First Citizens BancShares, Inc. — Q1 2015 Form 10-Q
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 company provides commercial banking, treasury, cardholder and merchant services, wealth management, mortgage and other financial services through 573 branches as of May 7, 2015. The filing covers the unaudited quarter ended March 31, 2015.
Results include the October 2014 acquisition of First Citizens Bancorporation and the February 13, 2015 FDIC-assisted acquisition of Capitol City Bank & Trust Company of Atlanta, Georgia.
Financial performance and condition
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Total assets | $30.85 billion at March 31, 2015 | $30.08 billion at December 31, 2014; $22.15 billion at March 31, 2014 |
| Net interest income | $220.2 million | $160.9 million in Q1 2014 |
| Net interest margin, taxable equivalent | 3.18% | 3.26% in Q1 2014; 3.09% in Q4 2014 |
| Net income | $63.8 million | $22.5 million in Q1 2014; $62.9 million in Q4 2014 |
| Diluted or reported net income per share | $5.31 | $2.34 in Q1 2014; $5.24 in Q4 2014 |
| Return on average assets | 0.85% | 0.42% in Q1 2014 |
| Return on average equity | 9.50% | 4.36% in Q1 2014 |
| Loans and leases | $19.09 billion | $18.77 billion at December 31, 2014; $13.47 billion at March 31, 2014 |
| Deposits | $26.30 billion | $25.68 billion at December 31, 2014; $18.76 billion at March 31, 2014 |
| Allowance for loan and lease losses | $205.6 million, or 1.08% of loans | $204.5 million, or 1.09%, at December 31, 2014 |
| Nonperforming assets | $183.0 million, or 0.95% of loans, leases and OREO | $170.9 million, or 0.91%, at December 31, 2014; $185.4 million, or 1.37%, in Q1 2014 |
Interest income was $231.5 million and interest expense was $11.3 million. The provision for loan and lease losses was $5.8 million, compared with a $1.9 million credit in Q1 2014. Noninterest income was $145.4 million, including a $37.6 million acquisition gain and $5.1 million of securities gains. Noninterest expense was $258.3 million, up from $191.0 million, primarily because of the Bancorporation merger and related higher staffing, employee benefits, occupancy, equipment and processing costs. The effective tax rate was 37.1%.
Operating cash flow was $62.7 million, compared with $63.1 million in Q1 2014. Investing activities used $589.3 million, principally reflecting purchases of securities, higher overnight investments and business acquisition activity. Financing activities provided $418.3 million, primarily from deposit growth and $120.0 million of new long-term obligations. Cash and due from banks ended at $495.9 million.
Capital remained above regulatory minimums under Basel III. BancShares reported a 12.91% Tier 1 risk-based capital ratio, 12.76% common equity Tier 1 ratio, 14.40% total risk-based capital ratio and 8.89% leverage ratio. Free liquidity was $4.81 billion, with $2.01 billion of additional FHLB borrowing capacity and $715.0 million of federal funds lines and other borrowing facilities.
Material changes versus prior comparable periods
- Net income increased $41.3 million year over year, primarily due to the Bancorporation merger and the $37.6 million CCBT acquisition gain.
- Net interest income rose 36.8% year over year, mainly because the Bancorporation transaction added substantial loans, securities and deposits. The margin nevertheless declined eight basis points because of loan-yield compression and runoff of higher-yielding PCI loans.
- Total loans increased $322.3 million, or 1.7%, from December 31, 2014. Non-PCI loans rose $261.4 million, while PCI loans increased $60.8 million largely because of the CCBT acquisition.
- Noninterest income more than doubled year over year, while noninterest expense increased 35.2%. Excluding unusual acquisition and securities-related items, the filing does not present a single normalized earnings measure.
- Nonperforming assets increased sequentially, mainly because of a loan acquired in the Bancorporation merger and certain residential and revolving mortgage loans moving to nonaccrual status. Total troubled debt restructurings increased to $157.0 million from $151.5 million at year-end but declined materially from $231.0 million a year earlier.
- Accumulated other comprehensive loss improved to $35.4 million from $53.0 million at year-end, principally due to higher unrealized gains on available-for-sale securities.
Guidance, outlook, commentary, risks and unusual items
- Management expects originated loan growth to continue during the remainder of 2015, while noting that low interest rates, competitive loan pricing and PCI loan runoff may pressure margins and earnings.
- The CCBT acquisition gain is preliminary; fair-value estimates may be refined for up to one year and could positively or negatively affect future results.
- Management considers the allowance adequate, but future adjustments may be required because of economic conditions, borrower performance, collateral values or regulatory examinations.
- Loss-share protection for certain Sun American Bank and First Regional Bank assets expired at the beginning of Q2 2015; protection for certain Williamsburg First National Bank assets is scheduled to expire at the beginning of Q4 2015. The company must comply with agreement requirements to preserve reimbursement rights.
- Estimated FDIC clawback liability was $118.6 million. The FDIC loss-share receivable was $21.3 million and may be affected by disputes, reimbursement delays or noncompliance.
- Merger-related costs for the Bancorporation transaction were estimated at $28 million to $32 million in total. First-quarter 2015 merger-related expense was $2.8 million.
- Key risks include merger integration, deposit retention, interest-rate changes, credit losses, real-estate values, regulatory actions, cybersecurity and vendor disruptions, technology-project costs, litigation and operational failures.
- The company expected no pension contributions during the remainder of 2015. Its 2011 interest-rate swap hedged $93.5 million of variable-rate trust-preferred debt through June 2016.
Important facts for investors to verify
- Separate recurring earnings from the $37.6 million CCBT gain, $5.1 million securities gains and other acquisition-related effects.
- Track whether organic loan growth continues after excluding acquired portfolios and whether PCI loan runoff further reduces net interest margin.
- Monitor nonperforming assets, nonaccrual loans, TDRs, charge-offs and allowance coverage as loss-share agreements expire.
- Assess the sustainability of the 3.18% net interest margin in a prolonged low-rate environment and under rising-rate scenarios.
- Review Bancorporation integration progress, remaining merger costs, technology spending and realization of expected cost savings.
- Confirm the company’s continuing capital and liquidity cushions under Basel III, including the phaseout of trust-preferred securities from Tier 1 capital.