Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2010

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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 principle executive offices)   (Zip code)

(919) 716-7000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨

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 ‘accelerated filer’ and ‘large accelerated filer’ 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

Class A Common Stock—$1 Par Value—8,756,778 shares

Class B Common Stock—$1 Par Value—1,677,675 shares

(Number of shares outstanding, by class, as of August 6, 2010)

 

 

 


Table of Contents

INDEX

 

         Page(s)

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

  Financial Statements (Unaudited)   
  Consolidated Balance Sheets at June 30, 2010, December 31, 2009 and June 30, 2009    3
 

Consolidated Statements of Income for the three and six month periods ended June 30, 2010 and June 30, 2009

   4
 

Consolidated Statements of Changes in Shareholders’ Equity for the six month periods ended June 30, 2010 and June 30, 2009

   5
 

Consolidated Statements of Cash Flows for the six month periods ended June 30, 2010 and June 30, 2009

   6
  Notes to Consolidated Financial Statements    7

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    28

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk    50

Item 4.

  Controls and Procedures    50

PART II.

 

OTHER INFORMATION

  
Item 1A.   Risk Factors    51

Item 6.

  Exhibits    54

 

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Table of Contents

Part 1

Item 1. Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets

Unaudited

 

     June 30*
2010
    December 31#
2009
    June 30*
2009
 
     (thousands, except share data)  

Assets

  

Cash and due from banks

   $ 625,857      $ 480,242      $ 637,896   

Overnight investments

     736,896        723,260        229,668   

Investment securities available for sale

     3,768,777        2,929,162        3,745,385   

Investment securities held to maturity

     3,084        3,603        4,140   

Loans held for sale

     91,076        67,381        115,920   

Loans and leases:

      

Covered by loss share agreements

     2,367,090        1,173,020        0   

Not covered by loss share agreements

     11,622,494        11,644,999        11,523,045   

Less allowance for loan and lease losses

     188,169        172,282        162,282   
                        

Net loans and leases

     13,801,415        12,645,737        11,360,763   

Premises and equipment

     846,702        837,082        821,219   

Other real estate owned:

      

Covered by loss share agreements

     98,416        93,774        0   

Not covered by loss share agreements

     46,763        40,607        33,301   

Income earned not collected

     77,186        60,684        66,226   

Receivable from FDIC for loss share agreements

     692,242        249,842        0   

Goodwill

     102,625        102,625        102,625   

Other intangible assets

     12,936        6,361        3,035   

Other assets

     201,794        225,703        197,702   
                        

Total assets

   $ 21,105,769      $ 18,466,063      $ 17,317,880   
                        

Liabilities

      

Deposits:

      

Noninterest-bearing

   $ 3,730,321      $ 3,215,414      $ 2,974,494   

Interest-bearing

     14,056,920        12,122,153        11,383,655   
                        

Total deposits

     17,787,241        15,337,567        14,358,149   

Short-term borrowings

     541,709        642,405        599,853   

Long-term obligations

     918,930        797,366        735,803   

Other liabilities

     164,580        129,610        189,862   
                        

Total liabilities

     19,412,460        16,906,948        15,883,667   

Shareholders’ Equity

      

Common stock:

      

Class A - $1 par value (8,756,778 shares issued for all periods)

     8,757        8,757        8,757   

Class B - $1 par value (1,677,675 shares issued for all periods)

     1,678        1,678        1,678   

Surplus

     143,766        143,766        143,766   

Retained earnings

     1,561,665        1,429,863        1,334,655   

Accumulated other comprehensive income (loss)

     (22,557     (24,949     (54,643
                        

Total shareholders’ equity

     1,693,309        1,559,115        1,434,213   
                        

Total liabilities and shareholders’ equity

   $ 21,105,769      $ 18,466,063      $ 17,317,880   
                        

 

* Unaudited
# Derived from the 2009 Annual Report on Form 10-K.

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income

Unaudited

 

     Three Months Ended June 30     Six Months Ended June 30  
     2010     2009     2010    2009  
     (thousands, except share and per share data)  

Interest income

     

Loans and leases

   $ 202,541      $ 155,449      $ 389,615    $ 312,033   

Investment securities:

         

U. S. Government

     10,250        18,118        19,601      39,277   

Residential mortgage backed securities

     1,873        1,234        3,437      2,382   

Corporate bonds

     2,198        1,580        4,333      1,858   

State, county and municipal

     15        104        48      155   

Other

     12        164        82      371   
                               

Total investment securities interest and dividend income

     14,348        21,200        27,501      44,043   

Overnight investments

     546        192        1,019      417   
                               

Total interest income

     217,435        176,841        418,135      356,493   

Interest expense

         

Deposits

     41,091        48,890        79,207      101,836   

Short-term borrowings

     640        1,281        1,396      2,602   

Long-term obligations

     10,842        9,638        21,634      19,218   
                               

Total interest expense

     52,573        59,809        102,237      123,656   
                               

Net interest income

     164,862        117,032        315,898      232,837   

Provision for loan and lease losses

     31,826        20,759        48,756      39,482   
                               

Net interest income after provision for loan and lease losses

     133,036        96,273        267,142      193,355   

Noninterest income

         

Gain on acquisitions

     0        0        132,623      0   

Cardholder and merchant services

     28,505        24,107        52,294      45,599   

Service charges on deposit accounts

     19,513        19,163        38,340      37,014   

Wealth management services

     14,222        11,481        25,956      22,253   

Fees from processing services

     7,226        7,136        14,449      14,688   

Securities (losses) gains

     (186     (139     945      (139

Other service charges and fees

     5,110        4,068        9,758      8,417   

Mortgage income

     1,924        2,369        3,334      5,821   

Insurance commissions

     1,794        1,825        4,600      4,295   

ATM income

     1,699        1,772        3,354      3,501   

Adjustments to FDIC receivable for loss share agreements

     12,713        0        15,452      0   

Other

     102        (366     89      (341
                               

Total noninterest income

     92,622        71,416        301,194      141,108   

Noninterest expense

         

Salaries and wages

     74,475        63,751        146,635      129,297   

Employee benefits

     15,839        15,773        34,150      33,092   

Occupancy expense

     18,517        15,970        36,353      31,376   

Equipment expense

     16,604        14,749        32,419      29,472   

FDIC deposit insurance

     6,609        13,763        11,496      17,949   

Foreclosure-related expenses

     4,014        1,785        8,075      3,422   

Other

     45,718        33,329        85,598      69,005   
                               

Total noninterest expense

     181,776        159,120        354,726      313,613   
                               

Income before income taxes

     43,882        8,569        213,610      20,850   

Income taxes

     15,280        2,369        80,452      5,987   
                               

Net income

   $ 28,602      $ 6,200      $ 133,158    $ 14,863   
                               

Average shares outstanding

     10,434,453        10,434,453        10,434,453      10,434,453   

Net income per share

   $ 2.74      $ 0.59      $ 12.76    $ 1.42   
                               

 

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Unaudited

 

     Class A
Common
Stock
   Class B
Common
Stock
   Surplus    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (loss)
    Total
Shareholders’
Equity
 
     (thousands, except share and per share data)  

Balance at December 31, 2008

   $ 8,757    $ 1,678    $ 143,766    $ 1,326,054      $ (36,880   $ 1,443,375   

Comprehensive loss:

               

Net income

     0      0      0      14,863        0        14,863   

Change in unrealized securities gains arising during period, net of $13,108 deferred tax benefit

     0      0      0      0        (20,322     (20,322

Change in unrecognized loss on cash flow hedge, net of $1,670 deferred tax

     0      0      0      0        2,559        2,559   
                     

Total comprehensive loss

                  (2,900
                     

Cash dividends of $0.60 per share

     0      0      0      (6,262     0        (6,262
                                             

Balance at June 30, 2009

   $ 8,757    $ 1,678    $ 143,766    $ 1,334,655      $ (54,643   $ 1,434,213   
                                             

Balance at December 31, 2009

   $ 8,757    $ 1,678    $ 143,766    $ 1,429,863      $ (24,949   $ 1,559,115   

Adjustment resulting from adoption of change in accounting for QSPEs and controlling financial interests effective January 1, 2010

              4,904        $ 4,904   

Comprehensive income:

               

Net income

     0      0      0      133,158        0        133,158   

Change in unrealized securities gains arising during period, net of $2,238 deferred tax

     0      0      0      0        5,988        5,988   

Change in unrecognized loss on cash flow hedge, net of $2,346 deferred tax benefit

     0      0      0      0        (3,596     (3,596
                     

Total comprehensive income

                  135,550   
                     

Cash dividends of $0.60 per share

     0      0      0      (6,260     0        (6,260
                                             

Balance at June 30, 2010

   $ 8,757    $ 1,678    $ 143,766    $ 1,561,665      $ (22,557   $ 1,693,309   
                                             

At June 30, 2010, Accumulated Other Comprehensive Loss includes on an after-tax basis $27,418 in unrealized gains on investment securities available for sale, $43,131 in unrealized losses resulting from the funded status of the defined benefit plan and an unrealized loss of $6,844 on cash flow hedges.

At June 30, 2009, Accumulated Other Comprehensive Income includes on an after-tax basis $25,069 in unrealized gains on investment securities available for sale, $75,815 in unrealized losses resulting from the funded status of the defined benefit plan and an unrealized loss of $3,897 on cash flow hedges.

See accompanying Notes to Consolidated Financial Statements.

 

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Consolidated Statements of Cash Flows

First Citizens BancShares, Inc. and Subsidiaries

 

     For the six months ended June 30  
     2010     2009  

OPERATING ACTIVITIES

    

Net income

   $ 133,158      $ 14,863   

Adjustments to reconcile net income to cash provided by operating activities:

    

Amortization of intangibles

     3,164        869   

Provision for loan and lease losses

     48,756        39,482   

Deferred tax (benefit) expense

     (35,427     8,589   

Change in current taxes payable

     13,899        (3,825

Depreciation

     30,296        27,816   

Change in accrued interest payable

     2,771        8,884   

Change in income earned not collected

     (8,842     5,803   

Gain on acquisitions

     (132,623     0   

Securities losses (gains)

     (945     139   

Origination of loans held for sale

     (255,495     (483,656

Proceeds from sale of loans held for sale

     235,171        442,659   

Gain on sale of loans held for sale

     (3,371     (5,524

Proceeds from sale of other real estate

     40,943        14,836   

Loss on sale of other real estate

     720        2,126   

Net amortization of premiums and discounts

     21,550        19,507   

Receivable from FDIC for loss share agreements

     67,552        0   

Net change in other assets

     46,361        (12,174

Net change in other liabilities

     46,492        (19,332
                

Net cash provided by operating activities

     254,130        61,062   
                

INVESTING ACTIVITIES

    

Net change in loans and leases outstanding

     307,745        71,765   

Purchases of investment securities available for sale

     (1,603,861     (1,293,856

Proceeds from maturities of investment securities held to maturity

     518        1,808   

Proceeds from maturities of investment securities available for sale

     797,949        715,300   

Proceeds from sales of investment securities available for sale

     24,137        0   

Net change in overnight investments

     (13,636     (55,052

Additions to premises and equipment

     (39,916     (50,126

Net cash received from acquisitions

     106,489        0   
                

Net cash used by investing activities

     (420,575     (610,161
                

FINANCING ACTIVITIES

    

Net change in time deposits

     86,680        (53,721

Net change in demand and other interest-bearing deposits

     655,263        698,107   

Net change in short-term borrowings

     (505,105     (47,501

Origination of long-term obligations

     81,482        2,997   

Cash dividends paid

     (6,260     (6,262
                

Net cash provided by financing activities

     312,060        593,620   
                

Change in cash and due from banks

     145,615        44,521   

Cash and due from banks at beginning of period

     480,242        593,375   
                

Cash and due from banks at end of period

   $ 625,857      $ 637,896   
                

CASH PAYMENTS FOR:

    

Interest

   $ 99,466      $ 114,772   

Income taxes

     46,041        17,516   
                

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Unrealized securities gains (losses)

   $ 8,226      $ (33,430

Unrealized (loss) gain on cash flow hedge

     (5,942     4,229   

Transfers of loans to other real estate

     55,559        20,307   

Acquisitions:

    

Assets acquired

     2,288,282        0   

Liabilities assumed

     (2,155,861     0   

Net assets acquired

     132,421        0   
          

See accompanying Notes to Consolidated Financial Statements

 

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First Citizens BancShares, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

Note A

Accounting Policies and Other Matters

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements.

In the opinion of management, the consolidated financial statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. and Subsidiaries (BancShares) as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the period. Actual results could differ from those estimates.

Management has evaluated subsequent events through the filing date of the Quarterly Report on Form 10-Q.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in BancShares’ 2009 Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2010. However, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

FDIC-Assisted Transactions

US GAAP requires that the acquisition method of accounting be used for all business combinations, including those resulting from FDIC-assisted transactions and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. In addition, acquisition-related costs and restructuring costs are recognized as period expenses as incurred.

During 2010 and 2009, BancShares’ wholly-owned subsidiary First-Citizens Bank & Trust Company (FCB) acquired assets and assumed liabilities of four entities as noted below (collectively referred to as “the Acquisitions”) with the assistance of the Federal Deposit Insurance Corporation (FDIC), which had been appointed Receiver of each entity by its respective state banking authority.

 

Name of entity

  

Headquarters location

  

Date of transaction

Sun American Bank (SAB)    Boca Raton, Florida    March 5, 2010
First Regional Bank (First Regional)    Los Angeles, California    January 29, 2010
Venture Bank (VB)    Lacey, Washington    September 11, 2009
Temecula Valley Bank (TVB)    Temecula, California    July 17, 2009

The acquired assets and assumed liabilities were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the Acquisitions. Management judgmentally assigned risk ratings to loans based on credit quality, appraisals and estimated collateral values, estimated expected cash flows, and applied appropriate liquidity and coupon discounts to measure fair values for loans. Other real estate acquired through foreclosure was valued based upon pending sales contracts and appraised values, adjusted for current market conditions. FCB also recorded identifiable intangible assets representing the estimated values of the assumed core deposits and other customer relationships. Management used quoted or current market prices to determine the fair value of investment securities, short-term borrowings and long-term obligations.

 

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Loans and Leases

Loans and leases that are held for investment purposes are carried at the principal amount outstanding. Loans that are classified as held for sale are carried at the lower of aggregate cost or fair value. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding.

Acquired loans are recorded at fair value at the date of acquisition. The fair values of acquired loans with evidence of credit deterioration since origination (impaired loans) are recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included in the carrying amount of acquired loans. Subsequent decreases to the expected cash flows will generally result in a provision for credit losses. Subsequent increases in expected cash flows result in either a reversal of the provision for credit losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on the accretable yield. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation regarding the amount and timing of such cash flows. BancShares did not estimate the amount and timing of cash flows for impaired loans acquired from TVB and VB, but cash flow analyses were performed on all loans deemed impaired that were acquired from First Regional and SAB in order to determine the cash flows expected to be collected.

Receivable from FDIC for Loss Share Agreements

The receivable from the FDIC for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable should the assets be sold. Fair value was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses using the applicable loss share percentages and the estimated true-up payment at the expiration of the loss share agreements, if applicable. These cash flows were discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC and the true-up payment to the FDIC, when applicable. The FDIC receivable has been reviewed and updated prospectively as loss estimates related to covered loans and other real estate owned change and as reimbursements are received from the FDIC.

Other Real Estate Owned Covered by Loss Share Agreements

Other real estate owned (OREO) covered by loss share agreements with the FDIC are reported exclusive of expected reimbursement cash flows from the FDIC. Subsequent downward adjustments to the estimated recoverable value of covered OREO result in a reduction of covered OREO, a charge to other expense and an increase in the FDIC receivable for the estimated amount to be reimbursed, with a corresponding amount recorded as other noninterest income. OREO is presented at the estimated present value that management expects to receive when the property is sold, net of related costs of disposal. Management used appraisals of properties to determine fair values and applied additional discounts where appropriate for passage of time or, in certain cases, for subsequent events occurring after the appraisal date.

Recently Adopted Accounting Policies and Other Regulatory Issues

Under revisions to US GAAP that became effective January 1, 2010, the concept of a qualifying special-purpose entity (QSPE) was removed, resulting in a change in the accounting for QSPEs that were previously exempt. Further changes required evaluation of variable interests to determine whether a controlling financial interest exists. Upon adoption, the off-balance sheet accounting treatment for the 2005 asset securitization of home equity loans was discontinued, and the loans that were sold in the securitization and the corresponding debt obligations were reported on the consolidated balance sheet in the first quarter of 2010. The adoption resulted in increases of $97,291 in noncovered revolving mortgage loans, $681 in allowance for loan and lease losses, $86,926 in long-term obligations, and $3,189 in deferred tax liabilities. The retained interest in the residual interest strip and the servicing asset were written off, resulting in reductions of $1,287 and $304 to investment securities available for sale and other assets, respectively. The adoption also resulted in an adjustment to the beginning balance of retained earnings in the amount of $4,904.

 

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Note B

Federally Assisted Acquisitions of First Regional Bank and Sun American Bank

On January 29, 2010, FCB purchased substantially all the assets and assumed substantially all the liabilities of First Regional from the FDIC, as Receiver. First Regional operated through 8 offices in the state of California, primarily serving Southern California. The FDIC took First Regional under receivership upon its closure by the California Department of Financial Institutions. FCB’s bid to the FDIC included the purchase of substantially all of First Regional’s assets at a discount of $299,400 in exchange for assuming certain First Regional deposits and certain other liabilities. No cash, deposit premium or other consideration was paid by FCB. FCB and the FDIC entered into loss share agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss share agreements, there is no reimbursement by the FDIC until net losses reach $41,815. The FDIC will reimburse FCB for 80 percent of net losses incurred up to $1,017,000, and 95 percent of net losses exceeding $1,017,000.

The Purchase and Assumption Agreement between FCB and the FDIC also includes a true-up payment at the end of year 10. On March 17, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $203.4 million, less (ii) the sum of (a) 25 percent of the asset discount, or $74.9 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements. Current projections suggest a true-up payment of $65,919 will be payable under the First Regional loss share agreements. This estimate is subject to change over the term of the agreements.

The term for loss share on residential real estate loans is ten years, while the term for loss share on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss share agreements with the FDIC and considering an estimate of a contingent true-up payment to the FDIC, FCB recorded a receivable of $365,170 at the time of acquisition. During the second quarter of 2010, adjustments were made to the FDIC receivable based on changes in loss estimates related to covered loans and other real estate owned that affect the respective acquisition date fair values. These adjustments were made retroactive to the first quarter of 2010 and increased the receivable by $24,391.

On March 5, 2010, FCB purchased substantially all the assets and assumed substantially all the liabilities of SAB from the FDIC, as Receiver. SAB operated 12 offices in the state of Florida, primarily serving South Florida. The FDIC took SAB under receivership upon its closure by the Florida Office of Financial Regulation. FCB’s bid to the FDIC included the purchase of substantially all of SAB’s assets at a discount of $69,400 in exchange for assuming certain SAB deposits and certain other liabilities. The FDIC paid FCB $31,965 in additional cash consideration at closing. FCB and the FDIC entered into loss share agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss share agreements, the FDIC will reimburse FCB for 80 percent of net losses incurred up to $99,000 and 95 percent of net losses exceeding $99,000.

The Purchase and Assumption Agreement between FCB and the FDIC also includes a true-up payment at the end of year 10. On May 15, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $19.8 million, less (ii) the sum of (a) 25 percent of the asset discount, or $17.5 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements. Although no true-up payment is currently projected under the SAB loss share agreements, those projections are subject to change.

The term for loss share on residential real estate loans is ten years, while the term for loss share on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss share agreements with the FDIC, FCB recorded a receivable of $92,360 at the time of acquisition. During the second quarter of 2010, adjustments were made to the FDIC receivable based on changes in loss estimates related to covered loans and other real estate owned that affect the respective acquisition date fair values. These adjustments were made retroactive to the first quarter of 2010 and decreased the receivable by $2,626.

The acquisitions of First Regional and SAB were accounted for using the acquisition method of accounting. The statement of net assets acquired, adjustments to the acquisition date fair values made in the second quarter and the resulting bargain purchase gains are presented in the following tables. As indicated in the explanatory notes that accompany the following tables, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date estimated fair values. Fair values are subject to refinement for up to one year after the closing date of each merger as additional information regarding closing date fair values becomes available. Adjustments to the estimated fair values made in the second quarter were based on additional information regarding the acquisition date fair values, which included updated appraisals on several commercial properties on acquired impaired loans and updated financial statements for some borrowers which allowed for adjustments to expected cash flows that more closely reflect the borrowers’ ability to repay the debt.

 

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First quarter noninterest income included bargain purchase gains of $137,447 that resulted from the 2010 Acquisitions. The gains resulted from the difference between the estimated fair values of acquired assets and assumed liabilities. During the second quarter of 2010, adjustments were made to the gains based on additional information regarding the respective acquisition date fair values, which reduced the gains by a net of $5,026. These adjustments were made retroactive to the first quarter of 2010, the period the 2010 acquisitions were consummated, resulting in an adjusted gain of $132,421. FCB recorded a deferred tax liability for the gains totaling $51,856. To the extent there are additional adjustments to the respective acquisition date fair values up to one year following the respective acquisitions, there will be additional adjustments to the gains.

The following tables identify the assets acquired and liabilities assumed by FCB from First Regional and SAB. The tables provide the balances recorded by First Regional and SAB at the time of the respective FDIC-assisted transactions, the fair value adjustments recorded and the resulting adjusted fair values recorded by FCB for the acquisition date.

First Regional Bank

Acquisition date: January 29, 2010

 

     As recorded
by First
Regional
   Fair value
adjustments
at
acquisition
date
    Subsequent
acquisition-date
adjustments
    As recorded
by FCB
     (thousands)

Assets

         

Cash and due from banks

   $ 37,508    $ —        $ —        $ 37,508

Investment securities available for sale

     3,250      —          —          3,250

Loans covered by loss share agreements

     1,853,325      (576,171 ) a      (30,488 ) a      1,246,666

Other real estate owned covered by loss share agreements

     61,488      (20,353 ) b      414   b      41,549

Income earned not collected

     6,048      —          —          6,048

Receivable from FDIC for loss share agreements

     —        365,170   c      24,391   c      389,561

Intangible assets

     —        9,110   d      —          9,110

Other assets

     23,782      (500 ) e      —          23,282
                             

Total assets acquired

   $ 1,985,401    $ (222,744   $ (5,683   $ 1,756,974
                             

Liabilities

         

Deposits:

         

Noninterest-bearing

   $ 528,235    $ —        $ —        $ 528,235

Interest-bearing

     759,484      —          —          759,484
                             

Total deposits

     1,287,719      —          —          1,287,719

Short-term borrowings

     361,876      —          —          361,876

Other liabilities

     1,188      1,547   h      —          2,735
                             

Total liabilities assumed

     1,650,783      1,547        —          1,652,330
                             

Excess of assets acquired over liabilities assumed

   $ 334,618       
             

Aggregate fair value adjustments

      $ (224,291   $ (5,683  
                     

Gain on acquisition of First Regional

          $ 104,644
             

 

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Sun American Bank

Acquisition date: March 5, 2010

 

     As recorded
by SAB
   Fair value
adjustments
at acquisition
date
    Subsequent
acquisition-date
adjustments
    As recorded by
FCB
     (thousands)

Assets

         

Cash and due from banks

   $ 37,016    $ —        $ —        $ 37,016

Investment securities available for sale

     66,968      —          —          66,968

Loans covered by loss share agreements

     411,315      (123,707 ) a      3,283  a      290,891

Other real estate owned covered by loss share agreements

     15,220      (7,200 ) b      —          8,020

Income earned not collected

     1,612      —          —          1,612

Receivable from FDIC for loss share agreements

     —        92,360  c      (2,626 ) c      89,734

Intangible assets

     —        629  d      —          629

Other assets

     4,473      —          —          4,473
                             

Total assets acquired

   $ 536,604    $ (37,918   $ 657      $ 499,343
                             

Liabilities

         

Deposits:

         

Noninterest-bearing

   $ 39,435    $ —        $ —        $ 39,435

Interest-bearing

     380,577      —          —          380,577
                             

Total deposits

     420,012      —          —          420,012

Short-term borrowings

     42,485      48  f      —          42,533

Long-term obligations

     37,000      3,082  g      —          40,082

Other liabilities

     853      51  h      —          904
                             

Total liabilities assumed

     500,350      3,181        —          503,531
                             

Excess of assets acquired over liabilities assumed

   $ 36,254       
             

Aggregate fair value adjustments

      $ (41,099   $ 657     
                     

Cash received from the FDIC

          $ 31,965
             

Gain on acquisition of Sun American

          $ 27,777
             

Explanation of fair value adjustments

a - Adjustment reflects the fair value adjustments based on FCB’s evaluation of the acquired loan portfolio.

b - Adjustment reflects the estimated OREO losses based on FCB’s evaluation of the acquired OREO portfolio.

c - Adjustment reflects the estimated fair value of payments FCB will receive from the FDIC under the loss share agreements.

d - Adjustment reflects the estimated value of intangible assets, which includes core deposit intangibles and when applicable, trust customer relationships.

e - Adjustment reflects the amount needed to adjust the carrying value of other assets to estimated fair value.

f - Adjustment arises since the rates on short-term borrowings are higher than rates available on similar borrowings at date of acquisition.

g - Adjustment arises since the rates on long-term obligations are higher than rates available on similar borrowings at date of acquisition.

h - Adjustment reflects amount needed to adjust the carrying value of other liabilities to estimated fair value.

Results of operations for First Regional and SAB prior to their respective acquisition dates are not included in the income statement.

Due to the significant amount of fair value adjustments, the resulting accretion of those fair value adjustments and the protection resulting from the FDIC loss share agreements, historical results of First Regional and SAB are not relevant to BancShares’ results of operations. Therefore, no pro forma information is presented.

 

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Note C

Investments

The aggregate values of investment securities at June 30, 2010, December 31, 2009 and June 30, 2009, along with unrealized gains and losses determined on an individual security basis are as follows:

 

     Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value

Investment securities available for sale

           

June 30, 2010

           

U. S. Government

   $ 3,073,134    $ 11,606    $ 23    $ 3,084,717

Corporate bonds

     480,738      8,845      —        489,583

Residential mortgage-backed securities

     168,307      6,313      104      174,516

Equity securities

     1,358      17,333      —        18,691

State, county and municipal

     1,242      30      2      1,270
                           

Total investment securities available for sale

   $ 3,724,779    $ 44,127    $ 129    $ 3,768,777
                           

December 31, 2009

           

U. S. Government

   $ 2,274,084    $ 14,005    $ 666    $ 2,287,423

Corporate bonds

     481,341      4,326      —        485,667

Residential mortgage-backed securities

     126,601      4,489      752      130,338

Equity securities

     2,377      14,245      —        16,622

State, county and municipal

     7,053      35      275      6,813

Other

     1,937      362      —        2,299
                           

Total investment securities available for sale

   $ 2,893,393    $ 37,462    $ 1,693    $ 2,929,162
                           

June 30, 2009

           

U. S. Government

   $ 3,144,025    $ 27,447    $ 1,589    $ 3,169,883

Corporate bonds

     457,572      1,410      1,240      457,742

Residential mortgage-backed securities

     95,181      2,052      512      96,721

Equity securities

     2,862      12,071      336      14,597

State, county and municipal

     1,600      26      9      1,617

Other

     2,894      1,931      —        4,825
                           

Total investment securities available for sale

   $ 3,704,134    $ 44,937    $ 3,686    $ 3,745,385
                           

Investment securities held to maturity

           

June 30, 2010

           

Residential mortgage-backed securities

   $ 2,933    $ 276    $ 26    $ 3,183

State, county and municipal

     151      —        —        151
                           

Total investment securities held to maturity

   $ 3,084    $ 276    $ 26    $ 3,334
                           

December 31, 2009

           

Residential mortgage-backed securities

   $ 3,452    $ 230    $ —      $ 3,682

State, county and municipal

     151      1      —        152
                           

Total investment securities held to maturity

   $ 3,603    $ 231    $ —      $ 3,834
                           

June 30, 2009

           

Residential mortgage-backed securities

   $ 3,988    $ 266    $ 27    $ 4,227

State, county and municipal

     152      —        —        152
                           

Total investment securities held to maturity

   $ 4,140    $ 266    $ 27    $ 4,379
                           

Investments in corporate bonds represent debt securities issued by various financial institutions under the Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the United States of America. The guarantee for these securities is triggered when an issuer defaults on a scheduled payment.

 

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The following table provides maturity information for investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.

 

     June 30, 2010    December 31, 2009    June 30, 2009
     Cost    Fair
Value
   Cost    Fair
Value
   Cost    Fair
Value

Investment securities available for sale

                 

Maturing in:

                 

One year or less

   $ 2,342,011    $ 2,351,171    $ 1,544,063    $ 1,554,657    $ 1,616,772    $ 1,630,131

One through five years

     1,220,914      1,232,535      1,226,202      1,233,604      1,986,438      1,999,122

Five through 10 years

     1,912      1,946      1,943      2,201      3,623      5,561

Over 10 years

     158,584      164,434      118,808      122,078      94,439      95,974

Equity securities

     1,358      18,691      2,377      16,622      2,862      14,597
                                         

Total investment securities available for sale

   $ 3,724,779    $ 3,768,777    $ 2,893,393    $ 2,929,162    $ 3,704,134    $ 3,745,385
                                         

Investment securities held to maturity

                 

Maturing in:

                 

One through five years

   $ 151    $ 151    $ 151    $ 152    $ 152    $ 152

Five through 10 years

     2,797      3,005      3,306      3,497      3,834      4,035

Over 10 years

     136      178      146      185      154      192
                                         

Total investment securities held to maturity

   $ 3,084    $ 3,334    $ 3,603    $ 3,834    $ 4,140    $ 4,379
                                         

The following table provides information regarding securities with unrealized losses as of June 30, 2010, December 31, 2009 and June 30, 2009:

 

     Less than 12 months    12 months or more    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

June 30, 2010

                 

Investment securities available for sale:

                 

U.S. Government

   $ 4,005    $ 23    $ —      $ —      $ 4,005    $ 23

Residential mortgage-backed securities

     5,151      81      1,152      23      6,303      104

State, county and municipal

     —        —        439      2      439      2
                                         

Total

   $ 9,156    $ 104    $ 1,591    $ 25    $ 10,747    $ 129
                                         

Investment securities held to maturity:

                 

Residential mortgage-backed securities

   $ 151      —      $ 28    $ 26    $ 179    $ 26

December 31, 2009

                 

Investment securities available for sale:

                 

U.S. Government

   $ 250,600    $ 666    $ —      $ —      $ 250,600    $ 666

Residential mortgage-backed securities

     25,608      621      2,434      131      28,042      752

State, county and municipal

     5,476      271      439      4      5,915      275
                                         

Total

   $ 281,684    $ 1,558    $ 2,873    $ 135    $ 284,557    $ 1,693
                                         

June 30, 2009

                 

Investment securities available for sale:

                 

U.S. Government

   $ 622,984    $ 1,589    $ —      $ —      $ 622,984    $ 1,589

Corporate Bonds

     177,515      1,240      —        —        177,515      1,240

Residential mortgage-backed securities

     21,298      450      1,411      62      22,709      512

Equity securities

     485      336      —        —        485      336

State, county and municipal

     113      2      437      7      550      9
                                         

Total

   $ 822,395    $ 3,617    $ 1,848    $ 69    $ 824,243    $ 3,686
                                         

Investment securities held to maturity:

                 

Residential mortgage-backed securities

   $ —      $ —      $ 33    $ 27    $ 33    $ 27

 

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Investment securities with an aggregate fair value of $1,619 have had continuous unrealized losses for more than twelve months as of June 30, 2010 with an aggregate unrealized loss of $51. These 21 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of June 30, 2010 related to the marketability of the securities or the issuer’s ability to honor redemption obligations. Consequently, the securities were not deemed to be other than temporarily impaired.

With respect to investment securities held to maturity, BancShares has the ability and intent to hold those securities until they mature.

For each period presented, securities gains (losses) include the following:

 

     Six months ended June 30,  
     2010     2009  

Gross gains on sales of investment securities available for sale

   $ 2,636      $ —     

Gross losses on sales of investment securities available for sale

     (1,505     —     

Other than temporary impairment loss on equity investments

     (186     (139
                

Total securities gains (losses)

   $ 945      $ (139
                

Investment securities having an aggregate carrying value of $1,694,084 at June 30, 2010, $2,121,783 at December 31, 2009 and $2,012,080 at June 30, 2009, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.

 

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Note D

Loans and Leases

Loans and leases outstanding include the following as of the dates indicated:

 

     June 30, 2010    December 31, 2009    June 30, 2009

Loans covered by loss share agreements

   $ 2,367,090    $ 1,173,020    $ —  

Loans and leases not covered by loss share agreements

        

Real estate:

        

Construction and land development

     627,899      622,354      677,884

Commercial mortgage

     4,625,351      4,552,078      4,397,247

Residential mortgage

     921,346      864,704      858,036

Revolving mortgage

     2,187,978      2,147,223      2,052,941

Other mortgage

     157,333      158,187      155,483
                    

Total real estate loans

     8,519,907      8,344,546      8,141,591

Commercial and industrial

     1,801,465      1,832,670      1,858,910

Consumer

     815,008      941,986      1,070,290

Lease financing

     300,047      330,713      332,644

Other

     186,067      195,084      119,610
                    

Total loans and leases not covered by loss share agreements

     11,622,494      11,644,999      11,523,045
                    

Total loans and leases

     13,989,584      12,818,019      11,523,045

Less allowance for loan and lease losses

     188,169      172,282      162,282
                    

Net loans and leases

   $ 13,801,415    $ 12,645,737    $ 11,360,763
                    
     June 30, 2010
     Impaired at
acquisition
date
   All other
acquired loans
   Total

Loans covered by loss share agreements

        

Real estate:

        

Construction and land development

   $ 172,256    $ 561,002    $ 733,258

Commercial mortgage

     121,134      947,197      1,068,331

Residential mortgage

     33,853      40,144      73,997

Revolving mortgage

     128      25,041      25,169

Other mortgage

     35,346      197,740      233,086
                    

Total real estate loans

     362,717      1,771,124      2,133,841

Commercial and industrial

     9,195      211,669      220,864

Consumer

     133      7,441      7,574

Other

     72      4,739      4,811
                    

Total loans covered by loss share agreements

   $ 372,117    $ 1,994,973    $ 2,367,090
                    

Impaired loans are loans that have evidence of deterioration in credit quality since origination, suggesting it is probable that all contractually required payments will not be collected. The following table provides information on all impaired loans, exclusive of those loans evaluated collectively as a homogeneous group.

 

     June 30, 2010    December 31, 2009    June 30, 2009

Impaired loans:

        

Covered by loss share agreements

   $ 372,117    $ 116,446    $ —  

Not covered by loss share agreements

     54,457      50,797      35,098
                    

Total

   $ 426,574    $ 167,243    $ 35,098
                    

Allowance for loan and lease losses related to:

        

Impaired loans covered by loss share agreements

   $ 16,006    $ 3,500    $ —  

Impaired loans and leases not covered by loss share agreements

     3,781      9,611      5,689

Impaired loans with no allowance for loan and lease loss:

        

Loans covered by loss share agreements

     323,319      106,498      —  

Loans and leases not covered by loss share agreements

     2,039      9,902      10,807

Interest previously accrued on acquired loans covered by loss share agreements with the FDIC (Covered Loans) placed on nonaccrual status is charged against interest income. Payments received are applied against the principal balance of the fully impaired loans until such time as full collection of the remaining recorded balance is expected. Additional interest payments received after that time are recorded as interest income on a cash basis.

 

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When the fair values of Covered Loans were established, certain loans were identified as impaired. Due to uncertainty regarding the timing of future cash flows, no accretable yield is being recorded for loans deemed impaired at acquisition from TVB and VB, and these loans are being accounted for using the cost recovery method. Cash flow analyses were completed for loans deemed impaired at acquisition from First Regional and SAB and therefore the accretion method is being applied with respect to recognition of accretable yield on those loans.

The following table provides changes in the carrying value of acquired impaired loans during the six-month period ended June 30, 2010:

 

Balance, December 31, 2009

   $ 75,368   

Fair value of acquired impaired loans covered by loss share agreements

     412,627   

Reductions for repayments, foreclosures and decreases in fair value

     (115,878
        

Balance, June 30, 2010

   $ 372,117   
        

 

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Information regarding the June 30, 2010 and December 31, 2009 carrying amount of acquired loans that were identified as impaired at acquisition follows:

 

     June 30, 2010    December 31, 2009

Outstanding balance

   $ 807,288    $ 200,310

Carrying amount

     372,117      75,368

The cash flow analyses prepared for loans originated by First Regional and SAB are being used to determine the amount of accretable yield recognized on those loans identified as impaired at acquisition. Improvements in fair values subsequent to acquisition on several loans for TVB and VB resulted in the reclassification of nonaccretable yield to accretable yield.

 

     Accretable Yield  

Balance at December 31, 2009

   $ —     

Additions

     45,523   

Accretion

     (12,170

Reclassifications from (to) nonaccretable difference

     2,795   

Disposals

     (1,070
        

Balance at June 30, 2010

   $ 35,078   
        

Note E

Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses is summarized as follows:

 

          Six months ended
June 30,
 
          2010     2009  

Balance, January 1

      $ 172,282      $ 157,569   

Adjustment resulting from adoption of change in accounting for QSPEs and controlling financial interests, effective January 1, 21010

        681        —     

Provision for loan and lease losses

        48,756        39,482   

Loans and leases charged-off:

       

Covered by loss share agreements

        (7,358     —     

Not covered by loss share agreements

        (29,244     (37,024

Loans and leases recovered:

       

Covered by loss share agreements

        —          —     

Not covered by loss share agreements

        3,052        2,255   

Net charge-offs

        (33,550     (34,769
                   

Balance, June 30

      $ 188,169      $ 162,282   
                   

 

     June 30, 2010    December 31, 2009    June 30, 2009

Allowance for loan and lease losses allocated to:

        

Loans covered by loss share agreements

   $ 16,006    $ 3,500    $ —  

Loans and leases not covered by loss share agreements

     172,163      168,782      162,282
                    

Total

   $ 188,169    $ 172,282    $ 162,282
                    

 

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Note F

Receivable from FDIC for Loss Share Agreements

The following table provides changes in the receivable from the FDIC during the first six months of 2010:

 

     June 30, 2010  

Balance at December 31, 2009

   $ 249,842   

Additional receivable from 2010 acquisitions

     479,295   

Accretion of premium and discount, net

     2,386   

Receipt of payments from FDIC

     (52,422

Post-acquisition adjustments

     13,141   
        

Balance at June 30, 2010

   $ 692,242   
        

The receivable from the FDIC for loss share agreements is measured separately from the related covered assets and is recorded at fair value. The fair value was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages.

Post-acquisition adjustments represent the net change in loss estimates related to covered loans and other real estate owned as a result of changes in estimated fair values 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 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 receivable from the FDIC for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously recorded provision for loan and lease losses and related allowance for loan and lease losses and adjustments to the receivable from the FDIC, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded. Adjustments related to acquisition date fair values, made within one year after the closing date of the respective acquisition, are reflected in the bargain purchase gain.

Note G

Estimated Fair Values

Fair value estimates are made at a specific point in time based on relevant market information and information about each financial instrument. Where information regarding the fair value of a financial instrument is publicly available, those values are used, as is the case with investment securities, residential mortgage loans and certain long-term obligations. In these cases, an open market exists in which those financial instruments are actively traded.

Because no market exists for many financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For those financial instruments with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. For each period presented, the fair value for loans, net of allowance for loan and lease losses, included an adjustment to reflect the unfavorable liquidity conditions that existed in various financial markets. Generally, the fair value of variable rate financial instruments equals the book value.

 

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Table of Contents
     June 30, 2010    December 31, 2009    June 30, 2009
     Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value

Cash and due from banks

   $ 625,857    $ 625,857    $ 480,242    $ 480,242    $ 637,896    $ 637,896

Overnight investments

     736,896      736,896      723,260      723,260      229,668      229,668

Investment securities available for sale

     3,768,777      3,768,777      2,929,162      2,929,162      3,745,385      3,745,385

Investment securities held to maturity

     3,084      3,334      3,603      3,834      4,140      4,379

Loans held for sale

     91,076      91,076      67,381      67,381      115,920      115,920

Loans covered by loss share agreements, net of allowance for loan and lease losses

     2,351,084      2,296,345      1,169,520      1,169,520      —        —  

Loans and leases not covered by loss share agreements, net of allowance for loan and lease losses

     11,450,331      10,952,196      11,476,217      11,060,532      11,360,763      10,921,038

Receivable from FDIC for loss share agreements

     692,242      692,242      249,842      249,842      —        —  

Income earned not collected

     77,186      77,186      60,684      60,684      66,226      66,226

Stock issued by:

                 

Federal Home Loan Bank of Atlanta

     50,688      50,688      47,361      47,361      46,677      46,677

Federal Home Loan Bank of San Francisco

     16,781      16,781      5,592      5,592      —        —  

Federal Home Loan Bank of Seattle

     4,490      4,490      4,490      4,490      —        —  

Deposits

     17,787,241      17,855,490      15,337,567      15,396,423      14,358,149      14,435,457

Short-term borrowings

     541,709      541,709      642,405      642,405      599,853      599,853

Long-term obligations

     918,930      933,064      797,366      788,004      735,803      702,920

Accrued interest payable

     40,652      40,652      37,881      37,881      59,807      59,807

For off-balance sheet commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares’ financial position.

Fair value represents the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, BancShares considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. As required under US GAAP, individual fair value estimates are ranked based on the relative reliability of the inputs used in the valuation. Fair values determined using level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities that are not actively traded in observable markets are based on level 3 inputs, which are considered to be nonobservable.

Among BancShares’ assets and liabilities, investment securities available for sale and interest rate swaps accounted for as cash flow hedges are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or market. Impaired loans, OREO, goodwill and other intangible assets are periodically tested for impairment. Loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value. BancShares did not elect to voluntarily report any assets or liabilities at fair value.

 

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For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of June 30, 2010, December 31, 2009 and June 30, 2009:

 

          Fair value measurements using:

Description

   Fair value    Quoted prices in
active markets for
identical assets  and
liabilities

(Level 1 inputs)
   Quoted prices for
similar assets  and
liabilities

(Level 2 inputs)
   Significant
unobservable inputs
(Level 3 inputs)
June 30, 2010            

Assets measured at fair value

           

Investment securities available for sale

           

U.S. Government

   $ 3,084,717    $ 3,084,717    $ —      $ —  

Corporate bonds

     489,583      489,583      —        —  

Residential mortgage-backed securities

     174,516      —        174,516      —  

Equity securities

     18,691      18,691      —        —  

State, county, municipal

     1,270      —        1,270      —  
                           

Total

   $ 3,768,777    $ 3,592,991    $ 175,786    $ —  
                           

Liabilities measured at fair value

           

Interest rate swaps accounted for as cash flow hedges

   $ 11,309    $ —      $ 11,309    $ —  

December 31, 2009

           

Assets measured at fair value

           

Investment securities available for sale

           

U.S. Government

   $ 2,287,423    $ 2,287,423    $ —      $ —  

Corporate bonds

     485,667      485,667      —        —  

Residential mortgage-backed securities

     130,338      —        130,338      —  

Equity securities

     16,622      16,622      —        —  

State, county, municipal

     6,813      —        6,813      —  

Other

     2,299      1,012      —        1,287
                           

Total

   $ 2,929,162    $ 2,790,724    $ 137,151    $ 1,287
                           

Liabilities measured at fair value

           

Interest rate swaps accounted for as cash flow hedges

   $ 5,367    $ —      $ 5,367    $ —  
June 30, 2009            

Assets measured at fair value

           

Investment securities available for sale

           

U.S. Government

   $ 3,169,883    $ 3,169,883    $ —      $ —  

Corporate bonds

     457,742      457,742      —        —  

Residential mortgage-backed securities

     96,721      —        96,721      —  

Equity securities

     14,597      14,597      —        —  

State, county, municipal

     1,617      —        1,617      —  

Other

     4,825      —        —        4,825
                           

Total

   $ 3,745,385    $ 3,642,222    $ 98,338    $ 4,825
                           

Liabilities measured at fair value

           

Interest rate swaps accounted for as cash flow hedges

   $ 6,440    $ —      $ 6,440    $ —  

Prices for US Government securities and corporate bonds are readily available in the active markets in which those securities are traded and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, state, county and municipal securities are obtained using the fair values of similar assets and the resulting fair values are shown in the ‘Level 2 input’ column. At December 31, 2009, the fair value for the retained residual interest from a securitization transaction was determined

 

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based on Level 3 nonobservable inputs. Based on changes to US GAAP related to accounting for QSPEs and controlling financial interests that became effective January 1, 2010, the previously securitized loans were consolidated and the residual interest strip was removed from the consolidated balance sheet. There were no transfers between Level 1 and Level 2 inputs during the six months ended June 30, 2010.

At June 30, 2010, other assets include $71,959 of stock in various Federal Home Loan Banks (FHLB). The FHLB stock, which is redeemable only through the issuer, is carried at its par value. The investment in the FHLB stock is considered a long-term investment and its value is based on the ultimate recoverability of par value. Management has concluded that the investment in FHLB stock was not other-than-temporarily impaired as of June 30, 2010.

Under the terms of the existing cash flow hedges, BancShares pays a fixed payment to the counterparty in exchange for receipt of a variable payment that is determined based on the 3-month LIBOR rate. The fair value of the cash flow hedges are therefore based on projected LIBOR rates for the duration of the hedges, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument.

For those investment securities available for sale with fair values that are determined by reliance on significant nonobservable inputs, the following table identifies the factors causing the change in fair value during the first six months of 2010 and 2009:

 

     Investment securities available for sale
with fair values based  on significant
nonobservable inputs
 

Description

   2010     2009  

Beginning balance, January 1,

   $ 1,287      $ 5,427   

Total gains (losses), realized or unrealized:

    

Included in earnings

     —          —     

Included in other comprehensive income

     —          195   

Purchases, sales, issuances and settlements, net

     —          (797

Transfers in/out of Level 3

     (1,287     —     
                

Ending balance, June 30

   $ —        $ 4,825   
                

No gains or losses were reported for the six month periods ended June 30, 2010 and 2009 that relate to fair values estimated based on significant nonobservable inputs. The investment securities valued using level 3 inputs that were transferred out during the first quarter of 2010 result from changes in US GAAP adopted January 1, 2010 related to investments in the retained interest of a residual interest strip that resulted from an asset securitization.

 

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Certain assets and liabilities are carried at fair value on a nonrecurring basis. Loans held for sale are carried at the lower of aggregate cost or fair value and are therefore carried at fair value only when fair value is less than the asset cost. Certain impaired loans are also carried at fair value. For assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of June 30, 2010, December 31, 2009 and June 30, 2009:

 

          Fair value measurements using:

Description

   Fair value    Quoted prices in
active markets for
identical assets
and liabilities
(Level 1 inputs)
   Quoted prices for
similar assets
and liabilities
(Level 2 inputs)
   Significant
nonobservable
inputs

(Level 3 inputs)

June 30, 2010

           

Loans held for sale

   $ 91,076    $ —      $ 91,076    $ —  

Impaired loans:

           

Covered by loss share agreements

     356,111      —        —        356,111

Not covered by loss share agreements

     50,676      —        —        50,676

December 31, 2009

           

Loans held for sale

     67,381      —        67,381      —  

Impaired loans:

           

Covered by loss share agreements

     112,946      —        —        112,946

Not covered by loss share agreements

     40,895      —        —        40,895

June 30, 2009

           

Loans held for sale

     39,997      —        39,997      —  

Impaired loans:

           

Covered by loss share

     —        —        —        —  

agreements

           

Not covered by loss share

     18,624      —        —        18,624

The values of loans held for sale are based on prices observed for similar pools of loans. The values of impaired loans are determined by either the collateral value or by the discounted present value of the expected cash flows. No financial liabilities were carried at fair value on a nonrecurring basis as of June 30, 2010 or December 31, 2009.

Certain non-financial assets and non-financial liabilities are measured at fair value on a nonrecurring basis. OREO is measured and reported at fair value using Level 2 inputs for observable market data or Level 3 inputs for valuations based on nonobservable criteria. During the six month period ended June 30, 2010, foreclosures of other real estate not covered by loss share agreements totaled $16,217, all of which were valued using Level 3 inputs. In connection with the measurement and initial recognition of noncovered OREO, BancShares recognized loan charge-offs totaling $8,497. Based on updates to Level 3 inputs, noncovered OREO with a fair value of $6,006 as of June 30, 2010 incurred write-downs that totaled $1,160 during the six month period ended June 30, 2010.

Note H

Employee Benefit Plans

Pension expense is a component of employee benefits expense. For the three and six month periods ended June 30, 2010 and 2009, the components of pension expense are as follows:

 

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Table of Contents
     Three months ended June 30,     Six month periods ended June 30,  
     2010     2009     2010     2009  

Service cost

   $ 3,667      $ 3,669      $ 6,671      $ 6,282   

Interest cost

     7,317        6,584        12,546        10,867   

Expected return on assets

     (9,497     (8,584     (16,018     (13,751

Amortization of prior service cost

     68        63        115        104   

Amortization of net actuarial loss

     1,155        1,075        2,080        1,788   
                                

Total pension expense

   $ 2,710      $ 2,807      $ 5,394      $ 5,290   
                                

For the six month periods ended June 30, 2010 and 2009 the assumed discount rate is 6.00 percent, the expected long-term rate of return on plan assets is 8.00 percent and the assumed rate of salary increases is 4.50 percent.

Note I

Contingencies

BancShares and various subsidiaries have been named as defendants in various legal actions arising from their 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.

Note J

Derivatives

At June 30, 2010, BancShares had two interest rate swaps that qualify as cash flow hedges under US GAAP. The fair values of these derivatives are included in other liabilities in the consolidated balance sheets and in the net change in other liabilities in the consolidated statements of cash flows.

The interest rate swaps are used for interest rate risk management purposes and convert variable-rate exposure on outstanding debt to a fixed rate. The interest rate swaps each have a notional amount of $115,000, representing the amount of variable-rate trust preferred capital securities issued during 2006. The 2006 interest rate swap hedges interest payments through June 2011 and requires fixed-rate payments by BancShares at 7.125 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. The 2009 interest rate swap hedge interest payments from July 2011 through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR. As of June 30, 2010, collateral with a fair value of $10,366 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.

 

     June 30, 2010    December 31, 2009  
     Notional amount    Estimated fair value
of liability
   Notional amount    Estimated fair value
of (asset) liability
 

2006 interest rate swap hedging variable rate exposure on trust preferred capital securities 2006-2011

   $ 115,000    $ 5,384    $ 115,000    $ 7,424   

2009 interest rate swap hedging variable rate exposure on trust preferred capital securities 2011-2016

     115,000      5,925      115,000      (2,057
                     
      $ 11,309       $ 5,367   
                     

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the six month periods ended June 30, 2010 and 2009, BancShares recognized interest expense of $2,951 and $2,238, respectively, resulting from the interest rate swaps, none of which related to ineffectiveness.

 

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Table of Contents

The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the six month periods ended June 30, 2010 and 2009.

 

     2010     2009  

Accumulated other comprehensive loss resulting from interest rate swaps as of January 1, net of tax

   $ (3,248   $ (6,456

Other comprehensive (loss) income recognized during six month period ended June 30, net of tax

     (3,596     2,559   
                

Accumulated other comprehensive loss resulting from interest rate swaps as of June 30, net of tax

   $ (6,844   $ (3,897
                

BancShares monitors the credit risk of the interest rate swap counterparty.

Note K

Segment Disclosures

BancShares conducts its banking operations through its two wholly-owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets, except California, Washington and Florida, and has separate management groups. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth.

FCB operates from a single charter from its branch network in North Carolina, Virginia, West Virginia, Maryland, Tennessee, California, Washington, Florida and Washington, DC. FCB’s entrance into California, Washington and Florida during 2009 and 2010 resulted from participation in FDIC-assisted transactions. ISB began operations in 1997 and operates from a thrift charter in Florida, Georgia, Texas, New Mexico, Arizona, California, Oregon, Washington, Colorado, Oklahoma, Missouri and Kansas.

Management has determined that FCB and ISB are reportable business segments. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ISB account for more than 90 percent of consolidated assets, revenues and net income. The ‘Other’ category in the accompanying table includes activities of the parent company and Neuse, Incorporated (Neuse), a subsidiary that owns real property used in the banking operation and owns other real estate. The other real estate owned (non-performing assets) by Neuse relates to loans originated by ISB. During 2009, Neuse purchased some of ISB’s OREO to reduce ISB’s nonperforming assets. To facilitate the potential purchase of additional OREO in the future, ISB has agreed to lend Neuse up to $15,000 under a revolving line of credit. No amount was owed by Neuse to ISB as of June 30, 2010 under the revolving line of credit.

The adjustments in the accompanying tables represent the elimination of the impact of certain intercompany transactions. The adjustments for interest income and interest expense neutralize the earnings and cost of intercompany borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other service fees paid from one company to another within BancShares’ consolidated group.

 

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Table of Contents
     ISB    FCB    Other    Total    Adjustments     Consolidated

June 30, 2010

                

Total assets

   $ 2,807,642    $ 18,155,558    $ 2,181,898    $ 23,145,098    $ (2,039,329   $ 21,105,769

Loans and leases:

                

Covered by loss share agreements

     —        2,367,090      —        2,367,090      —          2,367,090

Not covered by loss share agreements

     2,255,885      9,457,684      —        11,713,569      (91,075     11,622,494

Allowance for loan and lease losses

     41,875      146,294      —        188,169      —          188,169

Goodwill

     793      60,593      —        61,386      41,239        102,625

Nonperforming assets:

                

Covered by loss share agreements

     —        362,578      —        362,578      —          362,578

Not covered by loss share agreements

     63,731      77,524      15,331      156,586      —          156,586

Deposits

     2,187,421      15,633,900      —        17,821,321      (34,080     17,787,241

December 31, 2009

                

Total assets

   $ 2,573,605    $ 15,791,475    $ 2,181,898    $ 20,546,978    $ (2,080,915   $ 18,466,063

Loans and leases:

                

Covered by loss share agreements

     —        1,173,020      —        1,173,020      —          1,173,020

Not covered by loss share agreements

     2,194,659      9,450,340      —        11,644,999      —          11,644,999

Allowance for loan and lease losses

     41,675      130,607      —        172,282      —          172,282

Goodwill

     793      101,832      —        102,625      —          102,625

Nonperforming assets:

                

Covered by loss share agreements

     —        220,233      —        220,233      —          220,233

Not covered by loss share agreements

     62,881      76,622      14,546      154,049      —          154,049

Deposits

     1,967,824      13,406,484      —        15,374,308      (36,741     15,337,567

June 30, 2009

                

Total assets

   $ 2,654,534    $ 14,601,756    $ 2,181,110    $ 19,437,400    $ (2,119,520   $ 17,317,880

Loans and leases not covered by loss share agreements

     2,154,136      9,368,909      —        11,523,045      —          11,523,045

Allowance for loan and lease losses

     38,425      123,857      —        162,282      —          162,282

Goodwill

     793      101,832      —        102,625      —          102,625

Nonperforming assets

     61,246      33,364      7,801      102,411      —          102,411

Deposits

     2,050,384      12,334,886      —        14,385,270      (27,121     14,358,149

 

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Table of Contents
     As of and for the quarter ended June 30, 2010
     ISB     FCB    Other     Total    Adjustments     Consolidated

Interest income

   $ 33,832      $ 183,364    $ 413      $ 217,609    $ (174   $ 217,435

Interest expense

     10,415        36,675      5,657        52,747      (174     52,573
                                            

Net interest income

     23,417        146,689      (5,244     164,862      —          164,862

Provision for credit losses

     4,889        26,937      —          31,826      —          31,826
                                            

Net interest income after

     18,528        119,752      (5,244     133,036      —          133,036

provision for credit losses

              

Noninterest income

     3,856        90,820      (140     94,536      (1,914     92,622

Noninterest expense

     22,624        160,712      354        183,690      (1,914     181,776
                                            

Income (loss) before income taxes

     (240     49,860      (5,738     43,882      —          43,882

Income taxes

     (42     17,321      (1,999     15,280      —          15,280
                                            

Net income (loss)

   $ (198   $ 32,539    $ (3,739   $ 28,602    $ —        $ 28,602
                                            
     As of and for the quarter ended June 30, 2009
     ISB     FCB    Other     Total    Adjustments     Consolidated

Interest income

   $ 32,461      $ 143,061    $ 1,454      $ 176,976    $ (135   $ 176,841

Interest expense

     13,484        40,844      5,616        59,944      (135     59,809
                                            

Net interest income

     18,977        102,217      (4,162     117,032      —          117,032

Provision for credit losses

     10,064        10,695      —          20,759      —          20,759
                                            

Net interest income after

     8,913        91,522      (4,162     96,273      —          96,273

provision for credit losses

              

Noninterest income

     3,318        71,143      (545     73,916      (2,500     71,416

Noninterest expense

     23,181        137,927      512        161,620      (2,500     159,120
                                            

Income (loss) before income taxes

     (10,950     24,738      (5,219     8,569      —          8,569

Income taxes

     (3,886     8,078      (1,823     2,369      —          2,369
                                            

Net income (loss)

   $ (7,064   $ 16,660    $ (3,396   $ 6,200    $ —        $ 6,200
                                            

 

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     As of and for the six months ended June 30, 2010
     ISB     FCB    Other     Total    Adjustments     Consolidated

Interest income

   $ 66,475      $ 351,117    $ 916      $ 418,508    $ (373   $ 418,135

Interest expense

     21,296        70,009      11,305        102,610      (373     102,237
                                            

Net interest income

     45,179        281,108      (10,389     315,898      —          315,898

Provision for credit losses

     8,746        40,010      —          48,756      —          48,756
                                            

Net interest income after provision for credit losses

     36,433        241,098      (10,389     267,142      —          267,142

Noninterest income

     7,189        298,106      (122     305,173      (3,979     301,194

Noninterest expense

     45,021        313,022      662        358,705      (3,979     354,726
                                            

Income (loss) before income taxes

     (1,399     226,182      (11,173     213,610      —          213,610

Income taxes

     (435     84,794      (3,907     80,452      —          80,452
                                            

Net income (loss)

   $ (964   $ 141,388    $ (7,266   $ 133,158    $ —        $ 133,158
                                            
     As of and for the six months ended June 30, 2009
     ISB     FCB    Other     Total    Adjustments     Consolidated

Interest income

   $ 65,125      $ 288,041    $ 3,630      $ 356,796    $ (303   $ 356,493

Interest expense

     28,620        83,983      11,356        123,959      (303     123,656
                                            

Net interest income

     36,505        204,058      (7,726     232,837      —          232,837

Provision for credit losses

     19,141        20,341      —          39,482      —          39,482
                                            

Net interest income after provision for credit losses

     17,364        183,717      (7,726     193,355      —          193,355

Noninterest income

     6,537        140,214      (546     146,205      (5,097     141,108

Noninterest expense

     45,308        272,430      972        318,710      (5,097     313,613
                                            

Income (loss) before income taxes

     (21,407     51,501      (9,244     20,850      —          20,850

Income taxes

     (7,655     16,878      (3,236     5,987      —          5,987
                                            

Net income (loss)

   $ (13,752   $ 34,623    $ (6,008   $ 14,863    $ —        $ 14,863
                                            

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

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 unaudited 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 2010, the reclassifications have no 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.

FDIC-ASSISTED TRANSACTIONS

First Regional Bank. On January 29, 2010, First-Citizens Bank & Trust Company (FCB) entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of First Regional Bank (First Regional) of Los Angeles, California. Immediately prior to the effectiveness of the transaction, the FDIC had been appointed Receiver of First Regional by the California Department of Financial Institutions.

Table 1 identifies the assets acquired and liabilities assumed, the fair value adjustments, the amounts recorded by FCB, and the calculation of the gain recognized.

 

First Regional Bank    Table 1

Acquisition date: January 29, 2010

  

 

     As recorded by
First Regional
   Fair value
adjustments
at acquisition
date
    Subsequent
acquisition-date
adjustments
    As recorded
by FCB
     (thousands)

Assets

         

Cash and due from banks

   $ 37,508    $ —        $ —        $ 37,508

Investment securities available for sale

     3,250      —          —          3,250

Loans covered by loss share agreements

     1,853,325      (576,171     (30,488     1,246,666

Other real estate owned covered by loss share agreements

     61,488      (20,353     414        41,549

Income earned not collected

     6,048      —          —          6,048

Receivable from FDIC for loss share agreements

     —        365,170        24,391        389,561

Intangible assets

     —        9,110        —          9,110

Other assets

     23,782      (500     —          23,282
                             

Total assets acquired

   $ 1,985,401    $ (222,744   $ (5,683   $ 1,756,974
                             

Liabilities

         

Deposits:

         

Noninterest-bearing

   $ 528,235    $ —        $ —        $ 528,235

Interest-bearing

     759,484      —          —          759,484
                             

Total deposits

     1,287,719      —          —          1,287,719

Short-term borrowings

     361,876      —          —          361,876

Other liabilities

     1,188      1,547        —          2,735
                             

Total liabilities assumed

     1,650,783      1,547        —          1,652,330
                             

Excess of assets acquired over liabilities assumed

   $ 334,618       
             

Aggregate fair value adjustments

      $ (224,291   $ (5,683  
                     

Gain on acquisition of First Regional

          $ 104,644
             

 

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The loans and other real estate acquired through foreclosure are covered by loss share agreements that provide for the FDIC to absorb 80 percent of losses incurred on covered loans and other real estate in excess of $41.8 million. The 80 percent coverage ratio applies to losses up to $1.0 billion with losses in excess of $1.0 billion covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $389.6 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss share agreements. The Purchase and Assumption Agreement between FCB and the FDIC includes a true-up payment at the end of year 10. On March 17, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $203.4 million, less (ii) the sum of (a) 25 percent of the asset discount, or $74.9 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements.

First quarter noninterest income included a bargain purchase gain of $110.3 million that resulted from the FDIC-assisted acquisition of First Regional. During the second quarter of 2010, adjustments were made to the initial gain based on additional information regarding the respective acquisition date fair values, which reduced the gain by $5.7 million. These adjustments were made retroactive to the first quarter of 2010 resulting in an adjusted gain of $104.6 million. Our operating results for the period ended June 30, 2010 include the results of the acquired assets and liabilities for the period from January 29, 2010 through June 30, 2010. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the first and second quarters of 2010.

Sun American Bank. On March 5, 2010, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of Sun American Bank (SAB) of Boca Raton, Florida. Immediately prior to the effectiveness of the acquisition, the FDIC had been appointed Receiver of SAB by the Florida Office of Financial Regulation.

Table 2 identifies the assets acquired and liabilities assumed, the fair value adjustments, the amounts recorded by FCB, and the calculation of the gain recognized.

 

Sun American Bank   Table 2
Acquisition date: March 5, 2010  

 

     As recorded
by SAB
   Fair value
adjustments
at acquisition
date
    Subsequent
acquisition-date
adjustments
    As recorded
by FCB
     (thousands)

Assets

         

Cash and due from banks

   $ 37,016    $ —        $ —        $ 37,016

Investment securities available for sale

     66,968      —          —          66,968

Loans covered by loss share agreements

     411,315      (123,707     3,283        290,891

Other real estate owned covered by loss share agreements

     15,220      (7,200     —          8,020

Income earned not collected

     1,612      —          —          1,612

Receivable from FDIC for loss share agreements

     —        92,360        (2,626     89,734

Intangible assets

     —        629        —          629

Other assets

     4,473      —          —          4,473
                             

Total assets acquired

   $ 536,604    $ (37,918   $ 657      $ 499,343
                             

Liabilities

         

Deposits:

         

Noninterest-bearing

   $ 39,435    $ —        $ —        $ 39,435

Interest-bearing

     380,577      —          —          380,577
                             

Total deposits

     420,012      —          —          420,012

Short-term borrowings

     42,485      48        —          42,533

Long-term obligations

     37,000      3,082        —          40,082

Other liabilities

     853      51        —          904
                             

Total liabilities assumed

     500,350      3,181        —          503,531
                             

Excess of assets acquired over liabilities assumed

   $ 36,254       
             

Aggregate fair value adjustments

      $ (41,099   $ 657     
                     

Cash received from the FDIC

          $ 31,965
             

Gain on acquisition of Sun American

          $ 27,777
             

 

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The loans and other real estate acquired through foreclosure are covered by loss share agreements that provide for the FDIC to absorb 80 percent of all losses incurred on covered loans and other real estate up to $99.0 million. Losses in excess of $99.0 million are covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $92.4 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss share agreements. The Purchase and Assumption Agreement between FCB and the FDIC includes a true-up payment at the end of year 10. On May 15, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $19.8 million, less (ii) the sum of (a) 25 percent of the asset discount, or $17.5 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements.

First quarter noninterest income included a bargain purchase gain of $27.1 million that resulted from the FDIC-assisted acquisition of SAB. During the second quarter of 2010, adjustments were made to the initial gain based on additional information regarding the respective acquisition date fair values, which increased the gain by $656,000. These adjustments were made retroactive to the first quarter of 2010 resulting in an adjusted gain of $27.8 million. Our operating results for the period ended June 30, 2010 include the results of the acquired assets and liabilities for the period from March 5, 2010 through June 30, 2010. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the first and second quarters of 2010.

The 2010 transactions involving First Regional and SAB represented the third and fourth transactions involving BancShares since July 17, 2009. Table 3 provides information regarding the four entities from which we have acquired assets and assumed liabilities in FDIC-assisted transactions during 2010 and 2009. Adjustments to acquisition date fair values are subject to change for one year following the closing date of each respective acquisition.

FDIC-Assisted Transactions

Table 3

 

               Fair value of

Entity

   Date of transaction    # branches    Loans
acquired
   Deposits
assumed
   Short-term
borrowings
assumed
   Long-term
obligations
assumed
                    (thousands)     

Sun American Bank

   March 5, 2010    12    $ 290,892    $ 420,012    $ 42,533    $ 40,082

First Regional Bank

   January 29, 2010    8      1,246,666      1,287,719      361,876      —  

Venture Bank

   September 11, 2009    18      456,995      709,091      —        55,618

Temecula Valley Bank

   July 17, 2009    11      855,583      965,431      79,096      —  
                                   

Total

   49    $ 2,850,136    $ 3,382,253    $ 483,505    $ 95,700
                                   

 

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EXECUTIVE OVERVIEW AND PERFORMANCE SUMMARY

BancShares is a financial holding company headquartered in Raleigh, North Carolina that offers full-service banking through two wholly-owned banking subsidiaries, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift institution. FCB operates branches in eight states and the District of Columbia. ISB operates branches in urban areas of twelve states. Beyond the traditional branch network, we offer customer sales and service through telephone, online banking and an extensive ATM network.

BancShares’ earnings and cash flows are primarily derived from the commercial banking activities conducted by its banking subsidiaries. We offer commercial and consumer loans, deposit and treasury services products, cardholder and merchant services, wealth management services as well as various other products and services typically offered by commercial banks. FCB and ISB gather deposits from retail and commercial customers. BancShares and its subsidiaries also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets such as loans and leases, investment securities and overnight investments. We also invest in the bank premises, furniture and equipment used to conduct the subsidiaries’ commercial banking business.

Various external factors influence the focus of our business efforts. Due to unprecedented asset quality challenges, capital shortages and the onset of a global economic recession, the U.S. banking industry experienced serious financial challenges during the period from 2008 through mid-2010. During this time of industry-wide turmoil, while maintaining our long-standing attention to prudent banking practices, we have modified our growth focus to benefit from the opportunities that currently exist through participation in FDIC-assisted transactions involving distressed financial institutions. BancShares’ ability to participate in FDIC-assisted transactions creates opportunities to significantly increase our business volumes in markets in which we presently operate and to expand our banking presence to additional markets which we deem demographically attractive. Additionally, due to purchase discounts and loss share agreements that protect us from a substantial portion of the asset quality risk that we would otherwise incur, we are able to create a substantial portion of the equity required to fund the transactions through significant acquisition gains.

Despite the recognition of significant acquisition gains during 2010 and 2009, recessionary economic conditions, high rates of unemployment, and a growing inability for some businesses and consumers to meet their debt service obligations continue to exert pressure on our core earnings and profitability.

In addition, real estate demand in many of our markets remains weak, resulting in continued depressed real estate prices that have adversely affected collateral values for many borrowers. In particular, the stressed residential real estate markets in Georgia and Florida had a material negative impact on the profitability of ISB during 2009. The financial impact of depressed real estate markets continues to affect earnings during 2010 at a more modest rate.

The demand for our deposit and treasury services products has been influenced by extraordinarily low interest rates and instability in alternative investment markets. Our balance sheet liquidity position remains strong, but our continuing participation in FDIC-assisted transactions creates pressure on liquidity management due to the uncertainty regarding retention of assumed deposit liabilities at a reasonable cost.

Ongoing economic weakness continues to have a significant impact on virtually all financial institutions in the United States, including BancShares. In addition to the various actions previously enacted by governmental agencies and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, it is likely that further changes will occur as the Federal government attempts to restore stability to the financial services sector.

 

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We operate in diverse geographic markets and can increase our business volumes and profitability by offering competitive products and superior customer service. In addition to our focus on retaining customers of the four banks involved in the FDIC-assisted transactions, we continue to concentrate our marketing efforts on business owners, medical and other professionals and financially active individuals. We seek to increase fee income in areas such as wealth management, cardholder and merchant services, and insurance and treasury services. Leveraging on our investments in technology, we also focus on opportunities to generate income by providing various processing services to other banks.

BancShares’ consolidated net income during the second quarter of 2010 equaled $28.6 million, an increase of $22.4 million over the $6.2 million earned during the corresponding period of 2009. The annualized return on average assets and equity amounted to 0.54 percent and 6.83 percent respectively during the second quarter of 2010, compared to 0.14 and 1.73 percent during the same period of 2009. Net income per share during the second quarter of 2010 totaled $2.74, compared to $0.59 during the second quarter of 2009. The increase in net income during 2010 resulted from higher net interest income and noninterest income offset in part by increased provision for loan and lease losses and noninterest expenses.

For the six-month period ending June 30, 2010, net income equaled $133.2 million compared to $14.9 million earned during the same period of 2009. Return on assets and equity during 2010 equaled 1.31 percent and 16.46 percent respectively, up from 0.18 percent and 2.09 percent during the six-month period ended June 30, 2009. Net income per share equaled $12.76 during the first six months of 2010 compared to $1.42 in the first six months of 2009. The increase in net income during 2010 was attributable primarily to gains arising from FDIC-assisted transactions completed during the first quarter of 2010.

Net interest income increased $47.8 million from $117.0 million in the second quarter of 2009 to $164.9 million in 2010, an increase of 40.9 percent resulting from balance sheet growth caused primarily by acquisitions and a significant improvement in the net yield on interest-earning assets. The net yield on interest-earning assets improved by 52 basis points from 3.02 in the second quarter 2009 to 3.54 percent in 2010 due to favorable changes in deposit costs and the positive impact of yields and rates on acquired loans and assumed deposits. Year-to-date net interest income increased $83.1 million, or 35.7 percent during 2010. The net yield on interest-earning assets increased 47 basis points to 3.54 percent during the six-month period ended June 30, 2010.

The provision for loan and lease losses recorded during the second quarter of 2010 equaled $31.8 million, compared to $20.8 million during the second quarter of 2009. During the first six months of 2010, the provision for loan and lease losses equaled $48.8 million, an increase of $9.3 million or 23.5 percent from the same period of 2009. The current year increase was caused primarily by post-acquisition deterioration of acquired loans from TVB and VB covered by loss share agreements with the FDIC.

Noninterest income increased $21.2 million or 29.7 percent in the second quarter of 2010 and $160.1 million or 113.4 percent in the first six months of 2010 when compared to the same period of 2009. The significant increase during the six-month period ended June 30, 2010 is primarily due to gains on acquisitions totaling $132.6 million. Noninterest expense increased $22.7 million or 14.2 percent in the second quarter of 2010 and $41.1 million or 13.1 percent in the first six months of 2010 when compared to the same period in 2009. The increase in noninterest expense is due to acquisition related activities, including operating costs for acquired branches and expenses related to the operation and disposition of other real estate.

 

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Financial Summary   Table 4

 

     2010     2009     Six months ended June 30  
     Second     First     Fourth     Third     Second              
     Quarter     Quarter     Quarter     Quarter     Quarter     2010     2009  
     (thousands, except share data and ratios)  

Summary of Operations

  

Interest income

   $ 217,435      $ 200,700      $ 191,976      $ 189,690      $ 176,841      $ 418,135      $ 356,493   

Interest expense

     52,573        49,664        49,575        54,413        59,809        102,237        123,656   
                                                        

Net interest income

     164,862        151,036        142,401        135,277        117,032        315,898        232,837   

Provision for loan and lease losses

     31,826        16,930        21,617        18,265        20,759        48,756        39,482   
                                                        

Net interest income after provision for loan and lease losses

     133,036        134,106        120,784        117,012        96,273        267,142        193,355   

Gains on acquisitions

     —          132,623        (536     104,970        —          132,623        —     

Other noninterest income

     92,622        75,949        82,800        77,661        71,416        168,571        141,108   

Noninterest expense

     181,776        172,950        174,165        166,277        159,120        354,726        313,613   
                                                        

Income before income taxes

     43,882        169,728        28,883        133,366        8,569        213,610        20,850   

Income taxes

     15,280        65,172        9,883        50,898        2,369        80,452        5,987   
                                                        

Net income

   $ 28,602      $ 104,556      $ 19,000      $ 82,468      $ 6,200      $ 133,158      $ 14,863   
                                                        

Net interest income, taxable equivalent

   $ 165,937      $ 151,870      $ 143,446      $ 136,426      $ 118,350      $ 318,013      $ 235,575   
                                                        

Per Share Data

              

Net income

   $ 2.74      $ 10.02      $ 1.82      $ 7.90      $ 0.59      $ 12.76      $ 1.42   

Cash dividends

     0.300        0.300        0.300        0.300        0.300        0.600        0.600   

Market price at period end (Class A)

     192.33        198.76        164.01        159.10        133.65        192.33        133.65   

Book value at period end

     162.28        159.91        149.42        145.16        137.45        162.28        137.45   

Tangible book value at period end

     151.21        148.68        138.98        134.66        127.32        151.21        127.32   
                                                        

Selected Quarterly Averages

              

Total assets

   $ 21,222,673      $ 19,957,379      $ 18,386,775      $ 17,892,599      $ 17,309,656      $ 20,550,439      $ 17,128,427   

Investment securities

     3,732,320        3,060,237        3,134,971        3,596,422        3,578,604        3,398,135        3,413,655   

Loans and leases (covered and not covered)

     14,202,809        13,789,081        12,877,150        12,078,390        11,621,450        13,953,897        11,640,555   

Interest-earning assets

     18,778,108        17,507,787        16,319,611        15,862,964        15,725,319        18,103,265        15,550,310   

Deposits

     17,881,444        16,576,039        15,291,720        14,792,449        14,316,103        17,232,348        14,107,973   

Interest-bearing liabilities