01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
First Citizens BancShares (FCNCA) reported 2012 net income of $134.3 milliona, or $13.11 per share, down 31.1% from $195.0 million ($18.80 per share) in 2011.
The decline was driven mainly by the absence of acquisition gains: 2011 included $150.4 millionb of gains from FDIC-assisted transactions, which contributed roughly $91.5 million after tax. Return on average assets fell to 0.64% from 0.92%, and return on average equity to 7.01% from 10.77%. Core trends were mixed: net interest income rose 5.0% to $914.7 million, helped by lower deposit costs and acquired-loan accretion of $304.0 million, while noninterest income fell 59.2% to $189.3 million, largely because of a $101.6 million charge to the FDIC indemnification receivable.
Noninterest expense fell 3.3% to $766.9 millionc. Credit costs improved. The provision for loan and lease losses dropped to $142.9 million from $232.3 million, and net charge-offs declined to $94.0 million from $189.9 million.
Nonperforming assets fell to $310.4 milliond (2.3% of loans, leases and OREO) from $553.8 million, although nonperforming assets not covered by FDIC loss share agreements rose to $133.4 million. Capital remains strong, with a Tier 1 risk-based ratio of 14.27% and a leverage ratio of 9.22%. The bank is well-capitalized, but Dodd-Frank will phase out $93.5 million of trust preferred securities from Tier 1 capital starting in 2013, and Basel III is a further headwind.
Management also disclosed a $100 million core technology modernization project running from 2013 through 2016, and an early-2013 agreement to sell most of its processing services business to a vendor. For investors, the key questions are whether core earnings can grow without acquisition gains, how quickly accretion income and FDIC loss share protection will decline as the acquired loan book runs off, and whether the technology spend and capital changes will weigh on returns. The Holding family controls about 52% of total voting power through its Class A and Class B shares, which limits the influence of public shareholders.
02—Key points
Key Highlights
- Net income fell 31.1% to $134.3 million ($13.11 per share) in 2012, versus $195.0 million ($18.80 per share) in 2011, mainly because 2011 included $150.4 million of FDIC-assisted acquisition gains and 2012 had none.
- Net interest income rose 5.0% to $914.7 million, supported by a 19 basis point increase in the taxable-equivalent net yield to 4.84% and $304.0 million of acquired-loan accretion income, which management expects to decline over time.
- Noninterest income fell 59.2% to $189.3 million, including a $101.6 million net charge from adjustments to the FDIC indemnification receivable, a sharp swing from the $19.3 million charge in 2011.
- Provision for loan and lease losses declined to $142.9 million from $232.3 million, and nonperforming assets fell to $310.4 million from $553.8 million, though noncovered nonperforming assets rose to $133.4 million.
- Capital is solid: Tier 1 risk-based ratio of 14.27%, total risk-based ratio of 15.95%, and leverage ratio of 9.22%. FCB is well-capitalized, but $93.5 million of trust preferred securities begin phasing out of Tier 1 capital in 2013.
- Return on average equity fell to 7.01% from 10.77%, and return on average assets fell to 0.64% from 0.92%, both below many peer banks, which management acknowledges.
- A $100.0 million core technology modernization project begins in 2013 with phased implementation through 2016, and a planned sale of most client processing relationships will reduce related fee income starting in Q1 2013.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Interest Expense | $90.15M$144.19M | −37.5% |
| Net Income | $132.40M$195.03M | −32.1% |
| EPS (Basic) | $12.92$18.80 | −31.3% |
| Shares Outstanding (Basic) | 10.24M10.38M | −1.3% |
05—Questions
Frequently Asked Questions
Why did net income drop so sharply in 2012?
Net income fell $60.7 million, or 31.1%, mainly because 2011 included $150.4 million of acquisition gains from FDIC-assisted transactions, which contributed about $91.5 million after tax. No acquisition gains were recorded in 2012. Higher net interest income and lower noninterest expense partly offset that drop, but a larger FDIC receivable adjustment also weighed on results.
Is the bank's core earnings power improving?
Partly. Net interest income grew 5.0% and noninterest expense fell 3.3%, and credit costs declined. However, much of the net interest income growth came from acquired-loan accretion, which management expects to shrink as the loan balance runs off. Excluding acquisition gains and FDIC receivable adjustments, noninterest income fell 12.7%, and management stated that narrow margins and legislated fee limits have hurt core earnings.
What are the main capital risks for investors?
Dodd-Frank removes trust preferred securities from Tier 1 capital in stages, starting with one-third ($31.2 million) in 2013, so the $93.5 million balance will be fully excluded by 2015. Pro forma, the Tier 1 leverage ratio would be 8.78% and the Tier 1 risk-based ratio 13.59%, still above well-capitalized levels. The proposed Basel III rules would add a 7.00% tier 1 common equity standard, and the company has said it has no plans to issue common stock, which limits its access to capital.
What risks come from the FDIC-assisted acquisitions?
Loss share agreements cover about 13.5% of total loans, and the company expects $100.2 million in cash reimbursements from the FDIC. However, the agreements are subject to FDIC interpretation, and noncompliance could lead to denied claims. The FDIC receivable also carries a $101.6 million clawback liability. Covered nonperforming assets were $177.1 million at year-end, and the company faces potential losses that may fall after the loss share periods end.
How concentrated is ownership and control?
Very concentrated. Members of the Holding family are considered to beneficially own about 24.7% of Class A shares and 66.3% of Class B shares, together about 52.0% of total votes, and they hold most senior management and board positions. Class B shares carry 16 votes each, and the Class B stock is thinly traded, with an average of about 1,645 shares per month in 2012. As a result, public shareholders have limited influence over governance.
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