Business Context and Reporting Period
Company: First Citizens BancShares, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2009
Overview: BancShares operates through two primary subsidiaries: First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB). The period was defined by the acquisition of two FDIC-assisted banks: Temecula Valley Bank (TVB) in July 2009 and Venture Bank (VB) in September 2009. These transactions significantly impacted asset growth, noninterest income, and nonperforming asset levels.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net Income | $82.5 million | $19.6 million | $97.3 million | $78.2 million |
| Diluted EPS | $7.90 | $1.87 | $9.33 | $7.49 |
| Total Assets | $18.51 billion | $16.67 billion | $18.51 billion | $16.67 billion |
| Total Deposits | $15.35 billion | $13.37 billion | $15.35 billion | $13.37 billion |
| Net Interest Income | $135.3 million | $127.3 million | $368.1 million | $374.3 million |
| Noninterest Income | $182.6 million | $77.5 million | $327.3 million | $241.3 million |
| Noninterest Expense | $166.3 million | $155.7 million | $483.5 million | $451.1 million |
| Provision for Credit Losses | $18.3 million | $20.0 million | $57.7 million | $43.3 million |
| Return on Average Assets (Annualized) | 1.83% | 0.47% | 0.75% | 0.64% |
| Return on Average Equity (Annualized) | 22.45% | 5.20% | 9.01% | 7.05% |
Material Changes vs. Prior Period
- Acquisition Gains: The primary driver of increased profitability was a $105.0 million gain on acquisitions (TVB and VB) recorded in noninterest income. This resulted in a $63.9 million after-tax impact.
- Asset Growth: Total assets increased by approximately $1.85 billion year-over-year, driven largely by the acquisition of $1.92 billion in assets from TVB and VB.
- Net Interest Income: Q3 net interest income increased $8.0 million year-over-year due to asset growth, though the nine-month period saw a $6.1 million decline due to a contraction in net yield caused by lower market interest rates.
- Expense Increases: Noninterest expenses rose significantly, primarily due to a $21.2 million increase in FDIC deposit insurance costs (including special assessments) and higher foreclosure-related expenses.
- Credit Quality: Nonperforming assets not covered by loss sharing agreements increased to $106.3 million (0.92% of non-covered loans) from $62.2 million in the prior year. However, $205.1 million of nonperforming assets are covered by FDIC loss sharing agreements.
Guidance, Outlook, and Risks
- Outlook: Management expects weak noninterest income trends to continue into the fourth quarter of 2009. Further reductions in acquired deposit balances are expected in Q4 2009.
- Capital Adequacy: The company remains "well-capitalized" under regulatory standards. Tier 1 risk-based capital ratio was 13.33% and total risk-based capital ratio was 15.58% as of September 30, 2009. The company did not apply for TARP funding.
- Key Risks:
- Real Estate Market Instability: Significant exposure to residential construction loans in Atlanta, Georgia, and Southwest Florida, where falling property values and excess capacity have led to higher charge-offs.
- FDIC Assessments: Continued risk of higher deposit insurance premiums or special assessments to restore the Deposit Insurance Fund.
- Goodwill Impairment: While no impairment was recorded in Q3 2009, management notes that if the stock price deteriorates below book value, future impairment charges could impact earnings.
- Legal Contingencies: A $5.3 million legal settlement was paid in Q3 2009 regarding a West Virginia lawsuit; management believes other pending litigation will not have a material effect.
Investor Verification Checklist
- Acquisition Accounting: Verify the finalization of fair value adjustments for TVB and VB, as the $105 million gain is preliminary and subject to revision for up to one year.
- FDIC Loss Sharing: Monitor the utilization of FDIC loss sharing agreements on the $1.26 billion of covered loans to assess future reimbursement potential.
- Regional Concentration: Review specific charge-off trends in the Atlanta and Southwest Florida residential construction portfolios, which are identified as high-risk areas.
- Deposit Attrition: Track the runoff of volatile time deposits acquired from TVB and VB, which are expected to decline further in Q4 2009.
- ISB Performance: Evaluate the continued losses of IronStone Bank (ISB), which reported a net loss of $17.7 million for the nine months ended September 30, 2009, requiring capital infusions from the parent company.