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, 2013
Commission File Number: 001-16715
____________________________________________________
FIRST CITIZENS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware | 56-1528994 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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 $1,199,498,891.
On February 26, 2014, 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 2014 Annual Meeting of Shareholders are incorporated in Part III of this report.
Page | |||
CROSS REFERENCE INDEX | |||
PART I | 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 for Form 10-K are omitted since they are not applicable, except as referred to in Item 8. | ||
(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 Committee’, ‘Executive Officers’ and ‘Section 16(a) Beneficial Ownership Reporting Compliance’ from the Registrant’s Proxy Statement for the 2014 Annual Meeting of Shareholders (2014 Proxy Statement).
Information required by Item 11 is incorporated herein by reference to the information that appears under the headings or captions ‘Compensation, Nominations and Governance Committee Report,’ ‘Compensation Discussion and Analysis,’ ‘Executive Compensation,’ and ‘Director Compensation,’ of the 2014 Proxy Statement.
Information required by Item 12 is incorporated herein by reference to the information that appears under the captions ‘Beneficial Ownership of Our Common Stock—Directors and Executive Officers’ and '—Principal Shareholders' of the 2014 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 2014 Proxy Statement.
Information required by Item 14 is incorporated by reference to the information that appears under the caption ‘Services and Fees During 2013 and 2012’ of the 2014 Proxy Statement.
2
Part I
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 southeastern and western United States. On January 7, 2011, ISB was merged into FCB resulting in a single banking subsidiary of BancShares.
Prior to 2009, we focused on organic growth, delivering our products and services to customers through de novo branch expansion. Beginning in 2009, leveraging on our strong capital and liquidity positions, we participated in six FDIC-assisted transactions involving distressed financial institutions. These transactions allowed FCB to enter new markets and expand its presence in other markets. A summary of the FDIC-assisted transactions is provided in Table 3 of Management's Discussion and Analysis.
As of December 31, 2013, FCB operated 397 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.
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.
During 2013, we refreshed our brand and updated our company logo. Our new brand line, Forever First®, symbolizes our commitment to the people, businesses and communities who rely on us to be the best we can be. It is used in all our branches, in print advertising and for our online presence. In certain North Carolina markets, television, radio and outdoor advertising share our brand story. We have also developed two product bundles that are used to target specific customers. Your Family First was developed for financially-active families, while the Your Venture First package was developed for small business customers.
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. We deliver products and services to our customers through our extensive branch network as well as online banking, telephone banking, mobile banking and various ATM networks. Business customers may 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, 2013, 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, 2013, controlled 79.1 percent of North Carolina deposits. In Virginia, FCB was the 18th largest bank with a June 30, 2013, deposit market share of 0.6 percent. The 17 larger banks represent 84.4 percent of total deposits in Virginia as of June 30, 2013.
3
The following table identifies the various states in which FCB maintains branch offices and the percentage of our deposits by state as of December 31, 2013.
December 31, 2013 | ||||
State | Number of branches | Percent of total deposits | ||
North Carolina | 253 | 72.3 | % | |
Virginia | 48 | 7.7 | ||
California | 21 | 5.9 | ||
Florida | 18 | 3.5 | ||
Georgia | 14 | 2.4 | ||
Washington | 7 | 1.9 | ||
Texas | 7 | 1.1 | ||
Colorado | 6 | 1.1 | ||
Tennessee | 6 | 0.6 | ||
West Virginia | 5 | 0.7 | ||
Arizona | 2 | 0.6 | ||
New Mexico | 2 | 1.0 | ||
Oklahoma | 2 | 0.3 | ||
Oregon | 2 | 0.3 | ||
District of Columbia | 1 | 0.1 | ||
Kansas | 1 | 0.3 | ||
Maryland | 1 | 0.2 | ||
Missouri | 1 | 0.1 | ||
Total | 397 | 100.0 | % | |
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.
In prior years, FCB provided processing and operational services to other banks. The scope of these services declined in 2012 due to client bank attrition, merger transactions involving client banks, and the conversion of certain clients to different systems, resulting in reduced revenues. 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 from all other client banks significantly declined during 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. 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.
At December 31, 2013, BancShares and its subsidiaries employed a full-time staff of 4,482 and a part-time staff of 393 for a total of 4,875 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 in other executive management positions and, since our formation in 1986, have remained shareholders controlling a large percentage of our common stock.
Our Chairman of the Board and Chief Executive Officer, Frank B. Holding, Jr., is the grandson of Robert P. Holding. Hope Holding Bryant, Vice Chairman of BancShares and FCB, is Robert P. Holding’s granddaughter. Frank B. Holding, son of
4
Robert P. Holding and father of Frank B. Holding, Jr. and Hope Holding Bryant, is our Executive Vice Chairman. On February 14, 2014, Frank Holding announced that he would retire from his position as a director effective April 29, 2014, and that he will retire from his positions as an officer of BancShares and FCB effective September 2, 2014.
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 she resigned from the boards 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.
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 24.6 percent of the outstanding shares of our Class A common stock and approximately 66.5 percent of the outstanding shares of our Class B common stock, together representing approximately 52.2 percent of the total votes entitled to be cast by all outstanding shares of both classes of BancShares' common stock. In addition, other banking organizations in which various members of the Holding family are principal shareholders and serve as directors, collectively hold an aggregate of approximately 5.1 percent of the outstanding shares of our Class A common stock and approximately 6.8 percent of the outstanding shares of our Class B common stock, together representing approximately 6.2 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 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.
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 persons and entities controlled by related persons. The impact of these statutes and regulations is discussed below and in the accompanying consolidated financial statements.
In July 2013, Bank regulatory agencies approved new global regulatory capital guidelines (Basel) 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 balance sheet exposure. When fully implemented in January 2019, the minimum ratio of common equity tier 1 capital to risk-weighted assets will increase to 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets will be applied, yielding a 7 percent required capital ratio. Basel also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. The enactment of the Dodd-Frank Act resulted in expansive changes in many areas affecting the financial services industry in general and BancShares in particular. The legislation provides broad economic oversight, consumer financial services protection, investor protection, rating agency reform and derivatives regulatory reform. Various corporate governance requirements have resulted in expanded proxy disclosures and shareholder rights. Additional provisions address the mortgage industry in an effort to strengthen lending practices. Deposit insurance reform has resulted in permanent FDIC protection for up
5
to $250,000 of deposits and requires the FDIC’s Deposit Insurance Fund to maintain 1.35 percent of insured deposits, with the burden for closing the shortfall falling to banks with more than $10 billion in assets.
The Dodd-Frank Act required that banks with total assets in excess of $10 billion establish an enterprise-wide risk committee consisting of members of its board of directors. At its July 2013 meeting, the board of directors established a Risk Committee that provides oversight of enterprise-wide risk management. With board oversight, the Risk Committee establishes risk appetite and supporting tolerances for credit, market and operational risk and ensures that risk is managed within those tolerances. The Risk Committee also monitors compliance with laws and regulations, reviews the investment securities portfolio to ensure that portfolio returns are managed within market risk tolerance, and monitors our legal activity and associated risk.
The Dodd-Frank Act also mandated that stress tests be developed and performed to ensure that financial institutions have sufficient capital to absorb losses and support operations during multiple economic and bank scenarios. Bank holding companies with total consolidated assets between $10 billion and $50 billion, including BancShares, will undergo annual company-run stress tests. As directed by the Federal Reserve, summaries of BancShares’ results in the severely adverse stress tests will be available to the public starting in June 2015. Through the stress testing program that has been implemented, BancShares and FCB will comply with current regulations. The results of stress testing activities will be considered by our Risk Committee in combination with other risk management and monitoring practices to maintain an effective risk management program.
Mortgage reform rules mandated by the Dodd-Frank Act became effective in January 2014 and require lenders to make a reasonable, good faith determination of a borrower's ability to repay any consumer credit transaction secured by a dwelling and to limit prepayment penalties. Increased risks of legal challenge, private rights of action and regulatory enforcement activities are presented by these rules. BancShares implemented the required systems, process, procedural and product changes prior to the effective dates of the new rules. We have modified our underwriting standards to ensure compliance with the ability to repay requirements. Historical performance and conservative underwriting of impacted loan portfolios mitigates the risks of non-compliance.
In response to the Dodd-Frank Act, the FDIC significantly raised the formula used to calculate the FDIC insurance assessment paid by each FDIC-insured institution. The new formula was effective April 1, 2011, and changed the assessment base from deposits to total assets less equity, resulting in larger assessments to banks with large levels of non-deposit funding. The revised assessment formula considers the level of higher-risk consumer loans and higher-risk commercial and industrial loans and securities, treating them as risk factors that may result in incremental insurance costs. Reporting of these assets under the final definitions was effective April 1, 2013. The new reporting requirement required BancShares to implement process and system changes to identify and report these higher-risk assets, but did not have an immediate material impact on the FDIC insurance assessment paid by or the operating results of BancShares.
The Dodd-Frank Act also imposed new regulatory capital requirements for banks that will result in the disallowance of qualified trust preferred capital securities as tier 1 capital. As of December 31, 2013, BancShares had $93.5 million in trust preferred capital securities that were included in tier 1 capital. Based on the Inter-Agency Capital Rule Notice, 75 percent, or $70.1 million of BancShares' trust preferred capital securities will be excluded from tier 1 capital beginning January 1, 2015, with the remaining 25 percent, or $23.4 million excluded beginning January 1, 2016.
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. The SOX Act established new responsibilities for corporate chief executive officers, chief financial officers and audit committees, 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 required 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 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.
6
The USA Patriot Act of 2001 (Patriot Act) was enacted to strengthen the ability of United States law enforcement and the intelligence community to work cohesively to combat terrorism. The Patriot Act contained 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 required financial institutions to adopt new policies and procedures to combat money laundering and granted 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. BancShares became a financial holding company during 2000.
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. All applicable capital standards must be satisfied for a bank holding company or a bank to be considered in compliance with these capital requirements.
Current federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”). The FDIC is required to take certain mandatory supervisory actions, and is authorized to take other discretionary actions, with respect to banks in the three undercapitalized categories.
Under the FDIC’s rules implementing the prompt corrective action provisions, an insured, state-chartered bank that has a total capital ratio of 10.0 percent or greater, a tier 1 capital ratio of 6.0 percent or greater, a leverage ratio of 5.0 percent or greater and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered to be “well-capitalized.” As of December 31, 2013, FCB is well-capitalized.
Under regulations of the FRB, all FDIC-insured banks must maintain 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 and approving 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. Certain 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 certain 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
7
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.
Management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
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.
8
Item 1A. Risk Factors
The risks and uncertainties that management believes are material are described below. The risks listed 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 such risks and uncertainties were to become reality or the likelihood of those risks were to increase, the market price of our common stock could decline significantly.
Unfavorable economic conditions could adversely affect our business
BancShares’ business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on BancShares’ operations and financial condition. BancShares’ banking operations are locally oriented and community-based. Accordingly, BancShares expects to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets it serves. Unfavorable changes in unemployment, real estate values, interest rates and other factors, could weaken the economies of the communities BancShares serves. Weakness in BancShares’ market area could have an adverse impact on our earnings, and consequently 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 weaknesses in real estate sales activity. That risk, coupled with 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 has arisen from junior lien loans due to inadequate collateral values.
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.
Accounting for acquired assets 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 prepayments and credit quality improvements. Post-acquisition deterioration results in the recognition of provision expense and allowance for loan and lease losses. Additionally, the income statement impact of adjustments to the indemnification asset may occur over a shorter period of time than the adjustments to the covered assets.
Fair value discount accretion, post-acquisition impairment and adjustments to the indemnification asset may result in significant volatility in 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 include loss share agreements that provide significant protection to FCB from the exposures to prospective losses on certain assets. Generally, losses on single family residential loans are covered for ten years. All other loans are generally covered for five years. During the third quarter of 2014, loss share protection will expire for non-single family residential loans acquired from Temecula Valley Bank and Venture Bank. During the first quarter of 2015, loss share protection will expire for non-single family residential loans acquired from First Regional Bank and Sun American Bank. Protection for all other covered assets extends beyond December 31, 2015.
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. We are required to report detailed loan level information and file requests
9
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. Certain loss share agreements contain contingencies that require that we pay the FDIC in the event aggregate losses are less than a pre-determined amount.
Loans and leases covered under loss share agreements represent 7.8 percent of total loans and leases as of December 31, 2013. As of December 31, 2013, we expect to receive cash payments from the FDIC totaling $38.4 million over the remaining lives of the respective loss share agreements, exclusive of $109.4 million we will owe the FDIC for settlement of the contingent payments.
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. The carrying value of the FDIC receivable includes 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.
Merger integration may be disruptive
On January 1, 2014, 1st Financial Services Corporation (1st Financial) was merged into FCB. During the second quarter of 2014, FCB will convert the 1st Financial systems to FCB systems. Complications in the conversion of operating systems, data processing systems and products may result in the loss of customers, damage to our reputation, operational problems, one-time costs currently not anticipated, or reduced cost savings resulting from the merger. The integration could result in higher than expected deposit attrition, loss of key employees, disruption of our business or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition.
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 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.
In July 2013, Bank regulatory agencies approved new global regulatory capital guidelines (Basel) 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 balance sheet exposure. BancShares will be under the new requirements effective January 1, 2015, subject to a transition period for several aspects of the rule. When fully implemented in January 2019, we will be required to maintain a ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets, totaling 7.0 percent. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4.0 percent to 6.0 percent and includes a minimum leverage ratio of 4.0 percent.
The Dodd-Frank Act instituted significant changes to the overall regulatory framework for financial institutions, including the creation of the Consumer Financial Protection Bureau. Additionally, trust preferred securities that currently qualify as tier 1 capital will be fully disallowed by January 1, 2016.
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, 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, and certain competitors are not subject to federal and state income taxes. The fierce competitive pressure that we face adversely affects pricing for many of our products and services.
10
Our financial condition could be adversely affected by the soundness of other financial institutions
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to numerous financial service providers, including banks, brokers and dealers in securities and other financial service providers. Transactions with other financial institutions expose us to credit risk in the event of counterparty default.
We are subject to interest rate risk
Our results of operations and cash flows are highly dependent upon 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 interest income and interest expense as well as the fair value of our financial assets and liabilities. If changes in interest rates on our interest-earning assets are not equal to the changes in interest rates on our interest-bearing liabilities, our net interest income and, therefore, our net income could be adversely impacted.
Although we maintain an interest rate risk monitoring system, the forecasts of future net interest income are estimates and may be inaccurate. Actual interest rate movements may differ from our forecasts, and unexpected actions by the Federal Open Market Committee may have a direct impact on 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 balance sheet liquidity. We normally have the ability to stimulate core deposit growth through reasonable and effective pricing strategies. However, in circumstances where our ability to generate needed liquidity is impaired, we need access to noncore funding such as borrowings from the Federal Home Loan Bank and the Federal Reserve, Federal 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 willingness and ability to lend.
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 and organizational 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, automated systems 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 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 employees
FCB's success depends primarily on our ability to attract and retain key employees. Competition is intense for employees who we believe will be successful in developing and attracting new business and/or managing critical support functions for FCB. We may not be able to hire the best employees or retain them for an adequate period of time after their hire date.
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 a broad range of attacks by doing business on the Internet, which arise from both domestic and international sources and seek to obtain customer information for fraudulent purposes or, in some cases, to disrupt business activities. Information security risks could result in reputational damage and lead to a material adverse impact on our business, financial condition and financial results of operations.
11
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 and associated facilities that will support our ability to provide products and services that satisfactorily meet the banking and other financial needs of our customers. In 2013, we undertook projects to modernize our systems and associated facilities, strengthen our business continuity and disaster recovery efforts and reduce operational risk. The projects will be implemented in phases over the next several years. The magnitude and scope of these projects is significant with total costs estimated to exceed $100 million. If the projects’ objectives are not achieved or if the cost of the projects is materially in excess of the estimate, our business, financial condition and financial results could be adversely impacted.
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 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 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 (OREO) at acquisition date and cash flow projections in subsequent periods, pension plan assumptions, and the related receivable from and payable to 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 based on future events. 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 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, shareholders’ equity, revenues, expenses and net income. In some cases, we could be required to apply new or revised standards retroactively, resulting in changes to previously-reported financial results or a cumulative adjustment to retained earnings. Application of new accounting rules or standards could require us to implement costly technology changes.
Our ability to grow is contingent on capital adequacy
Based on existing capital levels, BancShares and FCB are well-capitalized under current leverage and risk-based capital standards. Our prospective ability to grow is contingent on our ability to generate sufficient capital to remain well-capitalized under current and future capital adequacy guidelines.
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, 2015, provisions of the Dodd-Frank Act eliminate 75 percent of our trust preferred capital securities from tier 1 capital with the remaining 25 percent phased out January 1, 2016.
Rating agencies regularly evaluate our creditworthiness and assign credit ratings to our debt and the debt of FCB. 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. There can be no assurance that we will maintain our current credit ratings. Rating reductions could adversely affect our access to funding sources and the cost of obtaining funding.
12
The market price of our stock may be volatile
Although publicly traded, our common stock has less liquidity and public float than other large publicly traded financial services companies as well as companies listed on the NASDAQ National Market System. Low liquidity increases the price volatility of our stock and could make it difficult for our shareholders to sell or buy our common stock at specific prices.
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. BancShares derives considerable revenue and cash flow from dividends paid by FCB. The cash flow from these dividends is the primary source that allows BancShares to pay dividends on its common stock and interest and principal on its debt obligations. North Carolina state law limits the amount of dividends that FCB may pay to BancShares. In the event FCB is unable to pay dividends to BancShares for an extended period of time, BancShares may not be able to service its debt obligations or pay dividends on its common stock.
Our recorded goodwill may become impaired
As of December 31, 2013, 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 results of
operations, but would not impact our capital ratios since capital ratios are calculated using tangible capital amounts.
Item 2. Properties
As of December 31, 2013, FCB operated branch offices at 397 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 a separate 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.
Item 3. 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 those other matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
13
Part II
Item 5. 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, 2013, there were 1,617 holders of record of the Class A common stock and 286 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 196,133 shares for the fourth quarter of December 31, 2013, and 279,383 shares for the year ended December 31, 2013. The Class B common stock monthly trading volume averaged 2,133 shares in the fourth quarter of December 31, 2013, and 2,225 shares for the year ended December 31, 2013.
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 December 31, 2013, and December 31, 2012, are set forth in the following table.
2013 | 2012 | ||||||||||||||||||||||||||||||
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 | 226.07 | 212.30 | 204.76 | 182.21 | 174.03 | 169.70 | 181.62 | 185.42 | |||||||||||||||||||||||
Low | 201.64 | 194.39 | 179.22 | 166.49 | 156.48 | 160.89 | 161.22 | 164.70 | |||||||||||||||||||||||
Class B sales price | |||||||||||||||||||||||||||||||
High | 211.84 | 199.39 | 192.46 | 174.18 | 167.69 | 179.34 | 182.99 | 183.98 | |||||||||||||||||||||||
Low | 185.38 | 181.69 | 171.20 | 162.88 | 158.00 | 159.41 | 161.11 | 172.75 | |||||||||||||||||||||||
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 28, 2014, payable on April 7, 2014, to holders of record as of March 17, 2014. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. BancShares’ principal source of liquidity for payment of shareholder dividends is the dividend it receives from FCB. FCB is subject to various requirements under federal and state banking laws that restrict the payment of dividends and its ability to lend to BancShares. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.
During the second quarter of 2013, our board granted authority to purchase up to 100,000 and 25,000 shares of Class A and Class B common stock, respectively, beginning on July 1, 2013, and continuing through June 30, 2014. As of December 31, 2013, no purchases had occurred pursuant to that authorization. As of December 31, 2013, under the existing plan that expires June 30, 2014, BancShares had the ability to purchase 100,000 and 25,000 additional shares of Class A and Class B common stock, respectively.
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, we purchased and retired an aggregate of 56,276 shares of Class A common stock and 100 shares of Class B common stock. During 2013, BancShares purchased and retired 1,973 shares of Class A common stock pursuant to the July 1, 2012, authorization. Additionally, under separate authorizations, during 2012, BancShares purchased and retired 606,829 shares of Class B common stock in privately negotiated transactions, including purchases of 593,954 shares from a director and certain of her related interests. The purchase of these shares was approved by the Board of Directors at a price approved by an independent committee of the Board.
14
The following tables indicate that no shares of Class A or Class B common stock were purchased by BancShares during the three months ended December 31, 2013. The tables also indicate the number of shares that may be purchased under publicly announced plans.
Class A common stock | Total number of shares purchases | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||
Purchases from October 1, 2013, through October 31, 2013 | — | $ | — | — | 100,000 | |||||||
Purchases from November 1, 2013, through November 30, 2013 | — | — | — | 100,000 | ||||||||
Purchases from December 1, 2013, through December 31, 2013 | — | — | — | 100,000 | ||||||||
Total | — | $ | — | — | 100,000 | |||||||
Class B common stock | ||||||||||||
Purchases from October 1, 2013, through October 31, 2013 | — | $ | — | — | 25,000 | |||||||
Purchases from November 1, 2013, through November 30, 2013 | — | — | — | 25,000 | ||||||||
Purchases from December 1, 2013, through December 31, 2013 | — | — | — | 25,000 | ||||||||
Total | — | $ | — | — | 25,000 | |||||||
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, 2008, and that dividends were reinvested for additional shares.
15
Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(dollars in thousands, except share data) | |||||||||||||||||||
SUMMARY OF OPERATIONS | |||||||||||||||||||
Interest income | $ | 796,804 | $ | 1,004,836 | $ | 1,015,159 | $ | 969,368 | $ | 738,159 | |||||||||
Interest expense | 56,618 | 90,148 | 144,192 | 195,125 | 227,644 | ||||||||||||||
Net interest income | 740,186 | 914,688 | 870,967 | 774,243 | 510,515 | ||||||||||||||
Provision for loan and lease losses | (32,255 | ) | 142,885 | 232,277 | 143,519 | 79,364 | |||||||||||||
Net interest income after provision for loan and lease losses | 772,441 | 771,803 | 638,690 | 630,724 | 431,151 | ||||||||||||||
Gains on acquisitions | — | — | 150,417 | 136,000 | 104,434 | ||||||||||||||
Noninterest income | 263,603 | 189,300 | 313,949 | 270,214 | 299,017 | ||||||||||||||
Noninterest expense | 771,380 | 766,933 | 792,925 | 733,376 | 651,503 | ||||||||||||||
Income before income taxes | 264,664 | 194,170 | 310,131 | 303,562 | 183,099 | ||||||||||||||
Income taxes | 96,965 | 59,822 | 115,103 | 110,518 | 66,768 | ||||||||||||||
Net income | $ | 167,699 | $ | 134,348 | $ | 195,028 | $ | 193,044 | $ | 116,331 | |||||||||
Net interest income, taxable equivalent | $ | 742,846 | $ | 917,664 | $ | 874,727 | $ | 778,382 | $ | 515,446 | |||||||||
PER SHARE DATA | |||||||||||||||||||
Net income | $ | 17.43 | $ | 13.11 | $ | 18.80 | $ | 18.50 | $ | 11.15 | |||||||||
Cash dividends | 1.20 | 1.20 | 1.20 | 1.20 | 1.20 | ||||||||||||||
Market price at period end (Class A) | 222.63 | 163.50 | 174.99 | 189.05 | 164.01 | ||||||||||||||
Book value at period end | 215.89 | 193.75 | 180.97 | 166.08 | 149.42 | ||||||||||||||
SELECTED PERIOD AVERAGE BALANCES | |||||||||||||||||||
Total assets | $ | 21,300,800 | $ | 21,077,444 | $ | 21,135,572 | $ | 20,841,180 | $ | 17,557,484 | |||||||||
Investment securities | 5,206,000 | 4,698,559 | 4,215,761 | 3,641,093 | 3,412,620 | ||||||||||||||
Loans and leases (acquired and originated) | 13,163,743 | 13,560,773 | 14,050,453 | 13,865,815 | 12,062,954 | ||||||||||||||
Interest-earning assets | 19,433,947 | 18,974,915 | 18,824,668 | 18,458,160 | 15,846,514 | ||||||||||||||
Deposits | 17,947,996 | 17,727,117 | 17,776,419 | 17,542,318 | 14,578,868 | ||||||||||||||
Interest-bearing liabilities | 13,910,299 | 14,298,026 | 15,044,889 | 15,235,253 | 13,013,237 | ||||||||||||||
Long-term obligations | 462,203 | 574,721 | 766,509 | 885,145 | 753,242 | ||||||||||||||
Shareholders' equity | $ | 1,942,108 | $ | 1,915,269 | $ | 1,811,520 | $ | 1,672,238 | $ | 1,465,953 | |||||||||
Shares outstanding | 9,618,952 | 10,244,472 | 10,376,445 | 10,434,453 | 10,434,453 | ||||||||||||||
SELECTED PERIOD-END BALANCES | |||||||||||||||||||
Total assets | $ | 21,199,091 | $ | 21,283,652 | $ | 20,997,298 | $ | 20,806,659 | $ | 18,466,063 | |||||||||
Investment securities | 5,388,610 | 5,227,570 | 4,058,245 | 4,512,608 | 2,932,765 | ||||||||||||||
Loans and leases: | |||||||||||||||||||
Acquired | 1,029,426 | 1,809,235 | 2,362,152 | 2,007,452 | 1,173,020 | ||||||||||||||
Originated | 12,104,298 | 11,576,115 | 11,581,637 | 11,480,577 | 11,644,999 | ||||||||||||||
Interest-earning assets | 19,428,929 | 19,142,433 | 18,529,548 | 18,487,960 | 16,541,425 | ||||||||||||||
Deposits | 17,874,066 | 18,086,025 | 17,577,274 | 17,635,266 | 15,337,567 | ||||||||||||||
Interest-bearing liabilities | 13,654,436 | 14,213,751 | 14,548,389 | 15,015,446 | 13,561,924 | ||||||||||||||
Long-term obligations | 510,769 | 444,921 | 687,599 | 809,949 | 797,366 | ||||||||||||||
Shareholders' equity | $ | 2,076,675 | $ | 1,864,007 | $ | 1,861,128 | $ | 1,732,962 | $ | 1,559,115 | |||||||||
Shares outstanding | 9,618,941 | 9,620,914 | 10,284,119 | 10,434.453 | 10,434.453 | ||||||||||||||
SELECTED RATIOS AND OTHER DATA | |||||||||||||||||||
Rate of return on average assets (annualized) | 0.79 | % | 0.64 | % | 0.92 | % | 0.93 | % | 0.66 | % | |||||||||
Rate of return on average shareholders' equity (annualized) | 8.63 | 7.01 | 10.77 | 11.54 | 7.94 | ||||||||||||||
Net yield on interest-earning assets (taxable equivalent) | 3.82 | 4.84 | 4.65 | 4.22 | 3.25 | ||||||||||||||
Allowance for loan and lease losses to total loans and leases: | |||||||||||||||||||
Acquired | 5.20 | 7.74 | 3.78 | 2.55 | 0.30 | ||||||||||||||
Originated | 1.49 | 1.55 | 1.56 | 1.54 | 1.45 | ||||||||||||||
Nonperforming assets to total loans and leases and other real estate at period end: | |||||||||||||||||||
Acquired | 7.02 | 9.26 | 17.95 | 12.87 | 16.59 | ||||||||||||||
Originated | 0.74 | 1.15 | 0.89 | 1.14 | 0.85 | ||||||||||||||
Tier 1 risk-based capital ratio | 14.92 | 14.27 | 15.41 | 14.86 | 13.34 | ||||||||||||||
Total risk-based capital ratio | 16.42 | 15.95 | 17.27 | 16.95 | 15.59 | ||||||||||||||
Leverage capital ratio | 9.82 | 9.23 | 9.90 | 9.18 | 9.54 | ||||||||||||||
Dividend payout ratio | 6.88 | 9.15 | 6.38 | 6.49 | 10.76 | ||||||||||||||
Average loans and leases to average deposits | 73.34 | 76.50 | 79.04 | 79.04 | 82.74 | ||||||||||||||
Average loan and lease balances include nonaccrual loans and leases. See discussion of issues affecting comparability of financial statements under the caption FDIC-Assisted Transactions.
16
Item 7. 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. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2013, the reclassifications have no material effect on shareholders’ equity or net income as previously reported. 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 material to our consolidated financial statements and are highly dependent on estimates and assumptions.
Allowance for loan and lease losses. The allowance for loan and lease losses (ALLL) reflects the estimated losses resulting from the inability of our customers to make required loan and lease payments. The ALLL is based on 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.
During 2013, we implemented enhancements to our modeling methodology for estimating the general reserve component of the ALLL. Specifically for the originated commercial loans and leases segment, we refined our modeling methodology by increasing the granularity of the historical net loss data used to develop the applicable loss rates by utilizing information that further considers the class of the commercial loan and associated risk rating. For the originated noncommercial segment, we refined our modeling methodology to incorporate specific loan classes and delinquency status trends into the loss rates. The enhanced ALLL estimates implicitly include the risk of draws on open lines within each loan class. Management has also further enhanced a qualitative framework for considering economic conditions, loan concentrations and other relevant factors at a loan class level. We believe the methodology enhancements improve the application of historical net loss data and the precision of our segment analysis. These enhancements resulted in reallocations between segments, allocation of the nonspecific allowance to specific loan classes and reallocation of substantially all of the reserve for unfunded commitments into the ALLL. Other than these modifications, the enhancements to the methodology had no material impact on the ALLL.
Acquired loans 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 ALLL. Following acquisition, we routinely review acquired 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 ALLL. 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 ALLL, 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 acquired loans if the timing of the projected loss will result in the loss being covered by loss share agreements.
Management continuously monitors and actively manages the credit quality of the entire loan portfolio and recognizes provision expense to maintain the allowance at an appropriate level. 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.
17
Management considers the established allowance adequate to absorb losses that relate to loans and leases outstanding at December 31, 2013, 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. 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. 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.
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, 2013, the percentage of total assets and total liabilities measured at fair value on a recurring basis was 25.4 percent and less than 1.0 percent, respectively. The fair values of assets and liabilities carried at fair value on a recurring basis are estimated using various model-based valuation techniques. At December 31, 2013, no assets or liabilities measured at fair value on a recurring basis were based on significant nonobservable inputs. Certain other assets are reported at fair value on a nonrecurring basis, including loans held for sale, impaired loans and other real estate owned (OREO). See Note L “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 the 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, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded previously. Reversal of previously-established allowances result in immediate adjustments to the FDIC receivable to remove amounts that were expected to be reimbursed prior to the improvement. For improvements that increase accretable yield, 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 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.
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. For the calculation of pension expense, the assumed discount rate equaled 4.00 percent during 2013, and 4.75 percent during 2012. At December 31, 2013, BancShares increased the assumed discount rate on its pension liability to 4.90 percent due to higher long-term interest rates. This rate increase reduced BancShares' calculated benefit obligation as of December 31, 2013, and will lower the 2014 pension expense.
18
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 7.25 percent during 2013 compared to 7.50 percent in 2012. 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 2013 and 2012. 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.
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.
19
EXECUTIVE OVERVIEW
BancShares’ earnings and cash flows are primarily derived from our commercial banking activities. We gather deposits from retail and commercial customers and 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 bank premises, hardware, software, furniture and equipment used to conduct our commercial banking business. We provide treasury services products, cardholder and merchant services, wealth management services and 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.
Prior to 2009, we focused on organic growth, delivering our products and services to customers through de novo branch expansion. Beginning in 2009, leveraging on our strong capital and liquidity positions, we participated in six FDIC-assisted transactions involving distressed financial institutions. Each of the FDIC-assisted transactions include indemnification assets, or loss share agreements, that protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. Under GAAP, acquired assets, assumed liabilities and the indemnification asset are recorded at their fair values as of the acquisition date. Subsequent to the acquisition date, the amortization and accretion of premiums and discounts, the recognition of post-acquisition improvement and deterioration and the related accounting for the loss share agreements with the FDIC have contributed to significant income statement volatility. During 2013, in the aggregate, the net impact of assets acquired in the FDIC-assisted transactions has been favorable to current earnings, as recoveries of amounts previously charged off, the reversal of previously-identified impairment and accretion income has exceeded the unfavorable amortization of the receivable from the FDIC for loss share agreements.
On January 1, 2014, FCB completed its merger with 1st Financial Services Corporation (1st Financial) and its wholly-owned banking subsidiary Mountain 1st Bank & Trust Company. In accordance with the acquisition method of accounting, all assets and liabilities were recorded at their fair value as of the acquisition date. As a result of the 1st Financial transaction, during the first quarter of 2014, FCB recorded loans with a fair value of $316.3 million, investment securities with a fair value of $237.4 million and other real estate with a fair value of $11.6 million. The fair value of deposits assumed totaled $631.9 million. FCB paid $10.0 million to acquire 1st Financial, including $8.0 million to acquire the 1st Financial securities that had been issued under the Troubled Asset Relief Program. As a result of the merger, FCB recorded $24.5 million of goodwill. BancShares and FCB remain well-capitalized following the 1st Financial merger.
Various external factors influence the focus of our business efforts, and the results of our operations can change significantly based on those external factors. US economic conditions are improving, but unemployment rates remain high. The rate of economic growth increased during the second half of 2013. Consumer confidence continues to improve, with consumer spending at the highest level of growth in three years. Continued growth in household net worth, driven by increases in home, stock and other asset values, is believed to have positively influenced consumer confidence. As a result of perceived strength in the economy, during December 2013, the Federal Reserve announced its decision to taper its bond-buying program in 2014.
We continue to experience downward pressure on net interest income, resulting from low interest rates and acquired loan payoffs. While improvement in economic conditions contributed to originated loan growth during the second half of 2013, the rapid reduction in our acquired loan portfolio resulted in a net reduction in gross loans during 2013. Low interest rates and competitive loan and deposit pricing have led to narrow interest margins for our originated loan portfolio. The Federal Reserve's continuing efforts to stimulate economic growth has resulted in interest rates remaining at unprecedented low levels, and policymakers have indicated they intend to hold benchmark interest rates stable until 2015. The low interest rate environment and lack of growth continue to adversely affect net interest income.
Improving economic conditions and favorable real estate prices contributed to significant credit quality improvement during 2013. Charge-offs among both acquired and originated loans declined during 2013, and nonperforming assets and delinquencies declined from 2012. Despite these improvements, certain financially-distressed customers continue to experience difficulty meeting their debt service obligations.
20
Following a comprehensive evaluation of our core technology systems and related business processes during 2012, we concluded that significant investments were required to ensure we are able to meet changing business requirements and to support a growing organization. The project to modernize our systems and associated facilities began in 2013 with phased implementation scheduled through 2016. The project will improve our business continuity and disaster recovery efforts and will ultimately reduce operational risk. The magnitude and scope of this effort is significant with total costs estimated to exceed $100 million.
During the evaluation of our business processes, we identified several services that we concluded were not critical to our long-term strategic objectives. During the first quarter of 2013, we sold our rights and most of our obligations under various service agreements with client banks, some of which are controlled by Related Persons. We continue to provide processing services to First Citizens Bank and Trust Company, Inc. (FCB-SC), an entity controlled by Related Persons and our largest client bank.
During 2013, we unveiled an advertising campaign that features a refreshed brand and updated company logo. Our new brand line, Forever First®, symbolizes our commitment to the people, businesses and communities who rely on us to be the best we can be. It is used in all our branches, in print advertising and for our online presence. In the Triangle and greater Charlotte areas of North Carolina, television, radio and outdoor advertising share our brand story. We have also developed two product bundles that are used to target specific customers. Your Family First was developed for financially-active families, while the Your Venture First package was developed for small business customers.
Our balance sheet liquidity position remains strong. While total deposits have seen little change, during the past 2 years, we have seen significant reductions in time deposits, largely offset by growth among demand and money market deposits. We believe that customers continue to desire the safety of bank deposits, but are not willing to invest in time deposits based on expectations that time deposit rates are likely to increase.
In an effort to assist customers 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 debt obligations. The majority of restructured loans (TDRs) are to customers that are currently performing under existing terms but may be unable to do so in the near future without a modification.
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 July 2013, Bank regulatory agencies approved new global regulatory capital guidelines (Basel) 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 balance sheet exposure. BancShares will be subject to the requirements of Basel effective January 1, 2015, subject to a transition period for several aspects of the rule. Table 2 describes the minimum and well-capitalized requirements for the transitional period beginning during 2016 and the fully-phased-in requirements that become effective during 2019. As of December 31, 2013, BancShares' tier 1 common equity ratio, was 14.3 percent, compared to the fully-phased in well-capitalized minimum of 9.0 percent, which includes the 2.5 percent minimum conservation buffer.
Table 2
BASEL CAPITAL REQUIREMENTS
Basel final rules | Basel minimum requirement 2016 | Basel well capitalized 2016 | Basel minimum requirement 2019 | Basel well capitalized 2019 | ||
Leverage ratio | 4.00% | 5.00% | 4.00% | 5.00% | ||
Common equity tier 1 | 4.50 | 6.50 | 4.50 | 6.50 | ||
Common equity plus conservation buffer | 5.13 | 7.13 | 7.00 | 9.00 | ||
Tier 1 capital ratio | 6.00 | 8.00 | 6.00 | 8.00 | ||
Total capital ratio | 8.00 | 10.00 | 8.00 | 10.00 | ||
Total capital ratio plus conservation buffer | 8.63 | 10.63 | 10.50 | 12.50 | ||
21
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, ensuring our capital positions remain strong and 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.
EARNINGS SUMMARY
BancShares’ reported earnings for 2013 of $167.7 million, or $17.43 per share, compared to $134.3 million, or $13.11 per share during 2012. The annualized returns on average assets and equity amounted to 0.79 percent and 8.63 percent, respectively, during 2013, compared to 0.64 percent and 7.01 percent for 2012. The increase in net income in 2013 was due to a reduction in the provision for loan and lease losses and higher noninterest income, partially offset by lower net interest income.
Net interest income decreased $174.5 million from $914.7 million in 2012 to $740.2 million in 2013, primarily due to acquired loan shrinkage resulting in lower accretion income. The taxable-equivalent net yield on interest-earning assets decreased 102 basis points from 4.84 percent in 2012 to 3.82 percent in 2013. Lower accreted loan discounts resulting from payments on acquired loans significantly impacted the taxable-equivalent net yield on interest-earning assets during 2013 and 2012. Accretion income will continue to decrease in future periods as acquired loan balances continue to decline.
BancShares recorded a $32.3 million credit to provision for loan and lease losses during 2013, compared to provision expense of $142.9 million during 2012. Provision expense declined for both acquired loans and originated loans during 2013. The credit to provision expense related to acquired loans totaled $51.5 million during 2013, compared to provision expense of $100.8 million during 2012, a $152.4 million favorable change. The significant reduction in provision expense for acquired loans resulted from lower current impairment, credit quality improvements and payoffs of acquired loans for which an allowance had previously been established. Provision expense for originated loans totaled $19.3 million during 2013, compared to $42.0 million during 2012, a reduction of $22.8 million, resulting from lower net charge-offs and credit quality improvements in the originated portfolio.
For 2013, noninterest income increased $74.3 million from 2012 primarily resulting from higher acquired loan recoveries, a favorable reduction in the adjustments to the FDIC receivable and the sale of a large portion of our client bank processing. These favorable changes were partially offset by lower fees from processing services.
Noninterest expense increased $4.4 million, or 0.6 percent for 2013, when compared to 2012. The increase resulted from increases in pension, consulting and advertising expense, partially offset by lower foreclosure-related expenses.
Operating results related to acquired assets were favorable during 2013 and improved when compared to 2012. The significant reduction in the provision for loan and lease losses related to acquired assets, combined with improved noninterest income resulting from recoveries of acquired loans previously charged off and lower amortization expense related to the FDIC receivable more than offset the impact of lower accretion income. We expect the income statement impact of acquired assets will decrease in future periods as acquired loan balances decline.
Results from our non-acquired bank operations were mixed during 2013 when compared to 2012. While provision for loan and lease losses declined for 2013, noninterest expense increased primarily due to higher employee benefits expense and cardholder rewards expense. Net interest income was unchanged from 2012, while noninterest income increased slightly, the net result of improved cardholder and merchant income, offset by lower fees from processing services.
22
FDIC-ASSISTED TRANSACTIONS
FDIC-assisted transactions provided us significant growth opportunities from 2009 through 2011 and have continued to provide significant contributions to our results of operations. These transactions allowed us to increase our presence in existing markets and to expand our banking presence to adjacent markets. Each of the FDIC-assisted transactions included loss share agreements that, for the term of the loss share agreement, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.
Balance sheet impact. Table 3 provides information regarding the six FDIC-assisted transactions consummated during 2011, 2010 and 2009.
Table 3
FDIC-ASSISTED TRANSACTIONS
Entity | Date of transaction | Fair value of loans acquired | ||||
(dollars in thousands) | ||||||
Colorado Capital Bank (CCB) | July 8, 2011 | $ | 320,789 | |||
United Western Bank (United Western) | January 21, 2011 | 759,351 | ||||
Sun American Bank (SAB) | March 5, 2010 | 290,891 | ||||
First Regional Bank (First Regional) | January 29, 2010 | 1,260,249 | ||||
Venture Bank (VB) | September 11, 2009 | 456,995 | ||||
Temecula Valley Bank (TVB) | July 17, 2009 | 855,583 | ||||
Total | $ | 3,943,858 | ||||
Carrying value of acquired loans as of December 31, 2013 | $ | 1,029,426 | ||||
Income statement impact. The six FDIC-assisted transactions created acquisition gains recognized at the time of each respective transaction. No acquisition gains were recorded during 2013 and 2012, compared to $150.4 million in 2011. During 2013 and 2012, acquired loans resulting from the FDIC-assisted transactions have had a significant impact on interest income, provision for loan and lease losses and noninterest income. Due to the many factors that can affect the amount of income or expense related to acquired loans recognized in a given period, these components of net income are not easily predictable for future periods. Variations among these items may affect the comparability of various components of net income.
The amount of accretable yield related to acquired loans changes when the estimated cash flows expected to be collected change. The recognition of accretion income, which is included in interest income, may be accelerated in the event of unscheduled payments and various other post-acquisition events. For 2013, accretion income on acquired loans equaled $224.7 million, compared to $304.0 million during 2012 and $319.4 million during 2011. Accretion income continues to decline as acquired loan balances are repaid.
Total provision for loan and lease losses related to acquired loans decreased by $152.4 million from provision expense of $100.8 million in 2012 to a provision credit of $51.5 million in 2013. The decrease in the provision for acquired loan losses in 2013 is the result of reversal of previously identified impairment for post-acquisition deterioration and payoffs of loans for which an allowance had been established.
During 2013, the net adjustment to the FDIC receivable for post-acquisition improvements and deterioration in acquired assets resulted in a net reduction to the FDIC receivable and noninterest income of $72.3 million, compared to a net reduction in the receivable and a corresponding reduction in noninterest income of $101.6 million during 2012. For 2013, other noninterest income included $29.7 million of acquired loan recoveries, an increase of $19.2 million over 2012.
Expenses related to personnel supporting our acquired loan portfolio, facility and equipment costs, and expenses associated with collection and resolution of acquired loans as well as all income and expenses associated with OREO property covered under loss share agreements are not segregated from corresponding expenses related to originated assets.
23
Acquisition accounting and issues affecting comparability of financial statements. As estimated exposures related to the acquired assets covered by the loss share agreements change based on post-acquisition events, our adherence to GAAP and accounting policy elections 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 an acquired loan is less than originally expected: |
▪ | An allowance for loan and lease losses is 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 FDIC receivable 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 an acquired loan is greater than originally expected: |
▪ | 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 interest income; |
▪ | The FDIC receivable 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 relevant loss share agreement; |
• | When actual payments received on acquired loans are greater than initial estimates, large nonrecurring discount accretion or reductions in the allowance for loan and lease losses may be recognized during a specific period; discount accretion is recognized as an increase to interest income; reductions in the allowance for loan and lease losses are recorded as a reduction in the provision for loan and lease losses; |
• | Adjustments to the FDIC receivable resulting from changes in estimated cash flows for acquired loans are based on the reimbursement provision of the applicable loss share agreement with the FDIC. Adjustments to the FDIC receivable partially offset the adjustment to the acquired loan carrying value, but the rate of the change to the FDIC receivable relative to the change in the acquired 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 that the aggregate amount of losses is less than a loss estimate established by the FDIC. The adjustments to the FDIC receivable 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. |
Receivable from FDIC for loss share agreements. The various terms of each loss share agreement and the components of the receivable from the FDIC is provided in Table 4. As of December 31, 2013, the FDIC receivable included $38.4 million we expect to receive through reimbursements from the FDIC and $55.0 million we expect to recover through prospective amortization of the asset due to post-acquisition improvements in the related loans.
The timing of expected losses on acquired 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 relevant loss share agreement, the FDIC receivable is adjusted to reflect the forfeiture of loss share protection.
24
Table 4
LOSS SHARE PROVISIONS FOR FDIC-ASSISTED TRANSACTIONS
Fair value at acquisition date | Losses/expenses incurred through 12/31/2013 | Cumulative amount reimbursed by FDIC through 12/31/2013 | Carrying value at December 31, 2013 | Current portion of receivable due from (to) FDIC for 12/31/2013 filings | Prospective amortization (accretion) | ||||||||||||||||
Receivable from FDIC | Payable to FDIC | ||||||||||||||||||||
Entity | |||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||
TVB - combined losses | $ | 103,558 | $ | 194,302 | $ | — | $ | 16,988 | $ | — | $ | — | $ | 16,988 | |||||||
VB - combined losses | 138,963 | 156,254 | 123,583 | 1,988 | — | 1,421 | (1,176 | ) | |||||||||||||
First Regional - combined losses | 378,695 | 253,481 | 178,180 | 15,018 | 75,828 | (8,849 | ) | 15,199 | |||||||||||||
SAB - combined losses | 89,734 | 95,876 | 78,861 | 10,145 | 1,543 | (2,160 | ) | 7,801 | |||||||||||||
United Western | |||||||||||||||||||||
Non-single family residential losses | 112,672 | 111,480 | 88,866 | 15,209 | 16,821 | 148 | 6,878 | ||||||||||||||
Single family residential losses | 24,781 | 4,529 | 2,835 | 11,463 | — | 789 | 1,230 | ||||||||||||||
CCB - combined losses | 155,070 | 186,354 | 144,926 | 22,586 | 15,186 | 4,330 | 8,038 | ||||||||||||||
Total | $ | 1,003,473 | $ | 1,002,276 | $ | 617,251 | $ | 93,397 | $ | 109,378 | $ | (4,321 | ) | $ | 54,958 | ||||||
Except where noted, 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. The loss share agreements expire on July 17, 2014, for all TVB NSFR loans and July 17, 2019, for the SFR loans. | |||||||||||||||||||||
For VB, combined losses are covered at 80 percent up to $235.0 million and 95 percent for losses above $235.0 million. The loss share agreements expire on September 11, 2014, for all VB NSFR loans and September 11, 2019, for the SFR loans. | |||||||||||||||||||||
For First Regional, NSFR 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. The loss share agreement expires on January 29, 2015, for all First Regional NSFR loans. First Regional has no SFR loans. | |||||||||||||||||||||
For SAB, combined losses are covered at 80 percent up to $99.0 million and 95 percent for losses above $99.0 million. The loss share agreements expire on March 5, 2015, for all SAB NSFR loans and March 4, 2020, for the SFR loans. | |||||||||||||||||||||
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. The loss share agreement expires on January 21, 2016. | |||||||||||||||||||||
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. The loss share agreement expires on January 20, 2021. | |||||||||||||||||||||
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. The loss share agreements expire on July 7, 2016, for all CCB NSFR loans and July 7, 2021, for the SFR loans. | |||||||||||||||||||||
Fair value at acquisition date represents the initial fair value of the receivable from FDIC, excluding the payable to FDIC. 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. | |||||||||||||||||||||
25
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 higher levels of market risk.
We have historically focused on maintaining high-asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. We avoid high-risk industry concentrations, but we do maintain a concentration of owner-occupied real estate loans to borrowers in medical and medical-related fields. Our focus on asset quality also influences the composition of our investment securities portfolio. At December 31, 2013, government agency securities represented 47.2 percent of investment securities available for sale, compared to mortgage-backed securities, which represented 45.4 percent and U.S. Treasury securities, which represented 6.9 percent of the portfolio. The balance of the available-for-sale portfolio includes common stock of other financial institutions and state, county and municipal securities. Overnight investments are with the Federal Reserve Bank and other financial institutions.
Interest-earning assets averaged $19.43 billion for 2013, compared to $18.97 billion for 2012. The increase of $459.0 million, or 2.4 percent, was due to higher levels of investment securities and overnight investments offset, in part, by lower acquired loans.
Loans and leases
Loans and leases totaled $13.13 billion at December 31, 2013, a decrease of $251.6 million, or 1.9 percent, when compared to December 31, 2012. This follows a decrease of $558.4 million, or 4.0 percent, in total loans and leases from December 31, 2011 to December 31, 2012.
Total originated loans increased $528.2 million from $11.58 billion at December 31, 2012, to $12.10 billion at December 31, 2013, after declining $5.5 million from December 31, 2011 to December 31, 2012. Acquired loans totaled $1.03 billion at December 31, 2013, compared to $1.81 billion at December 31, 2012, and $2.36 billion at December 31, 2011. Originated loan demand improved during the second half of 2013, while acquired loan balances continued to decline due to repayments and charge-offs. Table 5 provides the composition of acquired and originated loan and leases for the past five years.
Originated commercial mortgage loans totaled $6.36 billion at December 31, 2013, 52.6 percent of originated loans and leases. The December 31, 2013, balance increased $333.1 million or 5.5 percent since December 31, 2012, and $179.2 million or 3.1 percent between December 31, 2011 and December 31, 2012. The 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, 2013, originated revolving mortgage loans totaled $2.11 billion, representing 17.5 percent of total originated loans outstanding, a decrease of $96.8 million or 4.4 percent since December 31, 2012, following a decrease of $86.2 million or 3.8 percent between December 31, 2011 and December 31, 2012. The reduction in revolving mortgage loans over the prior two years is a result of a reduced emphasis on this class of lending, partially resulting from eroded collateral values related to junior lien mortgage loans.
At December 31, 2013, originated commercial and industrial loans equaled $1.08 billion or 8.9 percent of total originated loans and leases, an increase of $42.6 million or 4.1 percent since December 31, 2012. This follows an increase of $19.4 million or 1.9 percent between December 31, 2011 and December 31, 2012. We observed improved demand for commercial and industrial lending during 2013, which we attribute to improving confidence among small businesses.
Originated residential mortgage loans totaled $982.4 million at December 31, 2013, up $159.5 million or 19.4 percent from December 31, 2012. This follows an increase of $38.8 million, or 4.9 percent between December 31, 2011 and December 31, 2012. While the majority of residential mortgage loans that we originated in 2013 were sold to investors, other loans, including affordable housing loans with nonconforming loan-to-value ratios, were retained in the loan portfolio.
Originated leases totaled $381.8 million or 3.2 percent of total originated loans at December 31, 2013, an increase of $51.1 million or 15.4 percent since December 31, 2012. This follows an increase of $17.8 million or 5.7 percent between December 31, 2011 and December 31, 2012.
26
Table 5
LOANS AND LEASES
December 31 | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Acquired loans: | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Construction and land development | $ | 78,915 | $ | 237,906 | $ | 338,873 | $ | 368,420 | $ | 223,487 | |||||||||
Commercial mortgage | 642,891 | 1,054,473 | 1,260,589 | 1,089,064 | 590,399 | ||||||||||||||
Other commercial real estate | 41,381 | 107,119 | 158,394 | 210,661 | 21,638 | ||||||||||||||
Commercial and industrial | 17,254 | 49,463 | 113,442 | 132,477 | 95,231 | ||||||||||||||
Lease financing | — | — | 57 | — | — | ||||||||||||||
Other | 866 | 1,074 | 1,330 | 1,510 | 2,887 | ||||||||||||||
Total commercial loans | 781,307 | 1,450,035 | 1,872,685 | 1,802,132 | 933,642 | ||||||||||||||
Noncommercial: | |||||||||||||||||||
Residential mortgage | 213,851 | 297,926 | 327,568 | 74,495 | 152,309 | ||||||||||||||
Revolving mortgage | 30,834 | 38,710 | 51,552 | 17,866 | — | ||||||||||||||
Construction and land development | 2,583 | 20,793 | 105,536 | 105,805 | 82,555 | ||||||||||||||
Consumer | 851 | 1,771 | 4,811 | 7,154 | 4,514 | ||||||||||||||
Total noncommercial loans | 248,119 | 359,200 | 489,467 | 205,320 | 239,378 | ||||||||||||||
Total acquired loans | 1,029,426 | 1,809,235 | 2,362,152 | 2,007,452 | 1,173,020 | ||||||||||||||
Originated loans and leases: | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Construction and land development | 319,847 | 309,190 | 381,163 | 338,929 | 541,110 | ||||||||||||||
Commercial mortgage | 6,362,490 | 6,029,435 | 5,850,245 | 5,505,436 | 5,311,550 | ||||||||||||||
Other commercial real estate | 178,754 | 160,980 | 144,771 | 149,710 | 158,187 | ||||||||||||||
Commercial and industrial | 1,081,158 | 1,038,530 | 1,019,155 | 1,101,916 | 1,073,198 | ||||||||||||||
Lease financing | 381,763 | 330,679 | 312,869 | 301,289 | 330,713 | ||||||||||||||
Other | 175,336 | 125,681 | 158,369 | 182,015 | 195,084 | ||||||||||||||
Total commercial loans | 8,499,348 | 7,994,495 | 7,866,572 | 7,579,295 | 7,609.842 | ||||||||||||||
Noncommercial: | |||||||||||||||||||
Residential mortgage | 982,421 | 822,889 | 784,118 | 878,792 | 864,704 | ||||||||||||||
Revolving mortgage | 2,113,285 | 2,210,133 | 2,296,306 | 2,233,853 | 2,147,223 | ||||||||||||||
Construction and land development | 122,792 | 131,992 | 137,271 | 192,954 | 81,244 | ||||||||||||||
Consumer | 386,452 | 416,606 | 497,370 | 595,683 | 941,986 | ||||||||||||||
Total noncommercial loans | 3,604,950 | 3,581,620 | 3,715,065 | 3,901,282 | 4,035,157 | ||||||||||||||
Total originated loans and leases | 12,104,298 | 11,576,115 | 11,581,637 | 11,480,577 | 11,644,999 | ||||||||||||||
Total loans and leases | 13,133,724 | 13,385,350 | 13,943,789 | 13,488,029 | 12,818,019 | ||||||||||||||
Less allowance for loan and lease losses | 233,394 | 319,018 | 270,144 | 227,765 | 172,282 | ||||||||||||||
Net loans and leases | $ | 12,900,330 | $ | 13,066,332 | $ | 13,673,645 | $ | 13,260,264 | $ | 12,645,737 | |||||||||
27
Originated commercial construction and land development loans totaled $319.8 million or 2.6 percent of total originated loans at December 31, 2013, an increase of $10.7 million or 3.4 percent since December 31, 2012. Modest growth during 2013 follows a decrease of $72.0 million, or 18.9 percent between December 31, 2011 and December 31, 2012. Most of the construction portfolio relates to borrowers in North Carolina and Virginia where real estate values have been more stable than in other markets in which we operate.
Originated consumer loans totaled $386.5 million at December 31, 2013, down $30.2 million or 7.2 percent since December 31, 2012. Consumer loans decreased $80.8 million or 16.2 percent between December 31, 2011 and December 31, 2012. This decline is the result of the general contraction in consumer borrowing over the past several years due to weak customer demand and continued run-off in our automobile sales finance portfolio.
At December 31, 2013, acquired commercial mortgage loans totaled $642.9 million, representing 62.5 percent of the total acquired portfolio compared to $1.05 billion at December 31, 2012, and $1.26 billion at December 31, 2011. Acquired residential mortgage loans totaled $213.9 million or 20.8 percent of the acquired portfolio as of December 31, 2013, compared to $297.9 million or 16.5 percent of total acquired loans at December 31, 2012, and $327.6 million or 13.9 percent of total acquired loans at December 31, 2011. Acquired commercial construction and land development loans amounted to $78.9 million, or 7.7 percent of total acquired loans at December 31, 2013, compared to $237.9 million at December 31, 2012, and $338.9 million from December 31, 2011. The changes in acquired loan balances reflect continued reductions of outstanding loans from the FDIC-assisted transactions from payments, charge-offs and foreclosure.
Management believes 2013 loan growth results from improving economic conditions. We expect originated loan growth to continue in 2014 with strengthening economic stability. Loan growth projections are subject to change due to further economic deterioration or improvement and other external factors.
Investment securities
Investment securities available for sale equaled $5.39 billion at December 31, 2013, compared to $5.23 billion at December 31, 2012. Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. As of December 31, 2013, investment securities available for sale had a net unrealized loss of $16.6 million, compared to a net unrealized gain of $33.8 million that existed as of December 31, 2012. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of December 31, 2013.
During 2013, in an effort to protect portfolio market value and profitability in a rising rate environment while not detracting from earnings in the current rate environment, management shifted the asset allocation towards more floating rate securities. A portion of proceeds from matured and called U.S. Government agency and U.S. Treasury securities were reinvested into collateralized mortgage obligations issued by the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. As as result, the carrying value of mortgage-backed securities available for sale, including collateralized mortgage obligations, increased $1.12 billion or 84.0 percent during 2013, while U.S. Government agency securities declined $511.0 million or 16.7 percent and U.S. Treasury securities declined $450.2 million or 54.7 percent. At December 31, 2013, 76.0 percent of the collateralized mortgage obligation portfolio was floating rate and 24.0 percent was fixed rate.
Changes in the total balance of our investment securities portfolio result from trends among loans and leases, deposits and short-term borrowings. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand. The total investment securities portfolio book value increased $211.5 million in 2013 largely on lower loan balances. Details of investment securities at December 31, 2013, December 31, 2012 and December 31, 2011, are provided in Table 6.
28
Table 6
INVESTMENT SECURITIES
2013 | 2012 | 2011 | ||||||||||||||||||||||||||
Average maturity (Yrs./mos.) | Taxable equivalent yield | |||||||||||||||||||||||||||
Cost | Fair value | Cost | Fair value | Cost | Fair value | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Investment securities available for sale: | ||||||||||||||||||||||||||||
U.S. Treasury | ||||||||||||||||||||||||||||
Within one year | $ | 245,510 | $ | 245,667 | 0/8 | 0.48 | % | $ | 576,101 | $ | 576,393 | $ | 811,038 | $ | 811,835 | |||||||||||||
One to five years | 127,713 | 127,770 | 1/7 | 1.76 | 247,140 | 247,239 | 76,003 | 75,984 | ||||||||||||||||||||
Total | 373,223 | 373,437 | 1/0 | 0.92 | 823,241 | 823,632 | 887,041 | 887,819 | ||||||||||||||||||||
Government agency | ||||||||||||||||||||||||||||
Within one year | 594,446 | 595,216 | 0/5 | 0.83 | 1,708,572 | 1,709,520 | 2,176,527 | 2,176,143 | ||||||||||||||||||||
One to five years | 1,948,777 | 1,949,013 | 1/11 | 0.62 | 1,343,468 | 1,345,684 | 415,447 | 416,066 | ||||||||||||||||||||
Total | 2,543,223 | 2,544,229 | 1/7 | 0.67 | 3,052,040 | 3,055,204 | 2,591,974 | 2,592,209 | ||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||
Within one year | 10,703 | 10,743 | 0/9 | 3.12 | 3,397 | 3,456 | 374 | 373 | ||||||||||||||||||||
One to five years | 2,221,351 | 2,192,285 | 3/7 | 1.79 | 732,614 | 736,284 | 56,650 | 56,929 | ||||||||||||||||||||
Five to ten years | 254,243 | 243,845 | 5/8 | 2.31 | 193,500 | 195,491 | 90,595 | 91,077 | ||||||||||||||||||||
Over ten years | — | — | — | — | 385,700 | 394,426 | 150,783 | 158,842 | ||||||||||||||||||||
Total | 2,486,297 | 2,446,873 | 3/9 | 1.85 | 1,315,211 | 1,329,657 | 298,402 | 307,221 | ||||||||||||||||||||
State, county and municipal | ||||||||||||||||||||||||||||
Within one year | — | — | — | — | 486 | 490 | 242 | 244 | ||||||||||||||||||||
One to five years | 186 | 187 | 2/5 | 7.88 | — | — | 359 | 372 | ||||||||||||||||||||
Five to ten years | — | — | — | — | 60 | 60 | 10 | 10 | ||||||||||||||||||||
Over ten years | — | — | — | — | — | — | 415 | 415 | ||||||||||||||||||||
Total | 186 | 187 | 2/5 | 7.88 | 546 | 550 | 1,026 | 1,041 | ||||||||||||||||||||
Corporate bonds | ||||||||||||||||||||||||||||
Within one year | — | — | — | — | — | — | 250,476 | 252,820 | ||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
One to five years | 863 | 830 | 4/5 | 3.8 | 838 | 820 | — | — | ||||||||||||||||||||
Equity securities | 543 | 22,147 | — | — | 543 | 16,365 | 939 | 15,313 | ||||||||||||||||||||
Total investment securities available for sale | 5,404,335 | 5,387,703 | 5,192,419 | 5,226,228 | 4,029,858 | 4,056,423 | ||||||||||||||||||||||
Investment securities held to maturity: | ||||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||
Within one year | 2 | 2 | 0/10 | 2.72 | — | — | — | — | ||||||||||||||||||||
One to five years | 831 | 891 | 1/4 | 5.53 | 1,242 | 1,309 | 12 | 11 | ||||||||||||||||||||
Five to ten years | 74 | 81 | 5/1 | 7.50 | 18 | 11 | 1,699 | 1,820 | ||||||||||||||||||||
Over ten years | — | — | — | — | 82 | 128 | 111 | 149 | ||||||||||||||||||||
Total investment securities held to maturity | 907 | 974 | 1/8 | 5.69 | 1,342 | 1,448 | 1,822 | 1,980 | ||||||||||||||||||||
Total investment securities | $ | 5,405,242 | $ | 5,388,677 | $ | 5,193,761 | $ | 5,227,676 | $ | 4,031,680 | $ | 4,058,403 | ||||||||||||||||
29
Table 7
AVERAGE BALANCE SHEETS
2013 | 2012 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | ||||||||||||||||
(dollars in thousands, taxable equivalent) | |||||||||||||||||||||
Assets | |||||||||||||||||||||
Loans and leases | $ | 13,163,743 | $ | 759,261 | 5.77 | % | $ | 13,560,773 | $ | 969,802 | 7.15 | % | |||||||||
Investment securities: | |||||||||||||||||||||
U.S. Treasury | 610,327 | 1,714 | 0.28 | 935,135 | 2,574 | 0.28 | |||||||||||||||
Government agency | 2,829,328 | 12,783 | 0.45 | 2,857,714 | 16,339 | 0.57 | |||||||||||||||
Mortgage-backed securities | 1,745,540 | 22,642 | 1.30 | 757,296 | 14,388 | 1.90 | |||||||||||||||
Corporate bonds | — | — | — | 129,827 | 2,574 | 1.98 | |||||||||||||||
State, county and municipal | 276 | 20 | 7.25 | 829 | 57 | 6.88 | |||||||||||||||
Other | 20,529 | 321 | 1.56 | 17,758 | 340 | 1.91 | |||||||||||||||
Total investment securities | 5,206,000 | 37,480 | 0.72 | 4,698,559 | 36,272 | 0.77 | |||||||||||||||
Overnight investments | 1,064,204 | 2,723 | 0.26 | 715,583 | 1,738 | 0.24 | |||||||||||||||
Total interest-earning assets | 19,433,947 | $ | 799,464 | 4.12 | % | 18,974,915 | $ | 1,007,812 | 5.31 | % | |||||||||||
Cash and due from banks | 483,186 | 529,224 | |||||||||||||||||||
Premises and equipment | 874,862 | 876,802 | |||||||||||||||||||
Receivable from FDIC for loss share agreements | 168,281 | 350,933 | |||||||||||||||||||
Allowance for loan and lease losses | (257,791 | ) | (272,105 | ) | |||||||||||||||||
Other real estate owned | 119,694 | 172,269 | |||||||||||||||||||
Other assets | 478,621 | 445,406 | |||||||||||||||||||
Total assets | $ | 21,300,800 | $ | 21,077,444 | |||||||||||||||||
Liabilities | |||||||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||||||
Checking With Interest | $ | 2,346,192 | $ | 600 | 0.03 | % | $ | 2,105,587 | $ | 1,334 | 0.06 | % | |||||||||
Savings | 968,251 | 482 | 0.05 | 874,311 | 445 | 0.05 | |||||||||||||||
Money market accounts | 6,338,622 | 9,755 | 0.15 | 5,985,562 | 16,185 | 0.27 | |||||||||||||||
Time deposits | 3,198,606 | 23,658 | 0.74 | 4,093,347 | 39,604 | 0.97 | |||||||||||||||
Total interest-bearing deposits | 12,851,671 | 34,495 | 0.27 | 13,058,807 | 57,568 | 0.44 | |||||||||||||||
Short-term borrowings | 596,425 | 2,724 | 0.46 | 664,498 | 5,107 | 0.77 | |||||||||||||||
Long-term obligations | 462,203 | 19,399 | 4.20 | 574,721 | 27,473 | 4.78 | |||||||||||||||
Total interest-bearing liabilities | 13,910,299 | $ | 56,618 | 0.41 | % | 14,298,026 | $ | 90,148 | 0.63 | % | |||||||||||
Demand deposits | 5,096,325 | 4,668,310 | |||||||||||||||||||
Other liabilities | 352,068 | 195,839 | |||||||||||||||||||
Shareholders' equity | 1,942,108 | ||||||||||||||||||||