First Citizens BancShares, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc. is a financial holding company operating primarily through First-Citizens Bank & Trust Company. The filing covers the unaudited three months ended March 31, 2016, with comparisons to March 31, 2015 and December 31, 2015.
In March 2016, the bank acquired certain assets and assumed certain liabilities of North Milwaukee State Bank in an FDIC-assisted transaction without loss-share protection. The acquisition contributed approximately $35.4 million of loans, $59.2 million of deposits and a $1.7 million gain.
Key financial metrics
| Metric | Q1 2016 | Comparable period | Change |
|---|---|---|---|
| Net interest income | $232.7 million | $220.2 million, Q1 2015 | Up 5.7% |
| Provision for loan and lease losses | $4.8 million | $5.8 million, Q1 2015 | Down $0.9 million |
| Noninterest income | $105.3 million | $150.8 million, Q1 2015 | Down $45.5 million |
| Noninterest expense | $251.7 million | $258.2 million, Q1 2015 | Down $6.5 million |
| Income before taxes | $81.5 million | $107.0 million, Q1 2015 | Down 23.8% |
| Net income | $52.1 million | $67.2 million, Q1 2015 | Down 22.5% |
| Net income per share | $4.34 | $5.59, Q1 2015 | Down 22.4% |
| Taxable-equivalent net interest margin | 3.18% | 3.18%, Q1 2015 | Flat; up from 3.12% in Q4 2015 |
| Return on average assets | 0.66% | 0.90%, Q1 2015 | Lower |
| Return on average equity | 7.17% | 10.00%, Q1 2015 | Lower |
At March 31, 2016, total assets were $32.20 billion, loans and leases were $20.42 billion, deposits were $27.37 billion and shareholders’ equity was $2.96 billion. Loans grew $177.7 million, or 3.5% annualized, from year-end 2015, while deposits increased $434.5 million, or 6.4% annualized.
Net charge-offs were $4.3 million, representing 0.08% of average loans and leases on an annualized basis. The allowance for loan and lease losses was $206.8 million, or 1.01% of total loans and leases, compared with 1.08% at March 31, 2015.
Nonperforming assets were $162.8 million, or 0.80% of loans, leases and other real estate owned, compared with $169.0 million at December 31, 2015 and $183.0 million at March 31, 2015. Total troubled debt restructurings were $141.4 million.
Operating cash flow was $75.2 million. Investing activities used $694.5 million, primarily reflecting purchases of securities and changes in overnight investments. Financing activities provided $543.1 million. Cash and due from banks ended at $457.8 million.
Liquidity included $4.24 billion of primary liquidity sources, $595.2 million of outstanding FHLB advances with approximately $5.50 billion of additional borrowing capacity, and $790.0 million of available Federal Funds lines and other borrowing facilities.
The company remained well-capitalized under Basel III: Tier 1 risk-based capital was 12.58%, common equity Tier 1 was 12.58%, total risk-based capital was 14.09% and the leverage ratio was 9.00%.
Material changes versus prior comparable periods
- Net income declined primarily because Q1 2015 included a $42.9 million gain from the Capitol City Bank & Trust acquisition, while Q1 2016 included only a $1.7 million NMSB acquisition gain.
- Net interest income increased $12.6 million year over year due to originated loan growth, higher investment-security and overnight-investment yields, and lower funding costs. These benefits were partly offset by declining accretion income from the runoff of acquired PCI loans.
- Noninterest income declined to $105.3 million from $150.8 million, mainly because of the prior-year acquisition gain and lower mortgage income, PCI recoveries and wealth-management income. Merchant-services income increased $3.1 million.
- Noninterest expense declined 2.5% year over year, supported by lower personnel, pension and merger-related costs, partly offset by higher merchant-processing and card-processing expenses.
- Non-PCI loans increased $182.3 million from year-end 2015 and $1.63 billion year over year. PCI loans declined to $945.9 million from $1.25 billion a year earlier due to portfolio runoff, partly offset by the NMSB acquisition.
- Available-for-sale securities had a net unrealized pretax gain of $38.9 million at March 31, 2016, compared with a $24.5 million unrealized loss at December 31, 2015, contributing to a $40.6 million improvement in accumulated other comprehensive loss.
Guidance, outlook, management commentary, risks and unusual items
Management emphasized initiatives focused on core revenue growth, expense control, branch-network optimization, technology enhancements and additional strategic acquisitions. No specific earnings or revenue guidance was provided.
Management cited low interest rates, competitive pressures, global economic uncertainty and the gradual pace of expected Federal Reserve rate increases as important operating conditions. Interest-rate sensitivity modeling indicated estimated 24-month net interest income increases of 4.20%, 5.21% and 2.01% under instantaneous rate increases of 100, 200 and 300 basis points, respectively.
- Loss-share protection on certain non-single-family residential loans from United Western Bank, Atlantic Bank & Trust and Colorado Capital Bank was scheduled to expire during the second, third and fourth quarters of 2016. The related loan balances totaled approximately $125.4 million at March 31, 2016.
- Loss-share agreements create potential reimbursement disputes and a $128.2 million estimated FDIC clawback liability. The FDIC receivable was $7.5 million.
- Mortgage servicing rights were reduced to $17.2 million after a $1.9 million impairment charge driven by lower interest rates and changed valuation assumptions.
- The company had $8.08 billion of unused credit commitments, $80.3 million of standby letters of credit and $3.0 million of reserves for mortgage-loan representation and warranty exposures.
- Legal proceedings arise in the ordinary course of business, including matters related to acquired institutions. Management stated that any ultimate liability is not expected to materially affect the consolidated financial statements.
- Management stated that the allowance was adequate, but future adjustments may be required as economic conditions, collateral values, borrower performance or regulatory examinations change.
- The 2011 interest-rate swap had a $93.5 million notional amount, a $0.7 million liability fair value and hedged variable-rate trust-preferred obligations through June 2016.
Most important facts for investors to verify
- Whether loan growth remains concentrated in commercial real estate and commercial mortgage lending and whether related credit quality trends remain favorable.
- The effect of continued PCI loan runoff and declining acquisition-related accretion income on future net interest income and margins.
- The financial impact of expiring FDIC loss-share protection, including the adequacy of the $128.2 million clawback liability and the $7.5 million FDIC receivable.
- Whether the NMSB acquisition’s preliminary fair values and $1.7 million gain are revised during the measurement period.
- Whether mortgage-servicing-rights valuations stabilize or require additional impairment charges if interest rates or prepayment speeds change.
- The sustainability of deposit growth, liquidity capacity and capital ratios as loans grow and interest rates change.
- Potential changes in nonperforming assets, troubled debt restructurings, commercial-mortgage delinquencies and the allowance for loan and lease losses.
- Future effects of newly adopted and pending accounting standards, including leases, financial instruments and revenue recognition; the filing does not quantify their eventual impact.