Business Context and Reporting Period
First Citizens BancShares, Inc. is a financial holding company operating primarily through First-Citizens Bank & Trust Company. The unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to March 31, 2016 and December 31, 2016. Operations comprise commercial and retail banking, deposits, lending, treasury services, cardholder and merchant services, wealth management and mortgage activities.
Financial Performance and Condition
| Metric | Q1 2017 | Comparable period |
|---|---|---|
| Interest income | $260.9 million | $243.1 million in Q1 2016 |
| Net interest income | $250.3 million | $232.7 million in Q1 2016 |
| Provision for loan losses | $8.2 million | $4.8 million in Q1 2016 |
| Noninterest income | $127.3 million | $105.3 million in Q1 2016 |
| Noninterest expense | $264.3 million | $251.7 million in Q1 2016 |
| Income before taxes | $105.1 million | $81.5 million in Q1 2016 |
| Net income | $67.6 million | $52.1 million in Q1 2016 |
| Diluted earnings per share | $5.63 | $4.34 in Q1 2016 |
| Taxable-equivalent net interest margin | 3.25% | 3.18% in Q1 2016 |
| Return on average assets | 0.82% | 0.66% in Q1 2016 |
| Return on average equity | 8.96% | 7.17% in Q1 2016 |
- Total assets were $34.02 billion at March 31, 2017, up from $32.99 billion at December 31, 2016.
- Loans and leases were $21.91 billion, up $168.6 million from year-end 2016. Non-PCI loans were $21.06 billion and PCI loans were $848.8 million.
- Total deposits were $29.00 billion, up $841.4 million from December 31, 2016, driven by organic growth and deposits assumed in the Harvest Community Bank transaction.
- The allowance for loan and lease losses was $220.9 million, or 1.01% of total loans and leases. Net charge-offs were $6.1 million, or 0.11% of average loans and leases on an annualized basis.
- Nonperforming assets were $144.0 million, or 0.66% of loans, leases and other real estate owned, compared with $147.0 million at December 31, 2016.
- Shareholders’ equity was $3.10 billion. Basel III ratios remained above well-capitalized thresholds: common equity Tier 1 and Tier 1 risk-based capital were each 12.57%, total risk-based capital was 13.99% and the leverage ratio was 9.15%.
- Cash and due from banks totaled $502.3 million. Net cash provided by operating activities was $137.6 million, while investing activities used $981.4 million and financing activities provided $806.3 million. Cash and due from banks declined $37.5 million during the quarter.
- Available liquidity included $4.62 billion of cash in excess of reserve requirements and unencumbered securities, $4.91 billion of additional FHLB borrowing capacity, $1.98 billion of additional Federal Reserve borrowing capacity and $715.0 million of available Federal Funds lines and other facilities.
Material Changes Versus Comparable Periods
- Net income increased 29.9% year over year, primarily reflecting higher net interest income and noninterest income.
- Net interest income increased 7.6% year over year. Growth was supported by originated loan volume, higher investment securities income and higher overnight investment income; PCI loan income declined as the acquired loan portfolio continued to run off.
- Noninterest income increased 20.9% year over year. The quarter included a $12.0 million acquisition gain from Harvest Community Bank. Excluding acquisition gains, noninterest income increased to $115.3 million from $103.6 million.
- Noninterest expense increased 5.0% year over year, primarily from higher salaries, benefits, equipment and merchant processing costs.
- The provision for loan and lease losses increased from $4.8 million to $8.2 million, reflecting higher non-PCI provision expense and select commercial loan downgrades, partly offset by a $2.8 million PCI provision credit.
- Compared with December 31, 2016, the net interest margin increased 11 basis points, loans increased 3.2% on an annualized basis, deposits increased 3.0%, and nonperforming assets declined modestly.
- Other comprehensive income was $24.3 million, reducing accumulated other comprehensive loss to $110.9 million from $135.2 million at year-end.
Outlook, Commentary, Risks and Unusual Items
- Management’s strategy emphasizes core customer deposits, loan growth, expense control, branch-network optimization and technology improvements, with an interest-rate profile intended to benefit from a rising-rate environment.
- Management cited strengthening labor conditions, moderate economic expansion, stable housing demand and gradual future Federal Reserve rate increases. No quantitative earnings or revenue guidance was provided.
- The January 2017 FDIC-assisted Harvest Community Bank acquisition added approximately $85.1 million of loans, $14.5 million of securities and $121.8 million of deposits at fair value and generated a $12.0 million gain. Fair values remain preliminary and may be refined for up to one year after closing.
- FCB terminated the Venture Bank shared-loss agreement, paying $285 thousand to the FDIC and recording a $45 thousand loss. Shared-loss protection now remains only for approximately $75.9 million of single-family residential loans.
- Credit risk remains concentrated in commercial lending, including owner-occupied real estate loans to medical and medical-related borrowers. Management reported select commercial credit downgrades during the quarter.
- Investment securities had a $36.6 million pretax unrealized loss at quarter-end, primarily related to interest-rate changes. Management concluded that no other-than-temporary impairment existed.
- Key risks include borrower repayment and collateral values, economic conditions, interest-rate and liquidity risk, competition, regulatory actions, FDIC shared-loss interpretations, acquisition integration, legal matters and changes in deposit behavior.
- Unused commitments to extend credit were $9.03 billion, standby letters of credit were $80.3 million, and mortgage-sale representation and warranty reserves were $3.0 million. Management stated that pending legal matters were not expected to have a material effect.
- The company implemented a new enterprise resource planning system during the quarter and reported effective disclosure controls. Management reported no material changes to previously disclosed risk factors.
Investor Verification Priorities
- Verify the sustainability of earnings excluding the $12.0 million Harvest Community Bank acquisition gain and other acquisition-related items.
- Monitor commercial loan downgrades, provision expense, charge-offs, nonaccrual loans and the allowance coverage ratio.
- Assess the pace and quality of originated loan growth and the ongoing runoff of PCI loans and related accretion income.
- Review deposit growth, funding costs, short-term borrowing levels and available collateral-based liquidity.
- Evaluate sensitivity to future interest-rate changes, including the reported net interest income and economic value of equity simulations.
- Track the effects of reduced FDIC shared-loss protection and the remaining $98.0 million FDIC clawback liability.
- Confirm the final purchase accounting valuations and any subsequent adjustments related to the Harvest Community Bank acquisition.