First Citizens BancShares, Inc. — 2011 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited interim results for the three months ended March 31, 2011, compared primarily with the three months ended March 31, 2010. BancShares is a financial holding company headquartered in Raleigh, North Carolina, operating through First-Citizens Bank & Trust Company across 17 states and the District of Columbia. IronStone Bank was merged into FCB on January 7, 2011. The company completed the FDIC-assisted acquisition of United Western Bank on January 21, 2011.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net interest income | $204.0 million | $151.0 million |
| Provision for loan and lease losses | $44.4 million | $16.9 million |
| Noninterest income | $131.1 million | $211.9 million |
| Noninterest expense | $190.0 million | $173.0 million |
| Income before taxes | $100.6 million | $173.1 million |
| Net income | $62.7 million | $106.6 million |
| Earnings per share | $6.01 | $10.22 |
| Return on average assets, annualized | 1.19% | 2.12% |
| Return on average equity, annualized | 14.51% | 26.62% |
| Taxable-equivalent net yield on interest-earning assets | 4.36% | 3.52% |
Dollar amounts in the table are as reported; financial statement amounts are generally in thousands. Interest income was $245.2 million, while interest expense declined to $41.2 million from $49.7 million. Net interest income benefited from $51.7 million of acquired-loan discount accretion, including $15.4 million related to unexpected loan payments.
- Total assets were $21.17 billion at March 31, 2011, versus $20.81 billion at December 31, 2010 and $21.22 billion at March 31, 2010.
- Total loans and leases were $14.05 billion, including $2.66 billion covered by FDIC loss-share agreements and $11.39 billion not covered.
- Total deposits were $17.81 billion. Short-term borrowings were $666.4 million and long-term obligations were $801.1 million.
- Shareholders’ equity was $1.79 billion, compared with $1.73 billion at December 31, 2010 and $1.67 billion at March 31, 2010.
- Cash provided by operating activities was $337.4 million. Investing activities provided $1.47 billion, principally from acquisition proceeds and investment-security maturities and sales. Financing activities used $1.87 billion, largely because of deposit reductions, borrowings repayments and a $216.5 million repayment of long-term obligations.
- Immediately available balance-sheet liquidity was approximately $1.76 billion at March 31, 2011, down from $2.73 billion at December 31, 2010 and $2.36 billion at March 31, 2010.
- Capital ratios remained strong: Tier 1 risk-based capital was 15.24%, total risk-based capital was 17.32%, and Tier 1 leverage capital was 9.35%. Management stated that BancShares and FCB remained well-capitalized.
Material changes versus the prior comparable period
- Net income fell $43.9 million, or approximately 41%, primarily because Q1 2010 included $136.0 million of acquisition gains, compared with $65.5 million in Q1 2011. After-tax acquisition gains declined by approximately $42.8 million year over year.
- Net interest income increased $53.0 million, or 35.1%, due to balance-sheet growth, lower funding costs, acquired-asset yields and discount accretion.
- The provision for loan and lease losses increased $27.5 million. Covered-loan provision expense increased substantially as post-acquisition deterioration rose, partly offset by lower provision expense on noncovered loans.
- Noninterest income declined $80.9 million, reflecting lower acquisition gains and a $10.4 million net charge from adjustments to the FDIC receivable, versus $2.6 million of net income from such adjustments in Q1 2010.
- Noninterest expense increased $17.1 million, or 9.9%, reflecting acquired-branch operating costs, higher FDIC insurance, foreclosure-related expenses, staffing, technology and processing costs.
- Nonperforming assets increased to $612.5 million, or 4.3% of total loans, leases and other real estate owned, from $417.2 million, or 2.9%, at March 31, 2010. Approximately $405.7 million was covered by FDIC loss-share agreements.
- The allowance for loan and lease losses increased to $232.6 million from $176.3 million a year earlier. The allowance on covered loans rose to $54.6 million from $6.8 million, while the noncovered-loan allowance rose to $178.0 million from $169.5 million.
Guidance, outlook, commentary, risks and unusual items
- Management expects non-acquisition loan growth to remain extremely limited for the next several quarters because of weak demand and customer deleveraging. No formal earnings guidance is provided.
- Management cautioned that loan-discount accretion is unpredictable and may cause future volatility in interest income and net interest income. The Q1 2011 benefit from unscheduled acquired-loan payments may not recur.
- United Western generated a $65.5 million preliminary acquisition gain and $542.1 million of cash received from the FDIC. The acquisition gain remained subject to fair-value refinement for one year after closing.
- United Western loss-share arrangements provide substantial FDIC protection, but reimbursement depends on compliance, FDIC review and the accuracy of loss estimates. The filing estimated a future true-up payment of approximately $10.5 million in 2021; the filing text contains a stated 2021 true-up measurement date.
- Approximately $1.0 billion of institutional deposits assumed from United Western subsequently declined after BancShares rejected unprofitable agreements, materially reducing available liquidity.
- Management identified risks from weak economic and real-estate conditions, borrower defaults, concentrations in real-estate and medical-related lending, FDIC reimbursement timing, interest-rate movements, regulatory changes, acquisition integration, litigation, technology and third-party vendors.
- A 200-basis-point increase in interest rates was modeled to increase net interest income by approximately 6.7% to 14.5%, although deposit migration could reduce the benefit.
- The Dodd-Frank Act is expected to phase out $265.0 million of trust-preferred securities from Tier 1 capital beginning in 2013 and eliminate their qualification by 2015. Management stated that the company would remain well-capitalized under the filing’s pro forma calculations.
- Management reported that pending and ordinary-course litigation was not expected to have a material effect, although the impact of litigation challenging the United Western seizure on FCB and acquired assets was unclear.
Important facts for investors to verify
- Whether the elevated Q1 net interest margin and $51.7 million of acquired-loan discount accretion can be sustained without further unexpected loan repayments.
- The performance and valuation of the $2.66 billion covered-loan portfolio, the $624.3 million FDIC receivable and the adequacy and timing of FDIC reimbursements.
- Trends in nonperforming assets, charge-offs, real-estate-owned assets and the $232.6 million allowance for loan and lease losses.
- The effect of the approximately $1.0 billion institutional-deposit runoff on liquidity, funding costs and future loan growth.
- The preliminary United Western acquisition gain, future fair-value adjustments and the estimated 2021 loss-share true-up.
- The impact of Dodd-Frank implementation, reduced debit-card interchange income, deposit-insurance costs and the phase-out of trust-preferred capital.
- Whether the January 2011 IronStone merger and United Western integration deliver expected operating efficiencies without additional deposit attrition or expenses.