First Citizens BancShares, Inc. — 2018 First-Quarter Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc. is a financial holding company conducting banking operations through First-Citizens Bank & Trust Company. The filing covers the unaudited three months ended March 31, 2018, with comparisons to March 31, 2017 and December 31, 2017. The business focuses on commercial and retail banking, deposits, loans and leases, investment securities, treasury services, cardholder and merchant services, wealth management, and mortgage activities.
Financial performance and condition
| Metric | Q1 2018 | Comparable period | Change |
|---|---|---|---|
| Net income | $100.2 million | $67.6 million in Q1 2017 | Up 48.2% |
| Earnings per share | $8.35 | $5.63 in Q1 2017 | Up 48.3% |
| Net interest income | $284.4 million | $250.3 million in Q1 2017 | Up 13.6% |
| Net interest margin, taxable-equivalent | 3.57% | 3.25% in Q1 2017 | Up 32 basis points |
| Noninterest income | $122.7 million | $99.6 million in Q1 2017 | Up 23.1% |
| Noninterest expense | $268.1 million | $236.7 million in Q1 2017 | Up 13.3% |
| Income before taxes | $131.5 million | $105.1 million in Q1 2017 | Up 25.1% |
| Effective tax rate | 23.8% | 35.6% in Q1 2017 | Lower primarily due to the Tax Act |
- Return on average assets was 1.19% annualized, compared with 0.82% in Q1 2017; return on average equity was 12.20%, compared with 8.96%.
- Total assets were $34.44 billion at March 31, 2018, compared with $34.53 billion at December 31, 2017.
- Total loans and leases were $23.61 billion, broadly stable from year-end and up from $21.91 billion at March 31, 2017. Non-PCI loans increased to $22.91 billion, while PCI loans declined to $703.8 million.
- Total deposits were $29.97 billion, up $703.0 million, or 2.4%, from December 31, 2017 and up $966.5 million, or 3.3%, year over year.
- The allowance for loan and lease losses was $223.1 million, or 0.94% of total loans and leases. Net charge-offs were $6.3 million for non-PCI loans and $6.4 million in total, representing an annualized 0.11% of average loans and leases.
- Nonperforming assets were $138.9 million, or 0.59% of loans, leases, and other real estate owned, down from $144.3 million at December 31, 2017.
- Cash provided by operating activities was $458.4 million, compared with $137.6 million in Q1 2017. Investing activities used $454.7 million, and financing activities used $91.7 million. Cash and due from banks ended at $248.1 million.
- Liquidity included $4.63 billion of cash, excess Federal Reserve balances, and unencumbered securities; $6.17 billion of additional FHLB borrowing capacity; $2.16 billion of additional Federal Reserve borrowing capacity; and $665.0 million of available Federal Funds lines and other facilities.
- Long-term obligations declined to $194.4 million from $870.2 million at year-end, primarily following the prepayment of $675.0 million of FHLB borrowings. Short-term borrowings were $554.8 million.
- Shareholders’ equity was $3.37 billion. Basel III ratios remained above well-capitalized thresholds: Tier 1 risk-based capital 13.38%, common equity Tier 1 13.38%, total risk-based capital 14.70%, and leverage capital 10.02%.
Material changes versus prior periods
- Net income improved substantially from Q1 2017 and Q4 2017, when net income was $67.6 million and $54.4 million, respectively.
- Net interest income benefited from originated loan growth, higher loan and investment yields, lower interest expense, and the 2017 Guaranty acquisition. The margin increased from 3.34% in Q4 2017 and 3.25% in Q1 2017.
- Noninterest income included a $25.8 million gain on extinguishment of debt, principally the $25.7 million gain from extinguishing eight FHLB obligations totaling $675.0 million. Q1 2017 included a $12.0 million acquisition gain, which did not recur.
- Noninterest expense increased year over year because of higher personnel, occupancy, third-party processing, consulting, and other costs, including expenses associated with the Guaranty acquisition.
- The first-quarter provision for loan and lease losses was $7.6 million, compared with a $2.8 million provision credit in Q4 2017 and $8.2 million of expense in Q1 2017. The quarter included higher PCI provision expense based on updated cash-flow estimates.
- Accumulated other comprehensive loss increased to $230.3 million from $122.3 million at year-end, primarily because of higher unrealized losses on available-for-sale securities and adoption adjustments.
- Adoption of ASU 2016-01 increased retained earnings by $18.7 million and moved equity-security fair-value changes into net income. Adoption of ASU 2018-02 increased retained earnings by $31.3 million and reduced AOCI. Revenue recognition adoption changed presentation of certain cardholder and merchant processing costs but did not change net income.
- On May 1, 2018, after the reporting date, FCB completed the $113.7 million cash acquisition of HomeBancorp. At March 31, HomeBancorp had $912.6 million of assets, $597.7 million of loans, and $647.1 million of deposits.
- Also on May 1, 2018, mortgage-backed securities with $2.49 billion of amortized cost and $2.38 billion of fair value were transferred from available-for-sale to held-to-maturity securities.
Outlook, commentary, risks, contingencies, and unusual items
Management is positioning the balance sheet to benefit from a rising-rate environment through core deposits and selected loan growth. Priorities include expanding noninterest income, controlling expenses, optimizing the branch network, and enhancing technology and delivery channels. The Federal Reserve raised the federal funds target range by 25 basis points during the first quarter and indicated expectations for continued gradual increases, although the filing provides no formal earnings or revenue guidance.
- Key risks include changing interest rates, deposit migration and funding costs, credit losses, borrower repayment capacity, real estate collateral values, competition, regulatory actions, economic conditions, and execution of acquired businesses.
- Available-for-sale securities had $157.5 million of net pretax unrealized losses at March 31, 2018, including $158.9 million of gross unrealized losses. Management concluded that the securities were not other-than-temporarily impaired and stated it had the intent and ability to hold them for recovery.
- Active FDIC shared-loss agreements remained for First Regional Bank, Georgian Bank, and United Western Bank. The FDIC shared-loss payable was $102.5 million, with estimated clawback payments due in March 2020 and March 2021 for relevant agreements. Coverage interpretations and reimbursement requests may be disputed or delayed.
- Unused commitments to extend credit were $9.99 billion, standby letters of credit were $81.1 million, and unfunded affordable-housing commitments were $63.8 million.
- Legal actions arise in the ordinary course of business, including matters associated with acquired banks. Management stated that no current legal action is expected to have a material effect, although ultimate liabilities cannot be determined.
- Management stated that the allowance for loan and lease losses was adequate, but future adjustments may be required based on economic conditions, credit performance, estimates, and regulatory examinations.
- The company expects to adopt the current expected credit loss standard in the first quarter of 2020. The eventual impact remains uncertain and will depend on portfolio composition, credit quality, economic conditions, models, and forecasts.
Important facts for investors to verify
- Whether the $25.8 million debt-extinguishment gain is nonrecurring and how earnings perform excluding this item.
- The integration, purchase accounting, and earnings contribution of HomeBancorp following the May 1, 2018 closing.
- Deposit retention, funding costs, and the effect of additional Federal Reserve rate increases on net interest margin and liquidity.
- Trends in commercial real estate, consumer, revolving mortgage, and PCI loan credit quality, including nonaccruals, TDRs, charge-offs, and allowance coverage.
- The effect of higher unrealized securities losses and the transfer of $2.49 billion of mortgage-backed securities to held-to-maturity classification.
- The sustainability of higher noninterest expense and the ability to offset acquisition-related and technology-related costs with revenue growth.
- Future regulatory capital effects, FDIC shared-loss clawback obligations, and the eventual adoption impact of the current expected credit loss standard.