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, 2012
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 Securities Exchange Act of 1934:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, Par Value $1 | NASDAQ Global Select Market | |
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934.
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 during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x 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 $888,367,135.
On March 1, 2013, there were 8,586,058 outstanding shares of the Registrant’s Class A Common Stock and 1,032,883 outstanding shares of the Registrant’s Class B Common Stock.
Portions of the Registrant’s definitive Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated in Part III of this report.
CROSS REFERENCE INDEX
Page | ||||||
PART 1 | Item 1 | |||||
Item 1A | ||||||
Item 1B | Unresolved Staff Comments | None | ||||
Item 2 | ||||||
Item 3 | ||||||
PART II | Item 5 | |||||
Item 6 | ||||||
Item 7 | ||||||
Item 7A | ||||||
Item 8 | Financial Statements and Supplementary Data | |||||
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | None | ||||
Item 9A | ||||||
Item 9B | Other Information | None | ||||
PART III | Item 10 | Directors, Executive Officers and Corporate Governance | * | |||
Item 11 | Executive Compensation | * | ||||
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | * | ||||
Item 13 | Certain Relationships and Related Transactions and Director Independence | * | ||||
Item 14 | Principal Accounting Fees and Services | * | ||||
PART IV | Item 15 | Exhibits, Financial Statement Schedules | ||||
(1) | Financial Statements (see Item 8 for reference) | |||||
(2) | All Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8. | None | ||||
(3) | ||||||
* 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 2013 Annual Meeting of Shareholders (2013 Proxy Statement) .
Information required by Item 11 is incorporated herein by reference to the information that appears under the headings or captions ‘Compensation Committee Report,’ ‘Compensation Discussion and Analysis,’ ‘Executive Compensation,’ and ‘Director Compensation,’ of the 2013 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 2013 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 2013 Proxy Statement.
Information required by Item 14 is incorporated by reference to the information that appears under the caption ‘Services and Fees During 2012 and 2011’ of the 2013 Proxy Statement.
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Business
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. 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 throughout the United States. On January 7, 2011, ISB was merged into FCB resulting in a single banking subsidiary of BancShares.
As of December 31, 2012, FCB operated 414 branches in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Washington, California, Florida, Georgia, Texas, Arizona, New Mexico, Oregon, Colorado, Oklahoma, Kansas, Missouri and Washington, DC.
During 2011, 2010 and 2009, FCB participated in six FDIC-assisted transactions, acquiring assets and assuming liabilities of the failed financial institutions. These transactions have allowed FCB to enter new markets and expand its presence in other markets. A summary of the FDIC-assisted transactions is provided in Table 2 of Management's Discussion and Analysis.
BancShares' market areas enjoy a diverse employment base, including, in various locations, manufacturing, service industries, agricultural, wholesale and 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. However, like larger banks, BancShares has the capacity to offer most financial products and services that our customers require.
A substantial portion of BancShares’ revenue is derived from our operations throughout North Carolina and Virginia, and in certain urban areas of Georgia, Florida, California and Texas. The delivery of products and services to our customers is primarily accomplished through associates deployed throughout our extensive branch network. However, we also provide customers with access to our products and services through online banking, telephone banking, mobile banking and various ATM networks. Business customers may also conduct banking transactions through use of remote image technology.
FCB’s primary deposit markets are North Carolina and Virginia. FCB’s deposit market share in North Carolina was 3.7 percent as of June 30, 2012, based on the FDIC Deposit Market Share Report, which makes FCB the fourth largest bank in North Carolina. The three banks larger than FCB based on deposits in North Carolina as of June 30, 2012, controlled 78.2 percent of North Carolina deposits. In Virginia, FCB was the 19th largest bank with a June 30, 2012, deposit market share of 0.5 percent. The 18 larger banks represent 85.4 percent of total deposits in Virginia as of June 30, 2012. The distribution of FCB branches as of December 31, 2012, is provided in the following table.
FCB seeks to meet the needs of both individuals and commercial entities in its market areas. 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. FCB’s wholly-owned subsidiary, First Citizens Investor Services, Inc. (FCIS), provides various investment products including annuities, discount brokerage services and third-party mutual funds to customers primarily through the bank's branch network. Other subsidiaries are not material to BancShares’ consolidated financial position or to consolidated net income.
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December 31, 2012 | ||||
State | Number of branches | Percent of total deposits | ||
North Carolina | 266 | 72.4 | % | |
Virginia | 48 | 7.3 | ||
California | 21 | 6.0 | ||
Florida | 17 | 3.6 | ||
Georgia | 14 | 2.3 | ||
Washington | 11 | 2.0 | ||
Colorado | 7 | 1.3 | ||
Texas | 7 | 1.3 | ||
Tennessee | 6 | 0.7 | ||
West Virginia | 5 | 0.7 | ||
Arizona | 2 | 0.5 | ||
New Mexico | 2 | 0.7 | ||
Oklahoma | 2 | 0.2 | ||
Oregon | 2 | 0.3 | ||
District of Columbia | 1 | 0.1 | ||
Kansas | 1 | 0.3 | ||
Maryland | 1 | 0.2 | ||
Missouri | 1 | 0.1 | ||
Total | 414 | 100.0 | % | |
In recent years, FCB has provided various processing and operational services to other banks. The scope of these services declined in 2012 due to client bank attrition and the conversion of certain clients to different systems that resulted in reduced revenue. In early 2013, we elected to sell nearly all processing service relationships to another servicer. Although we will continue to provide processing services to our largest client bank, the revenues generated by all other banks will end during the first quarter of 2013.
The financial services industry is highly competitive and the ability of non-bank financial entities to provide services has intensified competition. Traditional commercial banks are subject to significant competitive pressure from multiple types of financial institutions. This non-bank competitive pressure is perhaps most acute in wealth management and payments processing. 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 also be affected by the elimination of numerous smaller community-based institutions. Since 2008, asset quality challenges, capital erosion and difficulty attracting new capital and a severe global economic recession have compelled many banks to merge and have led to bank failures that have had a significant impact on the competitive environment. We anticipate that industry consolidation will continue in the foreseeable future.
At December 31, 2012, BancShares and its subsidiaries employed a full-time staff of 4,369 and a part-time staff of 452 for a total of 4,821 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, Vice Chairman of BancShares and 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.
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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 and brother of Frank B. Holding. Lewis R. Holding's daughter, Carmen Holding Ames, was a director of BancShares and FCB from 1996 until until she resigned from the board on December 20, 2012.
On December 20, 2012, BancShares purchased 593,954 shares of Class B common stock from Carmen Holding Ames and certain of her related entities, including trusts that held shares for her benefit. On the same day, Ms. Ames and certain related entities also sold 960,201 shares of Class A common stock to institutional investors unaffiliated with BancShares. Subsequent to those transactions, members of the Frank B. Holding family, including those members who serve as our directors and in management positions, and certain family members' related entities including family-owned entities, may be considered to beneficially own, in the aggregate, approximately 24.7 percent of the outstanding shares of our Class A common stock and approximately 66.3 percent of the outstanding shares of our Class B common stock, together representing approximately 52.0 percent of the total votes entitled to be cast by all outstanding shares of both classes of BancShares' common stock. In addition, four other banking organizations in which various members of the Holding family are principal shareholders and serve as directors, collectively hold an aggregate of approximately 5.2 percent of the outstanding shares of our Class A common stock and approximately 6.6 percent of the outstanding shares of our Class B common stock, together representing approximately 6.1 percent of the voting control of BancShares.
Statistical information regarding our business activities is found in Management’s Discussion and Analysis.
Regulatory Considerations
The business and operations of BancShares and FCB 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. Deposit obligations are insured by the FDIC to the maximum legal limits.
The various regulatory authorities supervise all areas of BancShares' and FCB's business including loans, allowances for loan and lease losses, mergers and acquisitions, the payment of dividends, various compliance matters and other aspects of its operations. The regulators conduct regular examinations, and BancShares and FCB must furnish periodic reports to its regulators containing detailed financial and other information.
Numerous statutes and regulations apply to and restrict the activities of FCB, 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.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. The Dodd-Frank Act implements far-reaching regulatory reform. Some of the more significant implications of the Dodd-Frank Act are summarized below:
• | Established centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (CFPB), responsible for implementing, examining and enforcing compliance with federal consumer financial laws; |
• | Established the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies; |
• | Required financial holding companies to be well-capitalized and well managed as of July 21, 2011; bank holding companies and banks must also be both well-capitalized and well managed in order to acquire banks located outside their home state; |
• | Disallowed the ability of banks and holding companies with more than $10 billion in assets to include trust preferred securities as tier 1 capital; this provision will be applied over a three-year period beginning January 1, 2013; |
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• | Changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital; |
• | Eliminated the ceiling on the size of the deposit insurance fund (DIF) and increased the floor on the size of the DIF; |
• | Required large, publicly-traded bank holding companies to create a board-level risk committee responsible for the oversight of enterprise risk management; |
• | Required implementation of corporate governance revisions; |
• | Established a permanent $250,000 limit for federal deposit insurance protection, increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provided unlimited federal deposit insurance protection until December 31, 2012, for noninterest-bearing demand transaction accounts at all insured depository institutions; |
• | Repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; |
• | Amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer; |
• | Increased the authority of the Federal Reserve to examine financial institutions, including non-bank subsidiaries. |
Many provisions of the Dodd-Frank Act require adoption of rules that will take effect over several years, making it difficult to anticipate the overall financial impact to financial institutions and consumers. The provision of the legislation related to allowable fees that may be charged for debit transactions resulted in significant revenue reductions for debit cards. Elimination of the prohibition on the payment of interest on demand deposits will increase the costs associated with certain deposit instruments.
Provisions within the Dodd-Frank Act related to the disallowance of our ability to include trust preferred securities as tier 1 capital will affect our capital ratios beginning in 2013. At December 31, 2012, BancShares had $93.5 million of trust preferred securities outstanding. Beginning in 2013 and continuing in each of the following two years, one-third or $31.2 million of the trust preferred securities will be disallowed from tier 1 capital. Elimination of the full $93.5 million of trust preferred securities from our December 31, 2012, capital structure would result in a proforma tier 1 leverage ratio of 8.78 percent, a proforma tier 1 risk-based ratio of 13.59 percent and a proforma total risk-based ratio of 15.27 percent. BancShares would continue to remain well-capitalized under current regulatory guidelines.
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 Troubled Asset Relief Program (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 continued to participate in the expanded deposit insurance program until the program expired on December 31, 2012.
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 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 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 and the elevated rates continued during 2010. During 2011, a new risk-based assessment model was introduced and future changes in our risk profile could impact our assessment costs. 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.
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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.
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.
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 FCB to pay dividends to BancShares is governed by North Carolina statutes and rules and regulations issued by regulatory authorities. Under federal law, and as an insured bank, FCB 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 is subject to capital adequacy standards established by the FDIC. The FRB and FDIC 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. During 2012, the FRB issued proposed regulations to implement the minimum capital standards of the Basel Committee on Banking Supervision including Basel III.
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.” As of December 31, 2012, FCB is well-capitalized.
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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 FCB's assets that are available for lending or other investment activities.
With respect to acquired loans and other real estate that are subject to various loss share agreements, the FDIC also has responsibility for reviewing various reimbursement claims we submit for losses or expenses we have incurred in conjunction with the resolution of acquired assets.
FCB 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 with a single affiliate is limited to 10 percent of capital and surplus and, for all affiliates, to 20 percent of 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. FCB is also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits the above and certain other transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable, as those prevailing at the time for comparable transactions with nonaffiliated companies.
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 safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate income neighborhoods.
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, free of charge, 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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Risk Factors
The risks and uncertainties that management believes are material are described below. These risks are not the only risks that BancShares faces. Additional risks and uncertainties that are not currently known or that management does not currently deem to be material could also have a material, adverse impact on our financial condition, the results of our operations or our business. If this were to occur, the market price of our common stock could decline significantly.
Unfavorable economic conditions could continue to adversely affect our business
Our 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 beginning in 2008 have resulted in negative effects on the business, risk profile, financial condition and results of operations of financial institutions in the United States, including BancShares and FCB. Continued unfavorable economic conditions could weaken the national economy further as well as the economies of communities that we serve. Further economic deterioration in our market areas could depress our earnings and have an adverse impact on our financial condition and capital adequacy.
Weakness in real estate markets and exposure to junior liens have adversely impacted our business and our results of operations and may continue to do so
Real property collateral values have declined due to continuing weaknesses in real estate sales activity. That risk, coupled with higher delinquencies and losses on various loan products caused by high rates of unemployment and underemployment, has resulted in losses on loans that, while adequately collateralized at the time of origination, are no longer fully secured. Our continuing exposure to under-collateralization is concentrated in our non-commercial revolving mortgage loan portfolio. Approximately two-thirds of the revolving mortgage portfolio is secured by junior lien positions, and lower real estate values for collateral underlying these loans has, in many cases, caused the outstanding balance of the senior lien to exceed the value of the collateral, resulting in a junior lien loan that is in effect unsecured. A large portion of our losses within the revolving mortgage portfolio have arisen from junior lien loans due to the inadequate collateral position.
Because of our conservative underwriting policies and generally stable or increasing collateral values, in past years, we have not experienced significant losses resulting from our junior lien positions. As a result, we have not closely monitored performance of senior lien positions held by other financial institutions in prior years. However, due to higher defaults resulting from financial strain facing our borrowers and lower collateral values, we now collect data to monitor performance of senior lien positions held by other lenders. That information allowed us to better estimate the probability of default on junior lien positions we hold as of December 31, 2012.
Further declines in collateral values, unfavorable economic conditions and sustained high rates of unemployment could result in greater delinquency, write-downs or charge-offs in future periods, which could have a material adverse impact on our results of operations and capital adequacy.
Accretion of fair value discounts may result in earnings volatility
Fair value discounts that are recorded at the time an asset is acquired are accreted into interest income based on accounting principles generally accepted in the United States of America. The rate at which those discounts are accreted is unpredictable, the result of various factors including unscheduled prepayments and credit quality improvements that result in a reclassification from nonaccretable difference to accretable yield that is prospectively included in interest income. The fair value discount accretion may result in significant volatility in interest income, net interest income and our earnings. Volatility in earnings could unfavorably influence investor interest in our common stock thereby depressing the market value of our stock and the market capitalization of our company.
Reimbursements under loss share agreements are subject to FDIC oversight and interpretation and contractual term limitations
The FDIC-assisted transactions completed during 2011, 2010 and 2009 include significant protection to FCB from the exposures to prospective losses on certain assets that are covered under loss share agreements with the FDIC. Loans and leases covered under loss share agreements represent 13.5 percent of total loans and leases as of December 31, 2012. The loss share agreements impose certain obligations on us, including obligations to manage covered assets in a manner consistent with prudent business practices and in accordance with the procedures and practices that we customarily use for assets that are not
covered by loss share agreements. Based on projected losses as of December 31, 2012, we expect to receive cash payments
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from the FDIC totaling $100.2 million over the remaining lives of the respective loss share agreements. We are also required to report detailed loan level information and file requests for reimbursement of covered losses and expenses on a quarterly basis. In the event of noncompliance, delay or disallowance of some or all of our rights under those agreements could occur, including the denial of reimbursement for losses and related collection costs.
The loss share agreements are subject to differing interpretations by the FDIC and FCB, and disagreements may arise regarding coverage of losses, expenses and contingencies. Additionally, losses that are currently projected to occur during the loss share term may not occur until after the expiration of the applicable agreement, and those losses could have a material impact on results of operations in future periods. Our current estimates of losses include only those losses that we project to occur during the loss share period and for which we believe we will receive reimbursement from the FDIC at the applicable reimbursement rate.
During March 2012, FCB received communications from the US Small Business Administration (SBA) asserting that the SBA is entitled to receive a share of amounts paid or to be paid by the FDIC to FCB relating to certain specific SBA-guaranteed loans pursuant to the Loss Share Agreement between FCB and the FDIC applicable to Temecula Valley Bank. FCB disputes the validity of the SBA claims and is pursuing administrative relief through the SBA.
We are subject to extensive oversight and regulation that continues to change
We and FCB are subject to extensive federal and state banking laws and regulations. These laws and regulations primarily focus on the protection of depositors, federal deposit insurance funds, and the banking system as a whole rather than the protection of security holders. 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 deposit insurance premiums, increased expenses, reductions in fee income and limitations on activities that could have a material adverse effect on our results of operations.
The Dodd-Frank Act instituted significant changes to the overall regulatory framework for financial institutions, including the creation of the CFPB, that will impact BancShares and FCB. During the fourth quarter of 2011, limitations on debit card interchange fees became effective. As of January 1, 2013, one-third of our trust preferred securities that qualified as tier 1 capital ceased to be included in tier 1 capital with similar phase-outs occurring during 2014 and 2015.
In September 2010, the Basel Committee on Banking Supervision announced new global regulatory capital guidelines (Basel III) aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers, and more conservative definitions of capital and exposure.
In June 2012, the Federal Reserve released proposed rules regarding implementation of the Basel III regulatory capital rules for United States banking organizations. The proposed rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the total phase-out from tier 1 capital of trust preferred securities for all banks, a capital conservation buffer of 2.50 percent above minimum capital ratios, inclusion of accumulated other comprehensive income in tier 1 common equity, inclusion in tier 1 capital of perpetual preferred stock, and an effective floor for tier 1 common equity of 7.00 percent. Final rules are expected to be adopted in 2013. While we have estimated the impact that the proposed rules would have on our capital ratios, we are unable at this time to predict how the final rules will differ from the proposed rules and what the effective date of the final rules will be.
We encounter significant competition
We compete with other banks and specialized financial service providers in our market areas. Our primary competitors include local, regional and national banks and savings associations, credit unions, commercial finance companies, various wealth management providers, independent and captive insurance agencies, mortgage companies and non-bank providers of financial services. Some of our larger competitors, including banks that have a significant presence in our market areas, have the capacity to offer products and services we do not offer. Some of our competitors operate in a regulatory environment that is less stringent than the one in which we operate, or are not subject to federal and state income taxes. The fierce competitive pressure that we face may force us to reduce pricing for certain of our products and services to levels that are marginally profitable.
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Our financial condition could be adversely affected by the soundness of other financial institutions
While the overall financial condition of the banking industry has improved during 2011 and 2012, the number of bank failures since 2008 has been significant and numerous banks remain in critical financial condition. 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.
Natural disasters and other catastrophes could affect our ability to operate
The occurrence of catastrophic events, including weather-related events such as hurricanes, tropical storms, floods, or windstorms, as well as earthquakes, pandemic disease, fires and other catastrophes, could adversely affect our 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 natural and man-made events, catastrophic events could nevertheless adversely affect our results of operations.
We are subject to interest rate risk
Our results of operations and cash flows are highly dependent upon our net interest income. Interest rates are sensitive to economic and market conditions that are beyond our control, including the actions of the Federal Reserve Board’s Federal Open Market Committee. Changes in monetary policy could influence our interest income and interest expense as well as the fair value of our financial assets and liabilities. If the changes in interest rates on our interest-earning assets are not roughly equal to the changes in interest rates paid on our interest-bearing liabilities, our net interest income and, therefore, our earnings could be adversely impacted.
Even though we maintain what we believe to be an adequate interest rate risk monitoring system, the forecasts of future net interest income are estimates and may be inaccurate. The yield curve may change differently than we forecast, and we cannot accurately predict changes in interest rates or Federal Open Market Committee actions that may directly impact market interest rates.
Our current level of balance sheet liquidity may come under pressure
Our deposit base represents our primary source of core funding and thus balance sheet liquidity. We normally have the ability to stimulate core deposit growth through reasonable and effective pricing strategies. However, in circumstances that impair our ability to generate liquidity, we would need access to noncore funding such as borrowings from the Federal Home Loan Bank and the Federal Reserve, fed funds purchased, and brokered deposits. While we maintain access to noncore funding sources, we are dependent on the availability of collateral and the counterparty’s liquidity capacity and willingness to lend to us.
We face significant operational risks in our businesses
Our ability to adequately conduct and grow our business is dependent on our ability to create and maintain an appropriate operational control infrastructure. Operational risk can arise in numerous ways, including employee fraud, customer fraud, and control lapses in bank operations and information technology. Our dependence on our employees and automated systems, including the automated systems used to account for acquired loans and those systems maintained by 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. Failure to maintain an appropriate operational infrastructure can lead to loss of service to customers, legal actions, and noncompliance with various laws and regulations.
Our business could suffer if we fail to attract and retain skilled people
FCB's success depends primarily on its ability to attract and retain key people. Competition is intense for people who we believe will be successful in developing and attracting new business and/or managing critical support functions for FCB. Our
historical policy of not providing annual cash incentives, incentive stock awards or long-term incentive awards creates unique challenges to our attraction and retention of key people. We may not be able to hire the best people or, when successful, retain them.
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We continue to encounter technological change for which we expect to incur significant expense
The financial services industry continues to experience an increase in technological complexity required to provide a competitive array of products and services to customers. Our future success requires that we maintain technology that will support our ability to provide products and services that satisfactorily meet the banking and other financial needs of our customers. During the past two years, we have closely examined the state of our core technology systems and related business processes and determined that significant investments are required. The project to modernize our systems will begin in 2013 with phased implementation through 2016. The magnitude and scope of this project is significant with total costs estimated at $100.0 million. If the project objectives are not achieved or if the cost of the project is materially in excess of the estimate, our business, financial condition and financial results could be adversely impacted.
We are subject to information security risks
We maintain and transmit large amounts of sensitive information electronically, including personal and financial information of our customers. In addition to our own systems, we also rely on external vendors to provide certain services and are, therefore, exposed to their information security risk. While we seek to mitigate internal and external information security risks, the volume of business conducted through electronic devices continues to grow, and our computer systems and network infrastructure, as well as the systems of external vendors and customers, present security risks and could be susceptible to hacking or identity theft.
We are also subject to risks arising from distributed denial of service attacks, which are occurring with increasing frequency. These attacks arise from both domestic and international sources and seek to obtain customer information for fraudulent purposes or, in some cases, to disrupt business activities. These information security risks could lead to a material adverse impact on our business, financial condition and financial results of operations, as well as result in reputational damage.
We rely on external vendors
Third party vendors provide key components of our business infrastructure, including certain data processing and information services. A number of our vendors are large national entities with dominant market presence in their respective fields, and their services could be difficult to quickly replace in the event of failure or other interruption in service. Failures of certain vendors to provide services for any reason could adversely affect our ability to deliver products and services to our customers. External vendors also present information security risk. We monitor vendor risks, including the financial stability of critical vendors. The failure of a critical external vendor could disrupt our business and cause us to incur significant expense.
We are subject to litigation risks that may be uninsured
We face litigation risks as a principal and as a fiduciary from customers, employees, vendors, federal and state regulatory agencies and other parties who may seek to assert individual or class action claims against us. 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. Although we carry insurance to mitigate our exposure to certain litigation risks, litigation could, nevertheless, adversely affect our results of operations.
We use accounting estimates in the preparation of our financial statements
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. Significant estimates include the allowance for loan and lease losses, the fair values of acquired loans and other real estate owned both at acquisition date and in subsequent periods, and the related receivable from the FDIC for loss share agreements. Due to the uncertainty of the circumstances relating to these estimates, we may experience more adverse outcomes than originally estimated. The allowance for loan and lease losses may need to be significantly increased. The actual losses or expenses on loans or the losses or expenses not covered under the FDIC agreements may differ from the recorded amounts, resulting in charges that could materially affect our results of operations.
Accounting standards may change
The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission periodically modify the standards that govern the preparation of our financial statements. The nature of these changes is not predictable and could impact how we record transactions in our financial statements, which could lead to material changes in assets, liabilities,
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shareholders’ equity, revenues, expenses, and net income. 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. The adoption of new accounting rules or standards could require us to implement costly technology changes.
Our access to capital is limited which could impact our future growth
Based on existing capital levels, BancShares and FCB are well-capitalized under current leverage and risk-based capital standards. Historically, our primary capital sources have been retained earnings and debt issued through both private and public markets including trust preferred securities and subordinated debt. Beginning January 1, 2013, provisions of the Dodd-Frank Act will partially eliminate our inclusion in tier 1 risk-based capital of $93.5 million of trust preferred securities with total elimination on January 1, 2015. The inability to include the trust preferred securities in tier 1 risk-based capital may lead us to redeem a portion or all of the securities prior to their scheduled maturity date. We have not historically raised capital through new issues of our common stock. Absent a change in that philosophy or additional acquisition gains, our ability to raise additional tier 1 capital is limited to our retained earnings and issuance of perpetual preferred stock. A lack of ready access to adequate amounts of tier 1 capital could limit our ability to consummate additional acquisitions, make new loans, meet our existing lending commitments, and could potentially affect our liquidity, capital adequacy and ability to pay dividends.
The major rating agencies regularly evaluate our creditworthiness and assign credit ratings to our debt and the debt of our bank subsidiary. The ratings of the agencies are based on a number of factors, some of which are outside 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. One of the rating agencies downgraded our ratings in 2012 due to weak core profitability metrics when compared to a peer group. Due to continuing soft economic conditions and the challenges we face to significantly increase our core earnings, rating agencies may further reduce our current credit ratings. Rating reductions could adversely affect our access to funding sources and the cost of obtaining funding.
The market price of our stock may be volatile
Although publicly traded, our Class A and Class B common stock have substantially less liquidity and public float than large publicly traded financial services companies. A relatively small percentage of our common stock is actively traded with average monthly volume during 2012 of 193,957 shares for our Class A stock and 1,645 shares for our Class B stock. The relative lack of market liquidity increases the price volatility of our stock and may make it difficult for our shareholders to sell or buy our common stock when they deem a transaction is warranted at a price that they believe is attractive.
Excluding the impact of liquidity, the market price of our common stock can fluctuate widely in response to other factors, including expectations of operating results, actual operating results, actions of institutional shareholders, speculation in the press or the investment community, market perception of acquisitions, rating agency upgrades or downgrades, stock prices of other companies that are similar to us, general market expectations related to the financial services industry and the potential impact of government actions affecting the financial services industry.
BancShares relies on dividends from FCB
As a financial holding company, BancShares is a separate legal entity from FCB and receives substantially all of its revenue and cash flow through dividends paid by FCB. FCB dividends are the primary source for BancShares' payment of dividends on its common stock and interest and principal on its debt obligations. North Carolina state law establishes certain limits on the amount of dividends that FCB may pay to BancShares. In the event that FCB is unable to pay dividends to BancShares, BancShares may not be able to pay dividends on its common stock or service its debt obligations.
Our recorded goodwill may become impaired
As of December 31, 2012, we had $102.6 million of goodwill recorded as an asset on our balance sheet. We test goodwill for impairment at least annually, and the impairment test compares the estimated fair value of a reporting unit with its net book value. We also test goodwill for impairment when certain events occur, such as a significant decline in our expected future cash flows, a significant adverse change in the business climate, or a sustained decline in the price of our common stock. These tests may result in a write-off of goodwill deemed to be impaired, which could have a significant impact on our earnings, but would
not impact our capital ratios since capital ratios are determined based upon tangible capital. Although the book value per share of our Class A common stock as of December 31, 2012, was $193.75 compared to a market value of $163.50, we do not believe that this represents a sustained decline in the price of our common stock. In the event of a goodwill impairment charge and the resulting unfavorable earnings impact, the price of our stock could decline.
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Properties
As of December 31, 2012, FCB operated branch offices at 414 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. FCB owns many of the buildings and leases other facilities from third parties.
BancShares' headquarters facility, a nine-story building with approximately 163,000 square feet, is located in suburban Raleigh, North Carolina. In addition, we occupy an owned facility in Raleigh that serves as our data and operations center.
Additional information relating to premises, equipment and lease commitments is set forth in Note E of BancShares’ Notes to Consolidated Financial Statements.
Legal Proceedings
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, there is no pending action that would have a material effect on BancShares’ consolidated financial statements.
Additional information relating legal proceedings is set forth in Note S of BancShares’ Notes to Consolidated Financial Statements.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 on the over-the-counter market and quoted on the OTC Bulletin Board under the symbol FCNCB. As of December 31, 2012, there were 1,729 holders of record of the Class A common stock and 307 holders of record of the Class B common stock. The market for Class B common stock is extremely limited. On many 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 242,829 shares for the fourth quarter of 2012 and 193,957 shares for the year ended December 31, 2012. The Class B common stock monthly trading volume averaged 1,772 shares in the fourth quarter of 2012 and 1,645 shares for the year ended December 31, 2012.
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 2012 and 2011 are set forth in the following table.
2012 | 2011 | ||||||||||||||||||||||||||||||
Fourth quarter | Third quarter | Second quarter | First quarter | Fourth quarter | Third quarter | Second quarter | First quarter | ||||||||||||||||||||||||
Cash dividends (Class A and Class B) | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.30 | |||||||||||||||
Class A sales price | |||||||||||||||||||||||||||||||
High | 174.03 | 169.70 | 181.62 | 185.42 | 180.25 | 191.66 | 204.89 | 208.55 | |||||||||||||||||||||||
Low | 156.48 | 160.89 | 161.22 | 164.70 | 138.71 | 137.10 | 176.48 | 188.81 | |||||||||||||||||||||||
Class B sales price | |||||||||||||||||||||||||||||||
High | 167.69 | 179.34 | 182.99 | 183.98 | 189.00 | 193.00 | 207.69 | 208.50 | |||||||||||||||||||||||
Low | 158.00 | 159.41 | 161.11 | 172.75 | 146.00 | 153.00 | 184.00 | 191.25 | |||||||||||||||||||||||
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 cents per share was declared by the Board of Directors on January 29, 2013, payable on April 1, 2013, to holders of record as of March 18, 2013. 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
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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 2012, our Board of Directors granted authority and approved a plan to purchase up to 100,000 and 25,000 shares of Class A and Class B common stock, respectively, during the period from July 1, 2012 through June 30, 2013. That authority replaced similar plans approved by the Board during 2011 that were in effect during the twelve months preceding July 1, 2012. Pursuant to those plans, during 2012 as a whole, we purchased and retired an aggregate of 56,276 shares of Class A common stock and 100 shares of Class B common stock. Additionally, pursuant to separate authorizations, during 2012 we purchased an aggregate of 606,829 shares of Class B common stock in privately negotiated transactions, including, as previously reported and as further described below, purchases of 593,954 shares during December 2012 from a director and certain of her related interests which were approved by the independent Directors, after review and recommendation by a special committee of independent Directors. As of December 31, 2012, under the existing plan which expires June 30, 2013, BancShares had the ability to purchase 43,724 and 24,900 additional shares of Class A and Class B common stock, respectively.
The following tables provide information regarding purchases of shares of Class A and Class B common stock by BancShares during the three-month period ended December 31, 2012, as well as shares that may be purchased under publicly announced plans.
Issuer Repurchases of Equity Securities
Period | Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs (2) | Maximum number of shares that may yet be purchased under the plans or programs (2) | ||||||||
Purchases from October 1, 2012, through October 31, 2012 | 6,788 | $ | 162.83 | 6,788 | 77,715 | |||||||
Purchases from November 1, 2012, through November 30, 2012 | 2,649 | 164.00 | 2,649 | 75,066 | ||||||||
Purchases from December 1, 2012, through December 31, 2012 | 31,342 | 161.25 | 31,342 | 43,724 | ||||||||
Total | 40,779 | $ | 161.69 | 40,779 | 43,724 | |||||||
Period | Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs (2) | Maximum number of shares that may yet be purchased under the plans or programs (2) | ||||||||
Purchases from October 1, 2012, through October 31, 2012 | — | $ | — | — | 25,000 | |||||||
Purchases from November 1, 2012, through November 30, 2012 | — | — | — | 25,000 | ||||||||
Purchases from December 1, 2012, through December 31, 2012 | 594,054 | 155.00 | 100 | 24,900 | ||||||||
Total | 594,054 | $ | 155.00 | 100 | 24,900 | |||||||
(1) | As previously reported, during December 2012, we purchased an aggregate of 593,954 shares of Class B common stock from a director and certain of her related interests in private transactions, at a price of $155.00 per share, pursuant to agreements approved in advance by our independent Directors following approval and recommendation of the transactions by a specially appointed committee of independent Directors. |
(2) | The currently effective plan was approved by the Board on June 18, 2012 and authorized the purchase of up to an aggregate of 100,000 and 25,000 shares of Class A and Class B common stock, respectively. It was publicly announced on June 22, 2012, and it expires on June 30, 2013, |
During December 2012, BancShares purchased 593,954 shares of Class B common stock at a per share price of $155. This purchase was not part of a publicly announced plan or program.
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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, 2007, and that dividends were reinvested for additional shares.
12/31/2007 | 12/31/2008 | 12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | |||||||||
FCNCA | $ | 100 | 106 | 114 | 132 | 123 | 116 | |||||||
Nasdaq - Banks | $ | 100 | 73 | 61 | 72 | 65 | 77 | |||||||
Nasdaq - US | $ | 100 | 61 | 88 | 104 | 105 | 124 | |||||||
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Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(thousands, except share data and ratios) | ||||||||||||||||||||
SUMMARY OF OPERATIONS | ||||||||||||||||||||
Interest income | $ | 1,004,836 | $ | 1,015,159 | $ | 969,368 | $ | 738,159 | $ | 813,351 | ||||||||||
Interest expense | 90,148 | 144,192 | 195,125 | 227,644 | 314,945 | |||||||||||||||
Net interest income | 914,688 | 870,967 | 774,243 | 510,515 | 498,406 | |||||||||||||||
Provision for loan and lease losses | 142,885 | 232,277 | 143,519 | 79,364 | 65,926 | |||||||||||||||
Net interest income after provision for loan and lease losses | 771,803 | 638,690 | 630,724 | 431,151 | 432,480 | |||||||||||||||
Gain on acquisitions | — | 150,417 | 136,000 | 104,434 | — | |||||||||||||||
Other noninterest income | 189,300 | 313,949 | 270,214 | 299,017 | 307,506 | |||||||||||||||
Noninterest expense | 766,933 | 792,925 | 733,376 | 651,503 | 600,382 | |||||||||||||||
Income before income taxes | 194,170 | 310,131 | 303,562 | 183,099 | 139,604 | |||||||||||||||
Income taxes | 59,822 | 115,103 | 110,518 | 66,768 | 48,546 | |||||||||||||||
Net income | $ | 134,348 | $ | 195,028 | $ | 193,044 | $ | 116,331 | $ | 91,058 | ||||||||||
Net interest income, taxable equivalent | $ | 917,664 | $ | 874,727 | $ | 778,382 | $ | 515,446 | $ | 505,151 | ||||||||||
PER SHARE DATA | ||||||||||||||||||||
Net income | $ | 13.11 | $ | 18.80 | $ | 18.50 | $ | 11.15 | $ | 8.73 | ||||||||||
Cash dividends declared | 1.20 | 1.20 | 1.20 | 1.20 | 1.10 | |||||||||||||||
Market price at December 31 (Class A) | 163.50 | 174.99 | 189.05 | 164.01 | 152.80 | |||||||||||||||
Book value at December 31 | 193.75 | 180.97 | 166.08 | 149.42 | 138.33 | |||||||||||||||
SELECTED AVERAGE BALANCES | ||||||||||||||||||||
Total assets | $ | 21,077,444 | $ | 21,135,572 | $ | 20,841,180 | $ | 17,557,484 | $ | 16,403,717 | ||||||||||
Investment securities | 4,698,559 | 4,215,761 | 3,641,093 | 3,412,620 | 3,112,717 | |||||||||||||||
Loans and leases | 13,560,773 | 14,050,453 | 13,865,815 | 12,062,954 | 11,306,900 | |||||||||||||||
Interest-earning assets | 18,974,915 | 18,824,668 | 18,458,160 | 15,846,514 | 14,870,501 | |||||||||||||||
Deposits | 17,727,117 | 17,776,419 | 17,542,318 | 14,578,868 | 13,108,246 | |||||||||||||||
Interest-bearing liabilities | 14,298,026 | 15,044,889 | 15,235,253 | 13,013,237 | 12,312,499 | |||||||||||||||
Long-term obligations | 574,721 | 766,509 | 885,145 | 753,242 | 607,463 | |||||||||||||||
Shareholders’ equity | $ | 1,915,269 | $ | 1,811,520 | $ | 1,672,238 | $ | 1,465,953 | $ | 1,484,605 | ||||||||||
Shares outstanding | 10,244,472 | 10,376,445 | 10,434,453 | 10,434,453 | 10,434,453 | |||||||||||||||
SELECTED PERIOD-END BALANCES | ||||||||||||||||||||
Total assets | $ | 21,283,652 | $ | 20,997,298 | $ | 20,806,659 | $ | 18,466,063 | $ | 16,745,662 | ||||||||||
Investment securities | 5,227,570 | 4,058,245 | 4,512,608 | 2,932,765 | 3,225,194 | |||||||||||||||
Loans and leases: | ||||||||||||||||||||
Covered under loss share agreements | 1,809,235 | 2,362,152 | 2,007,452 | 1,173,020 | — | |||||||||||||||
Not covered under loss share agreements | 11,576,115 | 11,581,637 | 11,480,577 | 11,644,999 | 11,649,886 | |||||||||||||||
Interest-earning assets | 19,142,433 | 18,529,548 | 18,487,960 | 16,541,425 | 15,119,095 | |||||||||||||||
Deposits | 18,086,025 | 17,577,274 | 17,635,266 | 15,337,567 | 13,713,763 | |||||||||||||||
Interest-bearing liabilities | 14,213,751 | 14,548,389 | 15,015,446 | 13,561,924 | 12,441,025 | |||||||||||||||
Long-term obligations | 444,921 | 687,599 | 809,949 | 797,366 | 733,132 | |||||||||||||||
Shareholders’ equity | $ | 1,864,007 | $ | 1,861,128 | $ | 1,732,962 | $ | 1,559,115 | $ | 1,443,375 | ||||||||||
Shares outstanding | 9,620.914 | 10,284.119 | 10,434,453 | 10,434,453 | 10,434,453 | |||||||||||||||
SELECTED RATIOS AND OTHER DATA | ||||||||||||||||||||
Rate of return on average assets | 0.64 | % | 0.92 | % | 0.93 | % | 0.66 | % | 0.56 | % | ||||||||||
Rate of return on average shareholders’ equity | 7.01 | 10.77 | 11.54 | 7.94 | 6.13 | |||||||||||||||
Net yield on interest-earning assets (taxable equivalent) | 4.84 | 4.65 | 4.22 | 3.25 | 3.40 | |||||||||||||||
Allowance for loan and lease losses on noncovered loans to noncovered loans and leases at year-end | 1.55 | 1.56 | 1.54 | 1.45 | 1.35 | |||||||||||||||
Nonperforming assets to total loans and leases plus other real estate at year-end: | ||||||||||||||||||||
Covered under loss share agreements | 9.26 | 17.95 | 12.87 | 16.59 | — | |||||||||||||||
Not covered under loss share agreements | 1.15 | 0.89 | 1.14 | 0.85 | 0.59 | |||||||||||||||
Tier 1 risk-based capital ratio | 14.27 | 15.41 | 14.86 | 13.34 | 13.20 | |||||||||||||||
Total risk-based capital ratio | 15.95 | 17.27 | 16.95 | 15.59 | 15.49 | |||||||||||||||
Leverage capital ratio | 9.22 | 9.90 | 9.18 | 9.54 | 9.88 | |||||||||||||||
Dividend payout ratio | 9.15 | 6.38 | 6.49 | 10.76 | 12.60 | |||||||||||||||
Average loans and leases to average deposits | 76.50 | 79.04 | 79.04 | 82.74 | 86.26 | |||||||||||||||
Average loans and leases include nonaccrual loans. See discussion of issues affecting comparability of financial statements under the caption FDIC-Assisted Transactions. The capital ratios presented are of First Citizens BancShares, Inc., and Subsidiaries.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. Unless otherwise noted, the terms "we," "us" and "BancShares" refer to the consolidated financial position and consolidated results of operations for BancShares.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of BancShares are in accordance with accounting principles generally accepted in the United States of America (GAAP) and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Our financial position and results of operations can be materially affected by these estimates and assumptions. 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. The most critical accounting and reporting policies include those related to the allowance for loan and lease losses, fair value estimates, the receivable from and payable to the FDIC for loss share agreements, pension plan assumptions and income taxes. Significant accounting policies are discussed in Note A of the Notes to Consolidated Financial Statements.
The following is a summary of our critical accounting policies that are highly dependent on estimates and assumptions.
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. A consistent methodology is utilized that includes allowances assigned to specific impaired commercial loans and leases, general commercial loan allowances that are based upon estimated loss rates by credit grade with the loss rates derived in part from migration analysis among grades, general non-commercial allowances based upon estimated loss rates derived primarily from historical losses, and a nonspecific allowance based upon economic conditions, loan concentrations and other relevant factors. Specific allowances for impaired loans are determined by analyzing estimated cash flows discounted at a loan's original rate or collateral values in situations where we believe repayment is dependent on collateral liquidation. Substantially all impaired loans are collateralized by real property.
Loans covered by loss share agreements are recorded at fair value at acquisition date. Amounts deemed uncollectible at acquisition date become part of the fair value calculation and are excluded from the allowance for loan and lease losses. Following acquisition, we routinely review covered loans to determine if changes in estimated cash flows have occurred. Subsequent decreases in the amount expected to be collected may 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, if any, 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 for loans covered by loss share agreements.
Management considers the established allowance adequate to absorb losses that relate to loans and leases outstanding at December 31, 2012, although future additions may be necessary based on changes in economic conditions, collateral values, erosion of the borrower's access to liquidity 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, 2012, the percentage of total assets and total liabilities measured at fair value on a recurring basis was 24.6 percent and less than 1.0 percent, respectively. The fair values of assets and liabilities carried at fair value on a recurring basis are primarily based on quoted market prices. At December 31, 2012, no assets or
liabilities measured at fair value on a recurring basis were based on significant nonobservable inputs. Certain other assets are
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reported at fair value on a nonrecurring basis, including loans held for sale, other real estate owned (OREO) and impaired loans. See Note K “Estimated Fair Values” in the Notes to Consolidated Financial Statements for additional disclosures regarding fair value.
As required under GAAP, the assets acquired and liabilities assumed in our FDIC-assisted transactions were recognized at their fair values as of the acquisition date. Fair values were determined using valuation methods and assumptions established by management. Use of different assumptions and methods could yield significantly different fair values. Cash flow estimates for loans, leases and OREO were based on judgments regarding future expected loss experience, which included the use of commercial loan credit grades, collateral valuations and current economic conditions. The cash flows were discounted to fair value using rates that included consideration of factors such as current interest rates, costs to service the loans and liquidation of the asset.
Receivable from and Payable to FDIC for loss share agreements. The receivable from the FDIC for loss share agreements is measured separately from the related covered assets and is recorded at fair value at the acquisition date using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and expenses at the applicable loss share percentages. The receivable from the FDIC is reviewed and updated quarterly as loss estimates and timing of estimated cash flows related to covered loans and OREO change. Post-acquisition adjustments represent the net change in loss estimates related to covered loans and OREO as a result of changes in expected cash flows and the allowance for loan and lease losses related to covered loans. For loans covered by loss share agreements, subsequent decreases in the amount expected to be collected from the borrower or collateral liquidation may 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 from the borrower or collateral liquidation 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 and the related FDIC receivable if no provision for loan and lease losses had been recorded previously. While accretable yield is recognized over the estimated remaining life of the covered loan, the FDIC receivable is adjusted over the shorter of the remaining term of the loss share agreement or the life of the covered loan. Other adjustments to the FDIC receivable result from unexpected recoveries of amounts previously charged off, servicing costs that exceed initial estimates and changes to the estimated fair value of OREO.
Certain of the loss share agreements include clawback provisions that require payments to the FDIC if actual losses and expenses do not exceed a calculated amount. Our estimate of the clawback payments based on current loss and expense projections are recorded as an accrued liability. Projected cash flows are discounted to reflect the estimated timing of the payments to the FDIC. For 2012, the payable to the Federal Deposit Insurance Corporation (FDIC) for loss share agreements, which was previously netted against the receivable from FDIC for loss share agreements and reported as an asset, was reclassified and is now included as a liability.
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 the 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 obligation. The assumed discount rate equaled 4.00 percent at December 31, 2012, and 4.75 percent at December 31, 2011. A reduction in the assumed discount rate increases the calculated benefit obligations which results in higher pension expense subsequent to adoption of the lower discount rate. Conversely, an increase in the assumed discount rate causes a reduction in obligations thereby resulting in lower pension expense following the increase in the discount rate.
We also estimate a long-term rate of return on pension plan assets that is used to estimate the future value of plan assets. 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 calculation of pension expense was based on an assumed expected long-term return on plan assets of 7.50 percent during 2012 compared to 7.75 percent in 2011. A reduction in the long-term rate of return on plan assets increases pension expense for periods following the decrease in the assumed rate of return.
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 4.00 percent to calculate pension expense during 2012 and 4.00 percent during 2011. Assuming other variables remain unchanged, an increase in the rate of future compensation increases results in higher pension expense for periods following the increase in the assumed rate of future compensation increases.
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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 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. Accrued income taxes payable represents an estimate of the net amounts due to or from taxing jurisdictions based upon various estimates, interpretations and judgments.
We evaluate our effective tax rate on a quarterly basis based upon the current estimate of net income, the favorable impact of various credits, statutory tax rates expected for the year and the amount of tax liability in each jurisdiction in which we operate. Annually, we file tax returns with each jurisdiction where we have tax nexus and settle our return liabilities.
Changes in estimated 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
BancShares’ earnings and cash flows are primarily derived from our commercial banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in the bank premises and furniture and equipment used to conduct our commercial banking business. In addition to traditional loan and deposit products, we also offer treasury services products, cardholder and merchant services, wealth management services, as well as various other products and services typically offered by commercial banks.
BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (FCB), a state-chartered bank organized under the laws of the state of North Carolina. Prior to 2011, BancShares also conducted banking activities through IronStone Bank (ISB), a federally-chartered thrift institution. On January 7, 2011, ISB was merged into FCB.
Various external factors influence the focus of our business efforts. The industry-wide financial challenges that began in 2008 have, to varying degrees, continued through 2012. During this period, asset quality challenges, capital adequacy problems and weak economic conditions have resulted in unfavorable conditions for growth. During this period of industry-wide turmoil, we have continued our longstanding attention to prudent banking practices. Historically, we have focused on liquidity, asset quality and capital strength as key areas of focus. We believe these qualities are critical to our company's long-term health and also enable us to participate in various growth opportunities.
During the period 2000 though 2008, we focused on organic growth in North Carolina and Virginia and de novo branching into high growth markets in other states. However, in recognition of the significant opportunity for balance sheet and capital growth with little credit risk, we elected to participate in six FDIC-assisted transactions involving distressed financial institutions during the period from 2009 through 2011. Participation in FDIC-assisted transactions provided opportunities to increase our business volumes in existing markets and to expand our banking presence to adjacent markets that we deemed demographically attractive. For each of the six FDIC-assisted transactions we completed, loss share agreements protect us from a substantial portion of the asset quality risk that we would otherwise incur. Additionally, purchase discounts and fair value adjustments on acquired assets and assumed liabilities resulted in significant acquisition gains that provided a substantial portion of the equity required to fund the transactions.
Despite the recognition of significant acquisition gains in 2011, 2010 and 2009, narrow interest margins and legislatively-imposed restrictions on our ability to collect various fees have adversely affected our core earnings. Additionally, while distressed customers continue to experience difficulty meeting their debt service obligations, other customers who are fearful of economic uncertainty defer new borrowings and continue to repay existing debt.
As we consider our position in the current business environment, we continue to benefit from our organization’s strengths. In our effort to optimally allocate our resources, we have identified the following corporate strengths and market opportunities:
• | Our multi-state delivery network that serves both major metropolitan markets and rural communities |
• | Our strategic focus on narrow business customer segments that utilize mainstream banking services |
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• | Our focus on balance sheet liquidity |
• | Our conservative credit philosophies |
• | Our commitment to the long-term impact of strategic, financial and operational decisions |
• | Our dedicated associates and experienced executive leadership |
• | Our size, which allows us to provide services typically only available through large banks, but with a focus on customer service that is typical of community banks |
• | The opportunity to expand our branch network and asset base through acquisitions |
• | Our presence in diverse and demographically robust markets |
• | Our ability to attract customers of super-regional banks who demand a higher level of customer service than they currently receive |
• | The opportunity to generate increased volumes of fee income in areas such as merchant processing, credit card interchange, insurance, business and treasury services and wealth management activities |
• | Our 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 |
We have identified the following challenges and threats that are most relevant and likely to have an impact on our success.
• | Weakened domestic economy driving higher than normal unemployment, elevated credit costs and low interest rates |
• | Increased competition from non-bank financial service providers |
• | Continued decline in the role of traditional commercial banks in the large loan credit market |
• | Continued customer migration away from traditional branch offices as the banking focal point |
• | Challenge to attract and retain qualified associates |
• | Competition from global financial service providers that operate with narrower margins on loan and deposit products |
• | Existing legislative and regulatory actions that have had an adverse impact on fee income, increased our compliance costs and will reduce existing capital |
• | The need to make significant investments to improve our information technology infrastructure |
• | Overcapacity in noninterest expense structure that reduces our ability to effectively compete with larger financial institutions |
• | Incremental capital required by BASEL III |
During the past two years, we have closely examined the state of our core technology systems and related business processes and determined that significant investments are required. The project to modernize our systems will begin in 2013 with phased implementation through 2016. During 2012, we also identified several product offerings with inadequate business volumes to allow us to achieve adequate profitability. Therefore, during 2012, we divested our working capital division that purchased and collected short-term receivables and our stock transfer division that provided shareholder services to clients.
In addition to our commercial banking activities, we have for a number of years provided a variety of business, data processing, bank operations, corporate trust, stock transfer and related services to other banks and financial institutions. FCB has engaged in that line of business for more than 20 years and has provided certain of those services to as many as 60 different financial institutions. However, due to the rapid consolidation of the banking industry and the resulting loss of a significant number of client banks, as well as the prospective loss of additional client banks, we began a planned transition away from this line of business in 2012.
One of the principal services offered to client banks has been core processing services on our legacy technology systems. As a component of the transition from the client bank services line of business and realizing that the majority of those banks utilizing our legacy technology systems would benefit from a more integrated processing system designed for community banks, we converted nearly all banks to a vendor-provided integrated processing system licensed from the vendor. Another step in the transition from this line of business was the execution in early-2013 of an agreement with the vendor to sell to them our processing business that had been running on their application, thus prospectively terminating our ongoing support and efforts with respect to this aspect of our client bank business. Our largest client bank is a financial institution controlled by Related Persons, which did not migrate to the vendor-provided servicing system due to the size and complexity of that institution. That institution will continue to utilize our core technology systems and is partnering with us on the system modernization project.
While industry earnings recovered during 2012, financial challenges were evident with pressure on net interest income and noninterest income accompanied by little change in noninterest expenses. The earnings recovery was driven by lower credit costs and reduced allowance for loan and lease loss level. The Federal Reserve's continuing efforts to stimulate economic growth has resulted in interest rates remaining at unprecedented low levels, with an expressed intent to hold benchmark interest rates stable until 2015. The low interest rate environment has created pressure on net interest income.
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Although improved when compared to 2011, soft real estate markets continue to cause banks to carry relatively large inventories of OREO and to market and sell properties for amounts less than estimated market prices. Real estate demand in many of our markets remains weak, resulting in depressed real estate prices that continue to affect collateral values for many borrowers. As a result, when customer cash flow is inadequate to avoid default, losses resulting from liquidation of collateral are higher than would have occurred prior to the decline in real estate values. Exposure to declining real estate values have caused some loans secured by a second mortgage to become effectively unsecured.
In an effort to assist customers who are experiencing financial difficulty, we have selectively agreed to modify existing loan terms to provide relief to customers who are experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. As a result, troubled debt restructurings have increased during 2012 and 2011. The majority of the modifications we provide are to customers that are currently performing under existing terms, but may be unable to do so in the near future without a modification.
The demand for our treasury services products has been adversely influenced by extraordinarily low interest rates. Our balance sheet liquidity position remains strong despite significant attrition of deposits assumed in the FDIC-assisted transactions.
Ongoing economic weakness and market uncertainty continues to have a significant impact on virtually all financial institutions in the United States. Beyond the profitability pressures resulting from a weak economy, financial institutions continue to face challenges resulting from implementation of legislative and governmental reforms to stabilize the financial services industry and provide added consumer protection. In addition to the various actions previously enacted by governmental agencies and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), further changes will likely occur, including the BASEL III requirements that are anticipated to be finalized during 2013.
The Dodd-Frank Act contained provisions that will gradually eliminate our ability to include trust preferred securities as equity for capital adequacy purposes. Due to the pending elimination of those securities from our capital and the cost of those borrowings, we elected to redeem $150.0 million of our trust preferred securities during July 2012.
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 have been 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 particularly well during the period from 2009 through 2012.
Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, prudently 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 and opportunities when appropriate. As economic conditions improve, we believe we are well positioned to resume favorable organic growth in loans and deposits and achieve acceptable profitability levels without the benefit of acquisition gains.
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EARNINGS SUMMARY
BancShares reported earnings for 2012 of $134.3 million, or $13.11 per share, compared to $195.0 million, or $18.80 per share during 2011. Net income as a percentage of average assets equaled 0.64 percent during 2012, compared to 0.92 percent during 2011. The return on average equity was 7.01 percent for 2012, compared to 10.77 percent for 2011. The $60.7 million,
or 31.1 percent, decrease in 2012 net income was primarily due to the 2011 acquisition gains that had an after-tax impact of $91.5 million or $8.79 per share. No acquisition gains were recorded in 2012. The absence of acquisition gains in 2012 was partially offset by a reduction in the provision for loan and lease losses on covered loans, lower noninterest expense and higher net interest income.
Net interest income during 2012 increased $43.7 million, or 5.0 percent, versus 2011. The taxable-equivalent net yield on interest-earning assets increased 19 basis points due to reduced deposit costs and an increase in average interest-earning assets,
primarily due to higher investment securities and overnight borrowings. During 2012, acquired loan accretion income significantly impacted the taxable-equivalent net yield on interest-earning assets. Continued reduction in acquired loans over the next several years will likely cause accretion income to decline.
The provision for loan and lease losses decreased $89.4 million, to $142.9 million for 2012, compared to $232.3 million for 2011, the result of lower noncovered loan net charge-offs and reduced post-acquisition deterioration of acquired loans covered by loss share agreements. In general, the provision for loan loss entries to record or reverse post-acquisition deterioration of acquired loans are accompanied by corresponding adjustments to the receivable from the FDIC with offsets to noninterest income at the appropriate indemnification rate.
Noninterest income decreased $275.1 million or 59.2 percent during 2012 when compared to 2011, resulting from both the absence of acquisition gains in 2012 and significant differences in the income statement impact of adjustments to the receivable from the FDIC. Adjustments to the receivable from the FDIC for loss share agreements resulted in a $101.6 million reduction in noninterest income in 2012 compared to a net reduction of $19.3 million in 2011. Excluding the $150.4 million in 2011 acquisition gains and the adjustments to the FDIC receivable, noninterest income decreased $42.4 million, or 12.7 percent during 2012.
Noninterest expense decreased $26.0 million, or 3.3 percent, during 2012 when compared to 2011 due to reductions in foreclosure-related expenses, FDIC deposit insurance premiums, card loyalty program expense and external processing fees.
FDIC-ASSISTED TRANSACTIONS
Participation in FDIC-assisted transactions provided significant growth opportunities for us during 2011, 2010 and 2009. These transactions allowed us to increase our presence in existing markets and to expand our banking presence to contiguous markets. Additionally, purchase discounts and fair value adjustments on acquired assets and assumed liabilities resulted in significant acquisition gains recorded at the time of each acquisition. All of the FDIC-assisted transactions included loss share agreements that protect us from a substantial portion of the credit and asset quality risk we would have otherwise incurred.
Acquisition accounting and issues affecting comparability of financial statements. As estimated exposures related to the acquired assets covered by loss share agreements change based on post-acquisition events, our adherence to GAAP and accounting policy elections that we have made affect the comparability of our current results of operations to earlier periods. Several of the key issues affecting comparability are as follows:
• | When post-acquisition events suggest that the amount of cash flows we will ultimately receive for a loan covered by a loss share agreement is less than originally expected: |
• | An allowance for loan and lease losses may be established for the post-acquisition exposure that has emerged with a corresponding charge to provision for loan and lease losses; |
• | If the expected loss is projected to occur during the relevant loss share period, the receivable from the FDIC is adjusted to reflect the indemnified portion of the post-acquisition exposure with a corresponding increase to noninterest income; |
• | When post-acquisition events suggest that the amount of cash flows we will ultimately receive for a loan covered under a loss share agreement is greater than originally expected: |
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• | Any allowance for loan and lease losses that was previously established for post-acquisition exposure is reversed with a corresponding reduction to provision for loan and lease losses; if no allowance was established in earlier periods, the amount of the improvement in the cash flow projection results in a reclassification from the nonaccretable difference created at the acquisition date to an accretable yield; the newly-identified accretable yield is accreted into income over the remaining life of the loan as an increase in interest income; |
• | The receivable from the FDIC is adjusted immediately for reversals of previously recognized impairment and prospectively for reclassifications from nonaccretable difference to reflect the indemnified portion of the post-acquisition change in exposure; a corresponding reduction in noninterest income is also recorded immediately for reversals of previously established allowances or, for reclassifications from nonaccretable difference, over the shorter of the remaining life of the related loan or loss share agreements; |
• | When actual payments received on loans are greater than current estimates, large nonrecurring discount accretion may be recognized during a specific period; discount accretion is recognized as an increase in interest income; |
• | Adjustments to the receivable from the FDIC resulting from changes in estimated loan cash flows are based on the reimbursement provision of the applicable loss share agreement with the FDIC. Adjustments to the receivable from the FDIC partially offset the impact of the adjustment to the covered loan carrying value, but the rate of the change to the receivable from the FDIC relative to the change in the covered loan carrying value is not constant. The loss share agreements establish reimbursement rates for losses incurred within certain ranges. In some loss share agreements, higher loss estimates result in higher reimbursement rates, while in other loss share agreements, higher loss estimates trigger a reduction in the reimbursement rates. In addition, some of the loss share agreements include clawback provisions that require the purchaser to remit a payment to the FDIC in the event the aggregate amount of losses and expenses is less than a loss estimate established by the FDIC. The adjustments to the receivable from and payable to the FDIC based on changes in loss estimates are measured based on the actual reimbursement rates and consider the impact of changes in the projected clawback payment. Table 3 provides details on the various reimbursement rates for each loss share agreement; |
• | As of December 31, 2012, loans acquired in all six of the FDIC-assisted transactions are being accounted for using an acquired loan accounting system. Loans acquired in the CCB and SAB transactions have been on the acquired loan accounting system throughout 2012, loans acquired in the TVB and VB transactions were added to the acquired loan accounting system during the third quarter of 2012 and loans acquired in the First Regional and United Western transactions were added to the acquired loan accounting system during the fourth quarter of 2012. The acquired loan accounting system has a greater capacity to project future cash flows than the manual system used prior to the dates loans were converted to the acquired loan accounting system. As loans have migrated to the acquired loan accounting system, the balance of loans accounted for under the cost recovery method decreased significantly, which resulted in a large increase in accretable yield. Some of the newly-identified accretable yield has been reclassified from non-accretable difference, but much of the increase results from cash flows that were not previously projected and from revisions of prior projections. |
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Table 2
FDIC-ASSISTED TRANSACTIONS
Fair value of | |||||||||||||||||||||
Entity | Date of transaction | Loans acquired | Deposits assumed | Short-term borrowings assumed | Long-term obligations assumed | Gains on acquisition | |||||||||||||||
(thousands) | |||||||||||||||||||||
Colorado Capital Bank (CCB) | July 8, 2011 | $ | 320,789 | $ | 606,501 | $ | 15,212 | $ | — | $ | 86,943 | ||||||||||
United Western Bank (United Western) | January 21, 2011 | 759,351 | 1,604,858 | 336,853 | 207,627 | 63,474 | |||||||||||||||
Sun American Bank (SAB) | March 5, 2010 | 290,891 | 420,012 | 42,533 | 40,082 | 27,777 | |||||||||||||||
First Regional Bank (First Regional) | January 29, 2010 | 1,260,249 | 1,287,719 | 361,876 | — | 107,738 | |||||||||||||||
Venture Bank (VB) | September 11, 2009 | 456,995 | 709,091 | — | 55,618 | 48,000 | |||||||||||||||
Temecula Valley Bank (TVB) | July 17, 2009 | 855,583 | 965,431 | 79,096 | — | 56,400 | |||||||||||||||
Total | $ | 3,943,858 | $ | 5,593,612 | $ | 835,570 | $ | 303,327 | $ | 390,332 | |||||||||||
Balance sheet impact. Table 2 provides information regarding the six FDIC-assisted transactions consummated during 2011, 2010 and 2009.
GAAP permits acquired loans to be accounted for in designated pools based on common risk characteristics. When loans are pooled, improvements in some loans within a pool may offset deterioration in other loans within the same pool resulting in less volatility in net interest income and provision for loan and lease losses. All CCB loans and United Western's residential mortgage loans were assigned to pools based on various factors including loan type, collateral type and performance status. All other acquired loans are being accounted for on an individual loan level. The non-pool election for the majority of our acquired loans accentuates volatility in net interest income and the provision for loan and lease losses.
Income statement impact. The six FDIC-assisted transactions created acquisition gains recognized at the time of the respective transaction. For the years ended December 31, 2011, and 2010, acquisition gains totaled $150.4 million, and $136.0 million, respectively. No acquisition gains were recorded during 2012. Additionally, the acquired loans, assumed deposits and assumed borrowings originated by the six banks have affected net interest income, provision for loan and lease losses and noninterest income. Increases in noninterest expense have resulted from incremental staffing, facility costs for the branch locations, collection expenses and foreclosure-related expenses resulting from the FDIC-assisted transactions. Various fair value discounts and premiums that were previously recorded are being accreted and amortized into income over the life of the underlying asset or liability.
Post-acquisition changes that affect the amount of expected cash flows can result in recognition of provision for loan and lease losses or the reversal of previously-recognized provision for loan and lease losses. During the years ended December 31, 2012, and 2011, total provision for loan and lease losses related to acquired loans equaled $100.8 million and $174.5 million, respectively. The decreases in the provision for covered loan losses in 2012 are the result of lower charge-offs, improved cash flow projections and lower post-acquisition deterioration on acquired loans. Provision for loan and lease losses related to acquired loans equaled $86.9 million in 2010.
Accretion income is generated by recognizing accretable yield over the life of acquired loans. At acquisition date, accretable yield is the difference in the expected cash flows and the present value of those expected cash flows. The amount of accretable yield related to the loans can change if the estimated cash flows expected to be collected changes subsequent to the initial estimates. While changes in accretable yield generally result from changes identified in credit reviews, more precise cash flow estimates and discount accretion resulting from the deployment of loans acquired from TVB, VB, First Regional and United Western to the acquired loan accounting system during 2012 resulted in a large reduction in loans previously accounted for under the cost recovery method since those loans are now accreting yield. The recognition of accretion income can be accelerated in the event of unscheduled repayments for amounts in excess of current estimates and various other post-acquisition events. Due to the many factors that can influence the amount of accretion income recognized in a given period, this component of net interest income is not easily predictable for future periods and impacts the comparability of interest income, net interest income and overall results of operations. During the years ended December 31, 2012, and 2011, total discount accretion on acquired loans equaled $304.0 million and $319.4 million, respectively. Accretion income recognized during 2010 totaled $181.4 million.
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Post-acquisition improvements that affect accretion income as well as post-acquisition deterioration of covered loans also result in adjustments to the receivable from the FDIC for changes in the estimated amount that would be covered under the respective loss share agreement. While accretion income is recognized prospectively over the remaining life of the loan, the adjustment to the receivable from the FDIC is recognized over the shorter of the remaining life of the loan or the remaining term of the applicable loss share agreement. As a result, the recognition of accretion income may occur over a longer period than the related income statement impact of the adjustment to the receivable from the FDIC. During the year ended December 31, 2012, the adjustment to the receivable from the FDIC resulting from post-acquisition improvements in covered assets exceeded the amount of the adjustment for post-acquisition deterioration, resulting in a net reduction to the receivable from the FDIC and a net charge of $101.6 million to noninterest income compared to a net reduction to the receivable and a corresponding reduction of $19.3 million in noninterest income during 2011. The change during 2012 primarily reflects favorable changes in loss estimates when compared to 2011.
Certain loss share agreements require that we make a payment to the FDIC in the event the aggregate amount of losses and expenses incurred fall below a certain amount. As of December 31, 2012, based on our current estimate of losses and expenses, we estimate that we will be required to pay the FDIC a total of $101.6 million.
The various terms of each loss share agreement and the components of the resulting receivable from the FDIC is provided in Table 3. The table includes the estimated fair value of the receivable at the respective acquisition dates of each FDIC-assisted transaction as well as the carrying value of the receivable at December 31, 2012. Additionally, the portion of the carrying value of the receivable that relates to accretable yield from improvements in acquired loan cash flows subsequent to acquisition is provided for each loss share agreement. This component of the receivable will be recognized as a reduction to noninterest income over the shorter of the remaining life of the associated loan receivable or the related loss share agreement. The carrying value as of December 31, 2012, excludes estimated obligations to the FDIC under any applicable clawback provisions.
As of December 31, 2012, the receivable from the FDIC includes $100.2 million of estimated reimbursements from the FDIC. The receivable from the FDIC also includes $170.0 million that we expect to recover through prospective amortization of the asset arising from improvements in the related loans. The timing of expected losses on covered assets is monitored by
management to ensure the losses will occur during the respective loss share terms. When projected losses are expected to occur after expiration of the applicable loss share agreement, the receivable from the FDIC is adjusted to reflect the forfeiture of loss share protection.
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Table 3
LOSS SHARE PROVISIONS FOR FDIC-ASSISTED TRANSACTIONS
Losses/expenses incurred through 12/31/2012 | Cumulative amount reimbursed by FDIC through 12/31/2012 | Carrying value at December 31, 2012 | Current portion of receivable due from FDIC for 12/31/2012 filings | Receivable related to accretable yield as of 12/31/2012 | ||||||||||||||||||
Fair value at acquisition date | Receivable from FDIC | Payable to FDIC | ||||||||||||||||||||
Entity | ||||||||||||||||||||||
(thousands) | ||||||||||||||||||||||
TVB - combined losses | $ | 103,558 | $ | 184,037 | $ | — | $ | 41,406 | $ | — | $ | — | $ | 30,776 | ||||||||
VB - combined losses | 138,963 | 149,074 | 116,287 | 12,754 | — | 2,972 | 7,293 | |||||||||||||||
First Regional - combined losses | 378,695 | 324,117 | 208,011 | 74,535 | 67,718 | 17,829 | 56,137 | |||||||||||||||
SAB - combined losses | 89,734 | 87,420 | 64,604 | 37,435 | 3,570 | 5,332 | 25,381 | |||||||||||||||
United Western | ||||||||||||||||||||||
Non-single family residential losses | 112,672 | 108,990 | 83,236 | 33,941 | 15,568 | 4,199 | 14,290 | |||||||||||||||
Single family residential losses | 24,781 | 1,917 | 1,105 | 12,425 | — | 428 | 7,310 | |||||||||||||||
CCB - combined losses | 155,070 | 172,534 | 124,636 | 57,696 | 14,785 | 13,537 | 28,844 | |||||||||||||||
Total | $ | 1,003,473 | $ | 1,028,089 | $ | 597,879 | $ | 270,192 | $ | 101,641 | $ | 44,297 | $ | 170,031 | ||||||||
Each FDIC-assisted transaction has a separate loss share agreement for Single-Family Residential loans (SFR) and non-Single-Family Residential loans (NSFR). | ||||||||||||||||||||||
For TVB, combined losses are covered at 0 percent up to $193.3 million, 80 percent for losses between $193.3 million and $464.0 million, and 95 percent for losses above $464.0 million. | ||||||||||||||||||||||
For VB, combined losses are covered at 80 percent up to $235.0 million and 95 percent for losses above $235.0 million. | ||||||||||||||||||||||
For FRB, combined losses are covered at 0 percent up to $41.8 million, 80 percent for losses between $41.8 million and $1.02 billion, and 95 percent for losses above $1.02 billion. | ||||||||||||||||||||||
For SAB, combined losses are covered at 80 percent up to $99.0 million and 95 percent for losses above $99.0 million. | ||||||||||||||||||||||
For United Western SFR loans, losses are covered at 80 percent up to $32.5 million, 0 percent between $32.5 million and $57.7 million, and 80 percent for losses above $57.7 million. | ||||||||||||||||||||||
For United Western NSFR loans, losses are covered at 80 percent up to $111.5 million, 30 percent between $111.5 million and $227.0 million, and 80 percent for losses above $227.0 million. | ||||||||||||||||||||||
For CCB, combined losses are covered at 80 percent up to $231.0 million, 0 percent between $231.0 million and $285.9 million, and 80 percent for losses above $285.9 million. | ||||||||||||||||||||||
Fair value at acquisition date represents the initial value of the receivable, net of the payable. Receivable related to accretable yield represents balances that, due to post-acquisition credit quality improvement, will be amortized over the shorter of the covered asset's life or the term of the loss share period. | ||||||||||||||||||||||
INTEREST-EARNING ASSETS
Interest-earning assets include loans and leases, investment securities 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 with a concentration of owner-occupied real estate loans in the medical and
related fields. The focus on asset quality also influences the composition of our investment securities portfolio. At December 31, 2012, government agency securities represented 58.4 percent of our investment securities portfolio, compared to
residential mortgage-backed securities and U. S. Treasury securities, which represented 25.4 percent and 15.8 percent,
27
respectively, of the investment securities portfolio. The balance of the portfolio included corporate bonds, state, county and municipal securities and common stock of other financial institutions. Overnight investments are selectively made with the Federal Reserve Bank and other financial institutions that are within our risk tolerance.
During 2012, interest-earning assets averaged $18.97 billion, an increase of $150.2 million or 0.8 percent from 2011. The increase was due to a $482.8 million increase in investment securities and a $157.1 million increase in overnight investments. Average loans declined by $489.7 million.
Loans and leases
Loans and leases totaled $13.39 billion at December 31, 2012, a decrease of $558.4 million or 4.0 percent when compared to December 31, 2011. Because of lower levels of noncommercial loans, total noncovered loans decreased $5.5 million during 2012, following a decline of $95.5 million during 2011. Loans covered under loss share agreements totaled $1.81 billion at December 31, 2012, or 13.5 percent of total loans, compared to $2.36 billion at December 31, 2011, representing 16.9 percent of loans outstanding. Table 4 details the composition of loans and leases for the past five years.
Commercial mortgage loans not covered by loss share agreements totaled $5.34 billion at December 31, 2012, a $236.8 million or 4.6 percent increase from December 31, 2011. In 2011 commercial mortgage loans increased 7.7 percent over 2010. Noncovered commercial mortgage loans represent 46.1 percent of total noncovered loans at December 31, 2012, and 44.1 percent at December 31, 2011. The sustained growth reflects our continued focus on small business customers, particularly among medical-related and other professional customers. 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, 2012, revolving mortgage loans not covered by loss share agreements totaled $2.21 billion or 19.1 percent of total noncovered loans and leases, compared to $2.30 billion or 19.8 percent at December 31, 2011. The 2012 decrease in noncovered revolving mortgage loans is a result of reduced demand among retail customers.
Commercial and industrial loans not covered by loss share agreements equaled $1.73 billion at December 31, 2012, compared to $1.76 billion at December 31, 2011, a decline of $38.3 million or 2.2 percent. This decrease follows a decline of $105.1 million or 5.6 percent from 2010 to 2011. Noncovered commercial and industrial loans represent 14.9 percent and 15.2 percent of total noncovered loans and leases, respectively, as of December 31, 2012, and 2011. While general demand for commercial and industrial lending improved during 2012, our primary lending focus remains with real estate-secured lending.
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Table 4
LOANS AND LEASES
December 31 | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
(thousands) | |||||||||||||||||||
Covered loans | $ | 1,809,235 | $ | 2,362,152 | $ | 2,007,452 | $ | 1,173,020 | $ | — | |||||||||
Noncovered loans and leases : | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Construction and land development | 309,190 | 381,163 | 338,929 | 541,110 | 548,095 | ||||||||||||||
Commercial mortgage | 5,341,839 | 5,104,993 | 4,737,862 | 4,552,078 | 4,343,809 | ||||||||||||||
Other commercial real estate | 160,980 | 144,771 | 149,710 | 158,187 | 149,478 | ||||||||||||||
Commercial and industrial | 1,726,126 | 1,764,407 | 1,869,490 | 1,832,670 | 1,885,358 | ||||||||||||||
Lease financing | 330,679 | 312,869 | 301,289 | 330,713 | 353,933 | ||||||||||||||
Other | 125,681 | 158,369 | 182,015 | 195,084 | 99,264 | ||||||||||||||
Total commercial loans | 7,994,495 | 7,866,572 | 7,579,295 | 7,609,842 | 7,379,937 | ||||||||||||||
Noncommercial: | |||||||||||||||||||
Residential mortgage | 822,889 | 784,118 | 878,792 | 864,704 | 894,802 | ||||||||||||||
Revolving mortgage | 2,210,133 | 2,296,306 | 2,233,853 | 2,147,223 | 1,911,852 | ||||||||||||||
Construction and land development | 131,992 | 137,271 | 192,954 | 81,244 | 230,220 | ||||||||||||||
Consumer | 416,606 | 497,370 | 595,683 | 941,986 | 1,233,075 | ||||||||||||||
Total noncommercial loans | 3,581,620 | 3,715,065 | 3,901,282 | 4,035,157 | 4,269,949 | ||||||||||||||
Total noncovered loans and leases | 11,576,115 | 11,581,637 | 11,480,577 | 11,644,999 | 11,649,886 | ||||||||||||||
Total loans and leases | 13,385,350 | 13,943,789 | 13,488,029 | 12,818,019 | 11,649,886 | ||||||||||||||
Less allowance for loan and lease losses | 319,018 | 270,144 | 227,765 | 172,282 | 157,569 | ||||||||||||||
Net loans and leases | $ | 13,066,332 | $ | 13,673,645 | $ | 13,260,264 | $ | 12,645,737 | $ | 11,492,317 | |||||||||
December 31, 2012 | December 31, 2011 | ||||||||||||||||||||||
Impaired at acquisition date | All other acquired loans | Total | Impaired at acquisition date | All other acquired loans | Total | ||||||||||||||||||
(thousands) | |||||||||||||||||||||||
Covered loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Construction and land development | $ | 71,225 | $ | 166,681 | $ | 237,906 | $ | 117,603 | $ | 221,270 | $ | 338,873 | |||||||||||
Commercial mortgage | 107,281 | 947,192 | 1,054,473 | 138,465 | 1,122,124 | 1,260,589 | |||||||||||||||||
Other commercial real estate | 35,369 | 71,750 | 107,119 | 33,370 | 125,024 | 158,394 | |||||||||||||||||
Commercial and industrial | 3,932 | 45,531 | 49,463 | 27,802 | 85,640 | 113,442 | |||||||||||||||||
Lease financing | — | — | — | — | 57 | 57 | |||||||||||||||||
Other | — | 1,074 | 1,074 | — | 1,330 | 1,330 | |||||||||||||||||
Total commercial loans | 217,807 | 1,232,228 | 1,450,035 | 317,240 | 1,555,445 | 1,872,685 | |||||||||||||||||
Noncommercial: | |||||||||||||||||||||||
Residential mortgage | 48,077 | 249,849 | 297,926 | 46,130 | 281,438 | 327,568 | |||||||||||||||||
Revolving mortgage | 9,606 | 29,104 | 38,710 | 15,350 | 36,202 | 51,552 | |||||||||||||||||
Construction and land development | 15,136 | 5,657 | 20,793 | 78,108 | 27,428 | 105,536 | |||||||||||||||||
Consumer | — | 1,771 | 1,771 | 1,477 | 3,334 | 4,811 | |||||||||||||||||
Total noncommercial loans | 72,819 | 286,381 | 359,200 | 141,065 | 348,402 | 489,467 | |||||||||||||||||
Total covered loans | $ | 290,626 | $ | 1,518,609 | $ | 1,809,235 | $ | 458,305 | $ | 1,903,847 | $ | 2,362,152 | |||||||||||
29
Consumer loans not covered by loss share agreements amounted to $416.6 million at December 31, 2012, a decrease of $80.8 million, or 16.2 percent, from the prior year. At December 31, 2012, and 2011, consumer loans not covered by loss share agreements represent 3.6 percent and 4.3 percent of total noncovered loans, respectively. This decline is the result of the general contraction in consumer borrowing in 2012 and 2011 due to recessionary economic conditions and continued run-off in our automobile sales finance portfolio.
There were $822.9 million of residential mortgage loans not covered by loss share agreements at December 31, 2012, representing 7.1 percent of total noncovered loans compared to $784.1 million at December 31, 2011, an increase of $38.8 million or 4.9 percent. This increase is indicative of the low interest rate environment and consumer refinance demand. While the majority of residential mortgage loans that we originated in 2012 and 2011 were sold to investors, other loans are retained in the loan portfolio principally due to the nonconforming characteristics of the retained loans.
Commercial construction and land development loans not covered by loss share agreements equaled $309.2 million at December 31, 2012, a decrease of $72.0 million, or 18.9 percent from December 31, 2011. This decrease was driven by repayments and write-downs on a commercial construction and land development relationships based on updated appraisals. Our noncovered construction and land development portfolio does not include significant exposure to builders to acquire, develop or construct homes in large tracts of real estate. Rather, the commercial construction and land development portfolio is composed primarily of loans to construct commercial buildings to be occupied by the borrower. Most of the construction portfolio relates to borrowers in North Carolina and Virginia where real estate values have declined less severely than other markets in which we operate, particularly Atlanta, Georgia and Florida.
At December 31, 2012, there were $1.05 billion of commercial mortgage loans covered by loss share agreements, 58.3 percent of the $1.81 billion in covered loans. This compares to $1.26 billion of covered commercial mortgage loans, representing 53.4 percent of total covered loans, at December 31, 2011. Covered residential mortgage loans totaled $297.9 million or 16.5 percent of total covered loans at December 31, 2012, compared to $327.6 million or 13.9 percent at December 31, 2011. Construction and land development loans covered by loss share agreements at December 31, 2012, totaled $258.7 million or 14.3 percent of total covered loans, a decrease of $185.7 million since December 31, 2011. The changes in covered loan balances since December 31, 2011, reflect continued reductions of outstanding loans from the FDIC-assisted transactions from foreclosure, payoffs and normal run-off.
There were no foreign loans or leases, covered or noncovered, in any period.
We expect non-acquisition loan growth to improve only slightly in 2013 due to the weak demand for loans and intense competitive pricing. Loan projections are subject to change due to further economic deterioration or improvement and other external factors.
Investment securities
Investment securities available for sale at December 31, 2012, and 2011 totaled $5.23 billion and $4.06 billion, respectively, a $1.17 billion or 28.8 percent increase. Available for sale securities are reported at their aggregate fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes.
Changes in our investment securities portfolio result from trends among loans and leases, 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 and called securities to fund loan demand. The increase during 2012 is the result of deposit growth occurring while loan balances declined.
Since 2009, we have invested a significant portion of our available liquidity in government agency securities, while the balance of U.S. Treasury securities has declined due to scheduled maturities. As a result of policy changes initiated during the second quarter of 2012, we modified the targeted portfolio composition, increasing the allowable portion of mortgage-backed securities, while the U.S. Treasury securities allocation declined. The residential mortgage-backed securities are primarily pass-through securities issued by the Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation comprised of 10-year and 15-year loans.
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Table 5 presents detailed information relating to the investment securities portfolio.
Income on interest-earning assets.
Interest income amounted to $1.00 billion during 2012, a $10.3 million or 1.0 percent decrease from 2011, compared to a $45.8 million or 4.7 percent increase from 2010 to 2011. The slight decrease in interest income during 2012 is the result of reduced yields on investment securities offset by higher balances of interest-earning assets. During 2012, interest-earning assets averaged $18.97 billion, an increase of $150.2 million from 2011. This increase results from higher investment security balances caused by deposit growth within our legacy branch network in excess of loan and lease demand.
Table 6 analyzes taxable-equivalent yields and rates on interest-earning assets and interest-bearing liabilities for the five years ending December 31, 2012. The taxable-equivalent yield on interest-earning assets was 5.31 percent during 2012, a 10 basis point decrease from the 5.41 percent reported in 2011, the result of lower average loan balances and reduced yields on investment securities. The taxable-equivalent yield on interest-earning assets equaled 5.27 percent in 2010 with a significantly higher yield on investment securities, compared to 2011, which was more than offset by a lower loan yield due to more modest levels of accretion income on acquired loans.
The taxable-equivalent yield on the loan and lease portfolio increased from 6.91 percent in 2011 to 7.15 percent in 2012. The 24 basis point yield increase was offset by a $489.7 million or 3.5 percent reduction in average loans and leases resulting in a slight overall decline in loan interest income from 2011. Loan interest income included $304.0 million of discount accretion during 2012 compared to $319.4 million during 2011. The recognition of accretion income on acquired loans is significantly influenced by differences between initial cash flow estimates and changes to those estimates that evolve in subsequent periods. Accretion income in future periods is likely to decrease as the balance of acquired loans continues to decline. Loan interest income in 2011 increased $53.2 million, or 5.8 percent, driven by a 30 basis point yield increase resulting from loan discount accretion income in 2011, and by incremental interest from a $184.6 million, or 1.3 percent increase in average loans and leases.
Interest income earned on the investment securities portfolio amounted to $35.5 million and $46.0 million during 2012 and 2011, respectively, with a taxable-equivalent yield of 0.77 percent and 1.12 percent. The $10.5 million decrease in investment interest income during 2012 resulted from a 35 basis points decrease in the taxable-equivalent yield. While increases in average balances have partially offset the impact of lower yields, the yield reduction was primarily caused by significantly lower reinvestment rates on new securities as compared to maturing and called securities. Interest income on investment securities declined from 2010 to 2011 by $6.4 million due to a 36 basis point decrease in the taxable-equivalent yield. The yield reductions in 2012 and 2011 reflect the extraordinarily low interest rates on investment securities. We anticipate the yield on investment securities will remain at current low levels until the Federal Reserve begins to raise the benchmark fed funds rates, an action that would likely lead to higher asset yields.
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Table 5
INVESTMENT SECURITIES
2012 | 2011 | 2010 | |||||||||||||||||||||||||||
Cost | Fair value | Average maturity (yrs./mos.) | Taxable equivalent yield | Cost | Fair value | Cost | Fair value | ||||||||||||||||||||||
Investment securities available for sale: | (dollars in thousands) | ||||||||||||||||||||||||||||
U. S. Treasury: | |||||||||||||||||||||||||||||
Within one year | $ | 576,101 | $ | 576,393 | 0/11 | 0.39 | % | $ | 811,038 | $ | 811,835 | $ | 1,332,798 | $ | 1,336,446 | ||||||||||||||
One to five years | 247,140 | 247,239 | 1/9 | 0.27 | 76,003 | 75,984 | 602,868 | 602,954 | |||||||||||||||||||||
Total | 823,241 | 823,632 | 1/2 | 0.35 | 887,041 | 887,819 | 1,935,666 | 1,939,400 | |||||||||||||||||||||
Government agency: | |||||||||||||||||||||||||||||
Within one year | 1,708,572 | 1,709,520 | 0/4 | 0.38 | 2,176,527 | 2,176,143 | 1,879,988 | 1,869,569 | |||||||||||||||||||||
One to five years | 1,343,468 | 1,345,684 | 1/10 | 0.43 | 415,447 | 416,066 | 50,481 | 50,417 | |||||||||||||||||||||
Total | 3,052,040 | 3,055,204 | 1/0 | 0.40 | 2,591,974 | 2,592,209 | 1,930,469 | 1,919,986 | |||||||||||||||||||||
Residential mortgage-backed securities: | |||||||||||||||||||||||||||||
Within one year | 3,397 | 3,456 | 0/9 | 3.69 | 374 | 373 | 6 | 3 | |||||||||||||||||||||
One to five years | 732,614 | 736,284 | 3/8 | 1.50 | 56,650 | 56,929 | 10,755 | 11,061 | |||||||||||||||||||||
Five to ten years | 193,500 | 195,491 | 7/6 | 1.78 | 90,595 | 91,077 | 1,673 | 1,700 | |||||||||||||||||||||
Over ten years | 385,700 | 394,426 | 18/4 | 2.90 | 150,783 | 158,842 | 126,857 | 130,781 | |||||||||||||||||||||
Total | 1,315,211 | 1,329,657 | 8/7 | 1.96 | 298,402 | 307,221 | 139,291 | 143,545 | |||||||||||||||||||||
State, county and municipal: | |||||||||||||||||||||||||||||
Within one year | 486 | 490 | 0/3 | 5.19 | 242 | 244 | 757 | 757 | |||||||||||||||||||||
One to five years | — | — | — | — | 359 | 372 | 473 | 489 | |||||||||||||||||||||
Five to ten years | 60 | 60 | 5/11 | 4.75 | 10 | 10 | 10 | 10 | |||||||||||||||||||||
Over ten years | — | — | — | — | 415 | 415 | — | — | |||||||||||||||||||||
Total | 546 | 550 | 0/10 | 5.14 | 1,026 | 1,041 | 1,240 | 1,256 | |||||||||||||||||||||
Corporate bonds: | |||||||||||||||||||||||||||||
Within one year | — | — | — | — | 250,476 | 252,820 | 227,636 | 230,043 | |||||||||||||||||||||
One to five years | — | — | — | — | — | — | 251,524 | 256,615 | |||||||||||||||||||||
Total | — | — | — | — | 250,476 | 252,820 | 479,160 | 486,658 | |||||||||||||||||||||
Other | |||||||||||||||||||||||||||||
Five to ten years | 838 | 820 | 5/6 | 7.58 | — | — | — | — | |||||||||||||||||||||
Equity securities | 543 | 16,365 | 939 | 15,313 | 1,055 | 19,231 | |||||||||||||||||||||||
Total investment securities available for sale | 5,192,419 | 5,226,228 | 4,029,858 | 4,056,423 | 4,486,881 | 4,510,076 | |||||||||||||||||||||||
Investment securities held to maturity: | |||||||||||||||||||||||||||||
Residential mortgage-backed securities: | |||||||||||||||||||||||||||||
One to five years | 1,242 | 1,309 | 4/3 | 5.58 | 12 | 11 | — | — | |||||||||||||||||||||
Five to ten years | 18 | 11 | 8/10 | 4.55 | 1,699 | 1,820 | 2,404 | 2,570 | |||||||||||||||||||||
Over ten years | 82 | 128 | 16/2 | 7.07 | 111 | 149 | 128 | 171 | |||||||||||||||||||||
Total | 1,342 | 1,448 | 5/1 | 5.66 | 1,822 | 1,980 | 2,532 | 2,741 | |||||||||||||||||||||
Total investment securities held to maturity | 1,342 | 1,448 | 5/1 | 5.66 | 1,822 | 1,980 | |||||||||||||||||||||||