Business Context and Reporting Period
First Citizens BancShares, Inc. filed its Form 10-K for the fiscal year ended December 31, 2011, including fourth-quarter results. The company operates primarily through First-Citizens Bank & Trust Company, a full-service community bank with 430 branches across 18 states and Washington, D.C. IronStone Bank was merged into the bank on January 7, 2011. Results include two FDIC-assisted acquisitions completed in 2011: United Western Bank and Colorado Capital Bank.
Financial Results and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net income | $195.0 million | $193.0 million | 1.0% increase |
| Net income per share | $18.80 | $18.50 | 1.6% increase |
| Net interest income | $871.0 million | $774.2 million | 12.5% increase |
| Provision for loan losses | $232.3 million | $143.5 million | 61.8% increase |
| Noninterest income | $464.4 million | $406.2 million | 14.3% increase |
| Noninterest expense | $792.9 million | $733.4 million | 8.1% increase |
| Return on average assets | 0.92% | 0.93% | Decreased |
| Return on average equity | 10.77% | 11.54% | Decreased |
- Total assets were $20.88 billion at year-end, compared with $20.81 billion in 2010.
- Total loans and leases increased 3.4% to $13.94 billion. Covered loans represented $2.36 billion, or 16.9% of total loans.
- Deposits declined modestly to $17.58 billion from $17.64 billion. Demand and money-market deposits increased, while time deposits declined 22.3%.
- Shareholders’ equity increased to $1.86 billion from $1.73 billion, while book value per share rose to $180.97 from $166.08.
- Cash provided by operating activities was $628.8 million, compared with $146.7 million in 2010. Investing activities provided $2.41 billion, primarily reflecting net cash received from acquisitions and securities activity. Financing activities used $2.91 billion, largely because of time-deposit runoff, debt repayments and share repurchases.
- The taxable-equivalent net yield on interest-earning assets increased to 4.65% from 4.22%, substantially reflecting acquired-loan discount accretion. Discount accretion was $319.4 million in 2011 versus $181.4 million in 2010.
- Capital remained strong. BancShares reported a 15.41% Tier 1 risk-based capital ratio, a 17.27% total risk-based capital ratio and a 9.90% leverage ratio. First-Citizens Bank & Trust Company was also well-capitalized.
Material Changes Versus the Prior Comparable Period
- Net income increased only modestly because higher net interest income and noninterest income were largely offset by higher loan-loss provisions and operating expenses.
- Acquisition gains increased to $150.4 million from $136.0 million, consisting of $63.5 million from United Western and $86.9 million from Colorado Capital Bank. These gains are significant contributors to reported earnings but are not recurring operating revenue.
- Provision expense related to acquired loans rose to $174.5 million from $86.9 million, reflecting post-acquisition deterioration in covered loans. Total net charge-offs increased to $189.9 million from $88.7 million.
- Nonperforming assets increased to $803.9 million from $525.8 million. The increase was concentrated in covered assets, which were protected in substantial part by FDIC loss-share agreements; noncovered nonperforming assets also increased to $226.9 million.
- Noninterest income benefited from acquisition gains, a $9.7 million gain on redemption of trust preferred securities and more favorable FDIC receivable adjustments. These benefits were partly offset by lower deposit service charges and a $4.6 million reduction in debit-card interchange income following Dodd-Frank fee limits.
- Liquidity declined: immediately available balance-sheet liquidity was approximately $1.40 billion at year-end versus $2.73 billion in 2010, primarily because of rapid runoff of deposits assumed in FDIC-assisted transactions.
- Long-term obligations declined 15.1% to $687.6 million, including the redemption of $21.5 million of trust preferred securities.
Guidance, Outlook, Risks and Unusual Items
- Management expected modest non-acquisition loan growth in 2012 because of weak demand and customer deleveraging. Further FDIC-assisted transactions were viewed as possible, but their timing and size could not be estimated.
- Management expected credit costs on acquired loans to remain high in 2012 because of elevated nonperforming covered assets. Noncovered credit costs were expected to moderate if economic conditions stabilized.
- Management expected debit-card interchange income to decline by approximately $17.6 million in 2012 from 2011 levels. Collection and foreclosure expenses were also expected to remain elevated, while some processing costs were expected to decline after system conversions.
- The company had $243.5 million of trust preferred securities outstanding. Dodd-Frank provisions phase these securities out of Tier 1 capital beginning in 2013 and eliminate their inclusion by 2015. Management stated that the company would remain well-capitalized on a pro forma basis after full exclusion.
- FDIC loss-share reimbursements are subject to regulatory review, contractual requirements, interpretation and potential clawback payments. Estimated future clawback obligations totaled $110.3 million.
- Real estate weakness, particularly in Georgia and Florida, remains a material credit risk. Revolving mortgage loans include a significant junior-lien component, exposing the company to collateral-value deterioration.
- The filing disclosed a material weakness in internal control over financial reporting related to accounting for acquired loans and the FDIC receivable. Management and the auditor concluded that controls were not effective as of December 31, 2011, although the auditor issued an unqualified opinion on the consolidated financial statements and management stated that prior financial statements were not materially misstated.
- The company’s disclosure controls were also deemed ineffective because of the material weakness. Remediation includes enhanced controls and conversion of acquired loans to an automated accounting system.
- Management reported no pending legal proceeding expected to have a material effect on consolidated financial statements, but noted uncertainty regarding litigation involving United Western’s former owners and the FDIC.
Most Important Facts for Investors to Verify
- Whether earnings remain sustainable after excluding the $150.4 million of 2011 acquisition gains and significant acquired-loan discount accretion.
- Trends in covered and noncovered nonperforming assets, net charge-offs, allowance coverage and FDIC reimbursement claims.
- The adequacy and timing of liquidity as acquired deposits continue to run off and loan demand potentially improves.
- The effect of debit-card interchange regulation, overdraft-fee changes and other regulatory actions on recurring fee income.
- Progress in remediating the material weakness in acquired-loan and FDIC-receivable accounting controls.
- The impact of the trust-preferred-security phase-out and future Basel III requirements on capital, acquisitions and growth capacity.
- Actual FDIC loss-share reimbursements, potential clawback payments and any revisions to the preliminary acquisition gains.