01—Abstract
Summary
Summary of the 10-K filed March 1, 2011. Cited figures are marked; the original filing is the authoritative source.
First Citizens BancShares (FCNCA) reported 2010 net income of $193.0 milliona, or $18.50 per share, up from $116.3 million ($11.15 per share) in 2009, with return on average assets rising to 0.93% from 0.66% and return on average equity to 11.54% from 7.94%.
The improvement was driven largely by the FDIC-assisted acquisitions of First Regional Bank and Sun American Bank in 2010, which generated $136.0 millionb in bargain purchase gains and lifted net interest income 51.7% to $774.2 million. The taxable-equivalent net yield on earning assets rose to 4.22% partly because of $145.4 million of discount accretion from unscheduled loan payoffs, which management warns is unpredictable and will create earnings volatility. Underlying credit costs remained elevated.
The provision for loan and lease losses rose to $143.5 millionc from $79.4 million, nonperforming assets reached $560.1 million (4.10% of loans, leases and OREO), and noncovered nonperforming assets rose to 1.71% from 1.32%. Noninterest expense climbed 12.6% to $733.4 million, with $61.9 million tied to the new FDIC-assisted branches. Management also flagged that the Dodd-Frank Act will significantly reduce debit card interchange income in 2011 and will phase out $265 million of trust preferred securities from Tier 1 capital beginning in 2013.
Capital remains strong, with a Tier 1 risk-based ratio of 14.86% and a leverage ratio of 9.18%, both well above well-capitalized thresholds. Subsequent events include the January 2011 FDIC-assisted acquisition of United Western Bank in Colorado (about $993 milliond of loans and $1.6 billion of deposits assumed) and the January 2011 merger of IronStone Bank into First-Citizens Bank & Trust. Investors should weigh the one-time nature of acquisition gains and loss-share income against the rising credit costs and the regulatory headwinds ahead.
02—Key points
Key Highlights
- Net income rose 65.9% to $193.0 million ($18.50 per share), with ROA of 0.93% and ROE of 11.54%, compared with 0.66% and 7.94% in 2009.
- Two 2010 FDIC-assisted acquisitions (First Regional and Sun American) produced $136.0 million in bargain purchase gains, which are non-recurring and subject to one-year fair value adjustments.
- Net interest income increased 51.7% to $774.2 million, helped by $145.4 million of discount accretion from large unscheduled loan payoffs that management says will likely make future yields volatile.
- Credit costs increased: the provision for loan losses rose to $143.5 million and nonperforming assets reached $560.1 million (4.10% of loans, leases and OREO), including $363.5 million covered by FDIC loss share agreements.
- Noninterest expense rose 12.6% to $733.4 million, including $61.9 million of costs from the new FDIC-assisted branches, while the Dodd-Frank Act is expected to materially reduce debit interchange income in 2011.
- Capital ratios are strong, with a Tier 1 risk-based ratio of 14.86%, a total risk-based ratio of 16.95% and a leverage ratio of 9.18%, though $265 million of trust preferred securities will be phased out of Tier 1 beginning in 2013.
- Subsequent to year-end, the company acquired United Western Bank in Colorado in an FDIC-assisted deal and merged IronStone Bank into First-Citizens Bank & Trust; the Holding family controls 46.2% of voting power.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 1, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Interest Expense | $195.13M$227.64M | −14.3% |
| Net Income | $193.04M$116.33M | +65.9% |
| Shares Outstanding (Basic) | 10.43M10.43M | 0.0% |
05—Questions
Frequently Asked Questions
How much of 2010 earnings came from one-time acquisition gains rather than recurring operations?
Bargain purchase gains of $136.0 million from the First Regional and Sun American acquisitions contributed heavily to 2010 results. Pre-tax income was $303.6 million, so these gains were a large share of the total, while the company also recorded $46.8 million of net charges to the FDIC receivable that partly offset them. Investors should treat the gains as non-recurring, and the figures are subject to adjustment for one year after each acquisition date.
Is the 2010 jump in net interest margin sustainable?
Management says it is not reliably sustainable. The net yield on interest-earning assets rose to 4.22% from 3.25%, largely because of $145.4 million of accretion from unscheduled loan payoffs. Management states that such payments are unpredictable, so the yield is likely to be volatile in future periods. Underlying yields excluding this accretion were materially lower.
How exposed is the company to credit deterioration in acquired loans?
Covered loans totaled $2.01 billion, and FDIC loss share agreements generally cover 80% of losses up to stated thresholds and 95% above them, which limits exposure. However, nonperforming covered assets reached $363.5 million (17.1% of covered assets), and the company faces a potential true-up payment of about $67.2 million to the FDIC on the First Regional agreements in 2020. Loss share reimbursements are also subject to FDIC review and possible delay or disallowance.
What are the main regulatory and capital risks for shareholders over the next few years?
The Dodd-Frank Act will phase out the treatment of $265 million of trust preferred securities as Tier 1 capital beginning in 2013, with full elimination by 2015. On a pro forma basis with full elimination, the Tier 1 leverage ratio would be 7.93% and the Tier 1 risk-based ratio 12.83%, still well-capitalized. The act also limits debit interchange fees, which management expects to materially reduce noninterest income in 2011.
How concentrated is ownership, and how liquid is the stock?
The Holding family controls about 46.2% of voting power through Class A and Class B shares, which gives it substantial influence over corporate decisions. The Class A stock trades on NASDAQ under FCNCA, but average daily volume is only about 12,000 shares, which the company notes can make the stock volatile and hard to trade. Class B shares trade on the OTC market with very limited volume.
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