606 )
Net interest income after
provision for loan and lease
losses                                 162,834          169,317          186,866          192,770          223,488
Noninterest income                      61,181           69,177           71,918           64,995           57,513
Noninterest expense                    191,030          196,315          192,143          188,567          194,355
Income before income taxes              32,985           42,179           66,641           69,198           86,646
Income taxes                            10,619           14,953           25,659           25,292           31,061
Net income                       $      22,366     $     27,226     $     40,982     $     43,906     $     55,585
Net interest income, taxable
equivalent                       $     161,694     $    177,280     $    179,823     $    180,188     $    205,553
PER SHARE DATA
 Net income                      $        2.33     $       2.83     $       4.26     $       4.56     $       5.78
 Cash dividends                           0.30             0.30             0.30             0.30             0.30
 Market price at period end
(Class A)                               240.75           222.63           205.60           192.05           182.70
 Book value at period end               218.82           215.89           206.06           201.62           199.46
SELECTED PERIOD AVERAGE BALANCES
 Total assets                    $  21,872,343     $ 21,562,920     $ 21,260,384     $ 21,224,412     $ 21,150,143
 Investment securities               5,606,723        5,285,783        5,177,729        5,162,893        5,196,930
 Loans and leases (acquired and
originated)                         13,459,945       13,088,636       13,111,710       13,167,580       13,289,828
 Interest-earning assets            20,139,131       19,787,236       19,428,949       19,332,679       19,180,308
 Deposits                           18,492,310       18,102,752       17,856,882       17,908,705       17,922,665
 Long-term obligations                 500,805          510,871          449,013          443,804          444,539
 Interest-bearing liabilities       14,189,227       13,790,088       13,757,983       13,958,137       14,140,511
 Shareholders' equity            $   2,094,557     $  2,010,191     $  1,953,128     $  1,929,621     $  1,877,445
 Shares outstanding                  9,618,941        9,618,941        9,618,941        9,618,941        9,618,985
SELECTED PERIOD-END BALANCES
 Total assets                    $  22,154,997     $ 21,199,091     $ 21,511,352     $ 21,308,822     $ 21,351,012
 Investment securities               5,677,019        5,388,610        5,162,598        5,186,106        5,280,907
 Loans and leases:
Acquired                             1,270,818        1,029,426        1,188,281        1,443,336        1,621,327
Originated                          12,200,226       12,104,298       11,884,585       11,655,469       11,509,080
 Deposits                           18,763,545       17,874,066       18,063,319       18,018,015       18,064,921
 Long-term obligations                 440,300          510,769          510,963          443,313          444,252
 Shareholders' equity            $   2,104,830     $  2,076,675     $  1,982,057     $  1,939,330     $  1,918,581
 Shares outstanding                  9,618,941        9,618,941        9,618,941        9,618,941        9,618,941
SELECTED RATIOS AND OTHER DATA
 Rate of return on average
assets (annualized)                       0.41   %         0.50   %         0.76   %         0.83   %         1.07   %
Rate of return on average
shareholders' equity
(annualized)                              4.33             5.37             8.32             9.13            12.01
Net yield on interest-earning
assets (taxable equivalent)               3.26             3.55             3.67             3.74             4.35
Allowance for loan and lease
losses to total loans and
leases:
Acquired                                  3.54             5.20             5.01             5.30             5.95
Originated                                1.46             1.49             1.50             1.56             1.53
Nonperforming assets to total loans and leases
and other real estate at period end:
Acquired covered                          9.34             7.02             7.05             8.62             8.46
Acquired not covered                      3.36                -                -                -                -
Originated                                0.66             0.74             0.90             0.91             1.10
Tier 1 risk-based capital ratio          14.56            14.92            15.04            14.91            14.72
Total risk-based capital ratio           16.05            16.42            16.54            16.41            16.41
Leverage capital ratio                    9.66             9.82             9.84             9.68             9.53
Dividend payout ratio                    12.88            10.60             7.04             6.58             5.19
Average loans and leases to
average deposits                         72.79            72.30            73.43            73.53            74.15

Average loan and lease balances include nonaccrual loans and leases.


Table of Contents

BUSINESS COMBINATIONS

FDIC-assisted transactions occurring between 2009 and 2011 provided us significant growth opportunities and continue to provide significant contributions to our results of operations. These transactions allowed us to increase our presence in existing markets and to expand our banking presence to adjacent markets. Each of the FDIC-assisted transactions included loss share agreements that, for the term of the loss share agreement, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. Two of the loss share agreements expire during the third quarter of 2014. We will process all necessary filings in accordance with the agreements before expiration to collect the earned loss share receivables. Going forward, we will continue to manage these loans and loan relationships in accordance with our standard credit administration policies and procedures.

In January 2014, FCB completed its merger with 1st Financial Services Corporation (1st Financial) and its wholly-owned banking subsidiary, Mountain 1st Bank & Trust Company. The merger allowed FCB to expand its presence in Western North Carolina, within the communities of Columbus, Etowah, Hendersonville, Shelby and Waynesville. This merger was not an FDIC-assisted transaction and, therefore, it has no loss share agreements.

Table 2
FAIR VALUE OF 1ST FINANCIAL SERVICES ACQUIRED ASSETS AND LIABILITIES
(Dollars in thousands)                          January 1, 2014
Assets
Cash and cash equivalents                      $          28,194
Investment securities available for sale                 237,438
Loans and leases                                         316,327
Other real estate owned                                   11,591
Intangible assets                                          3,780
Other assets                                              23,991
Total assets acquired                          $         621,321
Liabilities
Deposits:
Noninterest-bearing                            $         152,444
Interest-bearing                                         479,427
Total deposits                                           631,871
Federal Funds purchased                                      406
Other liabilities                                          3,559
Total liabilities assumed                                635,836
Net liabilities acquired                                  14,515
Cash paid to 1st Financial shareholders                    2,000
Cash paid to U.S. Treasury for TARP securities             8,000
Goodwill recorded                              $          24,515

Income statement impact. The 1st Financial merger was accretive to net interest income during the first quarter of 2014 and is expected to continue to be accretive going forward. The nonrecurring merger related costs are in line with original expectations totaling approximately $6 million to $7 million. Revenue generated from 1st Financial was approximately $6.9 million for the first quarter of 2014.

When comparing the current quarter to the first quarter of 2013, acquired loans had an unfavorable impact on earnings. Unfavorable variances were noted in interest income and provision for loan and lease losses, partially offset by improved noninterest income. The decrease in interest income, and overall earnings, for the first quarter of 2014 compared to the same quarter in the prior year is driven by sustained runoff in the acquired loan portfolio and nonrecurring FDIC-assisted acquisition accounting adjustments recorded during the the first quarter of 2013. Due to various factors that affect income or expense


Table of Contents

related to acquired loans recognized in a given period, these components of net income are not easily predictable for future periods. Variations among these items may affect the comparability of various components of net income.

Acquired loan accretion income, which is included in interest income, may be accelerated in the event of unscheduled repayments and various other post-acquisition events. During the three months ended March 31, 2014, accretion income on acquired loans equaled $30.2 million, compared to $44.9 million during the fourth quarter and $79.9 million during the first quarter of 2013. Accretion income during the first quarter of 2013 was impacted by a higher volume of repayments and nonrecurring acquisition accounting adjustments related to the FDIC-assisted transactions.

During the three months ended March 31, 2014, we recorded a credit to provision for loan and lease losses for acquired loans totaling $2.3 million compared to a credit of $22.6 million during the same period of 2013. During both periods, unscheduled loan payments resulted in the reversal of previously-recognized impairment, although as expected, the volume of repayments during the first quarter of 2014 was significantly less than repayments during the first quarter of 2013.

During the three-month period ended March 31, 2014, the net adjustment to the FDIC receivable resulted in a reduction to noninterest income of $12.3 million, compared to a corresponding reduction in noninterest income of $24.1 million during the same period of 2013. The smaller impact during 2014 primarily results from lower amortization expense of the FDIC receivable as the expiration dates of the loss share agreements approach.

Receivable from the FDIC for loss share agreements. The various terms of each loss share agreement and the components of the receivable from the FDIC is provided in Table 3. As of March 31, 2014, the FDIC receivable included $37.3 million of expected FDIC cash receipts and $37.5 million we expect to recover through prospective amortization of the asset due to post-acquisition improvements in the related loans. Generally, losses on single family residential loans are covered for ten years. All other loans are generally covered for five years. During the third quarter of 2014, loss share protection will expire for non-single family residential loans acquired from Temecula Valley Bank (TVB) and Venture Bank (VB). During the first quarter of 2015, loss share protection will expire for loans acquired from First Regional Bank (FRB) and for non-single family residential loans acquired from Sun American Bank (SAB). Protection for all other covered assets extends beyond December 31, 2015.

Table 3
LOSS SHARE PROVISIONS FOR FDIC-ASSISTED TRANSACTIONS

                                                                                                            Current
                                                                                Carrying value at          portion of
                                                                                  March 31, 2014         receivable due
(Dollars in                       Losses/expenses      Cumulative amount                                 from (to) FDIC      Prospective
thousands)     Fair value at      incurred through    reimbursed by FDIC   Receivable from   Payable to  for 3/31/2014      amortization
   Entity     acquisition date       3/31/2014         through 3/31/2014        FDIC            FDIC        filings          (accretion)
TVB -
combined
losses        $      103,558   $            195,585   $             832   $         8,374   $        -   $      1,026   $         5,906
VB - combined
losses               138,963                156,480             125,004             1,051            -            180              (607 )
FRB -
combined
losses               378,695                248,893             169,331            10,632       77,474         (3,670 )          11,300
SAB -
combined
losses                89,734                 97,764              76,701            12,712        1,491          1,510             6,487
United
Western
Non-single
family
residential
losses               112,672                111,035              89,014            13,535       17,014           (134 )           6,266
Single family
residential
losses                24,781                  4,679               3,623            10,876            -            120               189
Colorado
Capital -
combined
losses               155,070                186,504             149,256            17,604       15,360            108             7,940
Total         $    1,003,473   $          1,000,940   $         613,761   $        74,784   $  111,339   $       (860 ) $        37,481

Fair value at acquisition date represents the initial fair value of the receivable from FDIC, excluding the payable to FDIC. Prospective amortization (accretion) reflects balances that, due to post-acquisition credit quality improvement, will be amortized over the shorter of the covered asset's life or the term of the loss share period.


. . .
  Add FCNCA to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FCNCA - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.