Business Context and Reporting Period
First Citizens BancShares, Inc., through First-Citizens Bank & Trust Company, provides commercial and retail banking, treasury, cardholder and merchant services, wealth management, mortgage, insurance and related financial services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, with comparisons to September 30, 2016 and, where relevant, June 30, 2017 or December 31, 2016.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Total interest income | $284.3 million | $246.5 million | $817.7 million | $733.0 million |
| Net interest income | $273.2 million | $235.8 million | $785.1 million | $700.8 million |
| Provision for loan losses | $7.9 million | $7.5 million | $28.5 million | $16.9 million |
| Noninterest income | $125.4 million | $117.8 million | $500.9 million | $363.4 million |
| Noninterest expense | $287.0 million | $267.2 million | $836.9 million | $777.2 million |
| Net income | $67.1 million | $51.4 million | $269.3 million | $172.8 million |
| Net income per share | $5.58 | $4.28 | $22.43 | $14.39 |
| Taxable-equivalent net interest margin | 3.35% | 3.10% | 3.29% | 3.14% |
- Q3 annualized return on average assets was 0.77%, and return on average equity was 8.10%. For the first nine months, the corresponding returns were 1.06% and 11.37%.
- Total assets were $34.58 billion at September 30, 2017, up from $32.99 billion at December 31, 2016. Loans and leases were $23.15 billion, up $1.41 billion, or 8.7% annualized, from year-end.
- Deposits were $29.33 billion, up $1.17 billion, or 4.2%, from December 31, 2016. Noninterest-bearing deposits increased to $11.48 billion from $10.13 billion.
- The allowance for loan and lease losses was $231.8 million, or 1.00% of total loans and leases. Nonperforming assets were $145.1 million, or 0.63% of loans, leases and other real estate owned.
- Short-term borrowings were $679.3 million and long-term obligations were $866.1 million at September 30, 2017. Shareholders’ equity was $3.31 billion.
- Operating activities generated $304.1 million of cash during the first nine months. Investing activities used $717.8 million, primarily reflecting loan growth and securities purchases; financing activities provided $170.3 million. Cash and due from banks ended at $296.4 million.
- Liquidity included $4.49 billion of cash in excess of reserves and unencumbered securities, $5.10 billion of additional FHLB borrowing capacity, $2.05 billion of additional Federal Reserve borrowing capacity and $665.0 million of available Federal Funds lines and other facilities.
- At September 30, BancShares reported a Tier 1 risk-based capital ratio of 12.95%, common equity Tier 1 ratio of 12.95%, total risk-based capital ratio of 14.34% and leverage ratio of 9.43%; management classified BancShares as well-capitalized.
Material Changes Versus Comparable Periods
- Q3 net income increased 30.5% year over year, while first-nine-month net income increased 55.9%. The year-to-date comparison benefited materially from acquisition gains.
- Net interest income increased 15.8% in Q3 and 12.0% year to date, driven by originated loan growth, acquired loans, improved asset yields, higher overnight investment income and higher rates.
- Noninterest income increased $137.5 million year to date, primarily because 2017 included $134.7 million of gains from the Guaranty Bank and Harvest Community Bank acquisitions. Excluding acquisition gains, noninterest income increased to $366.1 million from $357.5 million.
- Noninterest expense increased 7.7% year to date, mainly due to personnel costs, acquisition-related services, software and processing expenses. Q3 expense also included a $1.7 million release of the cardholder rewards reserve.
- Loan growth was primarily organic in the non-PCI portfolio, supplemented by Guaranty loans. Non-PCI loans increased to $22.31 billion from $20.93 billion at year-end, while PCI loans increased modestly to $834.2 million from $809.2 million.
- Net provision expense increased to $28.5 million year to date from $16.9 million. Third-quarter annualized net charge-offs were 0.08% of average loans, compared with 0.07% in Q3 2016.
- Nonperforming assets declined from $147.0 million at December 31, 2016 and $160.1 million at September 30, 2016, although non-PCI nonaccrual loans increased to $90.1 million from $82.3 million at year-end.
- Accumulated other comprehensive loss improved to $92.3 million from $135.2 million at year-end, primarily due to lower unrealized losses on available-for-sale securities.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No formal earnings or revenue guidance is provided. Management expects economic activity to expand at a moderate pace and intends to focus on core deposits, targeted loan growth, noninterest-income growth, expense control, branch optimization and technology enhancements.
- Management’s interest-rate strategy is positioned to benefit from rising rates. A 100-basis-point instantaneous increase was estimated to increase 24-month net interest income by 4.84%; a 200-basis-point increase by 6.77%; and a 300-basis-point increase by 5.38%.
- Management stated that the allowance was adequate at September 30, 2017, but future adjustments may be required as economic conditions, borrower performance, collateral values and regulatory examinations change.
- Guaranty Bank was acquired in May 2017, generating a preliminary $122.7 million acquisition gain; Harvest Community Bank was acquired in January 2017, generating a $12.0 million gain. The fair values remain subject to refinement for up to one year after each acquisition.
- Active FDIC shared-loss agreements remained for First Regional Bank, Georgian Bank and United Western Bank. The estimated FDIC clawback liability was $100.2 million, with payment dates in March 2020 and March 2021. Shared-loss protection covered approximately $70.4 million of residential loans.
- Unused commitments to extend credit were $9.43 billion, standby letters of credit were $75.3 million and unfunded affordable-housing commitments were $57.7 million.
- The company has forward-starting FHLB advances totaling $200.0 million scheduled to fund in June 2018, with maturities in 2026 and 2028.
- Management reported no material change in previously disclosed risk factors. It was evaluating the effects of Hurricanes Harvey and Irma in Texas, Florida and Georgia and had not identified a significant credit-quality impact requiring an allowance adjustment as of the filing.
- Risks include credit deterioration, borrower repayment capacity, real-estate values, interest-rate and liquidity changes, deposit attrition, regulatory actions, FDIC transaction obligations, acquisition integration, legal matters and competitive pressures. Management believes pending legal matters will not materially affect consolidated financial statements.
- The company expects to adopt significant accounting standards in future periods, including revenue recognition and financial-instrument changes in 2018, leases in 2019 and the current expected credit loss standard in 2020. The eventual impact of the credit-loss standard remains under evaluation.
Important Facts for Investors to Verify
- Earnings quality: Separate recurring operating performance from the $134.7 million of 2017 acquisition gains and other securities gains.
- Loan growth and credit risk: Review commercial and industrial growth, selected credit downgrades, nonaccrual trends, TDRs of $154.4 million and the adequacy of the $231.8 million allowance.
- Acquisition accounting: Confirm final purchase-accounting adjustments, loan accretion and the sustainability of earnings from Guaranty and HCB.
- Funding and liquidity: Monitor deposit retention, the mix of noninterest-bearing deposits, borrowing costs, pledged collateral and available borrowing capacity.
- Interest-rate sensitivity: Compare actual rate movements and deposit behavior with management’s modeled net-interest-income and economic-value-of-equity sensitivities.
- FDIC obligations: Track remaining shared-loss recoveries, the $100.2 million clawback liability and the scheduled 2020–2021 payments.
- Future accounting effects: Verify implementation plans and opening-equity effects for CECL, leases, financial instruments and revenue recognition standards.