Business Context and Reporting Period
Company: First Citizens BancShares, Inc. (BancShares)
Reporting Period: Fiscal year ended December 31, 2009
Structure: BancShares operates through two primary subsidiaries: First-Citizens Bank & Trust Company (FCB), the largest subsidiary with 87.4% of consolidated deposits, and IronStone Bank (ISB), a federally-chartered thrift. The company operates 431 branch locations across 18 states and Washington, D.C.
Key Event: In 2009, FCB acquired substantially all assets and liabilities of Temecula Valley Bank (TVB) and Venture Bank (VB) from the FDIC. These transactions included "loss share" agreements protecting FCB from losses on covered loans and real estate.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income | $116.3 million | $91.1 million |
| Earnings Per Share | $11.15 | $8.73 |
| Total Assets | $18.47 billion | $16.75 billion |
| Total Deposits | $15.34 billion | $13.71 billion |
| Net Interest Income | $510.5 million | $498.4 million |
| Noninterest Income | $409.6 million | $313.5 million |
| Noninterest Expense | $657.7 million | $606.4 million |
| Return on Average Assets | 0.66% | 0.56% |
| Return on Average Equity | 7.94% | 6.13% |
| Tier 1 Risk-Based Capital Ratio | 13.34% | 13.20% |
| Total Risk-Based Capital Ratio | 15.59% | 15.49% |
Material Changes vs. Prior Period
- Acquisition Gains: Net income was significantly boosted by a $104.4 million pre-tax gain on the acquisitions of TVB and VB. This gain resulted from the excess of the fair value of assets acquired over liabilities assumed.
- Provision for Loan Losses: Increased by 20.4% to $79.4 million, driven by higher net charge-offs ($64.7 million vs. $45.3 million in 2008) in commercial, unsecured revolving credit, and residential mortgage portfolios.
- Noninterest Expense: Rose 8.5% to $657.7 million. Key drivers included a $24.2 million increase in FDIC deposit insurance premiums and a $11.4 million increase in foreclosure-related expenses.
- Nonperforming Assets (NPA): Total NPAs surged to $374.3 million from $71.7 million. However, $220.2 million of these are covered by FDIC loss share agreements. NPAs not covered by loss share agreements increased to $154.0 million.
- Net Interest Income: Increased 2.4% to $510.5 million due to asset growth, despite a 15 basis point decline in the net yield on interest-earning assets to 3.25%.
Guidance, Outlook, and Risks
- Outlook: Management expects ISB's operating losses to continue into 2010 but anticipates a reduction in the overall loss due to improved results in established markets and lower credit costs. The company plans to continue acquiring failed bank assets via FDIC loss share agreements to grow the balance sheet without significant external capital needs.
- Liquidity: Liquidity is expected to be a constraint for funding acquisitions. The company plans to generate liquidity through new core deposits, brokered deposits, and Federal Home Loan Bank (FHLB) borrowings.
- Key Risks:
- Economic Conditions: Continued recession, high unemployment, and falling real estate values could increase credit losses.
- Real Estate Exposure: 73.5% of total loans are secured by real estate. Instability in residential and commercial real estate markets poses a significant risk.
- FDIC Assessments: The FDIC increased premiums and imposed special assessments in 2009. Further increases are possible to restore the Deposit Insurance Fund.
- Interest Rate Risk: Earnings are highly dependent on net interest income; compression of spreads due to low interest rates adversely affects profitability.
Investor Verification Checklist
- Acquisition Accounting: Verify the finalization of fair value adjustments for the TVB and VB acquisitions, as the $104.4 million gain is preliminary and subject to revision for one year.
- Covered vs. Non-Covered Assets: Distinguish between the $220.2 million in nonperforming assets covered by FDIC loss share agreements and the $154.0 million in non-covered nonperforming assets to assess true credit risk exposure.
- FDIC Expense Trajectory: Monitor future FDIC deposit insurance assessments, as the $29.3 million expense in 2009 was a significant increase from prior years and may rise further.
- ISB Performance: Track IronStone Bank's path to profitability, as it recorded a net loss of $21.3 million in 2009 and requires continued capital infusions from the parent company.
- Subsequent Acquisition: Note the January 2010 acquisition of First Regional Bank (Los Angeles), which was announced after the balance sheet date but prior to filing, and verify the final fair value accounting for this transaction.