Business Context and Reporting Period
First Citizens BancShares, Inc. is a Delaware financial holding company operating primarily through First-Citizens Bank & Trust Company. The bank provides retail and commercial banking, lending, deposits, mortgage, wealth management, investment and payment services through 545 branches in 21 states. This Form 10-K covers the fiscal year ended December 31, 2017, including fourth-quarter results.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets, period end | $34.53 billion | $32.99 billion | +4.7% |
| Net interest income | $1.060 billion | $944.7 million | +12.2% |
| Noninterest income | $641.0 million | $488.1 million | +31.3% |
| Income before taxes | $543.7 million | $351.1 million | +54.9% |
| Net income | $323.8 million | $225.5 million | +43.6% |
| Earnings per share | $26.96 | $18.77 | +43.6% |
| Return on average assets | 0.94% | 0.70% | +24 basis points |
| Return on average equity | 10.10% | 7.51% | +259 basis points |
| Taxable-equivalent net interest margin | 3.30% | 3.14% | +16 basis points |
- Total loans and leases rose 8.6% to $23.60 billion, driven by $1.46 billion of organic non-PCI loan growth and loans acquired from Guaranty Bank.
- Deposits increased 3.9% to $29.27 billion, primarily from demand, checking and savings growth and acquired deposits.
- The allowance for loan and lease losses was $221.9 million, or 0.94% of loans, versus 1.01% in 2016. Net charge-offs were $22.6 million, or 0.10% of average loans.
- Nonperforming assets declined to $144.3 million, or 0.61% of loans, leases and other real estate owned, from $147.0 million, or 0.67%.
- Shareholders’ equity increased to $3.33 billion from $3.01 billion. Book value per share was $277.60.
- Short-term borrowings were $693.8 million and long-term obligations were $870.2 million at year end. Deposits remained the primary funding source.
- Operating cash flow was $351.7 million. Investing activities used $668.7 million, principally due to loan growth and securities purchases, while financing activities provided $113.4 million.
- Available liquidity included $3.70 billion of cash and unencumbered securities, $5.24 billion of additional FHLB borrowing capacity, $2.08 billion of Federal Reserve lendable collateral and $665.0 million of available unsecured Federal Funds lines.
- BancShares remained well-capitalized, with a 12.88% common equity Tier 1 ratio, 14.21% total risk-based capital ratio and 9.47% leverage ratio.
Material Changes Versus the Prior Comparable Period
- Net income increased $98.3 million, supported by higher net interest income, stronger fee income, lower loan-loss provision expense and acquisition gains.
- Noninterest income included $134.7 million of acquisition gains from Harvest Community Bank and Guaranty Bank, compared with $5.8 million of acquisition gains in 2016. Excluding acquisition gains, noninterest income increased approximately $24.0 million.
- Noninterest expense increased 7.9% to $1.13 billion, primarily due to higher personnel, merchant-processing, third-party processing, equipment, consulting and merger-related costs.
- Loan-loss provision expense decreased to $25.7 million from $32.9 million, reflecting favorable loss factors and credit trends.
- 2017 acquisitions added approximately $1.10 billion of acquired assets and generated a combined $134.7 million gain. Guaranty contributed a $122.7 million gain and HCB contributed a $12.0 million gain.
- The fourth quarter produced net income of $54.4 million, or $4.53 per share, versus $52.7 million, or $4.39 per share, in the fourth quarter of 2016. Fourth-quarter results included a $25.8 million tax expense related to the Tax Cuts and Jobs Act.
Guidance, Outlook, Risks and Unusual Items
- Management expected the 2018 effective tax rate to be approximately 23%, subject to the mix of income, expenses and discrete tax items.
- Management planned to pursue organic growth and acquisitions, expand fee-based businesses, improve technology and delivery channels, optimize the branch network and control operating costs.
- FCB agreed to acquire HomeBancorp for approximately $113.6 million in cash. Closing was expected by the second quarter of 2018, subject to shareholder and regulatory approvals. HomeBancorp reported approximately $954.9 million of assets, $699.4 million of deposits and $637.5 million of loans as of September 30, 2017.
- In January and February 2018, BancShares prepaid $675.0 million of FHLB advances and recognized aggregate net gains of $25.7 million.
- Key risks include credit exposure to real estate, junior-lien home equity lines and medical, dental and related borrowers; interest-rate and deposit repricing risk; cybersecurity and fraud; reliance on vendors; regulatory and capital requirements; acquisition integration; litigation; and changes in tax and accounting standards.
- Approximately 64.7% of the $2.77 billion revolving mortgage portfolio was secured by junior liens, and approximately 20.6% of total loans were to medical, dental or related borrowers.
- Active FDIC shared-loss agreements remained for First Regional, Georgian Bank and United Western. The related FDIC clawback liability was $101.3 million, with estimated payments primarily due in 2020 and 2021.
- The company had $9.63 billion of unused loan commitments, $81.5 million of standby letters of credit and $61.8 million of affordable-housing commitments.
- Management and the independent auditor concluded that internal control over financial reporting was effective; however, the 2017 assessment excluded HCB and Guaranty because they were acquired during the year.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $134.7 million of acquisition gains and the $25.8 million Tax Act-related tax charge.
- Assess whether loan and deposit growth can continue without materially higher funding costs or deterioration in credit quality.
- Review exposure to junior-lien mortgages, real estate-secured loans and medical and dental borrowers, including delinquency and loss trends.
- Evaluate the effect of the HomeBancorp acquisition, subsequent FHLB prepayments and related acquisition or refinancing gains.
- Monitor the $101.3 million FDIC clawback liability and the remaining shared-loss agreements.
- Confirm the implementation effects of the 2018 financial-instrument and revenue standards, the 2019 lease standard and the 2020 expected-credit-loss standard.
- Verify that the company and FCB remain above Basel III minimums and well-capitalized requirements while funding growth and paying dividends.