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 bank provides commercial and consumer lending, deposit and treasury services, cardholder and merchant services, wealth management, mortgage and insurance services, and operates 412 branches. This unaudited Form 10-Q covers the three months ended March 31, 2013, with comparative information for the three months ended March 31, 2012.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total interest income | $220.6 million | $246.8 million | Down 10.6% |
| Net interest income | $204.9 million | $221.0 million | Down 7.3% |
| Provision for loan losses | $(18.6) million credit | $30.7 million expense | Favorable $49.3 million |
| Noninterest income | $57.5 million | $46.9 million | Up 22.5% |
| Noninterest expense | $194.4 million | $183.3 million | Up 6.0% |
| Income before taxes | $86.6 million | $53.8 million | Up 60.9% |
| Net income | $55.6 million | $35.5 million | Up 56.6% |
| Net income per share | $5.78 | $3.45 | Up 67.5% |
| Annualized return on average assets | 1.07% | 0.68% | Up 39 basis points |
| Annualized return on average equity | 12.01% | 7.63% | Up 438 basis points |
| Taxable-equivalent net yield on interest-earning assets | 4.35% | 4.80% | Down 45 basis points |
All dollar amounts above are approximate and converted from the filing's thousands of dollars presentation.
- Total assets were $21.35 billion at March 31, 2013, compared with $21.23 billion at December 31, 2012 and $21.23 billion at March 31, 2012.
- Total loans and leases were $13.13 billion, including $1.62 billion covered by FDIC loss-share agreements and $11.51 billion not covered. Noncovered loans were broadly stable year over year but declined $67.0 million from year-end.
- Investment securities totaled approximately $5.28 billion, up from $4.46 billion a year earlier.
- Total deposits were $18.06 billion, up 1.7% year over year and down slightly from year-end. Short-term borrowings were $573.1 million and long-term obligations were $444.3 million.
- Cash and due from banks totaled $460.2 million, while overnight investments totaled $954.2 million. Immediately available balance-sheet liquidity was approximately $2.61 billion, compared with $1.40 billion at December 31, 2012.
- Operating cash flow was $73.3 million, compared with $84.5 million in Q1 2012. Investing activities used $232.4 million, and financing activities used $20.4 million. Cash and due from banks declined $179.5 million during the quarter.
- Shareholders' equity was $1.92 billion at March 31, 2013. The company paid a $0.30 per-share dividend and repurchased 1,973 Class A shares during the quarter.
- Capital remained strong: the Tier 1 risk-based capital ratio was 14.50%, total risk-based capital was 16.19%, and the Tier 1 leverage ratio was 9.36%. Management stated that the bank remained well-capitalized.
Material Changes Versus the Prior Comparable Period
- Net income increased $20.1 million, primarily because the loan-loss provision shifted from a $30.7 million expense to an $18.6 million credit and noninterest income increased. These benefits were partly offset by lower net interest income and higher operating expenses.
- Net interest income declined $16.1 million as average loan balances fell $532.4 million and asset yields compressed. Acquired-loan accretion income was $79.9 million, compared with $64.9 million in Q1 2012, but management expects accretion to become less significant as acquired loans run off.
- Noninterest income increased $10.6 million. The improvement included a net gain of approximately $5.5 million from selling rights and obligations related to client bank processing service agreements. Processing-fee income itself declined 34.4% to $5.6 million and is expected to remain lower in future periods.
- Noninterest expense rose $11.0 million, including higher employee benefits, pension expense, third-party processing costs and $1.4 million of fixed-asset writedowns related to the processing-services sale.
- Nonperforming assets declined to $273.2 million, or approximately 2.1% of loans, leases and other real estate, from $549.1 million, or 4.0%, a year earlier. Nonperforming assets not covered by FDIC loss-share agreements were $127.4 million.
- The allowance for loan and lease losses declined to $273.0 million from $319.0 million at year-end and $272.5 million a year earlier. The noncovered allowance ratio was 1.53%, versus 1.62% a year earlier; the covered-loan allowance was $96.5 million.
- Covered loans continued to decline, falling 25.8% from March 31, 2012. The FDIC receivable for loss-share agreements declined to $195.9 million from $492.4 million a year earlier, while the FDIC clawback payable was $98.9 million.
Guidance, Outlook, Commentary and Risks
- No formal earnings or revenue guidance is provided. Management expects noncovered loan growth to remain sluggish over the next several quarters because of weak loan demand and economic uncertainty.
- Low interest rates, competitive pricing and a shift from loans into lower-yielding securities are expected to continue pressuring net interest margins. Investment-security yields are expected to remain low until the Federal Reserve raises benchmark rates.
- Acquired-loan accretion, FDIC receivable adjustments and covered-loan impairment estimates can produce significant quarter-to-quarter earnings volatility and are difficult to predict.
- Management expects technology modernization costs of approximately $100 million from 2013 through 2016. Related depreciation, maintenance and other expenses are expected to increase as implementation proceeds.
- Key credit risks include weak real estate markets, junior-lien revolving mortgage loans, concentrations in real estate-secured lending and medical-related borrowers, and potential further deterioration in collateral values. Approximately 65.1% of revolving mortgage balances were secured by junior liens.
- FDIC reimbursements are subject to contractual requirements, FDIC review, possible delays or disallowance, and differing interpretations of loss-share coverage. The company disputes claims by the Small Business Administration concerning certain FDIC payments related to SBA-guaranteed loans; the outcome and potential loss cannot be determined.
- United Western Bank litigation against federal regulators remained subject to appeal. The filing states that the effect on First Citizens or acquired assets is unclear.
- Trust-preferred securities are being phased out of Tier 1 capital under the Dodd-Frank Act. Management estimated that excluding all remaining trust-preferred securities would reduce, but not eliminate, well-capitalized ratios.
- Additional risks include regulatory changes, Basel III implementation, deposit attrition, interest-rate exposure, cybersecurity and vendor risks, litigation, goodwill impairment, and the ability of the parent company to receive dividends from its bank subsidiary.
Important Facts for Investors to Verify
- Whether the Q1 earnings increase is sustainable after excluding the unusual processing-services gain, FDIC-related adjustments and the unusually favorable covered-loan provision credit.
- The future level and duration of acquired-loan accretion income and related FDIC receivable amortization.
- Trends in noncovered loan growth, nonaccrual loans, junior-lien performance, charge-offs and allowance adequacy.
- The timing and final cost of the $100 million technology modernization program.
- The effect of trust-preferred capital phase-outs and final Basel III requirements on capital ratios and strategic flexibility.
- The collectability and timing of the $195.9 million FDIC receivable, the $98.9 million clawback payable and expected future FDIC reimbursements.
- Developments in the SBA claims and United Western litigation, including any potential effect on loss-share economics or acquired assets.