First Citizens BancShares, Inc. 2012 Form 10-K Summary
Business context and reporting period
First Citizens BancShares, Inc. is a Delaware financial holding company operating primarily through First-Citizens Bank & Trust Company. At December 31, 2012, the bank operated 414 branches across 18 states and Washington, D.C., with primary deposit markets in North Carolina and Virginia. The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results, compared primarily with 2011.
The company provides retail and commercial banking, lending, deposits, wealth management, investment products, mortgage services, cardholder and merchant services, and processing services to other financial institutions.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net income | $134.3 million | $195.0 million | Down 31.1% |
| Earnings per share | $13.11 | $18.80 | Down 30.3% |
| Net interest income | $914.7 million | $871.0 million | Up 5.0% |
| Provision for loan and lease losses | $142.9 million | $232.3 million | Down 38.5% |
| Noninterest income | $189.3 million | $464.4 million | Down 59.2% |
| Noninterest expense | $766.9 million | $792.9 million | Down 3.3% |
| Return on average assets | 0.64% | 0.92% | Down 28 basis points |
| Return on average equity | 7.01% | 10.77% | Down 376 basis points |
| Taxable-equivalent net yield on interest-earning assets | 4.84% | 4.65% | Up 19 basis points |
Net interest income benefited from lower deposit and borrowing costs, despite lower average loan balances and reduced investment-security yields. Acquired-loan discount accretion contributed $304.0 million to interest income in 2012, compared with $319.4 million in 2011.
Period-end total assets were $21.28 billion, loans and leases were $13.39 billion, deposits were $18.09 billion, and shareholders’ equity was $1.86 billion. Investment securities increased 28.8% to $5.23 billion as deposits grew while loan demand remained weak.
Net cash provided by operating activities was $201.3 million. Investing activities used $244.3 million, primarily reflecting purchases of investment securities, while financing activities provided $92.0 million. Cash and due from banks increased to $639.7 million from $590.8 million.
Liquidity remained strong. Immediately available balance-sheet liquidity was approximately $2.82 billion at year-end, compared with $1.40 billion in 2011. The company had $475.0 million of contingent unsecured borrowing capacity and approximately $1.09 billion of additional secured borrowing capacity from the Federal Home Loan Bank.
Long-term obligations declined 35.3% to $444.9 million, primarily following the redemption of $150.0 million of trust preferred securities and maturities of Federal Home Loan Bank obligations. Short-term borrowings were $568.5 million.
Fourth-quarter results
| Metric | Fourth quarter 2012 | Fourth quarter 2011 |
|---|---|---|
| Net income | $21.7 million | $30.5 million |
| Earnings per share | $2.15 | $2.97 |
| Net interest income | $262.9 million | $242.4 million |
| Provision for loan and lease losses | $64.9 million | $89.3 million |
| Noninterest expense | $198.7 million | $211.6 million |
| Annualized return on average assets | 0.41% | 0.58% |
Fourth-quarter earnings declined primarily because of lower noninterest income from FDIC receivable adjustments. Net interest income increased 8.5%, and the provision for loan losses declined by $24.4 million.
Material changes versus the prior comparable period
- The 2011 results included $150.4 million of acquisition gains; no acquisition gains were recorded in 2012. The absence of these gains was the primary reason for the decline in reported earnings.
- Noninterest income also reflected a $101.6 million net charge from adjustments to the FDIC loss-share receivable in 2012, compared with a $19.3 million net charge in 2011.
- Cardholder and merchant-services income declined $15.4 million because of Dodd-Frank debit-card interchange-fee limits. The filing attributes $11.6 million of 2012 revenue reduction to those limits.
- Loans and leases declined 4.0% to $13.39 billion. Covered loans declined to $1.81 billion, or 13.5% of total loans, from $2.36 billion, or 16.9%, in 2011.
- Deposits increased 2.9% to $18.09 billion. Demand and money-market deposits grew, while time deposits declined 22.7% to $3.57 billion.
- Nonperforming assets declined to $310.4 million, or 2.29% of loans, leases and other real estate, from $553.8 million, or 3.92%. Noncovered nonperforming assets, however, increased to $133.4 million from $103.1 million.
- Net charge-offs declined to $94.0 million from $189.9 million, and the total allowance for loan and lease losses increased to $319.0 million from $270.1 million.
- Shareholders’ equity increased slightly to $1.86 billion despite $103.6 million of common-stock repurchases and $15.4 million of dividends paid.
Guidance, outlook, risks and unusual items
- Management expected non-acquisition loan growth to improve only slightly in 2013 because of weak loan demand and intense competitive pricing.
- Management expected acquired-loan accretion income to decline as acquired loan balances run off. The amount and timing of accretion remain unpredictable and may create earnings volatility.
- Processing-service revenue is expected to decline substantially in 2013 after the sale of nearly all processing relationships to another servicer. Revenue from affected banks totaled $19.2 million in 2012; the largest client bank is expected to remain.
- The company began a core technology modernization program in 2013, with phased implementation through 2016 and estimated total costs of approximately $100.0 million.
- Management expected pension costs to increase in 2013 because of lower discount-rate assumptions. The pension plan was underfunded by $117.9 million at year-end, and no contribution was anticipated for 2013.
- The Dodd-Frank Act will phase out the inclusion of $93.5 million of trust preferred securities from tier 1 capital beginning in 2013. Full exclusion is expected in 2015. Pro forma removal of the full amount would have resulted in tier 1 leverage, tier 1 risk-based, and total risk-based capital ratios of 8.78%, 13.59%, and 15.27%, respectively; management stated the company would remain well-capitalized.
- Basel III implementation remained subject to proposed rules and uncertain timing. The company reported a tier 1 common-equity ratio excluding trust preferred securities of 13.59%, compared with the proposed fully phased-in standard of 7.00%.
- FDIC loss-share agreements provided protection for covered assets, but reimbursement claims are subject to FDIC review, contractual limitations, compliance requirements and differing interpretations. The company estimated $100.2 million of future FDIC cash reimbursements and $101.6 million of potential clawback payments.
- FCB disputed claims by the Small Business Administration relating to certain SBA-guaranteed loans acquired from Temecula Valley Bank. The filing states that the amount and outcome of any loss could not be determined.
- The loan portfolio remains concentrated in real-estate-secured lending, junior-lien revolving mortgages and medical-related borrowers. Declining real-estate values, unemployment, borrower defaults and collateral shortfalls could increase future losses.
- In the first quarter of 2013, the company agreed to sell certain client-bank service agreements and expected an unaudited pretax gain of approximately $5.0 million.
- The 2011 material weakness in accounting and reporting for acquired loans and the FDIC receivable was remediated during the fourth quarter of 2012. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2012.
Most important facts for an investor to verify
- Whether core earnings can replace the acquisition gains and acquired-loan accretion that supported prior results.
- The sustainability of net interest income in a prolonged low-rate environment and as acquired-loan balances decline.
- The effect of declining processing-service revenue and the $100 million technology modernization program on future expenses and earnings.
- Trends in noncovered nonperforming assets, junior-lien mortgage performance, real-estate collateral values, charge-offs and allowance adequacy.
- The timing and amount of FDIC reimbursements, clawback obligations and any resolution of the SBA claims.
- The impact of trust-preferred-security phase-out, subordinated-debt capital deductions and final Basel III rules on capital ratios and growth capacity.
- The company’s ability to maintain dividends, given reliance on dividends from FCB and regulatory restrictions on bank capital distributions.
- The implications of related-party ownership, the December 2012 purchase of 593,954 Class B shares from a director and related interests, and related-party processing arrangements.