First Citizens BancShares, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc. is a financial holding company headquartered in Raleigh, North Carolina, operating primarily through First-Citizens Bank & Trust Company. The filing covers the unaudited three months ended March 31, 2012, with comparative results for the three months ended March 31, 2011. The bank operated 430 branches across multiple states and Washington, D.C. Its results remain materially affected by six FDIC-assisted acquisitions completed from 2009 through 2011, including related loss-share agreements, acquired-loan discount accretion and FDIC receivables.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total assets | $21.14 billion | $21.17 billion | Down $23.9 million from March 31, 2011 |
| Net interest income | $221.0 million | $204.0 million | Up 8.3% |
| Provision for loan and lease losses | $30.7 million | $44.4 million | Down 30.9% |
| Noninterest income | $46.9 million | $129.6 million | Down $82.6 million |
| Noninterest expense | $183.3 million | $190.0 million | Down 3.5% |
| Income before taxes | $53.8 million | $99.1 million | Down 45.7% |
| Net income | $35.5 million | $61.8 million | Down 42.5% |
| Earnings per share | $3.45 | $5.92 | Down $2.47 |
| Return on average assets | 0.68% | 1.18% | Down 50 basis points |
| Return on average equity | 7.63% | 14.30% | Down 667 basis points |
| Taxable-equivalent net yield | 4.80% | 4.36% | Up 44 basis points |
Amounts in the table are based on filing data; balance-sheet amounts are as of March 31, 2012 unless otherwise stated.
- Total loans and leases were $13.67 billion, including $2.18 billion covered by FDIC loss-share agreements and $11.49 billion not covered. Noncovered loans increased 0.9% year over year but declined 0.8% from December 31, 2011.
- Investment securities available for sale increased to $4.46 billion from $4.20 billion at March 31, 2011.
- Total deposits were $17.76 billion, broadly stable year over year and up 1.0% from December 31, 2011.
- Short-term borrowings were $678.0 million and long-term obligations were $649.8 million, down $151.3 million year over year for long-term obligations.
- Shareholders’ equity was $1.89 billion, compared with $1.79 billion at March 31, 2011. Book value per share was $184.14 at quarter-end.
- Cash provided by operating activities was $208.1 million. Investing activities used $448.8 million, primarily reflecting $1.68 billion of investment-security purchases partly offset by maturities. Financing activities provided $202.6 million. Cash and due from banks ended at $552.7 million.
- Immediately available balance-sheet liquidity was approximately $2.18 billion. The company also reported $946.4 million of additional secured FHLB borrowing capacity and $450.0 million of contingent unsecured borrowing access.
- Regulatory capital remained strong: Tier 1 risk-based capital was 15.74%, total risk-based capital was 17.62%, and the Tier 1 leverage ratio was 10.16%.
Material changes versus the prior comparable period
- Net income declined primarily because Q1 2011 included a $63.5 million United Western acquisition gain, producing an after-tax benefit of approximately $38.6 million. No acquisition gains were recorded in Q1 2012.
- Net interest income rose $17.0 million, supported by lower funding costs and $64.9 million of acquired-loan discount accretion versus $51.7 million in Q1 2011.
- Noninterest income fell because of the absent acquisition gain, a $26.8 million adjustment reducing the FDIC receivable compared with a $10.4 million reduction in Q1 2011, and lower cardholder and merchant-services income.
- Cardholder and merchant-services income fell 16.2% to $22.5 million, principally because of federal debit-card interchange-fee limits effective October 2011. Management expected this pressure to continue through 2012.
- The provision for loan and lease losses declined to $30.7 million, reflecting lower post-acquisition deterioration in covered loans. However, provision for noncovered loans increased to $21.1 million from $11.9 million.
- Total nonperforming assets were $549.1 million, or approximately 4.0% of total loans, leases and other real estate owned, compared with $490.5 million, or 3.4%, a year earlier. Of the Q1 2012 total, $434.6 million was covered by FDIC loss-share agreements.
- Noncovered net charge-offs increased to $15.6 million from $10.4 million, and the annualized noncovered net charge-off ratio increased to 0.54% from 0.37%.
- Noncovered consumer loans declined 23.7% year over year to $451.1 million, while noncovered commercial mortgage loans increased 7.7% to $5.13 billion.
Guidance, outlook, management commentary, risks and unusual items
- Management expected non-acquisition loan growth to remain limited for the next several quarters because of weak loan demand and customer deleveraging. Investment-security yields were expected to remain low until benchmark interest rates increased.
- Future net interest income may be volatile because acquired-loan discount accretion is affected by unpredictable prepayments, settlements and changes in expected cash flows. Q1 2012 accretion was unusually significant relative to recurring earnings.
- Management considered the allowance adequate at March 31, 2012, but stated that future additions could be required if economic conditions, collateral values or borrower performance deteriorate. The total allowance was $272.5 million, including $186.4 million for noncovered loans and $86.1 million for covered loans.
- Key credit risks include weak real-estate markets, junior-lien revolving mortgage loans, construction and land-development exposure, high unemployment, and a concentration of $3.19 billion of noncovered loans to medical, dental and related professionals.
- Total troubled debt restructurings were $318.3 million, including $165.9 million covered and $152.5 million noncovered. Performing TDRs totaled $236.7 million.
- The company has a material weakness in internal control over financial reporting related to accounting and reporting for acquired loans and the FDIC receivable. Disclosure controls were therefore not effective at March 31, 2012. Four of six FDIC-assisted transaction portfolios had not yet been converted to the automated acquired-loan accounting system.
- Management engaged an external firm to assist with the conversion, expected to begin in Q2 2012 and take up to twelve months, and implemented enhanced review controls, checklists and yield analyses.
- FCB received an SBA claim concerning potential entitlement to a portion of FDIC loss-share payments related to Temecula Valley Bank. Management disputed the claim and could not estimate the outcome or any potential loss.
- FCB identified potential compliance issues involving Treasury Regulations and information returns for customers with debt presumed forgiven for tax purposes. The scope, outcome and financial impact were not determinable.
- The Dodd-Frank Act will phase out $243.5 million of trust-preferred securities from Tier 1 capital beginning in 2013. Management stated that the company would remain well-capitalized under current guidelines even after full pro forma exclusion, but the change could affect capital flexibility and acquisition capacity.
- Ordinary litigation was not expected by management to have a material effect, although the filing states that ultimate liabilities cannot be determined. FDIC loss-share reimbursements remain subject to contractual terms, FDIC oversight, clawback provisions and potential disputes.
Most important facts for investors to verify
- Whether the material weakness in acquired-loan and FDIC-receivable accounting is remediated on schedule and whether additional errors or restatements emerge.
- The sustainability of Q1 net interest income excluding $64.9 million of acquired-loan discount accretion.
- Trends in noncovered delinquencies, charge-offs, nonperforming assets, TDRs and allowance coverage, particularly in commercial real estate, construction and junior-lien revolving mortgages.
- The timing and collectability of the $410.4 million FDIC receivable, including loss-share claims, clawbacks and the unresolved SBA claim.
- The effect of debit-card interchange limits, overdraft-fee changes, low interest rates and competitive pricing on recurring fee income and margins.
- The impact of trust-preferred capital phase-out, subordinated-debt capital deductions and future Basel III requirements on capital ratios and acquisition capacity.
- Potential costs or losses associated with the unresolved tax-information-return compliance matter and other legal proceedings.