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, 2008
Overview: BancShares operates two wholly-owned banking subsidiaries: First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB). In October 2008, the company announced plans to merge ISB into FCB in early 2009. The company emphasizes asset quality, liquidity, and capital conservation over short-term profitability, particularly amidst the 2008 economic instability.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Net Income | $19.6 million | $22.6 million | $78.2 million | $82.5 million |
| Net Income Per Share | $1.87 | $2.17 | $7.49 | $7.90 |
| Total Assets | $16.67 billion | $16.31 billion | $16.67 billion | $16.31 billion |
| Loans and Leases | $11.63 billion | $10.76 billion | $11.63 billion | $10.76 billion |
| Total Deposits | $13.37 billion | $12.98 billion | $13.37 billion | $12.98 billion |
| Net Interest Income | $127.6 million | $120.9 million | $375.6 million | $358.7 million |
| Provision for Credit Losses | $20.2 million | $17.3 million | $43.7 million | $21.8 million |
| Return on Average Assets (Annualized) | 0.48% | 0.56% | 0.64% | 0.70% |
| Return on Average Equity (Annualized) | 5.20% | 6.48% | 7.05% | 8.14% |
| Allowance for Loan Losses | $152.9 million | $133.6 million | $152.9 million | $133.6 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 13.6% in Q3 2008 and 5.2% for the nine-month period compared to 2007. This was driven primarily by a higher provision for credit losses and increased noninterest expenses, partially offset by growth in net interest income.
- Interest Rate Environment: Falling market interest rates significantly reduced yields on interest-earning assets. The taxable-equivalent yield on loans dropped 118 basis points in Q3 2008. Conversely, interest expense on liabilities decreased substantially (35.5% in Q3) due to lower rates paid on deposits and borrowings.
- Asset Growth: Loans and leases grew 8.0% year-over-year to $11.63 billion, driven by commercial mortgage, revolving mortgage, and commercial/industrial loans. Investment securities available for sale decreased to $2.97 billion as proceeds were used to fund loan growth.
- Credit Quality Deterioration: Nonperforming assets rose to $62.2 million (0.53% of loans) from $23.4 million in 2007. This increase is attributed to residential construction loans in Atlanta and Southwest Florida. Net charge-offs for the nine months ended Sept 30, 2008, were $27.3 million compared to $19.6 million in 2007.
- Segment Performance: FCB reported net income of $102.6 million for the nine months, while ISB reported a net loss of $19.5 million due to expansion costs and higher credit provisions.
Guidance, Outlook, and Risks
- Outlook: Management expects the net yield on interest-earning assets to decline in Q4 2008 and early 2009 due to reduced market rates and deposit pricing competition. Wealth management income is also expected to be negatively impacted by equity market declines.
- Strategic Moves: The company plans to merge ISB into FCB in 2009. ISB will remain dependent on BancShares for capital infusions until the merger is complete.
- Liquidity: While the company maintains strong liquidity, systemic struggles in the financial sector have constrained deposit growth at reasonable rates. The company has increased borrowings from the Federal Home Loan Bank (FHLB) to fund loan demand.
- Regulatory Actions: The company will participate in the FDIC's Temporary Liquidity Guarantee Program (TLGP) for enhanced deposit insurance but will not participate in the TARP Capital Purchase Program or the TLGP debt guarantee, citing adequate capital levels.
- Legal Contingencies: BancShares is a defendant in a patent infringement lawsuit filed by DataTreasury Corporation regarding check processing. A contingency accrual was recorded in Q2 2008. Additionally, a $1.4 million contingent liability was recorded in Q3 2008 related to Visa litigation settlements.
- Exposure: The company states it has limited sub-prime exposure ($3.8 million), no exposure to Fannie Mae or Freddie Mac (having written off Fannie Mae exposure in Q3), and no known losses from Lehman Brothers or AIG.
Investor Verification Checklist
- Credit Provision Adequacy: Verify if the $43.7 million provision for credit losses (up 100% YoY) is sufficient given the rise in nonperforming assets to $62.2 million, specifically in the residential construction sector.
- ISB Capital Requirements: Monitor the capital infusion needs of IronStone Bank (ISB) prior to its 2009 merger, as it continues to operate at a loss and requires parent company support.
- Net Interest Margin Compression: Assess the impact of the declining interest rate environment on future net interest income, as management explicitly forecasts yield declines.
- Legal Exposure: Track the status of the DataTreasury patent litigation and the potential for further costs or indemnification claims against vendors.
- Deposit Insurance Costs: Evaluate the impact of increased FDIC insurance premiums resulting from the temporary increase in deposit insurance limits and the TLGP participation.