FCNCA

Business Context and Reporting Period

Company: First Citizens BancShares, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Overview: BancShares operates through two primary subsidiaries: First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB). The quarter was defined by significant expansion via FDIC-assisted transactions, specifically the acquisitions of First Regional Bank (January 29, 2010) and Sun American Bank (March 5, 2010). These transactions resulted in substantial bargain purchase gains and increased the company's asset base significantly.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisition Gains: The most significant driver of profitability was a $137.6 million pre-tax gain on acquisitions (bargain purchase gains) from First Regional and Sun American Bank. This represented the majority of the $143.9 million increase in noninterest income.
• Balance Sheet Growth: Total assets increased by approximately $4.0 billion ($23.4%) compared to the prior year, driven by the assumption of assets and liabilities in FDIC transactions. Loans covered under loss share agreements grew from $0 to $2.60 billion.
• Net Interest Income: Increased 30.4% year-over-year due to balance sheet growth and a 43 basis point improvement in the net yield on interest-earning assets (3.52% vs. 3.09%).
• Expense Growth: Noninterest expenses rose 11.4% to $173.0 million, primarily due to integration costs, increased headcount in acquired markets, and higher foreclosure-related expenses.
• Accounting Changes: Adoption of new accounting standards regarding QSPEs (Qualifying Special Purpose Entities) on January 1, 2010, resulted in the consolidation of previously securitized loans, increasing loans by $97.3 million and long-term obligations by $86.9 million.

Outlook, Risks, and Management Commentary

• Outlook: Management expects non-acquisition loan growth to be extremely limited in 2010 due to weak demand and customer deleveraging. The company anticipates continued pressure on liquidity management due to deposit outflows from acquired institutions.
• Asset Quality: Nonperforming assets totaled $417.2 million (2.90% of total loans plus OREO). However, $257.6 million of these are covered under FDIC loss share agreements, providing significant protection. Noncovered nonperforming assets were 1.37% of noncovered loans.
• Capital Adequacy: The company remains well-capitalized with a Tier 1 risk-based capital ratio of 13.83% and a total risk-based capital ratio of 16.07%, exceeding regulatory requirements.
• Risks: Key risks include the potential for downward adjustments to acquisition gains as fair values are finalized, instability in real estate markets (particularly in Georgia and Florida), and the impact of ongoing economic weakness on credit quality.

Investor Verification Checklist

• Acquisition Gain Finalization: Verify if the $137.6 million gain on acquisitions is subject to future downward adjustments as fair value estimates are refined over the next 12 months.
• Deposit Retention: Monitor the rate of deposit attrition from the acquired First Regional and Sun American Bank portfolios, as this impacts liquidity and funding costs.
• Credit Quality Trends: Track the performance of noncovered loans, specifically in the commercial real estate and construction sectors in Georgia and Florida, which are not protected by FDIC loss share agreements.
• FDIC Loss Share Utilization: Review future reports on the utilization of FDIC loss share agreements to ensure the projected receivables ($687.5 million) align with actual loss experiences.
• IronStone Bank (ISB) Performance: Assess the continued profitability of ISB, which recorded a net loss of $0.8 million in Q1 2010, compared to FCB's strong performance.