First Citizens BancShares, Inc. — 2014 Q1 Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc. is a financial holding company headquartered in Raleigh, North Carolina, operating primarily through First-Citizens Bank & Trust Company. The filing covers the unaudited three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013 and December 31, 2013 balances.
On January 1, 2014, the bank completed its merger with 1st Financial Services Corporation and Mountain 1st Bank & Trust Company, expanding its presence in western North Carolina. The transaction added $316.3 million of loans, $237.4 million of investment securities and $631.9 million of deposits at fair value, and resulted in $24.5 million of goodwill and $3.8 million of core deposit intangibles.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total interest income | $173.4 million | $220.6 million | Down $47.2 million |
| Net interest income | $160.9 million | $204.9 million | Down $44.0 million |
| Net interest margin, taxable equivalent | 3.26% | 4.35% | Down 109 basis points |
| Provision for loan and lease losses | $(1.9) million credit | $(18.6) million credit | Smaller credit |
| Noninterest income | $61.2 million | $57.5 million | Up $3.7 million |
| Noninterest expense | $191.0 million | $194.4 million | Down $3.3 million |
| Income before taxes | $33.0 million | $86.6 million | Down $53.7 million |
| Net income | $22.4 million | $55.6 million | Down 59.8% |
| Net income per share | $2.33 | $5.78 | Down $3.45 |
| Return on average assets, annualized | 0.41% | 1.07% | Down 66 basis points |
| Return on average equity, annualized | 4.33% | 12.01% | Down 768 basis points |
Net income was $22.4 million, or $2.33 per share. The effective tax rate was 32.2%, compared with 35.8% in the prior-year quarter. The filing does not provide a reported net profit margin.
Cash provided by operating activities was $63.1 million, compared with $73.3 million in Q1 2013. Investing activities used $343.4 million, primarily reflecting purchases of available-for-sale securities and increased overnight investments. Financing activities provided $290.2 million, principally from deposit growth and short-term borrowings. Cash and due from banks increased $9.9 million to $543.5 million.
Balance sheet, debt and liquidity
- Total assets were $22.15 billion, up from $21.20 billion at December 31, 2013.
- Total deposits were $18.76 billion, up $889.5 million, or 5.0%, from year-end; approximately $593.3 million represented deposits acquired in the 1st Financial merger.
- Loans and leases totaled $13.47 billion, including $12.20 billion of originated loans and $1.27 billion of acquired loans. Originated loans increased 0.8% during the quarter and 6.0% year over year.
- Available-for-sale investment securities totaled $5.68 billion, up 5.4% from year-end. Net unrealized losses declined to $4.7 million from $16.6 million.
- Short-term borrowings were $617.8 million and long-term obligations were $440.3 million. Long-term obligations declined primarily because borrowings maturing within one year were reclassified as short-term borrowings.
- Free liquidity was $3.94 billion, compared with $3.39 billion at December 31, 2013. The bank also had access to $665.0 million of unsecured borrowing facilities and had collateral supporting up to $1.03 billion of additional FHLB borrowings.
- BancShares remained well-capitalized: tier 1 leverage was 9.66%, total risk-based capital was 16.05%, and the tier 1 common equity ratio was 13.91% on the filing’s Basel-related calculation.
Material changes versus comparable periods
- Net interest income declined mainly because of runoff in the FDIC-assisted acquired loan portfolio and substantially lower acquired-loan accretion income. Accretion income was $30.2 million versus $79.9 million in Q1 2013.
- Interest expense declined $3.3 million because of lower deposit and short-term funding costs, partially offset by higher long-term obligation expense.
- Noninterest income increased 6.4%, helped by a smaller negative adjustment to the FDIC loss-share receivable, stronger merchant and cardholder services, and wealth management revenue. Mortgage income declined 74.8% to $1.0 million.
- Noninterest expense decreased 1.7%, with lower employee benefits, collection costs and certain other expenses partly offset by higher salaries, occupancy and foreclosure-related costs.
- Credit trends improved in the originated portfolio. Net charge-offs on originated loans fell to $2.3 million from $6.5 million, and the originated-loan allowance ratio declined to 1.46% from 1.49% at year-end.
- Total nonperforming assets increased to $185.4 million, or 1.37% of loans, leases and other real estate, from $165.6 million, or 1.25%, at year-end. The increase primarily reflected one large acquired commercial loan placed on nonaccrual status.
- Other real estate owned increased to $86.4 million from $84.0 million, including an increase in noncovered OREO to $44.5 million from $36.9 million.
Guidance, outlook, commentary and risks
- Management expects originated loan growth to continue for the remainder of 2014, while acknowledging that economic conditions and competitive pricing continue to suppress loan demand and compress margins.
- Management expects the 1st Financial merger to remain accretive to net interest income. Estimated merger-related costs are $6 million to $7 million; first-quarter revenue generated by the acquired business was approximately $6.9 million.
- Two FDIC loss-share agreements are scheduled to expire in the third quarter of 2014, with additional coverage expirations expected in 2015. The FDIC receivable was $74.8 million and the estimated clawback payable was $111.3 million at March 31, 2014.
- Acquired-loan accretion, repayments, credit adjustments and FDIC loss-share accounting are unpredictable and may cause significant earnings volatility. Management expects the contribution from FDIC-related noninterest income to decline as agreements expire.
- Key risks include interest-rate and margin pressure, borrower and collateral performance, deposit attrition as market rates rise, regulatory actions, FDIC loss-share reimbursement disputes, litigation, information security, dependence on third-party vendors and technology projects estimated to cost more than $100 million over several years.
- Unused commitments to extend credit totaled $6.11 billion, and standby letters of credit totaled $52.3 million. Mortgage-sale representation and warranty reserves were $3.6 million.
- Management stated that no material changes occurred in previously disclosed risk factors, other than continued emphasis on information security and technology-related risks. Management also stated that pending legal matters are not expected to have a material effect, although ultimate liabilities cannot be determined.
Important facts for investors to verify
- Whether declining acquired-loan accretion and the expiration of FDIC loss-share agreements produce further pressure on net interest income and noninterest income.
- The sustainability of originated-loan growth and whether loan pricing competition continues to reduce originated-loan yields.
- The trend in acquired nonaccrual loans, noncovered OREO, troubled debt restructurings and related allowance requirements.
- The timing and total cost of the 1st Financial branch closures and merger integration, including the estimated $6 million to $7 million of merger costs.
- The timing and outcome of FDIC reimbursement filings, agreement expirations and potential clawback payments.
- The effect of interest-rate changes on net interest income, securities valuations, deposits and capital ratios.
- Execution and cost risk associated with technology modernization, business continuity and disaster-recovery projects estimated to exceed $100 million.