First Citizens BancShares, Inc. — 2Q10 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2010. BancShares operates through First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB), providing commercial and consumer banking, deposits, treasury services, cardholder and merchant services, wealth management, processing, insurance and mortgage services.
Results reflect FDIC-assisted acquisitions of First Regional Bank on January 29, 2010, and Sun American Bank on March 5, 2010, in addition to the 2009 acquisitions of Venture Bank and Temecula Valley Bank. FCB operated 393 branches at June 30, 2010; ISB operated 58 facilities.
Key financial metrics
| Metric | 2Q10 | 2Q09 | 1H10 | 1H09 |
|---|---|---|---|---|
| Net interest income | $164.9 million | $117.0 million | $315.9 million | $232.8 million |
| Provision for loan and lease losses | $31.8 million | $20.8 million | $48.8 million | $39.5 million |
| Noninterest income | $92.6 million | $71.4 million | $301.2 million | $141.1 million |
| Noninterest expense | $181.8 million | $159.1 million | $354.7 million | $313.6 million |
| Net income | $28.6 million | $6.2 million | $133.2 million | $14.9 million |
| Net income per share | $2.74 | $0.59 | $12.76 | $1.42 |
| Return on average assets | 0.54% | 0.14% | 1.31% | 0.18% |
| Return on average equity | 6.83% | 1.73% | 16.46% | 2.09% |
| Net yield on interest-earning assets | 3.54% | 3.02% | 3.54% | 3.05% |
At June 30, 2010, total assets were $21.11 billion, total loans and leases were $13.99 billion, deposits were $17.79 billion, shareholders’ equity was $1.69 billion, short-term borrowings were $541.7 million and long-term obligations were $918.9 million. Cash and due from banks totaled $625.9 million, overnight investments totaled $736.9 million and immediately available balance-sheet liquidity was approximately $2.71 billion.
Six-month cash flow from operating activities was $254.1 million, compared with $61.1 million in the prior-year period. Investing activities used $420.6 million, including securities purchases and acquisitions, while financing activities provided $312.1 million. Cash and due from banks increased by $145.6 million to $625.9 million.
Capital remained above regulatory well-capitalized thresholds: Tier 1 risk-based capital was 14.26%, total risk-based capital was 16.33% and Tier 1 leverage capital was 8.90% at June 30, 2010.
Material changes versus prior comparable periods
- Second-quarter net income increased 361% year over year; six-month net income increased approximately ninefold, primarily due to acquisition-related gains and stronger net interest income.
- Six-month noninterest income included $132.6 million of bargain purchase gains from the First Regional and Sun American acquisitions and $15.5 million of favorable adjustments to the FDIC loss-share receivable. These items are nonrecurring or subject to revision.
- Net interest income rose 40.9% in the second quarter and 35.7% year to date, driven by balance-sheet growth, acquired loans and assumed deposits, and lower funding costs. The taxable-equivalent net yield increased 52 basis points in the quarter and 49 basis points year to date.
- Provision expense increased because of post-acquisition deterioration in acquired loans covered by FDIC loss-share agreements. The allowance for loan and lease losses increased to $188.2 million from $162.3 million at June 30, 2009.
- Total loans increased to $13.99 billion from $11.52 billion a year earlier, primarily through acquisitions. Covered loans totaled $2.37 billion at June 30, 2010, compared with none in the prior-year period; noncovered loans were $11.62 billion, up modestly year over year.
- Total deposits increased 23.9% year over year, mainly from assumed deposits and organic growth. Long-term obligations increased 24.9% year over year to $918.9 million, primarily from obligations assumed in the FDIC-assisted transactions.
- Nonperforming assets increased to $519.2 million, or 3.67% of total loans, leases and other real estate, from $102.4 million, or 0.89%, a year earlier. Of the 2010 amount, $362.6 million was covered by FDIC loss-share agreements.
- ISB remained unprofitable, reporting a six-month net loss of $964,000, although this improved from a $13.8 million loss in the prior-year period. FCB reported six-month net income of $141.4 million versus $34.6 million.
Guidance, outlook, risks and unusual items
- Management expected non-acquisition loan growth in 2010 to be extremely limited because of weak demand and customer deleveraging.
- Management expected investment-security yields to remain depressed until the Federal Reserve raises benchmark rates. Interest-rate simulations indicated net interest income could increase 2.3% to 6.4% under rising-rate scenarios.
- Management described the liquidity position as strong but noted that FDIC-assisted acquisitions create liquidity pressure because assumed deposits may leave and may need to be replaced with core deposits from legacy markets. The company had access to approximately $1.50 billion of additional collateralized borrowings and $500 million of unsecured contingent borrowing capacity.
- FDIC loss-share agreements generally reimburse 80% of covered losses up to specified thresholds and 95% above those thresholds. The First Regional agreement had a projected future true-up payment of $65.9 million; no true-up was currently projected for Sun American. These estimates may change.
- Acquisition gains remain preliminary and may be revised for up to one year after closing. The 2010 acquisition gains were adjusted in the second quarter based on updated fair-value information.
- Overdraft-protection regulatory changes expected in the third quarter of 2010 could materially reduce service-charge revenue, depending on customer participation.
- Risks include continued economic weakness, unemployment, declining real-estate values, credit deterioration, deposit attrition, liquidity constraints, FDIC loss-share compliance, interest-rate changes, regulatory reform, capital-access limitations, litigation and operational or data-security disruptions.
- Adoption of new accounting guidance consolidated previously securitized home-equity loans, increasing loans by $97.3 million and long-term obligations by $86.9 million, and increasing beginning retained earnings by $4.9 million.
- Dodd-Frank legislation will phase out the eligibility of $265 million of trust-preferred securities as Tier 1 capital beginning in 2013. Management estimated that eliminating the full amount would reduce the Tier 1 risk-based capital ratio to 12.25% and the Tier 1 leverage ratio to 7.64%, while remaining well-capitalized on a pro forma basis.
Important facts for investors to verify
- Reconcile reported earnings excluding the $132.6 million of acquisition gains and $15.5 million of FDIC receivable adjustments to assess recurring profitability.
- Monitor nonperforming assets, impaired acquired loans, allowance adequacy and additional provisions, particularly in real-estate and covered-loan portfolios.
- Review FDIC loss-share reimbursement assumptions, compliance requirements and potential true-up payments.
- Assess deposit retention and replacement funding after FDIC-assisted acquisitions, including the availability and cost of collateralized and unsecured borrowing capacity.
- Evaluate the effect of overdraft regulatory changes, low investment-security yields and future interest-rate movements on revenue and margins.
- Track ISB’s continuing losses and BancShares’ capacity to provide further capital through dividends from FCB.
- Confirm the future capital impact of the phase-out of trust-preferred securities and the declining eligibility of subordinated debt.
- Review subsequent acquisition-date fair-value adjustments, legal contingencies and any changes in economic or regulatory conditions.