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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission File Number 001-16715
FIRST CITIZENS BANCSHARES, INC.
(Exact name of Registrant as specified in the charter)
| Delaware | 56-1528994 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification Number) |
4300 Six Forks Road
Raleigh, North Carolina 27609
(Address of Principal Executive Offices, Zip Code)
(919) 716-7000
(Registrant’s Telephone Number, including Area Code)
| Securities registered pursuant to: | ||||
| Section 12(b) of the Act: | Class A Common Stock, Par Value $1 | |||
| Section 12(g) of the Act: | Class B Common Stock, Par Value $1 | |||
| (Title of Class) |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $676,936,605.
On March 1, 2010, there were 8,756,778 outstanding shares of the Registrant’s Class A Common Stock and 1,677,675 outstanding shares of the Registrant’s Class B Common Stock.
Portions of the Registrant’s definitive Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated in Part III of this report.
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| * | Information required by Item 10 is incorporated herein by reference to the information that appears under the headings or captions ‘Proposal 1: Election of Directors,’ ‘Code of Ethics,’ ‘Committees of our Board—General,’ and ‘—Audit and Compliance Committee’, ‘Executive Officers’ and ‘Section 16(a) Beneficial Ownership Reporting Compliance’ from the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders (2010 Proxy Statement) . |
| Information required by Item 11 is incorporated herein by reference to the information that appears under the headings or captions ‘Compensation Discussion and Analysis,’ ‘Compensation Committee Report,’ ‘Executive Compensation,’ and ‘Director Compensation,’ of the 2010 Proxy Statement. |
| Information required by Item 12 is incorporated herein by reference to the information that appears under the heading ‘Beneficial Ownership of Our Common Stock’ of the 2010 Proxy Statement. |
| Information required by Item 13 is incorporated herein by reference to the information that appears under the headings or captions ‘Corporate Governance—Director Independence’ and ‘Transactions with Related Persons’ of the 2010 Proxy Statement. |
| Information required by Item 14 is incorporated by reference to the information that appears under the caption ‘Services and Fees During 2008 and 2009 of the 2010 Proxy Statement. |
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General
First Citizens BancShares, Inc. (BancShares) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (FCB), its banking subsidiary. FCB opened in 1898 as the Bank of Smithfield, Smithfield, North Carolina, and later became First-Citizens Bank & Trust Company. As of December 31, 2009, FCB operated 373 offices in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Washington, California and Washington, DC.
On April 28, 1997, BancShares launched IronStone Bank (ISB), a federally-chartered thrift institution that originally operated under the name Atlantic States Bank. Initially, ISB operated in the counties surrounding Atlanta, Georgia, but gradually expanded into other high-growth markets in urban areas throughout the United States. At December 31, 2009, ISB had 58 offices in Georgia, Florida, Texas, Arizona, New Mexico, California, Oregon, Washington, Colorado, Oklahoma, Kansas and Missouri. The financial results and trends of ISB reflect the impact of the de novo nature of its growth. Refer to Note S—Segment Disclosures in the Notes to Consolidated Financial Statements for additional financial disclosures on FCB and ISB including summary income statements and balance sheet information.
During 2009 FCB purchased substantially all the assets and assumed substantially all the liabilities of Temecula Valley Bank (TVB) and Venture Bank (VB) from the FDIC, as Receiver of those two banks, under agreements which included “ loss share” arrangements which protect FCB from losses on covered loans and other real estate owned up to stated limits. TVB operated 11 banking branches in California, primarily within the San Diego, California, area and the Temecula Valley area east of San Diego. Venture operated 18 banking branches in the Seattle/Olympia, Washington, area. Those branches are being operated as banking branches of FCB and represent FCB’s first entry into those banking markets. In connection with its acquisitions of TVB and VB, FCB measured all assets and liabilities at fair value, and recorded loans of $855.6 million and $457.0 million, total assets of $1.11 billion and $795.2 million, deposits of $965.4 million and $709.1 million, and total liabilities of $1.05 billion and $766.5 million, respectively. The two transactions resulted in bargain purchase gains in 2009 of $56.4 million and $48.0 million, respectively. Additional information regarding those two transactions is contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note B to BancShares’ audited consolidated financial statements.
BancShares conducts its banking operations through its two separately chartered wholly-owned subsidiaries, FCB and ISB. FCB and ISB offer similar banking products and services to customers through separate branch operations, and each operates in different geographic markets with the exception of the states of California and Washington, where both operate. With a diverse employment base in manufacturing, general services, agricultural, wholesale/retail trade, technology and financial services, BancShares believes its current market areas will support future growth in loans and deposits. BancShares maintains a community bank approach to providing customer service, a competitive advantage that strengthens our ability to effectively provide financial products and services to individuals and businesses in our markets. Although FCB provides products and services targeted to both business and retail customers, ISB has focused primary attention on business customers, providing retail banking services on a limited basis.
A substantial portion of BancShares’ revenue is derived from our operations throughout North Carolina, in southern and central Virginia, and in the urban areas of Georgia, Florida, California and Texas in which we operate. The delivery of products and services to our customers is primarily accomplished through associates deployed throughout our extensive branch network. However, FCB and ISB also provide customers with access to our products and services through alternative means, including online banking, telephone banking and through our participation in various ATM networks. Business customers may also conduct banking transactions through use of remote image technology.
FCB is BancShares’ largest banking subsidiary with 87.4 percent of BancShares’ consolidated deposits as of December 31, 2009. FCB’s primary deposit markets are North Carolina and Virginia. FCB’s deposit market share in North Carolina was 3.6 percent as of June 30, 2009 based on the Federal Deposit Insurance Corporation (FDIC) Deposit Market Share Report. Based on this ranking of deposits, FCB was the fourth largest bank in North Carolina. The three banks larger than FCB based on deposits in North Carolina as of June 30, 2009, controlled 75.6 percent of North Carolina deposits. In Virginia, FCB was the 17th largest bank with a June 30, 2009 deposit market share of 0.7 percent. The sixteen larger banks represent 81.9 percent of total deposits in Virginia as of June 30, 2009. At December 31, 2009, FCB had 280 branches in North Carolina, 51 branches in Virginia, 18 branches in Washington, 11 branches in California, 5 branches in West Virginia, 6 branches in Tennessee, 1 branch in Maryland, and 1 branch in Washington, D.C.
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ISB’s deposits represent 12.8 percent of BancShares’ consolidated deposits as of December 31, 2009. Due to ISB’s focus on urban areas with many financial service providers, ISB’s market share in each of the states in which it operates is less than one percent. At December 31, 2009, ISB had 15 branches in Georgia, 13 branches in Florida, 9 branches in California, 7 branches in Texas, 3 branches in Colorado, 2 branches in each of Arizona, New Mexico, Oregon and Oklahoma, and 1 branch in Kansas, Missouri and Washington.
FCB and ISB seek to meet the needs of both consumers and commercial entities in their respective market areas. Their services, offered at most offices, include taking of deposits, cashing of checks, and providing for individual and commercial cash needs; numerous checking and savings plans; commercial, business and consumer lending; a full-service trust department; and other activities incidental to commercial banking. First Citizens Investor Services, Inc. (FCIS) provides various investment products, including annuities, discount brokerage services and third-party mutual funds to customers. Other subsidiaries are not material to BancShares’ consolidated financial position or to consolidated net income.
The financial services industry is highly competitive and the ability of non-bank financial entities to provide services previously reserved for commercial banks has intensified competition. Traditional commercial banks are subject to significant competitive pressure from multiple types of financial institutions creating the requirement to not focus their competitive efforts solely on other commercial banks. This competitive pressure is perhaps most acute in the wealth management and payments arenas. Non-banks and other diversified financial conglomerates have developed powerful and focused franchises, which have eroded traditional commercial banks’ market share of both balance sheet and fee-based products. As the banking industry continues to consolidate, the degree of competition that exists in the banking market will be affected by the elimination of some regional and local institutions. Continued asset quality challenges, capital shortages, fallout of a global economic recession and the likely resulting bank failures will also have a profound impact on the competitive environment.
At December 31, 2009, BancShares and its subsidiaries employed a full-time staff of 4,221 and a part-time staff of 785 for a total of 5,006 employees.
Throughout its history, the operations of BancShares have been significantly influenced by descendants of Robert P. Holding, who came to control FCB during the 1920s. Robert P. Holding’s children and grandchildren have served as members of the board of directors, as chief executive officers and other executive management positions, and have remained shareholders controlling a large percentage of our common stock since BancShares was formed in 1986.
Our Chairman of the Board and Chief Executive Officer, Frank B. Holding, Jr., is the grandson of Robert P. Holding. Hope H. Connell, the President of ISB and Executive Vice President of FCB, is Robert P. Holding’s granddaughter. Frank B. Holding, son of Robert P. Holding and father of Frank B. Holding, Jr. and Hope H. Connell, is our Executive Vice Chairman. Carmen Holding Ames, another granddaughter of Robert P. Holding, is a member of our board of directors.
Lewis R. Holding preceded Frank B. Holding, Jr. as Chairman of the Board and Chief Executive Officer and served in both capacities from the time BancShares was formed until 2008, when he retired as Chief Executive Officer, and 2009, when he retired as Chairman of the Board. Lewis R. Holding, who died in August 2009, was the son of Robert P. Holding, brother of Frank B. Holding, and father of Carmen Holding Ames.
Members of the Holding family, including those who serve as members of our board of directors and in various management positions, and including certain of their related parties, own, in the aggregate, approximately 38 percent of the outstanding shares of our Class A common stock and approximately 49 percent of the outstanding shares of our Class B common stock, together representing approximately 47 percent of the voting control of BancShares. Additionally, a trust for the benefit of a family member holds additional shares over which the family member does not have voting or investment control. Those shares amount to approximately three percent and 30 percent, respectively, of the outstanding shares of our Class A and Class B common stock and together represent approximately 23 percent of the voting control of BancShares.
Statistical information regarding our business activities is found in Management’s Discussion and Analysis.
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Regulatory Considerations
The business and operations of BancShares and its subsidiary banks are subject to significant federal and state governmental regulation and supervision. BancShares is a financial holding company registered with the Federal Reserve Board (FRB) under the Bank Holding Company Act of 1956, as amended. It is subject to supervision and examination by, and the regulations and reporting requirements of, the FRB.
FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the North Carolina Commissioner of Banks. ISB is a federally-chartered thrift institution supervised by the Office of Thrift Supervision (OTS). Deposit obligations of FCB and ISB are insured by the FDIC to the maximum legal limits.
The various regulatory authorities supervise all areas of the banking subsidiaries, including reserves, loans, mergers, the payment of dividends, various compliance matters and other aspects of their operations. The regulators conduct regular examinations, and the banking subsidiaries must furnish periodic reports to their regulators containing detailed financial and other information regarding their affairs.
Numerous statutes and regulations apply to and restrict the activities of the banking subsidiaries, including limitations on the ability to pay dividends, capital requirements, reserve requirements, deposit insurance requirements and restrictions on transactions with related parties. The impact of these statutes and regulations is discussed below and in the accompanying audited consolidated financial statements.
The Gramm-Leach-Bliley Act (GLB Act) adopted by Congress during 1999 expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. The GLB Act permitted bank holding companies to become “financial holding companies” and expanded activities in which banks and bank holding companies may participate, including opportunities to affiliate with securities firms and insurance companies. During 2000, BancShares became a financial holding company.
Under Delaware law, BancShares is authorized to pay dividends declared by its Board of Directors, provided that no distribution results in its insolvency. The ability of the banking subsidiaries to pay dividends to BancShares is governed by statutes of each entity’s chartering jurisdiction and rules and regulations issued by each entity’s respective regulatory authority. Under federal law, and as insured banks, each of the banking subsidiaries is prohibited from making any capital distributions, including paying a cash dividend, if it is, or after making the distribution it would become, “undercapitalized” as that term is defined in the Federal Deposit Insurance Act (FDIA).
BancShares is required to comply with the capital adequacy standards established by the FRB, and FCB and ISB are required to comply with the capital adequacy standards established by the FDIC and OTS, respectively. The FRB, FDIC and OTS have promulgated risk-based capital and leverage capital guidelines for determining the adequacy of the capital of a bank holding company or a bank, and all applicable capital standards must be satisfied for a bank holding company or a bank to be considered in compliance with these capital requirements.
Current federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”). The FDIC is required to take certain mandatory supervisory actions, and is authorized to take other discretionary actions, with respect to banks in the three undercapitalized categories.
Under the FDIC’s rules implementing the prompt corrective action provisions, an insured, state-chartered bank that has a Total Capital Ratio of 10.0 percent or greater, a Tier 1 Capital Ratio of 6.0 percent or greater, a Leverage Ratio of 5.0 percent or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered to be “well-capitalized.” Each of BancShares’ banking subsidiaries is well-capitalized.
Under regulations of the FRB, all FDIC-insured banks must maintain average daily reserves against their transaction accounts. Because required reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank or with a qualified correspondent bank, the effect of the reserve requirement is to reduce the amount of the Banks’ assets that are available for lending or other investment activities.
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Under the Federal Deposit Insurance Reform Act of 2005 (FDIRA), the FDIC uses a risk-based assessment system to determine the amount of a bank’s deposit insurance assessment based on an evaluation of the probability that the deposit insurance fund (DIF) will incur a loss with respect to that bank. The evaluation considers risks attributable to different categories and concentrations of the bank’s assets and liabilities and other factors the FDIC considers to be relevant, including information obtained from the bank’s federal and state banking regulators.
The FDIC is responsible for maintaining the adequacy of the DIF, and the amount paid by a bank for deposit insurance is influenced not only by the assessment of the risk it poses to the DIF, but also by the adequacy of the insurance fund to cover the risk posed by all insured institutions. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the DIF. A rate increase and special assessment was imposed on insured financial institutions in 2009 due to the high level of bank failures. Under the provisions of the FDIRA, the FDIC may terminate a bank’s deposit insurance if it finds that the bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated applicable laws, regulations, rules, or orders.
Each of the banking subsidiaries is subject to the provisions of Section 23A of the Federal Reserve Act which places limits on the amount of certain transactions with affiliate entities. The total amount of transactions by any of the banking subsidiaries with a single affiliate is limited to 10 percent of the banking subsidiary’s capital and surplus and, for all affiliates, to 20 percent of the banking subsidiary’s capital and surplus. Each of the transactions among affiliates must also meet specified collateral requirements and must comply with other provisions of Section 23A designed to avoid transfers of low-quality assets between affiliates. The banking subsidiaries are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the banking subsidiary or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
The USA Patriot Act of 2001 (Patriot Act) is intended to strengthen the ability of United States law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws which required various new regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The Patriot Act has required financial institutions to adopt new policies and procedures to combat money laundering, and it grants the Secretary of the Treasury broad authority to establish regulations and impose requirements and restrictions on financial institutions’ operations.
Under the Community Reinvestment Act, as implemented by regulations of the federal bank regulatory agencies, an insured bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods.
The Sarbanes-Oxley Act of 2002 (SOX Act) mandated important new corporate governance, financial reporting and disclosure requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. The SOX Act also mandated new enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. Additionally, the SOX Act increased the opportunity for private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.
The SOX Act requires various securities exchanges, including The NASDAQ Global Select Market, to prohibit the listing of the stock of an issuer unless that issuer maintains an independent audit committee. In addition, the securities exchanges have imposed various corporate governance requirements, including the requirement that various corporate matters (including executive compensation and board nominations) be approved, or recommended for approval by the issuer’s full board of directors, by directors of the issuer who are “independent” as defined by the exchanges’ rules or by committees made up of “independent” directors. Since BancShares’ Class A common stock is a listed stock, BancShares is subject to those provisions of the Act and to corporate governance requirements of The NASDAQ Global Select Market. The economic and operational effects of the SOX Act on public companies, including BancShares, have been and will continue to be significant in terms of the time, resources and costs required to achieve compliance.
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During 2008, in response to widespread concern about weakness within the banking industry, the Emergency Economic Stabilization Act was enacted, providing expanded insurance protection to depositors. In addition, the U.S. Treasury created the TARP Capital Purchase Program to provide qualifying banks with additional capital. The FDIC created the Temporary Liquidity Guarantee Program (TLGP), which allowed banks to purchase a guarantee for newly-issued senior unsecured debt and provided expanded deposit insurance benefits to certain noninterest-bearing accounts. Due to our strong capital ratios, we did not apply for additional capital under the TARP Capital Purchase Program. We also did not participate in the TLGP debt guarantee program, but did elect to participate in the TLGP expansion of deposit insurance. We elected in 2009 to continue participation in the expanded deposit insurance program until expiration on June 30, 2010.
FCIS is a registered broker-dealer and investment adviser. Broker-dealer activities are subject to regulation by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization to which the Securities and Exchange Commission (SEC) has delegated regulatory authority for broker-dealers, as well as by the state securities authorities of the various states in which FCIS operates. Investment advisory activities are subject to direct regulation by the SEC, and investment advisory representatives must register with the state securities authorities of the various states in which they operate.
FCIS is also licensed as an insurance agency in connection with various investment products, such as annuities, that are regulated as insurance products. FCIS’ insurance sales activities are subject to concurrent regulation by securities regulators and by the insurance regulators of the various states in which FCIS conducts business.
Available Information
BancShares does not have its own separate Internet website. However, FCB’s website (www.firstcitizens.com) includes a hyperlink to the SEC’s website where the public may obtain copies of BancShares’ annual reports on Form 10-K, quarterly reports on 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Interested parties may also directly access the SEC’s website that contains reports and other information that BancShares files electronically with the SEC. The address of the SEC’s website is www.sec.gov.
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Unfavorable changes in economic conditions
BancShares’ business is highly affected by national, regional and local economic conditions. These conditions cannot be predicted or controlled, and may have a material impact on our operations and financial condition. Unfavorable economic developments such as an increase in unemployment rates, decreases in real estate values, rapid changes in interest rates, higher default and bankruptcy rates, and various other factors could weaken the national economy as well as the economies of specific communities that we serve. Weakness in our market areas, continuation or deepening of the current recession or a prolonged recovery could depress our earnings and financial condition because borrowers may not be able to repay their loans, collateral values may fall, and loans that are currently performing and other long-lived assets may become impaired.
Mergers and acquisitions
We must receive federal and state regulatory approvals before we can acquire a bank or bank holding company or acquire assets and assume liabilities of failed banks from the FDIC. Prior to granting approval, bank regulators consider, among other factors, the effect of the acquisition on competition, financial condition and future prospects including current and projected capital ratios, the competence, experience and integrity of management, our record of compliance with laws and regulations and the convenience and needs of the communities to be served, including our record of compliance under the Community Reinvestment Act. We cannot be certain when or if any required regulatory approvals will be granted or what conditions may be imposed by the approving authority.
In addition to the risks related to regulatory approvals, complications in the conversion of operating systems, data systems and products may result in the loss of customers, damage to our reputation, operational problems, one-time costs currently not anticipated or reduced cost savings resulting from a merger or acquisition. The integration could result in higher than expected deposit attrition, loss of key employees, disruption of our businesses or the businesses of the acquired company or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition.
With respect to the 2009 acquisitions, the exposures to prospective losses on certain assets are covered under loss share agreements with the FDIC. These loss share agreements impose certain obligations on us that, in the event of noncompliance, could result in the disallowance of our rights under those agreements.
Instability in real estate markets
Disruption in residential housing markets including reduced sales activity and falling market prices have adversely affected collateral values and customer demand, particularly with respect to our operations in Atlanta, Georgia and southwest Florida. With 73.5 percent of total loans secured by real estate, instability in residential and commercial real estate markets could result in higher credit losses in the future if customers default on loans that, as a result of lower property values, are no longer adequately collateralized. The weak real estate markets could also affect our ability to sell real estate acquired through foreclosure.
Liquidity
Liquidity is essential to our businesses. Our deposit base represents our primary source of liquidity, and we normally have the ability to stimulate deposit growth through our pricing strategies. However, in circumstances where our ability to generate needed liquidity is impaired, we would need access to alternative liquidity sources such as overnight and other short-term borrowings. While we maintain access to alternative funding sources, we are dependent on the availability of collateral, the counterparty’s willingness to lend to us, and their liquidity capacity.
Gain on acquisitions
The gain recorded during 2009 is preliminary and subject to revision for a period of one year following the respective acquisition dates. Adjustments to this gain may be recorded based on additional information received after the acquisition date that affected the acquisition date fair values of assets acquired and liabilities assumed. Further downward adjustments in values of assets acquired or increases in values of liabilities assumed on the date of acquisition would lower this gain on acquisitions.
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Deposit insurance premiums
During 2009, due to a higher level of bank failures, the FDIC increased recurring deposit insurance premiums and imposed a special assessment on insured financial institutions. In addition, the FDIC received approval to require prepayment of the next three years premiums by December 31, 2009. BancShares remitted $69.6 million to prepay its premiums for 2010, 2011 and 2012. Due to the continuing volume of bank failures, it is possible that higher deposit insurance rates or additional special assessments will be required to restore the DIF to the Congressionally established target.
Access to capital
Based on existing capital levels, BancShares and its subsidiary banks maintain well-capitalized ratios under current leverage and risk-based capital standards including the impact of the acquisitions in 2009 of TVB and VB. Historically, our primary capital sources have been retained earnings and debt issued through both private and public markets including junior subordinated debentures and subordinated debt. The market for junior subordinated debentures has been severely limited during the current economic environment, and our ability to raise capital by issuing new junior subordinated debentures at reasonable rates is highly questionable. A lack of access to capital could limit our ability to consummate additional acquisitions, make new loans, meet our existing lending commitments, and could potentially affect our liquidity and capital adequacy.
The major rating agencies regularly evaluate our creditworthiness and assign credit ratings to the debt of BancShares and one of our bank subsidiaries. The agencies’ ratings are based on a number of factors, some of which are not within our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions generally affecting the financial services industry. In light of the difficulties currently confronting the financial services industry, there can be no assurance that we will maintain our current credit ratings. Rating reductions could adversely affect our access to funding sources and the cost of obtaining funding. Long-term debt ratings also factor into the calculation of deposit insurance premiums, and a reduction in our subsidiary bank’s ratings would increase premiums and expense.
Condition of other financial institutions
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to numerous financial service providers, including banks, brokers and dealers in securities and other institutional clients. Transactions with other financial institutions expose us to credit risk in the event of default of the counterparty. These types of losses could materially and adversely affect our results of operations or earnings.
Changes in interest rates
Our earnings and financial condition are highly dependent upon net interest income. Compression of interest rate spreads adversely affects our earnings and financial condition. We cannot predict with certainty changes in interest rates or actions by the Federal Reserve that may have a direct impact on market interest rates. While we maintain policies and procedures designed to mitigate the risks associated with changes in interest rates, those changes may nonetheless have significant adverse effects on our profitability.
Changes in banking laws
Financial institutions are regulated under federal and state banking laws and regulations that primarily focus on the protection of depositors, federal deposit insurance funds and the banking system as a whole. Federal and state banking regulators possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on activities that could have a material adverse effect on our results of operations.
In addition, financial institutions are significantly affected by changes in economic and monetary policies. Various Congressional and regulatory proposals, if adopted, will likely result in increased compliance requirements, some of which may affect our results of operations.
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Competition
There is intense competition among commercial banks in our market areas. In addition, we compete with other providers of financial services, such as credit unions, consumer finance companies, commercial finance and leasing companies and brokerage firms as well as other institutions that deliver their products and services through alternative delivery networks. Some of our larger competitors, including various banks that have a significant presence in our market areas, have the capacity to offer products and services we do not offer.
Catastrophic events
The occurrence of catastrophic events including weather-related events such as hurricanes, tropical storms, floods, windstorms or severe winter weather, as well as earthquakes, pandemic disease, fires and other catastrophes could adversely affect our consolidated financial condition and results of operations.
In addition to natural catastrophic events, man-made events, such as acts of terror and governmental response to acts of terror, could adversely affect general economic conditions, which could have a material impact on our results of operations.
Unpredictable natural and other disasters could have an adverse effect if those events materially disrupt our operations or affect customers’ access to the financial services we offer. Although we carry insurance to mitigate our exposure to certain catastrophic events, catastrophic events could nevertheless affect our results of operations.
Operational and data security risk
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of illegal activities conducted by employees or outsiders, data security risk and operational errors. Our dependence on automated systems, including the automated systems used by acquired entities and third parties, to record and process transactions may further increase the risk that technical failures or tampering of those systems will result in losses that are difficult to detect. We are also subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control.
Reliance on vendors
Third party vendors provide key components of our business infrastructure. Failures of these third parties to provide services for any reason could adversely affect our ability to deliver products and services to our customers. Replacing critical third party vendors could also result in interruption of service and significant expense.
Litigation
The frequency of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against us may have material adverse financial effects or cause significant reputational harm.
Interpretation of tax laws and regulations
Our interpretation of federal, state or local tax laws and regulations that allows for our estimation of tax liabilities may differ from tax authorities. Those differing interpretations may result in the disallowance of deductions or credits, differences in the timing of deductions or other differences that could result in the payment of additional taxes, interest or penalties that could materially affect our results of operations.
Changes in accounting standards
The Financial Accounting Standards Board periodically modifies the standards that govern the preparation of our financial statements. These changes are not predictable and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results or a cumulative adjustment to retained earnings.
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Volatility in stock price and impairment of goodwill
Market prices of our common stock price can fluctuate widely in response to a variety of factors including expectations of operating results, actual operating results, market perception of business combinations, stock prices of other companies that are similar to BancShares, general market expectations related to the financial services industry and the potential impact of government actions affecting the financial services industry.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of our operating results.
Goodwill is tested for impairment at least annually, and the impairment test compares the estimated fair value of a reporting unit with its net book value. A write-off of impaired goodwill could have a significant impact on our results of operations, but would not impact our capital ratios as such ratios are calculated using tangible capital amounts.
As of December 31, 2009, BancShares’ subsidiary financial institutions operated branch offices at 431 locations in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon, Washington, Oklahoma, Kansas, Missouri and Washington, DC. BancShares owns many of the buildings and leases other facilities from third parties.
Additional information relating to premises, equipment and lease commitments is set forth in Note F of BancShares’ Notes to Consolidated Financial Statements.
BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such legal actions cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
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Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Security
BancShares has two classes of common stock—Class A common and Class B common. Shares of Class A common have one vote per share, while shares of Class B common have 16 votes per share. BancShares’ Class A common stock is listed on the NASDAQ Global Select Market under the symbol FCNCA. The Class B common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol FCNCB. As of December 31, 2009, there were 1,946 holders of record of the Class A common stock and 349 holders of record of the Class B common stock. The market for Class B common stock is extremely limited in that on most days there is no trading and, to the extent there is trading, it is generally low in volume. The average monthly trading volume for the Class A common stock was 250,633 for the fourth quarter of 2009 and 416,000 for the year ended December 31, 2009. The Class B common stock monthly trading volume averaged 3,666 in the fourth quarter of 2009 and 2,108 for the year ended December 31, 2009.
The per share cash dividends declared by BancShares on both the Class A and Class B common stock and the high and low sales prices for each quarterly period during 2009 and 2008 are set forth in the following table.
| 2009 | 2008 | |||||||||||||||||||||||
| Fourth Quarter |
Third Quarter |
Second Quarter |
First Quarter |
Fourth Quarter |
Third Quarter |
Second Quarter |
First Quarter | |||||||||||||||||
| Cash Dividends |
$ | 0.300 | $ | 0.300 | $ | 0.300 | $ | 0.300 | $ | 0.275 | $ | 0.275 | $ | 0.275 | $ | 0.275 | ||||||||
| Class A sales price |
||||||||||||||||||||||||
| High |
167.70 | 164.00 | 145.16 | 154.16 | 179.09 | 198.44 | 164.63 | 153.48 | ||||||||||||||||
| Low |
148.20 | 125.67 | 115.58 | 73.48 | 124.09 | 125.79 | 131.00 | 117.75 | ||||||||||||||||
| Class B sales price |
||||||||||||||||||||||||
| High |
200.00 | 156.00 | 139.00 | 152.00 | 174.00 | 177.00 | 192.00 | 204.75 | ||||||||||||||||
| Low |
155.00 | 138.00 | 110.00 | 91.00 | 146.00 | 172.00 | 166.00 | 181.00 | ||||||||||||||||
Sales prices for Class A common were obtained from the NASDAQ Global Select Market. Sales prices for Class B common were obtained from the OTC Bulletin Board.
A cash dividend of 30.0 cents per share was declared by the Board of Directors on January 25, 2010, payable April 5, 2010, to holders of record as of March 15, 2010. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. BancShares’ principal source of liquidity for payment of shareholder dividends is the dividend it receives from FCB. FCB is subject to various requirements under federal and state banking laws that restrict the payment of dividends and its ability to lend to BancShares. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.
During the fourth quarter of 2009, BancShares did not issue, sell or repurchase any Class A or Class B common stock.
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The following graph compares the cumulative total shareholder return (CTSR) of our Class A common stock during the previous five years with the CTSR over the same measurement period of the Nasdaq-Banks Index and the Nasdaq-U.S. Index. Each trend line assumes that $100 was invested on December 31, 2004, and that dividends were reinvested for additional shares.
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Selected Financial Data
Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (thousands, except share data and ratios) | ||||||||||||||||||||
| SUMMARY OF OPERATIONS |
||||||||||||||||||||
| Interest income |
$ | 738,159 | $ | 813,351 | $ | 902,181 | $ | 828,508 | $ | 668,320 | ||||||||||
| Interest expense |
227,644 | 314,945 | 423,714 | 353,737 | 218,151 | |||||||||||||||
| Net interest income |
510,515 | 498,406 | 478,467 | 474,771 | 450,169 | |||||||||||||||
| Provision for loan and lease losses |
79,364 | 65,926 | 32,939 | 21,203 | 33,562 | |||||||||||||||
| Net interest income after provision for loan and lease losses |
431,151 | 432,480 | 445,528 | 453,568 | 416,607 | |||||||||||||||
| Gain on acquisitions |
104,434 | — | — | — | — | |||||||||||||||
| Other noninterest income |
305,166 | 313,484 | 297,345 | 273,174 | 258,886 | |||||||||||||||
| Noninterest expense |
657,652 | 606,360 | 575,319 | 530,796 | 496,823 | |||||||||||||||
| Income before income taxes |
183,099 | 139,604 | 167,554 | 195,946 | 178,670 | |||||||||||||||
| Income taxes |
66,768 | 48,546 | 58,937 | 69,455 | 65,808 | |||||||||||||||
| Net income |
$ | 116,331 | $ | 91,058 | $ | 108,617 | $ | 126,491 | $ | 112,862 | ||||||||||
| Net interest income, taxable equivalent |
$ | 515,446 | $ | 505,151 | $ | 486,144 | $ | 481,120 | $ | 454,467 | ||||||||||
| PER SHARE DATA |
||||||||||||||||||||
| Net income |
$ | 11.15 | $ | 8.73 | $ | 10.41 | $ | 12.12 | $ | 10.82 | ||||||||||
| Cash dividends |
1.20 | 1.10 | 1.10 | 1.10 | 1.10 | |||||||||||||||
| Market price at December 31 (Class A) |
164.01 | 152.80 | 145.85 | 202.64 | 174.42 | |||||||||||||||
| Book value at December 31 |
149.42 | 138.33 | 138.12 | 125.62 | 113.19 | |||||||||||||||
| Tangible book value at December 31 |
138.98 | 128.13 | 127.72 | 115.02 | 102.35 | |||||||||||||||
| SELECTED AVERAGE BALANCES |
||||||||||||||||||||
| Total assets |
$ | 17,557,484 | $ | 16,403,717 | $ | 15,919,222 | $ | 15,240,327 | $ | 13,905,260 | ||||||||||
| Investment securities |
3,412,620 | 3,112,717 | 3,112,172 | 2,996,427 | 2,533,161 | |||||||||||||||
| Loans and leases |
12,062,954 | 11,306,900 | 10,513,599 | 9,989,757 | 9,375,249 | |||||||||||||||
| Interest-earning assets |
15,846,514 | 14,870,501 | 14,260,442 | 13,605,431 | 12,503,877 | |||||||||||||||
| Deposits |
14,578,868 | 13,108,246 | 12,659,236 | 12,452,955 | 11,714,569 | |||||||||||||||
| Interest-bearing liabilities |
13,013,237 | 12,312,499 | 11,883,421 | 11,262,423 | 10,113,999 | |||||||||||||||
| Long-term obligations |
753,242 | 607,463 | 405,758 | 450,272 | 353,885 | |||||||||||||||
| Shareholders’ equity |
$ | 1,465,953 | $ | 1,484,605 | $ | 1,370,617 | $ | 1,241,254 | $ | 1,131,066 | ||||||||||
| Shares outstanding |
10,434,453 | 10,434,453 | 10,434,453 | 10,434,453 | 10,434,453 | |||||||||||||||
| SELECTED PERIOD-END BALANCES |
||||||||||||||||||||
| Total assets |
$ | 18,466,063 | $ | 16,745,662 | $ | 16,212,107 | $ | 15,729,697 | $ | 14,639,392 | ||||||||||
| Investment securities |
2,932,765 | 3,225,194 | 3,236,835 | 3,221,048 | 2,929,516 | |||||||||||||||
| Loans and leases: |
||||||||||||||||||||
| Covered under loss share agreements |
1,173,020 | — | — | — | — | |||||||||||||||
| Not covered under loss share agreements |
11,644,999 | 11,649,886 | 10,888,083 | 10,060,234 | 9,446,987 | |||||||||||||||
| Interest-earning assets |
16,541,425 | 15,119,095 | 14,466,948 | 13,842,688 | 13,066,758 | |||||||||||||||
| Deposits |
15,337,567 | 13,713,763 | 12,928,544 | 12,743,324 | 12,173,858 | |||||||||||||||
| Interest-bearing liabilities |
13,561,924 | 12,441,025 | 12,118,967 | 11,612,372 | 10,745,696 | |||||||||||||||
| Long-term obligations |
797,366 | 733,132 | 404,392 | 401,198 | 408,987 | |||||||||||||||
| Shareholders’ equity |
$ | 1,559,115 | $ | 1,443,375 | $ | 1,441,208 | $ | 1,310,819 | $ | 1,181,059 | ||||||||||
| Shares outstanding |
10,434,453 | 10,434,453 | 10,434,453 | 10,434,453 | 10,434,453 | |||||||||||||||
| SELECTED RATIOS AND OTHER DATA |
||||||||||||||||||||
| Rate of return on average assets |
0.66 | % | 0.56 | % | 0.68 | % | 0.83 | % | 0.81 | % | ||||||||||
| Rate of return on average shareholders’ equity |
7.94 | 6.13 | 7.92 | 10.19 | 9.98 | |||||||||||||||
| Net yield on interest-earning assets (taxable equivalent) |
3.25 | 3.40 | 3.41 | 3.54 | 3.64 | |||||||||||||||
| Allowance for loan and lease losses to noncovered loans and leases at year-end |
1.45 | 1.35 | 1.25 | 1.28 | 1.33 | |||||||||||||||
| Nonperforming assets to total loans and leases and other real estate at year-end: |
||||||||||||||||||||
| Covered under loss share agreements |
17.39 | — | — | — | — | |||||||||||||||
| Not covered under loss share agreements |
1.32 | 0.61 | 0.18 | 0.20 | 0.27 | |||||||||||||||
| Tier 1 risk-based capital ratio |
13.34 | 13.20 | 13.02 | 12.93 | 12.56 | |||||||||||||||
| Total risk-based capital ratio |
15.59 | 15.49 | 15.36 | 15.37 | 15.11 | |||||||||||||||
| Leverage capital ratio |
9.54 | 9.88 | 9.63 | 9.39 | 9.17 | |||||||||||||||
| Dividend payout ratio |
10.76 | 12.60 | 10.57 | 9.08 | 10.17 | |||||||||||||||
| Average loans and leases to average deposits |
82.74 | 86.26 | 83.05 | 80.22 | 80.03 | |||||||||||||||
Average loans and leases include nonaccrual loans.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and related financial data should be read in conjunction with the audited consolidated financial statements and related footnotes of First Citizens BancShares, Inc. (BancShares), presented on pages 54 through 96 of this report. Intercompany accounts and transactions have been eliminated.
RECLASSIFICATIONS
Although certain amounts for prior years have been reclassified to conform to statement presentations for 2009, the reclassifications have no effect on shareholders’ equity or net income as previously reported.
CRITICAL ACCOUNTING POLICIES
Information included in our audited financial statements and management’s discussion and analysis is derived from our accounting records, which are maintained in accordance with accounting principles generally accepted in the United States of America (US GAAP) and general practices within the banking industry. While much of the information is definitive, certain accounting issues are highly dependent upon estimates and assumptions made by management. An understanding of these estimates and assumptions is vital to understanding BancShares’ financial statements. Critical accounting policies are those policies that are most important to the determination of our financial condition and results of operations or that require management to make assumptions and estimates that are subjective or complex.
We periodically evaluate our critical accounting policies, including those related to the allowance for loan and lease losses, fair value estimates, the FDIC receivable for loss share agreements, pension plan assumptions and income taxes. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or outcomes.
Allowance for loan and lease losses. The allowance for loan and lease losses reflects the estimated losses resulting from the inability of our customers to make required loan and lease payments. The allowance reflects management’s evaluation of the risk characteristics of the loan and lease portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible loan and lease losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets.
Loans covered under loss share agreements are recorded at fair value at acquisition date. Therefore, amounts deemed uncollectible at acquisition date become a part of the fair value calculation and are excluded from the allowance for loan and lease losses. Subsequent decreases in the amount expected to be collected result in a provision for loan and lease losses with a corresponding increase in the allowance for loan and lease losses. Subsequent increases in the amount expected to be collected result in a reversal of any previously recorded provision for loan and lease losses and related allowance for loan and lease losses, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded. Proportional adjustments are also recorded to the FDIC receivable under the loss share agreements.
Management considers the established allowance adequate to absorb losses that relate to loans and leases outstanding at December 31, 2009, although future additions may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses. These agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated and additions to the allowance may be required.
Fair value estimates. BancShares reports investment securities available for sale and interest rate swaps accounted for as cash flow hedges at fair value. At December 31, 2009, the percentage of total assets and total liabilities measured at fair value on a recurring basis was 15.86 percent and less than 1 percent, respectively. The majority of assets and liabilities reported at fair value are based on quoted market prices or market prices for similar instruments. At December 31, 2009, less than 1 percent of assets measured at fair value were based on significant unobservable inputs. Other financial assets
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are reported at fair value on a nonrecurring basis, including loans held for sale and impaired loans. See Note J “Estimated Fair Values” in the Notes to Consolidated Financial Statements for additional disclosures regarding the fair value of financial instruments.
Following a business combination, US GAAP requires that assets acquired and liabilities assumed be recognized at fair value at acquisition date. The determination of fair values requires the use of certain valuation methods and assumptions, which are subject to management judgment and may differ significantly depending upon assumptions used. The assets acquired and liabilities assumed from TVB and VB were recognized at their fair values using valuation methods and assumptions established by BancShares’ management. Use of different assumptions and methods could yield significantly different fair values. Fair value estimates for loans and leases and other real estate were based on judgments regarding future expected loss experience which included the use of loan credit grades, collateral valuations and current economic conditions.
FDIC receivable for loss share agreements. The FDIC receivable for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable should the assets be sold. Fair value was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages, and will be reviewed and updated prospectively as loss estimates related to Covered Loans and other real estate owned change. Subsequent decreases in the amount expected to be collected result in a provision for loan and lease losses, an increase in the allowance for loan and lease losses, and a proportional adjustment to the FDIC receivable for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously-recorded provision for loan and lease losses and related allowance for loan and lease losses and adjustments to the FDIC receivable, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded. Projected cash flows were discounted to reflect the estimated timing of the receipt from the FDIC.
Pension plan assumptions. BancShares offers a defined benefit pension plan to qualifying employees. The calculation of the benefit obligation, the future value of plan assets, funded status and related pension expense under the pension plan requires the use of actuarial valuation methods and assumptions. The valuations and assumptions used to determine the future value of plan assets and liabilities are subject to management judgment and may differ significantly depending upon assumptions used. The discount rate used to estimate the present value of the benefits to be paid under the pension plan reflects the interest rate that could be obtained for a suitable investment used to fund the benefit obligations. The assumed discount rate equaled 6.00 percent at December 31, 2009, unchanged from 6.00 percent at December 31, 2008. Assuming other variables remain unchanged, a reduction in the assumed discount rate would increase the calculated benefit obligations, which would result in higher pension expense. Conversely, an increase in the assumed discount rate would cause a reduction in obligations, thereby resulting in lower pension expense.
We also estimate a long-term rate of return on pension plan assets that is used to calculate the value of plan assets over time. We consider such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plan and projections of future returns on various asset classes. The assumed long-term rate of return on pension assets was adjusted downward to 8.00 percent to calculate the funded status of the pension plan as of December 31, 2009 compared to 8.50 percent at December 31, 2008. The calculation of pension expense during 2009 and 2008 was based on an assumed expected long-term return on plan assets of 8.00 percent and 8.50 percent, respectively. Assuming other variables remain unchanged, a reduction in the long-term rate of return on plan assets increases pension expense.
The assumed rate of future compensation increases is reviewed annually based on actual experience and future salary expectations. We used an assumed rate of compensation increase of 4.50 percent to calculate the funded status of the pension plan as of December 31, 2009 compared to 4.25 percent at December 31, 2008. The compensation increase assumption used to calculate pension expense was 4.50 percent during 2009 and 4.25 percent in 2008. Assuming other variables remain unchanged, an increase in the rate of future compensation increases results in higher pension expense.
Income taxes. Management estimates income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amount of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In
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estimating the liabilities and corresponding expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments.
Changes in the estimate of income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations being conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as income tax accounting pronouncements.
EXECUTIVE OVERVIEW AND PERFORMANCE SUMMARY
Due to unprecedented asset quality challenges, capital shortages and the onset of a global economic recession, the U.S. banking industry experienced serious financial challenges in 2008 and 2009. During this time of industry-wide turmoil, while maintaining its long-standing attention to prudent banking practices, BancShares modified its growth focus to benefit from the opportunities that currently exist.
BancShares’ vision and mission statements are structured to leverage identified corporate and organizational strengths as well as historical and predicted market opportunities that are perceived to exist in the financial institutions marketplace. The most notable corporate strengths and market opportunities are:
Corporate Strengths
| • | Breadth of the multi-state delivery network serving both major metropolitan markets and rural communities |
| • | Strategic focus on narrow business customer segments that utilize mainstream banking services |
| • | Balance sheet liquidity |
| • | Conservative credit philosophies |
| • | Focus on the long-term impact of strategic, financial and operational decisions, enhanced by the closely held nature of a majority of common equity |
| • | Dedicated associates and experienced executive leadership |
| • | Reputation as a personal banking company both as relates to lending and deposit products. |
| • | Size relative to community banks—the ability to leverage technology, customer service and sales and human resources expenditures |
Market Opportunities
| • | Expansion of branch network and asset base as a result of FDIC assisted bank acquisitions |
| • | Presence in diverse and growing geographic locales |
| • | Potential for attraction of customers of super-regional banks who have ceased providing an acceptable level of customer service, or have experienced financial and reputational challenges |
| • | Potential for attraction of former customers of banks that either have merged or will likely merge with super-regional banks or with one another |
| • | Potential for attracting customers of community banks that lack First Citizens’ level of financial expertise and breadth of products and services, or have experienced financial and reputational challenges |
| • | Despite the economic environment creating current stress on noninterest income levels, potential for increased volumes of fee income in areas such as merchant processing, debit and credit card interchange, client bank services, insurance, business and treasury services, wealth management and broker/dealer activities |
| • | Potential for incremental profitable sales as a result of an improved sales and relationship management culture, relationship profitability and sales management systems |
| • | Potential for customer attraction, enhanced customer experience and incremental sales as a result of the growing desire of customers to acquire financial services over the Internet |
| • | Expansion of sales of banking services within wealth management |
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The global recession has forced the Federal Reserve to maintain interest rates at unprecedented low levels and use various forms of monetary policy in an attempt to drive down long-term interest rates. The presence of historically low interest rates has created net interest income challenges for the banking industry in general. We expect that the combination of high credit costs, revenue reductions arising from legislated restrictions on NSF/OD fees, and material expenses caused by the recapitalization of the FDIC DIF, will cause the banking industry to report weak earnings and low capital generation during 2010.
Various external factors influence customer demand for our loan, lease and deposit products and ultimately affect the quality of our assets and our profitability. Recessionary economic conditions have caused higher rates of unemployment, and a growing inability for some businesses and consumers to meet their debt service obligations. In addition, real estate demand in many of our markets remains weak, resulting in a decline in real estate values that has adversely affected collateral values for certain of our loans. Further, the current and anticipated instability in alternative investment markets has influenced demand for our deposit and cash management products.
The meltdown in residential real estate in Georgia and Florida had a materially negative impact on the profitability of ISB during 2009 and will continue to adversely impact credit costs in 2010. Significant work to improve operational efficiency and margins has, however, improved core profitability in select markets. Maintaining a favorable mix of low cost deposits, building fee income and a focus on business lending are key priorities which will continue to improve core profitability. While ISB’s operating losses are expected to continue into 2010, improved results in more established markets and lower credit costs will help to significantly reduce the overall loss. Bancshares will continue to infuse capital into ISB to fund forecasted growth in assets.
Our liquidity will be provided primarily by a focused deposit-gathering process, including leveraging the existing branch network and through business and commercial relationships. While certificates of deposit will remain a key funding source, strong efforts will continue to be placed upon increasing the base of low cost stable deposits in demand deposit and money market categories. Additional funding will be provided as necessary through borrowings from the Federal Home Loan Bank (FHLB) of Atlanta and brokered deposits.
Loan growth will be concentrated in the business and commercial categories. Fixed-rate loans will be used selectively to attract and retain relationships, ensuring that our total interest rate risk remains within acceptable standards for safety and soundness. Construction lending will be offered on a selective basis. The primary retail lending product will continue to be the Equity Line.
A key impact of the current banking crisis is the failure or merger of numerous banks, which in turn has created and will continue to allow for significant opportunities for First Citizens to capture customer relationships and distinguish itself from the financial and operating turmoil of its primary competitors. The sale by the FDIC of selected assets and liabilities of large numbers of failed banks provides significant opportunities for balance sheet and capital growth with little credit risk via FDIC loss share agreements.
FCB acquired selected assets and assumed selected liabilities of two failed banks during 2009, TVB and VB. Both transactions were consummated with the assistance and support of loss share agreements with the FDIC that significantly limit credit risk to FCB as the acquirer. As a result, the pre-tax gain on the two transactions recognized on the income statement equaled $104.4 million, which generated a significant portion of the capital to fund the acquired assets.
Management believes that the opportunity to continue to acquire failed bank assets and assume associated liabilities will remain optimal during 2010. These acquisitions provide an unprecedented opportunity to materially grow the balance sheet without the need for incremental external capital, and create material amounts of nonrecurring earnings with limited risk.
While it is believed that capital availability will not be a material restriction in executing our acquisition strategy, liquidity will likely be a constraint. Liquidity to fund these transactions will therefore be generated outside of the failed bank market through new core deposits within the legacy FCB franchise, augmented as needed by brokered deposits and FHLB borrowings.
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BancShares’ management has identified challenges that are most relevant and likely to have an impact on the achievement of organizational strategies as:
| • | Continuation of a weak domestic economy driving high unemployment which has resulted in higher credit costs and low interest rates |
| • | Effective management of human resources in order to attract and retain qualified associates |
| • | Increased competition from larger banks and other financial service providers that mandate tighter margins on loan and deposit products |
| • | The need to continue to make significant investments in banking delivery channels |
| • | Overcapacity in noninterest expense structure reduces ability to effectively compete with non-bank and super-regional banking competitors |
| • | Additional regulation causing further deterioration in revenues, earnings and capital formation to support lending and customer services |
| • | Proper management of assets acquired from FDIC failed institutions |
Financial institutions have typically focused their strategic and operating emphasis on maximizing profitability, and therefore have measured their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ return on average assets and return on average equity have historically compared unfavorably to the returns of similar-sized financial holding companies. We have consistently placed primary strategic emphasis upon balance sheet liquidity, asset quality and capital conservation, even when those priorities may be detrimental to short-term profitability. While we have not been immune from adverse influences arising from economic weaknesses, our long-standing focus on balance sheet strength served us well during 2009.
Weak economic conditions in our principal market areas throughout 2009 have had an adverse impact on our financial condition and results of operations through soft demand for our loan products, reduced noninterest income and high provisions for loan and lease losses. In many of our markets, unfavorable trends, such as increased unemployment, falling real estate prices and increased loan default and bankruptcy rates, demonstrate the difficult business conditions which are affecting the general economy and therefore our operating results.
Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends and take advantage of favorable economic conditions when appropriate.
Once economic conditions begin to improve, we will be well positioned to resume favorable organic growth and profitability trends. We operate in diverse geographic markets and can increase our business volumes and profitability by offering competitive products and superior customer service. We continue to concentrate our marketing efforts on business owners, medical and other professionals and financially active individuals. We seek to increase fee income in areas such as wealth management, cardholder and merchant services, insurance and treasury services. Leveraging on our investments in technology, we also focus on opportunities to generate income by providing various processing services to other banks.
First Citizens BancShares reported earnings for 2009 of $116.3 million, or $11.15 per share, compared to $91.1 million, or $8.73 per share in 2008. Net income as a percentage of average assets equaled 0.66 percent during 2009, compared to 0.56 percent during 2008. The return on average equity was 7.94 percent for 2009, compared to 6.13 percent for 2008. Results for 2009 include after-tax gains of $63.5 million related to the FDIC assisted acquisitions (the 2009 Acquisitions) of certain assets and assumption of certain liabilities of TVB in Temecula, California and VB in Lacey, Washington. The gains resulted from the excess of the fair value of the recorded assets over the fair value of the liabilities assumed. Net income during 2009 also reflected improved net interest income, higher noninterest expense and additional provision for loan and lease losses.
Net interest income during 2009 increased $12.1 million, or 2.4 percent, versus 2008. Average interest-earning assets grew $976.0 million, or 6.6 percent, during 2009 due to the 2009 Acquisitions and organic growth in core markets.
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However, the impact of low interest rates offset the benefit of asset growth. As a result, the taxable-equivalent net yield on interest-earning assets fell 15 basis points to 3.25 percent during 2009, when compared to 2008.
The provision for loan and lease losses increased $13.4 million, or 20.4 percent during 2009. Net loan and lease charge-offs for 2009 totaled $64.7 million, compared to $45.3 million recorded during the same period of 2008. Higher 2009 net charge-offs of noncovered loans were primarily noted in the commercial, unsecured revolving credit, and revolving residential mortgage loan portfolios. The ratio of net charge-offs to average loans and leases not covered by FDIC loss share agreements in 2009 equaled 0.56 percent, compared to 0.40 percent for the prior year. Total nonperforming assets equaled $374.3 million at December 31, 2009, with $220.2 million covered by loss share agreements with the FDIC and $154.0 million not covered by loss share agreements.
The gain recognized on the 2009 Acquisitions totaled $104.4 million. Noninterest income from cardholder and merchant services, service charges on deposit accounts and wealth management services declined $8.6 million, or 3.8 percent, during 2009 due to general economic conditions. As a result of rate-induced refinance activity, mortgage income increased during 2009.
Noninterest expense increased $51.3 million, or 8.5 percent, during 2009. Significantly contributing to that increase was a $24.2 million increase in FDIC deposit insurance premium expense. Costs related to the maintenance, writedown and resolution of other real estate owned increased $11.4 million during 2009, approximately $5.5 million of which relates to assets covered under loss share agreements. Salaries and wages increased $5.1 million, or 2.0 percent, during 2009, primarily due to acquisitions. Benefit costs were up $5.5 million, or 9.3 percent, for the year as health insurance and pension costs continued to escalate. Occupancy costs grew $5.4 million, or 8.9 percent, due partly to the 2009 Acquisitions.
Under the purchase and assumption agreements with the FDIC, FCB received cash, investments securities, loans, foreclosed real estate, deposits and borrowings. The acquired loans and foreclosed real estate are covered by loss share agreements with the FDIC that provide significant loss protection to FCB. At December 31, 2009, FCB had $1.27 billion of covered assets, $220.2 million of which were nonperforming. Noncovered assets that are nonperforming as of December 31, 2009 totaled $154.0 million, compared to $71.7 million at December 31, 2008, an increase of $82.4 million primarily due to higher restructured loans and continuing weakness in the residential construction portfolio in the Atlanta, Georgia, and southwest Florida markets.
Table 2
BUSINESS COMBINATIONS
| Year |
Description of transaction |
Total Loans |
Total Deposits | |||||
| (thousands) | ||||||||
| 2009 |
Purchase substantially all the assets and assume substantially all the liabilities of Venture Bank of Lacey, Washington | $ | 456,995 | $ | 709,091 | |||
| 2009 |
Purchase substantially all the assets and assume substantially all the liabilities of Temecula Valley Bank of Temecula, California | 855,583 | 965,431 | |||||
| 2007 |
Sale of American Guaranty Insurance Company, a property and casualty insurance company | — | — | |||||
| 2007 |
Sale of Triangle Life Insurance Company, an accident and life insurance company | — | — | |||||
Total loans and deposits for VB and TVB are shown at acquisition date fair value as reported in Form 8-K/A filed on December 21, 2009 and February 1, 2010, respectively. Further details of the 2009 Acquisitions are documented in Note B in the Notes to Consolidated Financial Statements.
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INTEREST-EARNING ASSETS
Interest-earning assets include loans and leases, investment securities, interest bearing cash in banks and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate, but expose us to potentially higher levels of default.
We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. This focus on asset quality also influences the composition of our investment securities portfolio. At December 31, 2009, United States Treasury and government agency securities represented 78.0 percent of our investment securities portfolio. Mortgage-backed securities comprised only 4.6 percent of the total portfolio while corporate bonds purchased from banks participating in the TLGP represent 16.6 percent. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.
Changes in our interest-earning assets reflect the impact of liquidity generated by deposits and short-term borrowings, the majority of which arises from various treasury services products. The size of the investment securities portfolio changes principally based on trends among loans, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand.
Loans and Leases
Loans not covered by loss share agreements secured by commercial mortgages totaled $4.55 billion at December 31, 2009, a $208.3 million or 4.8 percent increase from December 31, 2008. In 2008 commercial mortgage loans increased 9.1 percent over 2007. The sustained growth reflects our continued focus on small business customers, particularly among medical-related and other professional customers targeted by our banking subsidiaries. As a percentage of total loans and leases not covered by loss share agreements, noncovered commercial mortgage loans represent 39.1 percent at December 31, 2009 and 37.3 percent at December 31, 2008. A large percentage of our commercial mortgage portfolio not covered by loss share agreements is secured by owner-occupied facilities rather than investment property. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.
At December 31, 2009, there were $590.4 million of commercial mortgage loans covered by loss share agreements, which is 50.3 percent of the $1.17 billion of covered loans. Including covered commercial mortgage loans, total commercial mortgage loans as of December 31, 2009 total $5.14 billion, 40.1 percent of total loans and leases.
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Table 3
LOANS AND LEASES
| December 31 | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| (thousands) | |||||||||||||||
| Loans covered under loss share agreements |
$ | 1,173,020 | $ | — | $ | — | $ | — | $ | — | |||||
| Loans and leases not covered under loss share agreements: |
|||||||||||||||
| Real estate: |
|||||||||||||||
| Construction and land development |
622,354 | 778,315 | 810,818 | 783,680 | 766,945 | ||||||||||
| Commercial mortgage |
4,552,078 | 4,343,809 | 3,982,496 | 3,725,752 | 3,518,563 | ||||||||||
| Residential mortgage |
864,704 | 894,802 | 953,209 | 812,426 | 807,434 | ||||||||||
| Revolving mortgage |
2,147,223 | 1,911,852 | 1,494,431 | 1,326,403 | 1,368,729 | ||||||||||
| Other mortgage |
158,187 | 149,478 | 145,552 | 165,223 | 172,712 | ||||||||||
| Total real estate loans |
8,344,546 | 8,078,256 | 7,386,506 | 6,813,484 | 6,634,383 | ||||||||||
| Commercial and industrial |
1,832,670 | 1,885,358 | 1,707,394 | 1,526,818 | 1,206,585 | ||||||||||
| Consumer |
941,986 | 1,233,075 | 1,368,228 | 1,360,524 | 1,318,971 | ||||||||||
| Lease financing |
330,713 | 353,933 | 340,601 | 294,366 | 233,499 | ||||||||||
| Other |
195,084 | 99,264 | 85,354 | 65,042 | 53,549 | ||||||||||
| Total loans and leases not covered under loss share agreements |
11,644,999 | 11,649,886 | 10,888,083 | 10,060,234 | 9,446,987 | ||||||||||
| Total loans and leases |
12,818,019 | 11,649,886 | 10,888,083 | 10,060,234 | 9,446,987 | ||||||||||
| Less allowance for loan and lease losses |
172,282 | 157,569 | 136,974 | 132,004 | 128,847 | ||||||||||
| Net loans and leases |
12,645,737 | $ | 11,492,317 | $ | 10,751,109 | $ | 9,928,230 | $ | 9,318,140 | ||||||
There were no foreign loans or leases in any period.
| December 31, 2009 | |||||||||
| Impaired at acquisition date |
All other acquired loans |
Total | |||||||
| (thousands) | |||||||||
| Loans covered under loss share agreements: |
|||||||||
| Real estate: |
|||||||||
| Construction and land development |
$ | 22,700 | $ | 283,342 | $ | 306,042 | |||
| Commercial mortgage |
36,820 | 553,579 | 590,399 | ||||||
| Residential mortgage |
8,828 | 143,481 | 152,309 | ||||||
| Other mortgage |
331 | 21,307 | 21,638 | ||||||
| Total real estate loans |
68,679 | 1,001,709 | 1,070,388 | ||||||
| Commercial and industrial |
5,958 | 89,273 | 95,231 | ||||||
| Consumer |
255 | 4,259 | 4,514 | ||||||
| Other |
476 | 2,411 | 2,887 | ||||||
| Total loans covered under loss share agreements |
$ | 75,368 | $ | 1,097,652 | $ | 1,173,020 | |||
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At December 31, 2009, revolving mortgage loans secured by real estate totaled $2.15 billion, compared to $1.91 billion at December 31, 2008. The $235.4 million or 12.3 percent increase in revolving mortgage loans in 2009 resulted from higher customer utilization. At December 31, 2009, revolving mortgage loans represented 16.8 percent of loans and leases, compared to 16.4 percent at December 31, 2008. There are no revolving mortgage loans covered by loss share agreements.
Commercial and industrial loans not covered by loss share agreements equaled $1.83 billion at December 31, 2009, compared to $1.89 billion at December 31, 2008, a decline of $52.7 million or 2.8 percent. This decrease follows an increase of $178.0 million or 10.4 percent from 2007 to 2008. Serious weakness in the economy has limited our ability to find loans that meet our underwriting standards, especially within the commercial and industrial portfolio. Commercial and industrial loans not covered by loss share agreements represent 15.7 percent and 16.2 percent of loans and leases not covered by loss share agreements, respectively, as of December 31, 2009 and 2008.
Commercial and industrial loans covered by loss share agreements total $95.2 million which is 8.1 percent of total covered loans. Including covered loans, total commercial and industrial loans as of December 31, 2009 equal $1.93 billion, 15.0 percent of total loans and leases.
Consumer loans not covered by loss share agreements total $942.0 million at December 31, 2009, a decrease of $291.1 million from the prior year. This decline results from our decision during 2008 to discontinue originations of sales finance loans through our dealer network. At December 31, 2009 and 2008, consumer loans not covered by loss share agreements represent 8.1 percent and 10.6 percent of the noncovered loans, respectively.
Consumer loans covered by loss share agreements at December 31, 2009 total $4.5 million, 0.4 percent of total loans and leases covered. Including covered consumer loans, total consumer loans are 7.4 percent of total loans and leases.
There were $864.7 million of residential mortgage loans not covered by loss share agreements and an additional $152.3 million covered for a total of $1.02 billion of residential mortgage loans as of December 31, 2009, 7.9 percent of total loans and leases.
Construction and land development loans not covered by loss share agreements equaled $622.4 million at December 31, 2009, a reduction of $156.0 million or 20.0 percent from December 31, 2008. Of the $622.4 million outstanding as of December 31, 2009, $67.8 million was in the Atlanta, Georgia and southwest Florida markets. Both of these market areas experienced significant reductions in real estate values during 2009. The majority of the remaining $554.6 million of noncovered construction and land development loans are in North Carolina and Virginia.
Construction and land development loans covered by loss share agreements at December 31, 2009 total $306.0 million, 26.1 percent of total loans covered by loss share agreements. Total construction and land development loans equal $928.4 million, which is 7.2 percent of total loans and leases.
Due to the generally weak demand for loans in our market areas and the challenge to provide liquidity to fund rapid levels of loan growth, our projections for 2010 anticipate a modest increase in our loan portfolio. Commercial and industrial and real estate secured loans will continue to grow, but at a much reduced rate. Projected economic instability could constrain customer demand for loans and lender support for increased debt levels. All growth projections are subject to change due to further economic deterioration or improvement and other external factors.
FCB announced in January 2010 that it had acquired substantially all of the assets and assumed a majority of the liabilities of First Regional Bank, headquartered in Los Angeles, California, in an FDIC-assisted transaction. Assets acquired included loans with a carrying value of $1.94 billion, as reflected in the December 31, 2009 Call Report filed by First Regional Bank. This includes $989.4 million in commercial mortgage, $640.4 million in construction and land development, $248.2 million in commercial and industrial and $66.8 million in consumer mortgage and other consumer loans. These loans will be recorded at their fair market value on the consolidated balance sheet of BancShares. Such fair market valuations were incomplete as of the date of filing of this Form 10-K.
Changes to accounting for transferred assets that become effective on January 1, 2010, will result in revolving mortgage loans with a fair value of $97.3 million returning to the consolidated balance sheet. These loans were sold in an asset securitization in 2005 but, due to changes in US GAAP, the fair value of these loans will be reconsolidated during 2010.
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Investment Securities
Investment securities available for sale at December 31, 2009 and 2008 totaled $2.93 billion and $3.22 billion, respectively, a $290.2 million or 9.0 percent decrease. The reduction was primarily attributable to our decision to increase balances of overnight investments in late-2009 in lieu of investing available liquidity in investment securities available for sale. Available for sale securities are reported at their aggregate fair value, and unrealized gains and losses on available for sale securities are included as a component of other comprehensive income, net of deferred taxes.
Investment securities held to maturity equaled $3.6 million and $5.9 million, respectively, at December 31, 2009 and 2008. Securities that are classified as held to maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.
Table 4 presents detailed information relating to the investment securities portfolio.
Income on interest-earning assets.
Interest income amounted to $738.2 million during 2009, a $75.2 million or 9.2 percent decrease from 2008, compared to an $88.8 million or 9.8 percent decrease from 2007 to 2008. The decrease in interest income during 2009 resulted from lower yields, partially offset by growth in interest-earning assets.
Table 5 analyzes taxable-equivalent yields and rates on interest-earning assets and interest-bearing liabilities for the five years ending December 31, 2009. The taxable-equivalent yield on interest-earning assets was 4.69 percent during 2009, an 82 basis point drop from the 5.51 percent reported in 2008, caused by significant reductions in market interest rates. The taxable-equivalent yield on interest-earning assets equaled 6.38 percent in 2007.
The taxable-equivalent yield on the loan and lease portfolio decreased from 6.05 percent in 2008 to 5.49 percent in 2009. The 56 basis point yield drop partially offset by the $756.1 million, or 6.7 percent, growth in average loans and leases contributed to a decrease in loan interest income of $22.3 million or 3.3 percent over 2008. This followed a decrease of $45.7 million or 6.3 percent in loan interest income in 2008 over 2007, driven by an 89 basis point yield decrease; partially offset by an increase in average loans and leases of $793.3 million.
Interest income earned on the investment securities portfolio amounted to $77.9 million and $122.7 million during 2009 and 2008, respectively, with a taxable-equivalent yield of 2.36 percent and 4.09 percent. The $44.9 million decrease in investment interest income during 2009 reflected the 173 basis points decrease in the taxable-equivalent yield. The $19.7 million decrease in interest income earned on investment securities during 2008 resulted from a 67 basis point decrease in the taxable-equivalent yield.
Interest earned on overnight investments equaled $731,000 during 2009, compared to $8.8 million during 2008, a decrease driven by a 174 basis point yield decline and a $79.9 million decrease in average overnight investments during 2009. During 2008, interest income earned from overnight investments decreased $23.4 million or 72.8 percent, the result of significantly lower yields and a $183.8 million decrease in average overnight investments.
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Table 4
INVESTMENT SECURITIES
| December 31 | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | |||||||||||||||||||||
| Cost | Fair Value |
Average Maturity (Yrs./Mos.) |
Taxable Equivalent Yield |
Cost | Fair Value |
Cost | Fair Value | ||||||||||||||||
| (thousands, except maturity and yield information) | |||||||||||||||||||||||
| Investment securities available for sale: |
|||||||||||||||||||||||
| U.S. Government: |
|||||||||||||||||||||||
| Within one year |
$ | 1,543,760 | $ | 1,554,353 | 0/6 | 1.91 | % | $ | 1,349,114 | $ | 1,374,022 | $ | 1,667,530 | $ | 1,675,309 | ||||||||
| One to five years |
730,324 | 733,070 | 1/3 | 1.12 | 1,704,326 | 1,738,406 | 1,377,715 | 1,399,434 | |||||||||||||||
| Five to ten years |
— | — | — | — | 6,300 | 6,287 | |||||||||||||||||
| Total |
2,274,084 | 2,287,423 | 1/9 | 1.65 | 3,053,440 | 3,112,428 | 3,051,545 | 3,081,030 | |||||||||||||||
| FNMA, GNMA and FHLMC mortgage- backed securities: |
|||||||||||||||||||||||
| One to five years |
13,430 | 13,729 | 2/4 | 1.24 | 32 | 30 | 51 | 48 | |||||||||||||||
| Five to ten years |
917 | 914 | 8/3 | 4.96 | 789 | 791 | 135 | 132 | |||||||||||||||
| Over ten years |
112,254 | 115,695 | 26/4 | 5.38 | 80,288 | 82,131 | 78,012 | 77,632 | |||||||||||||||
| Total |
126,601 | 130,338 | 23/10 | 4.40 | 81,109 | 82,952 | 78,198 | 77,812 | |||||||||||||||
| Corporate bonds: |
|||||||||||||||||||||||
| One to five years |
481,341 | 485,667 | 2/2 | 1.83 | — | — | — | — | |||||||||||||||
| Total |
481,341 | 485,667 | 2/2 | 1.83 | — | — | — | — | |||||||||||||||
| State, county and municipal: |
|||||||||||||||||||||||
| Within one year |
303 | 304 | 0/2 | 4.86 | 1,682 | 1,687 | 709 | 708 | |||||||||||||||
| One to five years |
1,107 | 1,138 | 2/4 | 4.64 | 1,416 | 1,356 | 2,246 | 2,236 | |||||||||||||||
| Five to ten years |
— | — | — | — | 356 | 363 | |||||||||||||||||
| Over ten years |
5,643 | 5,371 | 15/7 | 5.18 | 10 | 10 | 66 | 65 | |||||||||||||||
| Total |
7,053 | 6,813 | 13/10 | 5.08 | 3,108 | 3,053 | 3,377 | 3,372 | |||||||||||||||
| Other: |
|||||||||||||||||||||||
| Five to ten years |
1,026 | 1,287 | 8/5 | 11.03 | — | — | — | — | |||||||||||||||
| Over ten years |
911 | 1,012 | 21/0 | 14.49 | 3,691 | 5,427 | 7,771 | 9,390 | |||||||||||||||
| Total |
1,937 | 2,299 | 13/11 | 12.55 | 3,691 | 5,427 | 7,771 | 9,390 | |||||||||||||||
| Equity securities |
2,377 | 16,622 | 3,291 | 15,461 | 2,987 | 27,010 | |||||||||||||||||
| Total investment securities available for sale |
2,893,393 | 2,929,162 | 3,144,639 | 3,219,321 | 3,143,878 | 3,198,614 | |||||||||||||||||
| Investment securities held to maturity: |
|||||||||||||||||||||||
| FNMA, GNMA and FHLMC mortgage- backed securities: |
|||||||||||||||||||||||
| Five to ten years |
3,306 | 3,497 | 7/3 | 5.54 | 4,117 | 4,289 | 5,563 | 5,612 | |||||||||||||||
| Over ten years |
146 | 185 | 18/3 | 6.48 | 165 | 198 | 197 | 231 | |||||||||||||||
| Total |
3,452 | 3,682 | 7/9 | 5.58 |
|
4,282 | 4,487 | 5,760 | 5,843 | ||||||||||||||
| State, county and municipal: |
|||||||||||||||||||||||
| Within one year |
— | — | 151 | 151 | — | — | |||||||||||||||||
| One to five years |
151 | 152 | 3/10 | 5.50 | — | — | 149 | 153 | |||||||||||||||
| Five to ten years |
— | — | 1,440 | 1,472 | — | — | |||||||||||||||||
| Over ten years |
— | — | — | — | 1,435 | 1,530 | |||||||||||||||||
| Total |
151 | 152 | 8/6 | 6.01 | 1,591 | 1,623 | 1,584 | 1,683 | |||||||||||||||
| Other: |
|||||||||||||||||||||||
| Within one year |
— | — | — | — | — | 250 | 250 | ||||||||||||||||
| Total |
— | — | — | — | — | 250 | 250 | ||||||||||||||||
| Total investment securities held to maturity |
3,603 | 3,834 | 8/8 | 5.69 | 5,873 | 6,110 | 7,594 | 7,776 | |||||||||||||||
| Total investment securities |
$ | 2,896,996 | $ | 2,932,996 | $ | 3,150,512 | $ | 3,225,431 | $ | 3,151,472 | $ | 3,206,390 | |||||||||||
The average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities that are exempt from federal and/or state income taxes are stated on a taxable-equivalent basis assumming statutory rates of 35.0 percent for federal income taxes and 6.9 percent for state income taxes for all periods.
Corporate bonds are debt securities issued pursuant to the Temporary Liquidity Guarantee Program issued with the full faith and credit of the United States of America.
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Table 5
AVERAGE BALANCE SHEETS
| 2009 | 2008 | |||||||||||||||||||
| Average Balance |
Interest Income/ Expense |
Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
|||||||||||||||
| (dollars in thousands, taxable equivalent) | ||||||||||||||||||||
| Assets |
||||||||||||||||||||
| Loans and leases |
$ | 12,062,954 | $ | 661,750 | 5.49 | % | $ | 11,306,900 | $ | 683,943 | 6.05 | % | ||||||||
| Investment securities: |
||||||||||||||||||||
| U.S. Government |
2,908,651 | 67,998 | 2.34 | 2,994,352 | 121,803 | 4.07 | ||||||||||||||
| Corporate bonds |
342,643 | 6,283 | 1.83 | — | — | |||||||||||||||
| FNMA, GNMA and FHLMC mortgage- backed securities |
108,228 | 4,812 | 4.45 | 80,697 | 4,311 | 5.34 | ||||||||||||||
| State, county and municipal |
4,693 | 431 | 9.18 | 4,828 | 322 | 6.67 | ||||||||||||||
| Other |
48,405 | 1,085 | 2.24 | 32,840 | 962 | 2.93 | ||||||||||||||
| Total investment securities |
3,412,620 | 80,609 | 2.36 | 3,112,717 | 127,398 | 4.09 | ||||||||||||||
| Overnight investments |
370,940 | 731 | 0.20 | 450,884 | 8,755 | 1.94 | ||||||||||||||
| Total interest-earning assets |
15,846,514 | $ | 743,090 | 4.69 | % | 14,870,501 | $ | 820,096 | 5.51 | % | ||||||||||
| Cash and due from banks |
597,443 | 591,032 | ||||||||||||||||||
| Premises and equipment |
821,961 | 781,149 | ||||||||||||||||||
| Allowance for loan and lease losses |
(162,542 | ) | (145,523 | ) | ||||||||||||||||
| Other assets |
454,108 | 306,558 | ||||||||||||||||||
| Total assets |
$ | 17,557,484 | $ | 16,403,717 | ||||||||||||||||
| Liabilities and shareholders’ equity |
||||||||||||||||||||
| Interest-bearing deposits: |
||||||||||||||||||||
| Checking With Interest |
$ | 1,547,135 | $ | 1,692 | 0.11 | % | $ | 1,440,908 | $ | 1,414 | 0.10 | % | ||||||||
| Savings |
592,610 | 684 | 0.12 | 545,048 | 1,103 | 0.20 | ||||||||||||||
| Money market accounts |
3,880,703 | 27,078 | 0.70 | 3,187,012 | 59,298 | 1.86 | ||||||||||||||
| Time deposits |
5,585,200 | 154,305 | 2.76 | 5,402,505 | 201,723 | 3.73 | ||||||||||||||
| Total interest-bearing deposits |
11,605,648 | 183,759 | 1.58 | 10,575,473 | 263,538 | 2.49 | ||||||||||||||
| Short-term borrowings |
654,347 | 4,882 | 0.75 | 1,129,563 | 17,502 | 1.55 | ||||||||||||||
| Long-term obligations |
753,242 | 39,003 | 5.18 | 607,463 | 33,905 | 5.58 | ||||||||||||||
| Total interest-bearing liabilities |
13,013,237 | $ | 227,644 | 1.75 | % | 12,312,499 | $ | 314,945 | 2.56 | % | ||||||||||
| Demand deposits |
2,973,220 | 2,532,773 | ||||||||||||||||||
| Other liabilities |
105,074 | 73,840 | ||||||||||||||||||
| Shareholders’ equity |
1,465,953 | 1,484,605 | ||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 17,557,484 | $ | 16,403,717 | ||||||||||||||||
| Interest rate spread |
2.94 | % | 2.95 | % | ||||||||||||||||
| Net interest income and net yield on interest-earning assets |
$ | 515,446 | 3.25 | % | $ | 505,151 | 3.40 | % | ||||||||||||
Loans and leases include loans covered by loss share agreements, loans not covered by loss share agreements, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35.0 percent and a state income tax rate of 6.9 percent for all periods. Loan fees, which are not material for any period shown, are included in the yield calculation.
26
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Table 5
AVERAGE BALANCE SHEETS (continued)
| 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense |
Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
||||||||||||||||||||||
| (dollars in thousands, taxable equivalent) | ||||||||||||||||||||||||||||||
| $ | 10,513,599 | $ | 729,635 | 6.94 | % | $ | 9,989,757 | $ | 685,114 | 6.86 | % | $ | 9,375,249 | $ | 575,735 | 6.14 | % | |||||||||||||
| 2,989,248 | 142,235 | 4.76 | 2,890,611 | 113,904 | 3.94 | 2,421,756 | 74,085 | 3.06 | ||||||||||||||||||||||
| — | — | — | — | — | — | |||||||||||||||||||||||||
| 79,229 | 4,248 | 5.36 | 58,590 | 3,065 | 5.23 | 41,789 | 2,182 | 5.22 | ||||||||||||||||||||||
| 5,321 | 346 | 6.50 | 6,174 | 374 | 6.06 | 7,238 | 404 | 5.58 | ||||||||||||||||||||||
| 38,374 | 1,225 | 3.19 | 41,052 | 1,497 | 3.65 | 62,378 | 1,004 | 1.61 | ||||||||||||||||||||||
| 3,112,172 | 148,054 | 4.76 | 2,996,427 | 118,840 | 3.97 | 2,533,161 | 77,675 | 3.07 | ||||||||||||||||||||||
| 634,671 | 32,169 | 5.07 | 619,247 | 30,903 | 4.99 | 595,467 | 19,208 | 3.23 | ||||||||||||||||||||||
| 14,260,442 | $ | 909,858 | 6.38 | % | 13,605,431 | $ | 834,857 | 6.14 | % | 12,503,877 | $ | 672,618 | 5.38 | % | ||||||||||||||||
| 705,864 | 757,428 | 654,821 | ||||||||||||||||||||||||||||
| 735,465 | 669,748 | 608,668 | ||||||||||||||||||||||||||||
| (132,530 | ) | (131,077 | ) | (127,968 | ) | |||||||||||||||||||||||||
| 349,981 | 338,797 | 265,862 | ||||||||||||||||||||||||||||
| $ | 15,919,222 | $ | 15,240,327 | $ | 13,905,260 | |||||||||||||||||||||||||
| $ | 1,431,085 | $ | 1,971 | 0.14 | % | $ | 1,522,439 | $ | 1,875 | 0.12 | % | $ | 1,570,010 | $ | 1,923 | 0.12 | % | |||||||||||||
| 573,286 | 1,235 | 0.22 | 649,619 | 1,382 | 0.21 | 737,830 | 1,521 | 0.21 | ||||||||||||||||||||||
| 2,835,255 | 94,541 | 3.33 | 2,691,292 | 79,522 | 2.95 | 2,643,330 | 50,171 | 1.90 | ||||||||||||||||||||||
| 5,283,782 | 243,489 | 4.61 | 4,967,591 | 197,399 | 3.97 | 4,209,996 | 123,016 | 2.92 | ||||||||||||||||||||||
| 10,123,408 | 341,236 | 3.37 | 9,830,941 | 280,178 | 2.85 | 9,161,166 | 176,631 | 1.93 | ||||||||||||||||||||||
| 1,354,255 | 55,126 | 4.07 | 981,210 | 41,431 | 4.22 | 598,948 | 14,966 | 2.50 | ||||||||||||||||||||||
| 405,758 | 27,352 | 6.74 | 450,272 | 32,128 | 7.14 | 353,885 | 26,554 | 7.54 | ||||||||||||||||||||||
| 11,883,421 | $ | 423,714 | 3.57 | % | 11,262,423 | $ | 353,737 | 3.14 | % | 10,113,999 | $ | 218,151 | 2.16 | % | ||||||||||||||||
| 2,535,828 | 2,622,014 | 2,553,403 | ||||||||||||||||||||||||||||
| 129,356 | 114,636 | 106,792 | ||||||||||||||||||||||||||||
| 1,370,617 | 1,241,254 | 1,131,066 | ||||||||||||||||||||||||||||
| $ | 15,919,222 | $ | 15,240,327 | $ | 13,905,260 | |||||||||||||||||||||||||
| 2.81 | % | 3.00 | % | 3.22 | % | |||||||||||||||||||||||||
| $ | 486,144 | 3.41 | % | $ | 481,120 | 3.54 | % | $ | 454,467 | 3.63 | % | |||||||||||||||||||
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits are our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer demand for treasury services. Certain of our long-term borrowings also currently qualify as capital under guidelines established by the Federal Reserve and other banking regulators.
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Deposits
At December 31, 2009, deposits totaled $15.34 billion, an increase of $1.62 billion or 11.8 percent from the $13.71 billion in deposits recorded as of December 31, 2008. The 2009 Acquisitions accounted for $954.8 million of the growth from 2008. Money market deposits increased $638.5 million or 18.0 percent from December 31, 2008 to December 31, 2009, while demand deposits increased $562.5 million or 21.2 percent. Checking With Interest increased $251.3 million or 16.9 percent in 2009. Time deposits increased marginally, up $66.6 million or 1.2 percent. As a result of declining interest rates during 2009, depositors elected to place available liquidity in money market and transaction accounts rather than time deposits.
During 2009, competition and pricing for deposit business in our market areas remained intense, particularly from larger bank competitors confronting funding and other financial challenges.
Due to the ongoing industry-wide liquidity challenges that intensified during 2009 and our historic focus on maintaining a liquid balance sheet, we continued our focus on deposit attraction and retention as a key business objective. Our ability to satisfy customer loan demand could potentially be constrained unless we are able to continue to generate new deposits at a reasonable cost.
Table 6
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
| December 31, 2009 | |||
| (thousands) | |||
| Less than three months |
$ | 722,380 | |
| Three to six months |
597,660 | ||
| Six to 12 months |
815,061 | ||
| More than 12 months |
504,225 | ||
| Total |
$ | 2,639,326 | |
Short-term borrowings
At December 31, 2009, short-term borrowings totaled $642.4 million, compared to $647.0 million one year earlier, a 0.7 percent decrease. The $4.6 million reduction resulted from the net impact of reduced balances of our treasury services sweep accounts offset by higher current maturities of long-term obligations arising from the 2009 Acquisitions.
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Table 7
SHORT-TERM BORROWINGS
| 2009 | 2008 | 2007 | ||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Master notes |
||||||||||||||||||
| At December 31 |
$ | 395,577 | 0.20 | % | $ | 472,573 | 0.25 | % | $923,424 | 3.02 | % | |||||||
| Average during year |
443,286 | 0.52 | 819,209 | 1.52 | 910,389 | 4.19 | ||||||||||||
| Maximum month-end balance during year |
487,372 | — | 929,613 | — | 1,035,278 | — | ||||||||||||
| Repurchase agreements |
||||||||||||||||||
| At December 31 |
91,583 | 0.10 | 103,878 | 0.15 | 286,090 | 2.27 | ||||||||||||
| Average during year |
103,023 | 0.26 | 211,853 | 0.82 | 303,862 | 3.38 | ||||||||||||
| Maximum month-end balance during year |
105,253 | — | 293,703 | — | 325,790 | — | ||||||||||||
| Federal funds purchased |
||||||||||||||||||
| At December 31 |
12,551 | 0.01 | 10,551 | 0.10 | 23,893 | 3.60 | ||||||||||||
| Average during year |
9,059 | 0.08 | 40,079 | 1.69 | 59,050 | 5.07 | ||||||||||||
| Maximum month-end balance during year |
15,551 | — | 96,551 | — | 101,753 | — | ||||||||||||
| Notes payable to Federal Home Loan Banks |
||||||||||||||||||
| At December 31 |
128,761 | 2.70 | 50,000 | 4.95 | 50,000 | 4.95 | ||||||||||||
| Average during year |
84,965 | 2.68 | 50,000 | 4.95 | 50,000 | 4.95 | ||||||||||||
| Maximum month-end balance during year |
128,761 | — | 50,000 | — | 50,000 | — | ||||||||||||
| Other |
||||||||||||||||||
| At December 31 |
13,933 | — | 10,026 | 0.04 | 21,880 | 3.60 | ||||||||||||
| Average during year |
14,014 | — | 8,422 | 2.04 | 30,954 | 3.96 | ||||||||||||
| Maximum month-end balance during year |
20,023 | — | 21,286 | — | 46,785 | — | ||||||||||||
Long-term obligations
At December 31, 2009 and 2008, long-term obligations totaled $797.4 million and $733.1 million, respectively, an increase of $64.2 million or 8.8 percent. The increase during 2009 results from the fair value of borrowings from the FHLB of Seattle that were assumed in the VB transaction.
For 2009 and 2008, long-term obligations included $273.2 million in junior subordinated debentures representing obligations to two special purpose entities, FCB/NC Capital Trust I and FCB/NC Capital Trust III (the Capital Trusts). The Capital Trusts are the grantor trusts for $265.0 million of trust preferred capital securities outstanding as of December 31, 2009. The proceeds from the trust preferred capital securities were used to purchase the junior subordinated debentures issued by BancShares. Under current regulatory standards, these junior subordinated debentures qualify as capital for BancShares. The $150.0 million in trust preferred capital securities issued by FCB/NC Capital Trust I mature in 2028 and may be redeemed in whole or in part at a premium that declines until 2018, when the redemption price equals the par value of the securities. The $115.0 million in trust preferred capital securities issued by FCB/NC Capital Trust III mature in 2036 and may be redeemed at par in whole or in part on or after June 30, 2011. BancShares has guaranteed all obligations of the Capital Trusts.
Due to modifications to US GAAP that are effective on January 1, 2010, FCB will record a long-term obligation that results from recognition of the debt component of an asset securitization that was completed during 2005. The balance of the debt obligation, which was $85.8 million as of December 31, 2009, is projected to be repaid over a 30-month period.
Expense of interest-bearing liabilities
Interest expense amounted to $227.6 million in 2009, an $87.3 million or 27.7 percent decrease from 2008. This followed a $108.8 million or 25.7 percent decrease in interest expense during 2008 compared to 2007. For 2009, the decrease in interest expense was the net result of lower interest rates offset in part by increased levels of interest-bearing liabilities. The blended rate on total interest-bearing liabilities equaled 1.75 percent during 2009, compared to 2.56 percent in 2008 and 3.57 percent in 2007. Interest-bearing liabilities averaged $13.01 billion during 2009, an increase of
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$700.7 million or 5.7 percent over 2008 levels. During 2008, interest-bearing liabilities averaged $12.31 billion, an increase of $429.1 million or 3.6 percent over 2007.
Interest expense on interest-bearing deposits equaled $183.8 million during 2009, down $79.8 million or 30.3 percent from 2008. The impact of lower interest rates more than offset added expense from higher deposit balances. Lower market interest rates caused the aggregate rate on interest-bearing deposits to decline to 1.58 percent during 2009, down 91 basis points from 2008. Interest-bearing deposits averaged $11.61 billion during 2009, an increase of $1.03 billion or 9.7 percent. Average money market balances increased $693.7 million or 21.8 percent while average time deposits increased $182.7 million or 3.4 percent. During 2008, average time deposits increased $118.7 million or 2.2 percent.
Interest expense on short-term borrowings decreased $12.6 million or 72.1 percent during 2009, the result of decreases in the balances of both master note and repurchase obligations as well as lower rates. The rate on average short-term borrowings decreased 80 basis points from 1.55 percent in 2008 to 0.75 percent in 2009 due to reductions in the federal funds rate during 2009. During 2008, interest expense decreased $37.6 million over 2007, the result of a 252 basis point rate reduction from 4.07 percent in 2007 to 1.55 percent in 2008.
Interest expense on long-term obligations increased $5.1 million or 15.0 percent during 2009 due to new FHLB borrowings assumed as a part of the 2009 Acquisitions. The rate on average long-term obligations decreased 40 basis points from 5.58 percent in 2008 to 5.18 percent in 2009.
NET INTEREST INCOME
Net interest income amounted to $510.5 million during 2009, a $12.1 million or 2.4 percent increase over 2008. The increase from 2009 resulted from balance sheet growth as the taxable-equivalent net yield on interest-earning assets declined by 15 basis points from the prior year to 3.25 percent during 2009.
During 2008, net interest income equaled $498.4 million, a $19.9 million or 4.2 percent increase over 2007. The increase from 2007 resulted from balance sheet growth, the impact of which offset the unfavorable influence of a slight reduction in the net yield on interest-earning assets. The taxable-equivalent net yield on interest-earning assets was 3.40 percent in 2008 compared to 3.41 percent during 2007.
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Table 8 isolates the changes in taxable-equivalent net interest income due to changes in volume and interest rates for 2009 and 2008.
Table 8
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
| 2009 | 2008 | |||||||||||||||||||||||
| Change from previous year due to: |
Change from previous year due to: |
|||||||||||||||||||||||
| Volume | Yield/ Rate |
Total Change |
Volume | Yield/ Rate |
Total Change |
|||||||||||||||||||
| (thousands) | ||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Loans and leases |
$ | 43,433 | $ | (65,626 | ) | $ | (22,193 | ) | $ | 51,467 | $ | (97,159 | ) | $ | (45,692 | ) | ||||||||
| Investment securities: |
||||||||||||||||||||||||
| U.S. Government |
(2,746 | ) | (51,059 | ) | (53,805 | ) | 218 | (20,650 | ) | (20,432 | ) | |||||||||||||
| Corporate bonds |
3,141 | 3,142 | 6,283 | — | — | — | ||||||||||||||||||
| FNMA, GNMA and FHLMC mortgage-backed securities |
3,140 | (2,639 | ) | 501 | 78 | (15 | ) | 63 | ||||||||||||||||
| State, county and municipal |
211 | (102 | ) | 109 | (33 | ) | 9 | (24 | ) | |||||||||||||||
| Other |
402 | (279 | ) | 123 | (170 | ) | (93 | ) | (263 | ) | ||||||||||||||
| Total investment securities |
4,148 | (50,937 | ) | (46,789 | ) | 93 | (20,749 | ) | (20,656 | ) | ||||||||||||||
| Overnight investments |
(865 | ) | (7,159 | ) | (8,024 | ) | (6,434 | ) | (16,980 | ) | (23,414 | ) | ||||||||||||
| Total interest-earning assets |
$ | 46,716 | $ | (123,722 | ) | $ | (77,006 | ) | $ | 45,126 | $ | (134,888 | ) | $ | (89,762 | ) | ||||||||
| Liabilities |
||||||||||||||||||||||||
| Interest-bearing deposits: |
||||||||||||||||||||||||
| Checking With Interest |
$ | 110 | $ | 168 | $ | 278 | $ | 11 | $ | (568 | ) | $ | (557 | ) | ||||||||||
| Savings |
75 | (494 | ) | (419 | ) | (59 | ) | (73 | ) | (132 | ) | |||||||||||||
| Money market accounts |
8,873 | (41,093 | ) | (32,220 | ) | 9,137 | (44,380 | ) | (35,243 | ) | ||||||||||||||
| Time deposits |
5,934 | (53,352 | ) | (47,418 | ) | 4,952 | (46,718 | ) | (41,766 | ) | ||||||||||||||
| Total interest-bearing deposits |
14,992 | (94,771 | ) | (79,779 | ) | 14,041 | (91,739 | ) | (77,698 | ) | ||||||||||||||
| Short-term borrowings |
(5,455 | ) | (7,165 | ) | (12,620 | ) | (6,314 | ) | (31,310 | ) | (37,624 | ) | ||||||||||||
| Long-term obligations |
7,831 | (2,733 | ) | 5,098 | 12,427 | (5,874 | ) | 6,553 | ||||||||||||||||
| Total interest-bearing liabilities |
$ | 17,368 | $ | (104,669 | ) | $ | (87,301 | ) | $ | 20,154 | $ | (128,923 | ) | $ | (108,769 | ) | ||||||||
| Change in net interest income |
$ | 29,348 | $ | (19,053 | ) | $ | 10,295 | $ | 24,972 | $ | (5,965 | ) | $ | 19,007 | ||||||||||
Changes in income relating to certain loans, leases and investment securities are stated on a fully tax-equivalent basis at a rate that approximates BancShares’ marginal tax rate. The taxable equivalent adjustment was $4,931, $6,745 and $7,677 for the years 2009, 2008 and 2007 respectively. Table 5 provides detailed information on average balances, income/expense, yield/rate by category and the relevant income tax rates. The rate/volume variance is allocated equally between the changes in volume and rate.
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NONINTEREST INCOME
Growth of noninterest income is essential to our ability to sustain adequate levels of profitability. Traditionally, the primary sources of noninterest income are cardholder and merchant services income, service charges on deposit accounts, revenues derived from wealth management services and fees from processing services. During 2009, noninterest income also included gains resulting from the 2009 Acquisitions.
Noninterest income totaled $409.6 million during 2009, an increase of $96.1 million or 30.7 percent. Noninterest income during 2008 equaled $313.5 million, a $16.1 million or 5.4 percent increase over 2007. Table 9 presents the major components of noninterest income for the past five years.
Noninterest income during 2009 included $104.4 million in gains recognized on the 2009 Acquisitions. Other areas of improvement include fees from processing services and mortgage income. Mortgage income benefited during 2009 from significant refinance activity caused by low mortgage rates. These increases were partially offset by lower service charge, cardholder and merchant services, and wealth management income caused primarily by weak economic conditions during 2009.
The gains recorded on the 2009 Acquisitions represent the net of the fair values for assets acquired and liabilities assumed, adjusted for cash we received from the FDIC and for the benefits provided under the loss share agreements. As of December 31, 2009, noninterest income includes a bargain purchase gain of $104.4 million resulting from the 2009 Acquisitions. The initial gain of $104.9 million was adjusted $536,000 as a result of information received after the acquisition date that changed the fair values of loans, other real estate, FDIC receivable for loss share agreements and investment securities as of the acquisition date.
Cardholder and merchant services income amounted to $95.4 million in 2009, down $2.2 million from 2008. Merchant and interchange income earned on credit card transactions decreased during 2009; however, interchange income earned on debit transactions grew by $1.4 million or 6.1 percent in 2009.
Service charges on deposit accounts equaled $78.0 million during 2009, compared to $82.3 million in 2008, a $4.3 million or 5.2 percent decrease. Commercial service charge income, bad check and overdraft charges were all lower as a result of reduced customer activity. Service charge income will likely decline in future periods due to legislation affecting fees charged for overdrafts.
Table 9
NONINTEREST INCOME
| Year ended December 31 | ||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||
| (thousands) | ||||||||||||||||||
| Gain on acquisitions |
$ | 104,434 | $ | — | $ | — | $ | — | $ | — | ||||||||
| Cardholder and merchant services |
95,376 | 97,577 | 97,070 | 86,103 | 75,298 | |||||||||||||
| Service charges on deposit accounts |
78,028 | 82,349 | 77,827 | 72,561 | 77,376 | |||||||||||||
| Wealth management services |
46,071 | 48,198 | 49,305 | 42,213 | 34,726 | |||||||||||||
| Fees from processing services |
37,053 | 35,585 | 32,531 | 29,631 | 25,598 | |||||||||||||
| Mortgage income |
10,435 | 6,564 | 6,305 | 5,494 | 5,361 | |||||||||||||
| Insurance commissions |
8,129 | 8,277 | 7,735 | 6,942 | 6,390 | |||||||||||||
| ATM income |
6,856 | 7,003 | 6,515 | 6,803 | 7,843 | |||||||||||||
| Other service charges and fees |
16,411 | 17,598 | 15,318 | 15,996 | 16,902 | |||||||||||||
| Securities gains (losses) |
(511 | ) | 8,128 | 1,376 | (659 | ) | (492 | ) | ||||||||||
| Other |
7,318 | 2,205 | 3,363 | 8,090 | 9,884 | |||||||||||||
| Total |
$ | 409,600 | $ | 313,484 | $ | 297,345 | $ | 273,174 | $ | 258,886 | ||||||||
During 2009, fees from processing services totaled $37.1 million, an increase of $1.5 million or 4.1 percent over 2008. During 2008, BancShares recognized $35.6 million in fees from processing services. Growth in the transaction volume of processed banks led to the favorable trend.
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Fees from wealth management services decreased $2.1 million to $46.1 million in 2009 from $48.2 million in 2008. The 4.4 percent decrease in 2009 was driven by lower trust and asset management fees due to market declines in assets under management.
Mortgage income during 2009 equaled $10.4 million, a 59.0 percent improvement over 2008 with most of the income resulting from sales of newly-originated residential mortgage loans and the related servicing rights to various investors. Insurance commissions totaled $8.1 million during 2009, a 1.8 percent decrease over 2008.
Other service charges and fees totaled $16.4 million during 2009, a decrease of $1.2 million or 6.7 percent from 2008 due to lower check cashing and international fees. Other noninterest income totaled $7.3 million during 2009, a $5.1 million increase primarily resulting from the $4.4 million gain recognized on the sale of our bond trustee operation.
Table 10
NONINTEREST EXPENSE
| Year ended December 31 | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| (thousands) | |||||||||||||||
| Salaries and wages |
$ | 264,342 | $ | 259,250 | $ | 243,871 | $ | 228,472 | $ | 212,997 | |||||
| Employee benefits |
64,390 | 58,899 | 52,733 | 50,445 | 51,517 | ||||||||||
| Occupancy expense |
66,266 | 60,839 | 56,922 | 52,153 | 46,912 | ||||||||||
| Equipment expense |
60,310 | 57,715 | 56,404 | 52,490 | 50,291 | ||||||||||
| Cardholder and merchant services expense: |
|||||||||||||||
| Cardholder and merchant processing |
42,605 | 42,071 | 41,882 | 37,286 | 32,067 | ||||||||||
| Cardholder reward programs |
8,457 | 9,323 | 12,529 | 9,228 | 5,878 | ||||||||||
| FDIC deposit insurance |
29,344 | 5,126 | 2,619 | 1,550 | 1,578 | ||||||||||
| Foreclosure-related expense |
15,107 | 3,658 | 2,086 | 456 | 504 | ||||||||||
| Telecommunications |
11,314 | 12,061 | 10,501 | 9,844 | 9,873 | ||||||||||
| Postage |
10,385 | 10,427 | 9,614 | 8,926 | 8,045 | ||||||||||
| Processing fees paid to third parties |
9,672 | 8,985 | 7,004 | 5,845 | 4,332 | ||||||||||
| Advertising |
8,111 | 8,098 | 7,499 | 7,212 | 7,206 | ||||||||||
| Legal |
5,425 | 6,308 | 6,410 | 5,244 | 4,124 | ||||||||||
| Consultant |
2,508 | 2,514 | 3,324 | 2,254 | 3,362 | ||||||||||
| Amortization of intangibles |
1,940 | 2,048 | 2,142 | 2,318 | 2,453 | ||||||||||
| Other |
57,476 | 59,038 | 59,779 | 57,073 | 55,684 | ||||||||||
| Total |
$ | 657,652 | $ | 606,360 | $ | 575,319 | $ | 530,796 | $ | 496,823 | |||||
NONINTEREST EXPENSE
The primary components of noninterest expense are salaries and related employee benefits, occupancy costs for branch offices and support facilities and equipment and software costs related to branch offices and technology. Noninterest expense for 2009 amounted to $657.7 million, a $51.3 million or 8.5 percent increase over 2008. Noninterest expenses related to the 2009 Acquisitions accounted for approximately $20.3 million of the 2009 increase, while FDIC insurance expense soared by $24.2 million from the prior year. Noninterest expense in 2008 was $606.4 million, a $31.0 million or 5.4 percent increase over 2007. For 2009 and 2008, $3.7 million and $7.7 million of the respective increases in total noninterest expense are attributable to the growth and expansion of ISB. Table 10 presents the major components of noninterest expense for the past five years.
Salary expense totaled $264.3 million during 2009, compared to $259.3 million during 2008, an increase of $5.1 million or 2.0 percent, following a $15.4 million or 6.3 percent increase in 2008 over 2007. The increase in 2009 is attributable to staff costs for new branch offices and headcount additions in support functions. The 2009 Acquisitions accounted for $7.7 million of incremental salaries in 2009.
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Employee benefits expense equaled $64.4 million during 2009, an increase of $5.5 million or 9.3 percent from 2008. The 2009 increase results from a $5.0 million increase in pension costs triggered by a lower discount rate applied to plan liabilities and the unfavorable impact of other accounting assumptions. Health insurance expense increased $2.7 million as the cost of employee health care continues to rise. These increases were partially offset by lower executive retirement costs during 2009.
BancShares recorded occupancy expense of $66.3 million during 2009, an increase of $5.4 million or 8.9 percent during 2009. Occupancy expense during 2008 equaled $60.8 million, an increase of $3.9 million or 6.9 percent over 2007. The increase in occupancy expense during 2009 resulted from higher lease costs, depreciation expense and building repairs. The 2009 Acquisitions accounted for $1.7 million of the increase. Higher occupancy expense during 2008 resulted from improvements to our corporate headquarters building and significant increases in building repairs.
Equipment expense was $60.3 million for 2009 and $57.7 million in 2008. The $2.6 million increase during 2009 resulted primarily from increased software costs.
Costs associated with various cardholder reward programs totaled $8.5 million during 2009 compared to $9.3 million during 2008. The $866,000 reduction resulted from lower credit card rewards offset by increased expenses for debit card rewards. Processing fees paid to third parties increased $687,000 or 7.65 percent during 2009, the result of greater utilization of outsourced technology.
Telecommunications expense totaled $11.3 million during 2009, a decrease of $747,000 or 6.2 percent from 2008. Losses and other costs sustained on the maintenance and disposition of foreclosed assets increased $11.4 million during 2009.
FDIC insurance expense increased $24.2 million from $5.1 million in 2008 to $29.3 million in 2009. The FDIC increased the assessment rate on insured deposits in 2009 and instituted a special assessment as the cost of bank failures depleted the DIF.
INCOME TAXES
During 2009, BancShares recorded income tax expense of $66.8 million, compared to $48.5 million during 2008 and $58.9 million in 2007. BancShares’ effective tax rate equaled 36.5 percent in 2009, 34.8 percent in 2008 and 35.2 percent in 2007.
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Table 11
ANALYSIS OF CAPITAL ADEQUACY
| December 31 | Regulatory Minimum |
||||||||||||||
| 2009 | 2008 | 2007 | |||||||||||||
| (dollars in thousands) | |||||||||||||||
| First Citizens BancShares, Inc. |
|||||||||||||||
| Tier 1 capital |
$ | 1,752,384 | $ | 1,649,675 | $ | 1,557,190 | |||||||||
| Tier 2 capital |
295,300 | 286,318 | 279,573 | ||||||||||||
| Total capital |
$ | 2,047,684 | $ | 1,935,993 | $ | 1,836,763 | |||||||||
| Risk-adjusted assets |
$ | 13,136,815 | $ | 12,499,545 | $ | 11,961,124 | |||||||||
| Risk-based capital ratios |
|||||||||||||||
| Tier 1 capital |
13.34 | % | 13.20 | % | 13.02 | % | 4.00 | % | |||||||
| Total capital |
15.59 | % | 15.49 | % | 15.36 | % | 8.00 | % | |||||||
| Tier 1 leverage ratio |
9.54 | % | 9.88 | % | 9.63 | % | 3.00 | % | |||||||
| First-Citizens Bank & Trust Company |
|||||||||||||||
| Tier 1 capital |
$ | 1,349,972 | $ | 1,262,950 | $ | 1,188,599 | |||||||||
| Tier 2 capital |
259,416 | 250,095 | 244,470 | ||||||||||||
| Total capital |
$ | 1,609,388 | $ | 1,513,045 | $ | 1,433,069 | |||||||||
| Risk-adjusted assets |
$ | 11,501,548 | $ | 10,006,171 | $ | 9,716,423 | |||||||||
| Risk-based capital ratios |
|||||||||||||||
| Tier 1 capital |
11.74 | % | 12.62 | % | 12.23 | % | 4.00 | % | |||||||
| Total capital |
13.99 | % | 15.12 | % | 14.75 | % | 8.00 | % | |||||||
| Tier 1 leverage ratio |
8.63 | % | 9.17 | % | 8.81 | % | 3.00 | % | |||||||
| IronStone Bank |
|||||||||||||||
| Tier 1 capital |
$ | 291,897 | $ | 273,637 | $ | 261,500 | |||||||||
| Tier 2 capital |
42,496 | 38,250 | 24,801 | ||||||||||||
| Total capital |
$ | 334,393 | $ | 311,887 | $ | 286,301 | |||||||||
| Risk-adjusted assets |
$ | 2,370,704 | $ | 2,369,415 | $ | 2,190,348 | |||||||||
| Risk-based capital ratios |
|||||||||||||||
| Tier 1 capital |
12.31 | % | 11.55 | % | 11.94 | % | 4.00 | % | |||||||
| Total capital |
14.11 | % | 13.16 | % | 13.07 | % | 8.00 | % | |||||||
| Tangible equity ratio |
11.35 | % | 10.71 | % | 11.21 | % | 3.00 | % | |||||||
SHAREHOLDERS’ EQUITY
We continually monitor the capital levels and ratios for BancShares and the subsidiary banks to ensure that they comfortably exceed the minimum requirements imposed by their respective regulatory authorities and to ensure that the subsidiary banks’ capital is appropriate given each bank’s growth projection and risk profile. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material effect on the financial statements. Table 11 provides information on capital adequacy for BancShares, FCB and ISB as of December 31, 2009, 2008 and 2007.
BancShares continues to exceed minimum capital standards and the banking subsidiaries remain well-capitalized. The sustained growth of ISB has required BancShares to infuse significant amounts of capital into ISB to support its balance sheet growth. Infusions totaled $40.5 million in 2009, $45.8 million in 2008 and $24.0 million in 2007. Since ISB was formed in 1997, BancShares has provided $390.3 million in capital. BancShares’ prospective capacity to provide capital to support the future growth of ISB is highly dependent upon FCB’s ability to return capital through dividends to BancShares.
Dividends from FCB to BancShares provide the sole source for capital infusions into ISB. These dividends also fund BancShares’ payment of shareholder dividends and interest payments on a portion of its long-term obligations. During
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2009, FCB declared dividends to BancShares in the amount of $60.5 million, compared to $54.8 million in 2008 and $43.8 million in 2007. At December 31, 2009, based on limitations imposed by North Carolina General Statutes, FCB had the ability to declare dividends totaling $1.12 billion. However, any dividends declared in excess of $459.2 million would have caused FCB to lose its well-capitalized designation.
RISK MANAGEMENT
In the normal course of business, BancShares is exposed to various risks. To manage the major risks that are inherent in the operation of a financial holding company and to provide reasonable assurance that our long-term business objectives will be attained, various policies and risk management processes identify, monitor and manage risk within acceptable tolerances. Management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.
Our most prominent risk exposures are credit, interest rate and liquidity risk. Credit risk is the risk of not collecting the amount of a loan, lease or investment when it is contractually due. Interest rate risk is the potential reduction of net interest income as a result of changes in market interest rates. Liquidity risk is the possible inability to fund obligations to depositors, creditors, investors or borrowers.
Credit Risk
BancShares manages and monitors extensions of credit and the quality of the loan and lease portfolio through rigorous initial underwriting processes and periodic ongoing reviews. Underwriting standards reflect credit policies and procedures administered through our centralized credit decision process. We maintain an independent credit review function that conducts risk reviews and analyses for the purpose of ensuring compliance with credit policies and to closely monitor asset quality trends. The risk reviews include portfolio analysis by geographic location and horizontal reviews across industry and collateral sectors within the banking subsidiaries. We strive to identify potential credit problems as early as possible, to take charge-offs or writedowns as appropriate and to maintain adequate allowances for loan and lease losses that are inherent in the loan and lease portfolio. The maintenance of excellent asset quality is one of our key performance measures.
We maintain a well-diversified loan and lease portfolio and seek to avoid the risk associated with large concentrations within specific geographic areas or industries. The ongoing expansion of our branch network has allowed us to mitigate our historic exposure to geographic risk concentration in North Carolina and Virginia. Despite our focus on diversification, several characteristics of our loan and lease portfolio subject us to notable risk. These include our concentration of real estate loans, medical-related loans, and the existence of high loan-to-value loans.
We have historically carried a significant concentration of real estate secured loans, although our underwriting policies principally rely on adequate borrower cash flow rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property and, as a result, a large percentage of our real estate secured loans are owner-occupied. At December 31, 2009, loans secured by real estate not covered by loss share agreements totaled $8.34 billion or 71.7 percent of total loans not covered by loss share agreements compared to $8.08 billion or 69.3 percent at December 31, 2008.
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Table 12
NONPERFORMING ASSETS
| December 31, | ||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
| (thousands, except ratios) | ||||||||||||||||
| Nonaccrual loans and leases: |
||||||||||||||||
| Covered under FDIC loss share agreements |
$ | 116,446 | $ | — | $ | — | $ | — | $ | — | ||||||
| Not covered under FDIC loss share agreements |
58,417 | 39,361 | 13,021 | 14,882 | 18,969 | |||||||||||
| Other real estate owned: |
||||||||||||||||
| Covered under FDIC loss share agreements |
93,774 | — | — | — | — | |||||||||||
| Not covered under FDIC loss share agreements |
40,607 | 29,956 | 6,893 | 6,028 | 6,753 | |||||||||||
| Restructured loans: |
||||||||||||||||
| Covered under FDIC loss share agreements |
10,013 | — | — | — | — | |||||||||||
| Not covered under FDIC loss share agreements |
55,025 | 2,349 | — | — | — | |||||||||||
| Total nonperforming assets |
$ | 374,282 | $ | 71,666 | $ | 19,914 | $ | 20,910 | $ | 25,722 | ||||||
| Nonperforming assets covered under FDIC loss share agreements |
$ | 220,233 | $ | — | $ | — | $ | — | $ | — | ||||||
| Nonperforming assets not covered under FDIC loss share agreements |
154,049 | 71,666 | 19,914 | 20,910 | 25,722 | |||||||||||
| Total nonperforming assets |
$ | 374,282 | $ | 71,666 | $ | 19,914 | $ | 20,910 | $ | 25,722 | ||||||
| Accruing loans and leases 90 days or more past due |
$ | 27,766 | $ | 22,459 | $ | 7,124 | $ | 5,185 | $ | 9,180 | ||||||
| Loans and leases at December 31: |
||||||||||||||||
| Covered under FDIC loss share agreements |
1,173,020 | — | — | — | — | |||||||||||
| Not covered under FDIC loss share agreements |
11,644,999 | 11,649,886 | 10,963,904 | 10,273,043 | 9,656,230 | |||||||||||
| Ratio of nonperforming assets to total loans, leases and other real estate: |
||||||||||||||||
| Covered under FDIC loss share agreements |
17.39 | % | — | — | — | — | ||||||||||
| Not covered under FDIC loss share agreements |
1.32 | 0.61 | 0.18 | 0.20 | 0.27 | |||||||||||
| Total |
2.89 | 0.61 | 0.18 | 0.20 | 0.27 | |||||||||||
| Interest income that would have been earned on nonperforming loans and leases had they been performing |
$ | 4,172 | $ | 1,275 | $ | 1,200 | $ | 1,271 | $ | 551 | ||||||
| Interest income earned on nonperforming loans and leases |
3,746 | 797 | 465 | 226 | 821 | |||||||||||
There were no foreign loans or leases outstanding in any period.
In recent years, we have sought opportunities to provide financial services to businesses associated with and professionals within the medical community. Due to strong loan growth within this industry, noncovered loans to borrowers in medical, dental or related fields totaled $2.93 billion as of December 31, 2009 and $2.74 billion as of December 31, 2008, representing 25.1 percent and 23.5 percent of noncovered loans and leases as of the respective dates. Except for this single concentration, no other industry represented more than 10 percent of noncovered loans and leases outstanding at December 31, 2009.
In addition to geographic and industry concentrations, we monitor our loan and lease portfolio for other risk characteristics. Among the key indicators of credit risk are loan-to-value ratios, which measure a lender’s exposure as compared to the value of the underlying collateral. Regulatory agencies have established guidelines that define high loan-to-value loans as those real estate loans that exceed 65 percent to 85 percent of the collateral value depending upon the type of collateral. At December 31, 2009, we had $758.3 million or 6.5 percent of noncovered loans and leases that exceeded the loan-to-value ratio guidelines compared to $919.2 million or 7.8 percent at December 31, 2008. While we continuously strive to limit our high loan-to-value loans, we believe that the inherent risk within these loans is lessened by mitigating factors, such as our strict underwriting criteria and the high rate of owner-occupied properties.
Residential construction loans in the Atlanta, Georgia and southwest Florida markets as of December 31, 2009 equaled $67.8 million, compared to $128.8 million at December 31, 2008. As of December 31, 2009, $22.2 million of the
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residential construction loans were classified as nonperforming, and $32.0 million were identified as potential problem loans due to concerns about borrowers’ abilities to comply with existing loan repayment terms. We continue to closely monitor past due and problem accounts to identify any loans and leases that should be classified as impaired or non-accrual.
Nonperforming assets include nonaccrual loans and leases, other real estate and restructured loans. With the exception of certain residential mortgage loans, the accrual of interest on loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Loans and leases are returned to accrual status when both principal and interest are current and the asset is determined to be performing in accordance with the terms of the loan instrument. The accrual of interest on certain residential mortgage loans is discontinued when a loan is more than three monthly payments past due, and the accrual of interest resumes when the loan is less than three monthly payments past due. Other real estate includes foreclosed property, branch facilities that we have closed but not sold and land that we have elected to sell that was originally acquired for future branches. Restructured loans include accruing loans that we have modified in order to enable a financially-distressed borrower an opportunity to continue making payments under terms more favorable than we would normally extend. Nonperforming asset balances for the past five years are presented in Table 12.
BancShares’ nonperforming assets at December 31, 2009 totaled $374.3 million, compared to $71.7 million at December 31, 2008 and $19.9 million at December 31, 2007. As a percentage of total loans, leases and other real estate, nonperforming assets represented 2.92 percent, 0.61 percent and 0.18 percent as of December 31, 2009, 2008 and 2007, respectively.
The $302.6 million surge in nonperforming assets during 2009 was primarily due to the effect of high levels of nonperforming assets within the 2009 Acquisitions. Of the $374.3 million in nonperforming assets, $220.2 million are covered under FDIC loss share agreements that provide significant loss protection to FCB. We continue to closely monitor past due and problem accounts to identify any loans and leases that should be classified as impaired or nonaccrual.
Nonperforming assets not covered under loss share agreements totaled $154.0 million at December 31, 2009, compared to $71.7 million at December 31, 2008 and $19.9 million at December 31, 2007. The $82.4 million increase during 2009 resulted from a higher volume of restructured loans. The $51.8 million increase during 2008 primarily resulted from exposures in the residential construction portfolio in the Atlanta, Georgia and southwest Florida markets. The 2009 increase in nonperforming assets not covered under loss share agreements included increases of $19.1 million in nonaccrual loans and leases, $10.7 million in other real estate owned and $52.7 million in restructured loans. The 2009 increase in restructured loans resulted from modifications made to performing loans to support borrowers who were at risk of defaulting on their loan repayment obligations.
Accruing loans more than 90 days past due totaled $27.8 million at December 31, 2009 compared to $22.5 million at December 31, 2008. These are primarily secured retail loans that are in process of collection.
The allowance for loan and lease losses reflects the estimated losses resulting from the inability of our customers to make required payments. In calculating the allowance, we employ a variety of modeling and estimation tools for measuring credit risk. Generally, loans and leases to commercial customers are evaluated individually and assigned a credit grade, while consumer loans are evaluated collectively. The individual credit grades for commercial loans are assigned based upon factors such as the borrower’s cash flow, the value of any underlying collateral and the strength of any guarantee. Relying on historical data of credit grade losses and migration patterns among credit grades, we calculate a loss estimate for each credit grade. As loans to borrowers experiencing financial stress are moved to higher-risk credit grades, increased allowances are assigned to that exposure. Allowances are recorded for acquired loans for post-acquisition credit quality deterioration only.
Groups of consumer loans are aggregated over their remaining estimated behavioral lives and probable loss projections for each period become the basis for the allowance amount. The loss projections are based on historical losses, delinquency patterns and various other credit risk indicators. During 2009, based on deepening economic weaknesses indicated by higher unemployment and personal bankruptcy rates, we increased loss estimates for consumer loans and revolving mortgage loans.
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When needed, we also establish specific allowances for impaired loans. Commercial purpose loans are considered to be impaired if they are classified as nonaccrual. The allowance for impaired loans in excess of $1.0 million is the difference between its carrying value and the estimated collateral value or the present value of anticipated cash flows. Collateral values are obtained from current appraisals, if available, or prior appraisal values that have been discounted due to the age of the appraisal. For smaller impaired loans, the allowance is calculated based on the credit grade.
The allowance for loan and lease losses also includes an amount that is not specifically allocated to individual loan types. This unallocated allowance is based upon factors such as changes in business and economic conditions, recent loss, delinquency and asset quality issues both within BancShares and the banking industry, exposures resulting from loan concentrations or specific industry risks and other judgmental factors. As of December 31, 2009, the unallocated portion of the allowance equaled $12.1 million or 7.0 percent. This compares to $11.7 million or 7.4 percent of the total allowance for credit losses as of December 31, 2008.
At December 31, 2009, BancShares’ allowance for loan and lease losses on noncovered loans totaled $168.8 million or 1.45 percent of loans and leases not covered by loss share agreements, compared to $157.6 million or 1.35 percent at December 31, 2008. An additional allowance of $3.5 million was established in 2009 for loans covered by loss share agreements acquired from TVB, which represents 0.30 percent of total loans and leases covered by loss share agreements. This $3.5 million was established due to adjustments in estimates suggesting a deterioration in credit quality for certain identified loans that occurred after the date of the acquisition. The $11.2 million increase in the allowance for non-covered loan and lease losses during 2009 was primarily due to deterioration of credit quality within the noncovered commercial loan sectors as well as higher anticipated losses in the residential construction and revolving mortgage loan portfolios.
The provision for loan and lease losses equaled $79.4 million during 2009 compared to $65.9 million during 2008 and $32.9 million during 2007. The $13.4 million or 20.4 percent increase in provision for loan and lease losses from 2008 to 2009 resulted primarily from losses and provisions in the commercial, residential construction loan portfolio and certain consumer loan portfolios.
Net charge-offs for 2009 totaled $64.7 million, compared to $45.3 million during 2008, and $28.0 million during 2007. The ratio of net charge-offs to average loans and leases not covered by loss share agreements equaled 0.56 percent during 2009, 0.40 percent during 2008 and 0.27 percent during 2007. Despite the increase in the 2009 loss ratio, BancShares’ net charge-off rates remain low when compared to industry data.
Table 13 provides details concerning the allowance for loan and lease losses for the past five years. Table 14 details the allocation of the allowance for loan and lease losses among the various loan types. The process used to allocate the allowance considers, among other factors, whether the borrower is a retail or commercial customer, whether the loan is secured or unsecured, and whether the loan is an open or closed-end agreement.
Changes to the allocation of the allowance for loan and lease losses reflect changes in the mix of the loan portfolio and expectations regarding changes in loss exposure. Although construction and land development loans represent 7.2 percent of total loans at December 31, 2009, compared to 6.6 percent at December 31, 2008, noncovered loans actually declined due to charge-offs, foreclosures and payments during 2009, resulting in a reduction in the allowances allocated to that portfolio segment. Conversely, noncovered commercial mortgage and revolving mortgage loans increased, resulting in an increase in the allowance allocated to those categories. The percentage of consumer loans to total loans continues to decline, but higher loss projections as of December 31, 2009 contributed to an increase in the allowance allocated.
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Table 13
ALLOWANCE FOR LOAN AND LEASE LOSSES
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (thousands, except ratios) | ||||||||||||||||||||
| Allowance for loan and lease losses at beginning of period |
$ | 157,569 | $ | 136,974 | $ | 132,004 | $ | 128,847 | $ | 123,861 | ||||||||||
| Adjustment for sale of loans |
— | — | — | — | (1,585 | ) | ||||||||||||||
| Provision for loan and lease losses |
79,364 | 65,926 | 32,939 | 21,203 | 33,562 | |||||||||||||||
| Charge-offs: |
||||||||||||||||||||
| Real estate: |
||||||||||||||||||||
| Construction and land development |
(17,606 | ) | (17,559 | ) | (1,683 | ) | — | (1 | ) | |||||||||||
| Commercial mortgage |
(2,081 | ) | (696 | ) | (49 | ) | (124 | ) | (551 | ) | ||||||||||
| Residential mortgage |
(1,966 | ) | (1,165 | ) | (194 | ) | (1,717 | ) | (1,912 | ) | ||||||||||
| Revolving mortgage |
(8,390 | ) | (3,249 | ) | (1,363 | ) | (1,475 | ) | (951 | ) | ||||||||||
| Other mortgage loans |
(173 | ) | — | — | — | — | ||||||||||||||
| Total real estate loans |
(30,216 | ) | (22,669 | ) | (3,289 | ) | (3,316 | ) | (3,415 | ) | ||||||||||
| Commercial and industrial |
(17,114 | ) | (13,593 | ) | (13,106 | ) | (10,378 | ) | (18,724 | ) | ||||||||||
| Consumer |
(20,288 | ) | (12,695 | ) | (13,203 | ) | (9,171 | ) | (10,425 | ) | ||||||||||
| Lease financing |
(1,736 | ) | (1,124 | ) | (3,092 | ) | (1,488 | ) | (347 | ) | ||||||||||
| Total charge-offs |
(69,354 | ) | (50,081 | ) | (32,690 | ) | (24,353 | ) | (32,911 | ) | ||||||||||
| Recoveries: |
||||||||||||||||||||
| Real estate: |
||||||||||||||||||||
| Construction and land development |
517 | 227 | 21 | — | — | |||||||||||||||
| Commercial mortgage |
96 | 55 | 8 | 182 | 409 | |||||||||||||||
| Residential mortgage |
97 | 121 | 261 | 290 | 432 | |||||||||||||||
| Revolving mortgage |
182 | 215 | 96 | 182 | 155 | |||||||||||||||
| Total real estate loans |
892 | 618 | 386 | 654 | 996 | |||||||||||||||
| Commercial and industrial |
1,384 | 1,645 | 1,282 | 1,358 | 2,164 | |||||||||||||||
| Consumer |
2,305 | 2,173 | 2,883 | 4,140 | 2,672 | |||||||||||||||
| Lease financing |
122 | 314 | 170 | 155 | 88 | |||||||||||||||
| Total recoveries |
4,703 | 4,750 | 4,721 | 6,307 | 5,920 | |||||||||||||||
| Net charge-offs |
(64,651 | ) | (45,331 | ) | (27,969 | ) | (18,046 | ) | (26,991 | ) | ||||||||||
| Allowance for loan and lease losses at end of period |
$ | 172,282 | $ | 157,569 | $ | 136,974 | $ | 132,004 | $ | 128,847 | ||||||||||
| Average loans and leases not covered by loss share agreements |
$ | 11,635,355 | $ | 11,306,900 | $ | 10,513,599 | $ | 9,989,757 | $ | 9,375,249 | ||||||||||
| Loans and leases covered under loss share agreements at year-end |
1,173,020 | — | — | — | — | |||||||||||||||
| Loans and leases not covered under loss share agreements at year-end |
11,644,999 | 11,649,886 | 10,963,904 | 10,273,043 | 9,656,230 | |||||||||||||||
| Reserve for unfunded commitments |
7,130 | 7,176 | 7,297 | 6,642 | 6,923 | |||||||||||||||
| Ratios: |
||||||||||||||||||||
| Net charge-offs to average noncovered loans and leases |
0.56 | % | 0.40 | % | 0.27 | % | 0.18 | % | 0.29 | % | ||||||||||
| Allowance for loan and lease losses to total loans and leases |
||||||||||||||||||||
| Covered under loss share agreements at end of period |
0.30 | — | — | — | — | |||||||||||||||
| Not covered under loss share agreements at end of period |
1.45 | 1.35 | 1.25 | 1.28 | 1.33 | |||||||||||||||
All information presented in this table relates to domestic loans and leases as BancShares makes no foreign loans and leases.
Allowance for loan and lease losses at December 31, 2009 includes $3,500 established for Covered Loans.
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Table 14
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
| December 31 | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||
| Allowance for loan and lease losses |
Percent of loans to total loans |
Allowance for loan and lease losses |
Percent of loans to total loans |
Allowance for loan and lease losses |
Percent of loans to total loans |
Allowance for loan and lease losses |
Percent of loans to total loans |
Allowance for loan and lease losses |
Percent of loans to total loans |
|||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||
| Allowance for loan and lease losses allocated to: |
||||||||||||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||||
| Construction and land development |
$ | 10,121 | 7.24 | % | $ | 13,948 | 6.64 | % | $ | 9,918 | 7.40 | % | $ | 9,351 | 7.63 | % | $ | 8,985 | 7.94 | % | ||||||||||
| Commercial mortgage |
54,250 | 40.13 | 43,222 | 37.06 | 35,760 | 36.31 | 38,463 | 36.27 | 37,185 | 36.44 | ||||||||||||||||||||
| Residential mortgage |
8,213 | 7.93 | 8,006 | 8.23 | 7,011 | 9.39 | 6,954 | 9.98 | 6,822 | 10.53 | ||||||||||||||||||||
| Revolving mortgage |
8,389 | 16.75 | 6,821 | 16.31 | 5,735 | 13.63 | 8,425 | 12.91 | 8,712 | 14.17 | ||||||||||||||||||||
| Other mortgage |
5,366 | 1.40 | 5,231 | 1.28 | 2,323 | 1.33 | 2,145 | 1.61 | 2,242 | 1.79 | ||||||||||||||||||||
| Total real estate |
86,339 | 73.45 | 77,228 | 69.52 | 60,747 | 68.06 | 65,338 | 68.40 | 63,946 | 70.87 | ||||||||||||||||||||
| Commercial and industrial |
39,059 | 15.05 | 35,896 | 16.09 | 32,743 | 15.57 | 34,846 | 14.86 | 30,663 | 12.50 | ||||||||||||||||||||
| Consumer |
28,944 | 7.38 | 27,045 | 10.52 | 26,925 | 12.48 | 22,396 | 13.24 | 22,695 | 13.66 | ||||||||||||||||||||
| Lease financing |
4,535 | 2.58 | 5,091 | 3.02 | 4,649 | 3.11 | 3,562 | 2.87 | 2,389 | 2.42 | ||||||||||||||||||||
| Other |
1,333 | 1.54 | 632 | 0.85 | 412 | 0.78 | 723 | 0.63 | 576 | 0.55 | ||||||||||||||||||||
| Unallocated |
12,072 | 11,677 | 11,498 | 5,139 | 8,578 | |||||||||||||||||||||||||
| Total allowance for loan and lease losses |
$ | 172,282 | 100.00 | % | $ | 157,569 | 100.00 | % | $ | 136,974 | 100.00 | % | $ | 132,004 | 100.00 | % | $ | 128,847 | 100.00 | % | ||||||||||
| Allowance for loan and lease losses for: |
||||||||||||||||||||||||||||||
| Loans covered under loss share agreements |
$ | 3,500 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
| Loans not covered under loss share agreement |
168,782 | 157,569 | 136,974 | 132,004 | 128,847 | |||||||||||||||||||||||||
| Total allowance for loan and lease losses |
$ | 172,282 | $ | 157,569 | $ | 136,974 | $ | 132,004 | $ | 128,847 | ||||||||||||||||||||
Table 15
INTEREST RATE RISK ANALYSIS
| Favorable (unfavorable) impact on net interest income compared to stable rate scenario over the 12-month period following: |
||||||
| Assumed rate change |
December 31, 2009 |
December 31, 2008 |
||||
| Most likely |
-0.05 | % | -0.37 | % | ||
| Immediate 200 basis point increase |
4.00 | % | 2.06 | % | ||
| Gradual 200 basis point increase |
0.83 | % | 0.19 | % | ||
| Immediate 200 basis point decrease |
-6.25 | % | -0.58 | % | ||
| Gradual 200 basis point decrease |
-1.20 | % | 1.29 | % | ||
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Interest Rate Risk
Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes, an event frequently described by the resulting impact on the shape of the yield curve. Market interest rates also have an impact on the interest rate and repricing characteristics of loans and leases that are originated as well as the rate characteristics of our interest-bearing liabilities.
We assess our interest rate risk by simulating future amounts of net interest income using various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Due to the existence of contractual floors or competitive pressures that constrain our ability to reduce interest rates, certain deposit and short-term borrowings can price down only marginally from current interest rate levels. In our models, we assume that the prime interest rate will not move below the December 31, 2009 rate of 3.25 percent. Table 15 provides the impact on net interest income resulting from various interest rate scenarios as of December 31, 2009 and 2008.
We also utilize the market value of equity as a tool to measure and manage interest rate risk. The market value of equity measures the degree to which the market values of our assets and liabilities will change given a specific degree of movement in interest rates. Our calculation methodology for the market value of equity utilizes a 200-basis point parallel rate shock. As of December 31, 2009, the market value of equity calculated with a 200-basis point immediate decrease in interest rates equals 9.54 percent of assets, up from 8.81 percent when calculated with stable rates. The market value of equity calculated with a 200-basis point immediate increase in interest rates equals 7.58 percent of assets. The estimated amounts for the market value of equity are highly influenced by the relatively longer maturity of the commercial loan component of interest-earning assets when compared to the shorter term maturity characteristics of interest-bearing liabilities.
The maturity distribution and repricing opportunities of interest-earning assets and interest-bearing liabilities have a significant impact on our interest rate risk. Our strategy is to reduce overall interest rate risk by maintaining relatively short maturities. Table 16 provides loan maturity distribution and information regarding the sensitivity of loans and leases to changes in interest rates. Table 4 includes maturity information for our investment securities. Table 6 displays maturity information for time deposits with balances in excess of $100,000.
We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our overall balance sheet rate sensitivity and interest rate risk. However, during the second quarter of 2006, in conjunction with the issuance of $115.0 million in junior subordinated debentures, we entered into an interest rate swap to synthetically convert the variable rate coupon on the debentures to a fixed rate of 7.125 percent for a period of five years. The interest rate swap is effective from June 2006 to June 2011. During 2009, we entered into a second interest rate swap covering the period from June 2011 to June 2016 at a fixed interest rate of 5.50 percent. Both of the interest rate swaps qualify as cash flow hedges under US GAAP. The derivatives are valued each quarter, and changes in fair value are recorded on the consolidated balance sheet with an offset to other comprehensive income for the effective portion and an offset to the consolidated statements of income for any ineffective portion. The determination of effectiveness is made under the long-haul method.
Liquidity Risk
Liquidity risk results from the mismatching of asset and liability cash flows and the potential inability to secure adequate amounts of funding from traditional sources of liquidity. BancShares manages this risk by structuring its balance sheet prudently and by maintaining various borrowing resources to fund potential cash needs. BancShares has historically maintained a strong focus on liquidity, and we have traditionally relied on our deposit base as our primary liquidity source. Short-term borrowings resulting from commercial treasury customers are also an important source of liquidity, although most of those borrowings must be collateralized, thereby potentially restricting the use of the resulting liquidity. Through our deposit and treasury product pricing strategies, we have the ability to stimulate or curtail liability growth.
During 2009, economic conditions created significant disruptions to the normal availability of liquidity to lenders, a trend that was amplified in some institutions by deposit withdrawals. Despite these challenges, we achieved growth in average deposits of 11.2 percent in 2009, compared to 3.5 percent during 2008 and 1.7 percent during 2007. Although the deposits resulting from the 2009 Acquisitions contributed to our deposit growth, we also experienced strong organic
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growth attributed to consumers’ attraction to the safety and financial strength of our company. This growth in deposits occurred despite extraordinarily low interest rates. Low interest rates did significantly impact the balances of short-term borrowings during 2009 with our treasury services sweep balances experiencing a $484.8 million reduction.
Trends in cash flows after the effective dates of the 2009 Acquisitions created additional pressures on our liquidity during 2009 and will require us to generate incremental liquidity in 2010. These pressures are a function of relatively modest cash receipts arising from payments on covered loans and the FDIC receivable for loss share agreements versus the level of deposit outflows. The deposit outflows are driven by the high levels of wholesale and other non-core funding sources typically utilized by failing institutions, a large portion of which typically are withdrawn from the acquiring institution subsequent to the acquisition date. The incremental liquidity to fund our acquisitions will be primarily generated outside of the failed bank markets through new core deposits within the legacy FCB franchise, augmented as needed by brokered deposits and FHLB borrowings.
We routinely utilize borrowings from the FHLB of Atlanta as an alternative source of liquidity. At December 31, 2009, we had sufficient collateral pledged to provide access to $1.08 billion of additional borrowings. Additionally, we maintain federal funds lines of credit and other borrowing facilities. At December 31, 2009, BancShares had access to $500.0 million in unfunded borrowings through its various sources.
Once we have satisfied our loan demand and other funding needs, residual liquidity is held in cash or invested in overnight investment and investment securities available for sale. At December 31, 2009, these highly-liquid assets totaled $4.13 billion or 22.4 percent, compared to $3.99 billion or 23.8 percent of total assets at December 31, 2008.
Table 16
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
| At December 31, 2009, maturing | ||||||||||||
| Within One Year |
One to Five Years |
After Five Years |
Total | |||||||||
| (thousands) | ||||||||||||
| Loans covered under loss share agreements |
$ | 333,538 | $ | 476,866 | $ | 362,616 | $ | 1,173,020 | ||||
| Loans and leases not covered under loss share agreements |
||||||||||||
| Real estate |
2,355,541 | 4,116,348 | 1,872,657 | 8,344,546 | ||||||||
| Commercial and industrial |
475,501 | 756,136 | 601,033 | 1,832,670 | ||||||||
| Other |
424,717 | 879,928 | 163,138 | 1,467,783 | ||||||||
| Total not covered under loss share agreements |
$ | 3,255,759 | $ | 5,752,412 | $ | 2,636,828 | $ | 11,644,999 | ||||
| Loans maturing after one year with: |
||||||||||||
| Fixed interest rates |
$ | 3,235,989 | $ | 2,292,265 | $ | 5,528,254 | ||||||
| Floating or adjustable rates |
2,516,423 | 344,563 | 2,860,986 | |||||||||
| Total |
$ | 5,752,412 | ||||||||||