First Citizens BancShares, Inc. 2019 Form 10-K Summary
Business context and reporting period
First Citizens BancShares, Inc. is a Delaware financial holding company operating primarily through First-Citizens Bank & Trust Company. The company provides retail and commercial banking, lending, deposits, mortgage, card, wealth-management and trust services through 574 branches in 19 states. The filing covers the fiscal year ended December 31, 2019, with fourth-quarter comparisons to the quarter ended December 31, 2018.
Total assets were $39.82 billion at December 31, 2019. The company employed approximately 7,176 people and was primarily concentrated in North Carolina and South Carolina.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net interest income | $1.311 billion | $1.209 billion | +8.5% |
| Noninterest income | $415.9 million | $400.1 million | +3.9% |
| Noninterest expense | $1.104 billion | $1.077 billion | +2.5% |
| Provision for loan and lease losses | $31.4 million | $28.5 million | +$3.0 million |
| Income before taxes | $592.0 million | $503.6 million | +17.6% |
| Net income | $457.4 million | $400.3 million | +14.3% |
| Earnings per share | $41.05 | $33.53 | +22.4% |
| Return on average assets | 1.23% | 1.15% | +8 basis points |
| Return on average equity | 12.88% | 11.69% | +119 basis points |
| Taxable-equivalent net interest margin | 3.77% | 3.69% | +8 basis points |
Fourth-quarter 2019 net income was $101.9 million, or $9.55 per share, compared with $89.5 million, or $7.62 per share, in the fourth quarter of 2018. Fourth-quarter net interest margin declined to 3.62% from 3.82% because of higher deposit costs and lower loan yields.
Net cash provided by operating activities was $540.6 million. Investing activities used $1.558 billion, primarily reflecting loan growth, securities purchases and acquisitions. Financing activities provided $1.067 billion, largely from deposit growth, partially offset by share repurchases and dividends.
Balance sheet, credit, debt and liquidity
- Loans and leases increased 13.2% to $28.88 billion; excluding $2.00 billion of current-year acquired loans, growth was 5.3%.
- Deposits increased 12.3% to $34.43 billion; excluding acquired deposits of $2.27 billion, growth was 4.8%.
- Investment securities were $7.17 billion, including $7.06 billion classified as available for sale.
- Total borrowings were $1.33 billion, up from $892.2 million, including $572.2 million of Federal Home Loan Bank borrowings and $588.6 million of long-term obligations.
- Shareholders’ equity increased to $3.586 billion from $3.489 billion.
- The allowance for loan and lease losses was $225.1 million, or 0.78% of total loans, compared with 0.88% in 2018.
- Net charge-offs to average loans were 0.11%; non-PCI net charge-offs were 0.12%.
- Nonperforming assets increased to $168.3 million, or 0.58% of loans, leases and other real estate owned, from $133.9 million, or 0.52%.
- BancShares remained well-capitalized, with a common equity Tier 1 and Tier 1 risk-based capital ratio of 10.86%, total risk-based capital of 12.12% and leverage capital of 8.81%.
- Liquidity included $3.57 billion of excess cash and unencumbered securities, $6.01 billion of additional FHLB borrowing capacity, $2.98 billion of lendable collateral capacity at the Federal Reserve and $582.7 million of available federal funds and other credit lines.
Material changes versus the prior comparable period
- Profitability improved, primarily because of loan growth, higher loan and investment yields, increased marketable-equity-security gains and higher fee income.
- Interest expense increased substantially, particularly on deposits, as funding costs rose. Management reported margin compression during 2019 despite the full-year margin increase.
- Noninterest expense increased due to personnel, equipment and merger-related costs. Merger-related expense rose to $17.2 million from $6.5 million.
- 2019 acquisitions of Biscayne Bancshares, First South Bancorp and Entegra added approximately $2.36 billion of assets and $2.33 billion of deposits at or near their acquisition dates and generated $113.1 million of goodwill.
- Marketable equity securities generated a $20.6 million gain in 2019 versus a $7.6 million loss in 2018. The $26.6 million gain on extinguishment of debt recognized in 2018 did not recur.
- The company repurchased 998,910 Class A shares for $450.8 million and paid $17.7 million of cash dividends, returning approximately $468.6 million to shareholders.
- Accumulated other comprehensive loss improved to $126.7 million from $235.2 million, largely due to improved securities valuations and the reclassification of transferred mortgage-backed securities.
Guidance, outlook, commentary, risks and unusual items
Management did not provide formal quantitative earnings guidance. It expects net interest income to continue increasing in 2020, but expects continued market-rate pressure on net interest margin, followed by stabilization later in the year. Management emphasized expense control, branch-network optimization, technology investment, digital delivery, cardholder services, wealth management and continued organic growth and acquisition opportunities.
- On January 1, 2020, the company adopted the CECL credit-loss standard. Management expected the aggregate allowance for credit losses to decrease approximately 15% to 20%, with an initial retained-earnings increase of $32 million to $42 million and a deferred-tax-asset decrease of $10 million to $15 million.
- Entegra was acquired on December 31, 2019. Certain branches, assets and liabilities were required to be divested as a condition of regulatory approval; the filing anticipated closing in 2020.
- A $112.4 million FDIC clawback liability was recorded at year-end, with estimated payments due in March 2020 and March 2021.
- On February 1, 2020, the company completed the $2.3 million acquisition of Community Financial Holding Company, which had reported $224.0 million of assets, $136.9 million of loans and $211.8 million of deposits at December 31, 2019.
- Key risks include credit deterioration, real-estate and junior-lien exposure, concentration in medical and dental lending, interest-rate and deposit-cost pressure, liquidity and funding availability, LIBOR transition, acquisition integration, goodwill impairment, cybersecurity, fraud, vendor dependence, regulatory compliance and litigation.
- Loans secured by real estate were $22.38 billion, or 77.48% of total loans. Medical, dental and related-industry loans were $5.16 billion, or 17.9% of total loans. Approximately 64.4% of the revolving mortgage portfolio was secured by junior liens.
- Management stated that existing legal proceedings were not expected to have a material effect on consolidated financial statements. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether loan and deposit growth remains organic and profitable after separating the effects of the 2019 acquisitions.
- Whether deposit pricing and lower market rates cause further net interest margin compression in 2020.
- The effect of CECL adoption on credit reserves, retained earnings, regulatory capital and future provision expense.
- Trends in nonperforming assets, troubled debt restructurings, charge-offs and the allowance coverage ratio.
- Execution of the Entegra-required branch divestitures and integration of the 2019 acquisitions and Community Financial acquisition.
- Settlement timing and final amount of the FDIC clawback liability.
- Exposure to real estate, junior-lien HELOCs, medical and dental borrowers, and geographic concentration in North Carolina and South Carolina.
- Impact of share repurchases and dividends on capital ratios, liquidity and per-share earnings.
- Progress in managing LIBOR transition, cybersecurity, third-party technology and other operational risks.