Business Context and Reporting Period
Company: First Citizens BancShares, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Overview: BancShares operates through two primary subsidiaries: First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB). The company focuses on commercial and consumer banking across multiple states. The reporting period reflects the impact of a weak economic environment, characterized by falling interest rates, increased credit costs, and higher regulatory assessments.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|---|
| Net Income | $6.2 million | $14.9 million | $58.6 million |
| Net Income Per Share | $0.59 | $1.42 | $5.62 |
| Total Assets | $17.32 billion | $17.32 billion | $16.42 billion |
| Total Deposits | $14.36 billion | $14.36 billion | $13.08 billion |
| Net Interest Income | $117.0 million | $232.8 million | $246.9 million |
| Provision for Credit Losses | $20.8 million | $39.5 million | $23.3 million |
| Noninterest Expense | $160.9 million | $317.2 million | $295.3 million |
| Return on Average Assets (Annualized) | 0.14% | 0.18% | 0.72% |
| Return on Average Equity (Annualized) | 1.73% | 2.09% | 8.00% |
| Allowance for Loan Losses | $162.3 million (1.41% of loans) | $162.3 million (1.41% of loans) | $144.5 million (1.29% of loans) |
| Nonperforming Assets | $102.4 million | $102.4 million | $47.3 million |
Material Changes vs. Prior Period
- Earnings Decline: Net income for the six months ended June 30, 2009, decreased by $43.7 million (74.6%) compared to the same period in 2008. This was driven by a $16.2 million increase in the provision for credit losses and a $21.9 million increase in noninterest expense, partially offset by lower interest income.
- Interest Rate Environment: The net yield on interest-earning assets declined 37 basis points year-over-year to 3.05% due to the low interest rate environment. Interest income decreased $62.4 million, while interest expense decreased $48.3 million.
- Credit Quality Deterioration: Nonperforming assets more than doubled to $102.4 million from $47.3 million a year prior. Net charge-offs for the six-month period rose to $34.8 million from $15.7 million in 2008, primarily due to residential construction loans in Atlanta and Southwest Florida.
- FDIC Assessments: Noninterest expense included a significant increase in FDIC deposit insurance costs ($16.6 million increase year-over-date), including a $7.8 million special assessment.
- Deposit Growth: Total deposits increased by $1.28 billion (9.8%) year-over-year, driven by customer demand for safety and higher savings rates.
Outlook, Risks, and Unusual Items
- Acquisition of Temecula Valley Bank (TVB): On July 17, 2009, FCB entered into an agreement to acquire substantially all assets and assume liabilities of TVB. The acquisition includes $1.1 billion in loans and $1.3 billion in deposits. Prospective losses on acquired assets are subject to a loss-share agreement with the FDIC. The transaction is expected to increase risk-weighted assets by approximately $850 million.
- Goodwill Impairment Testing: Management tested goodwill for impairment due to the economic slowdown and stock price trading below book value. While no impairment was recorded for the quarter, the company noted that if the stock price remains below book value, future impairment charges could occur.
- Legal Contingency: FCB is appealing a $4.1 million jury verdict against it in a West Virginia lawsuit. Execution of the judgment is stayed pending the appeal.
- Capital Adequacy: The company remains well-capitalized with a Tier 1 risk-based capital ratio of 13.30%. Management declined to participate in the TARP Capital Purchase Program, citing adequate capital levels.
- Segment Performance: IronStone Bank (ISB) reported a net loss of $13.8 million for the six-month period, attributed to high provisions for loan losses and expansion costs. FCB reported net income of $34.6 million.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of nonperforming assets and net charge-offs, specifically in the residential construction and revolving mortgage portfolios in Atlanta and Florida.
- TVB Acquisition Impact: Monitor the fair value adjustments and integration costs associated with the Temecula Valley Bank acquisition in the upcoming quarter.
- FDIC Costs: Assess the potential for further special assessments or premium increases from the FDIC given the ongoing banking sector instability.
- Goodwill Valuation: Track the market price of common stock relative to book value to evaluate the risk of future goodwill impairment charges.
- Legal Exposure: Follow the status of the West Virginia litigation appeal and potential liability exposure.