First Citizens BancShares, Inc. — Q3 2010 Form 10-Q Summary
Business context and reporting period
Unaudited consolidated results for the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. BancShares operates through First-Citizens Bank & Trust Company and IronStone Bank, providing commercial and consumer banking, deposits, treasury services, cardholder and merchant services, wealth management, processing, mortgage and insurance services.
Growth in 2010 was driven substantially by FDIC-assisted acquisitions of First Regional Bank and Sun American Bank, following the 2009 acquisitions of Venture Bank and Temecula Valley Bank. As of September 30, 2010, the company had total assets of $21.05 billion and 10,434,453 shares outstanding.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net interest income | $229.9 million | $135.3 million | $545.8 million | $368.1 million |
| Provision for loan and lease losses | $59.9 million | $18.3 million | $108.6 million | $57.7 million |
| Noninterest income | $50.0 million | $180.9 million | $354.5 million | $322.0 million |
| Noninterest expense | $176.9 million | $164.5 million | $531.6 million | $478.1 million |
| Net income | $27.7 million | $82.5 million | $163.0 million | $97.3 million |
| Net income per share | $2.66 | $7.90 | $15.62 | $9.33 |
| Return on average assets | 0.52% | 1.83% | 1.05% | 0.75% |
| Return on average equity | 6.46% | 22.45% | 13.17% | 9.01% |
| Taxable-equivalent net yield on interest-earning assets | 4.93% | 3.41% | 4.02% | 3.17% |
Q3 2010 net interest income benefited from balance-sheet growth, lower deposit costs and $74.9 million of discount accretion from large unscheduled payments on acquired loans. Management cautioned that this accretion is unpredictable and may make future yields and earnings volatile.
Nine-month cash provided by operating activities was $220.6 million, compared with $138.6 million in 2009. Investing activities used $483.0 million, principally reflecting purchases of investment securities and changes in overnight investments. Financing activities provided $275.9 million. Cash and due from banks totaled $493.8 million at September 30, 2010.
Total assets increased from $18.47 billion at December 31, 2009 and $18.51 billion at September 30, 2009. Loans and leases totaled $13.77 billion, including $2.22 billion covered by FDIC loss-share agreements and $11.55 billion not covered. Total deposits were $17.74 billion, up approximately 15.7% from December 31, 2009. Shareholders’ equity was $1.72 billion.
The balance sheet reported short-term borrowings of $652.7 million and long-term obligations of $819.1 million at September 30, 2010. The MD&A separately cites $906.1 million of long-term obligations; the filing text does not clearly reconcile this difference.
Management reported approximately $2.68 billion of immediately available balance-sheet liquidity, access to $1.50 billion of additional collateralized borrowings and contingent access to $500.0 million of unsecured borrowings. Capital ratios remained well above regulatory minimums: Tier 1 risk-based capital was 14.38%, total risk-based capital was 16.45% and Tier 1 leverage capital was 9.04%.
Material changes versus prior comparable periods
- Q3 net income declined $54.8 million, or approximately 66%, primarily because Q3 2009 included $104.4 million of acquisition gains, while Q3 2010 had no acquisition gain and included a $28.5 million charge related to FDIC receivable adjustments.
- Nine-month net income increased $65.6 million, or approximately 67%, primarily due to $136.0 million of 2010 acquisition gains versus $104.4 million in 2009 and substantially higher net interest income.
- Net interest income increased 70.0% in Q3 and 48.3% year to date, while interest expense declined 10.5% in Q3 and 15.2% year to date.
- The loan-loss provision increased 227.7% in Q3 and 88.1% year to date. Approximately $43.1 million of the Q3 increase related to post-acquisition deterioration in acquired loans covered by FDIC loss-share agreements.
- Nonperforming assets rose to $615.6 million, or 4.42% of loans and leases plus other real estate owned, from $374.3 million, or 2.89%, at December 31, 2009. Approximately $429.9 million was covered by FDIC loss-share agreements.
- The allowance for loan and lease losses increased to $218.0 million from $172.3 million at December 31, 2009. Net charge-offs were $63.5 million for the first nine months, compared with $50.0 million in 2009.
- Available-for-sale investment securities increased to $3.79 billion from $2.93 billion at December 31, 2009, while investment securities interest income declined because of lower market yields.
- Effective January 1, 2010, accounting changes eliminated the QSPE concept and consolidated previously securitized home-equity loans, increasing loans by $97.3 million, long-term obligations by $86.9 million and beginning retained earnings by $4.9 million.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expects non-acquisition loan growth to remain extremely limited for the next several quarters because of weak demand and customer deleveraging.
- Management expects the proposed merger of FCB and ISB, subject to regulatory approval, to occur in early 2011. The merger is expected to produce minor expense reductions and improve liquidity management, but is not expected to materially affect consolidated financial position, results or liquidity.
- FDIC loss-share agreements cover a substantial portion of credit losses on acquired assets. However, reimbursement filings totaling $54.5 million were delayed because of filing inaccuracies, and the FDIC indicated that future reimbursements may also be deferred pending remediation of filing processes.
- The First Regional loss-share agreement currently implies a potential FDIC true-up payment of approximately $67.2 million in 2020; no SAB true-up payment is currently projected. Both estimates may change materially.
- Acquisition gains remain preliminary and subject to revision for one year after each acquisition. The company recognized $136.0 million of acquisition gains in the first nine months of 2010.
- Management identified continuing risks from weak economic conditions, unemployment, declining real estate values, borrower defaults, concentrated real estate and medical-related lending, liquidity and deposit-retention pressures, regulatory changes, interest-rate movements and FDIC reimbursement compliance.
- The Dodd-Frank Act will phase out $265 million of trust-preferred securities from Tier 1 capital beginning in 2013. Management stated that the company and its banks would remain well-capitalized on a pro forma basis.
- Legal proceedings arise in the ordinary course of business; management does not expect them to have a material effect on the consolidated financial statements.
Most important facts for investors to verify
- Whether loan discount accretion and future acquired-loan cash flows are sustainable, given the $74.9 million of Q3/year-to-date accretion and management’s volatility warning.
- The trend and ultimate recoverability of the $651.8 million FDIC loss-share receivable, including the delayed $54.5 million reimbursement filings.
- Changes in nonperforming assets, especially the $185.7 million not covered by loss-share agreements and exposures in Georgia, Florida and other real estate markets.
- The reconciliation between the $819.1 million long-term obligations shown on the balance sheet and the $906.1 million cited in MD&A.
- Regulatory approval, timing and integration risks associated with the proposed FCB-ISB merger.
- The effect of Dodd-Frank’s phase-out of trust-preferred capital and any future changes to FDIC premiums, capital rules and consumer-fee regulations.