First Citizens BancShares, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2014. First Citizens BancShares is a financial holding company operating primarily through First-Citizens Bank & Trust Company, providing commercial banking, deposit, lending, treasury, cardholder, merchant, wealth management and related services.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total interest income | $177.6 million | $192.6 million | $528.3 million | $607.2 million |
| Net interest income | $166.2 million | $179.2 million | $492.9 million | $563.6 million |
| Noninterest income | $77.4 million | $71.9 million | $204.0 million | $194.4 million |
| Noninterest expense | $201.8 million | $192.1 million | $591.9 million | $575.1 million |
| Net income | $26.4 million | $41.0 million | $75.3 million | $140.5 million |
| Diluted earnings per share | $2.74 | $4.26 | $7.83 | $14.60 |
| Net interest margin | 3.26% | 3.67% | 3.27% | 3.90% |
| Return on average assets | 0.47% | 0.76% | 0.46% | 0.89% |
| Return on average equity | 4.85% | 8.32% | 4.74% | 9.79% |
At September 30, 2014, total assets were $21.94 billion, total deposits were $18.41 billion, shareholders’ equity was $2.17 billion, and total loans and leases were $13.80 billion. Originated loans increased 5.8% from December 31, 2013, while acquired loans declined 3.2% due to portfolio runoff, partly offset by the 1st Financial acquisition.
Cash and due from banks totaled $401.0 million at September 30, 2014, compared with $533.6 million at December 31, 2013. During the first nine months, operating activities provided $67.5 million of cash, investing activities used $181.8 million, and financing activities used $18.3 million. Free liquidity was $3.36 billion, including cash, overnight investments and unpledged available-for-sale securities.
Short-term borrowings were $798.2 million and long-term obligations were $313.8 million. The decline in long-term obligations primarily reflected reclassifications of $195.0 million to short-term borrowings as maturities approached. FHLB advances were $250.3 million, with approximately $1.23 billion of additional secured borrowing capacity and $690.0 million of unsecured borrowing access.
Capital remained strong: BancShares reported a 14.26% Tier 1 risk-based capital ratio, 15.60% total risk-based capital ratio and 9.79% Tier 1 leverage ratio. The company paid quarterly cash dividends of $0.30 per share, or $0.90 per share year to date.
Material changes versus comparable periods
- Q3 net income decreased 35.7% year over year; nine-month net income decreased 46.4%.
- Net interest income declined 7.2% in the quarter and 12.6% year to date. Acquired-loan accretion income fell to $29.1 million in Q3 from $47.9 million and to $89.8 million year to date from $179.8 million, reflecting continued acquired-loan runoff.
- Net interest margin declined to 3.26% from 3.67% in Q3 2013 and to 3.27% from 3.90% year to date, primarily because higher-yielding acquired loans were replaced by lower-yielding originated loans.
- Noninterest income increased 7.6% in Q3 and 4.9% year to date. The improvement included higher processing fees and a smaller unfavorable adjustment to the FDIC loss-share receivable, partly offset by lower mortgage income and acquired-loan recoveries.
- Noninterest expense increased 5.0% in Q3 and 2.9% year to date, driven by salaries, occupancy, merger costs, merchant and card processing, and advertising. Lower pension and collection expenses partially offset the increases.
- The provision for loan and lease losses was $1.5 million in Q3 2014 versus a $7.7 million credit in Q3 2013. Year-to-date provision was a $7.7 million credit versus a $39.5 million credit in 2013, reflecting fewer acquired-loan impairment reversals.
- Credit quality improved overall. Nonperforming assets declined to $157.1 million, or 1.13% of loans, leases and other real estate, from $195.1 million, or 1.48%, a year earlier. Originated annualized net charge-offs declined to 0.11% from 0.28%.
Outlook, commentary, risks and unusual items
- Management expects originated-loan growth to continue through the remainder of 2014, supported by improving economic conditions, although loan demand remains affected by economic and competitive factors.
- Low interest rates, competitive loan and deposit pricing, and the runoff of acquired loans are expected to continue constraining margins and earnings. Management expects the effect of acquired-loan runoff to become less significant over time.
- On October 1, 2014, BancShares completed its merger with First Citizens Bancorporation, Inc. FCB-SC was expected to merge into FCB during the first quarter of 2015. The transaction is expected to create diversification, cost savings and operating efficiencies; total merger costs were estimated at $28 million to $32 million. Purchase accounting remained incomplete at the filing date.
- The January 1, 2014 merger with 1st Financial Services added $316.3 million of loans, $237.4 million of investment securities, $631.9 million of deposits, $24.5 million of goodwill and $3.8 million of core deposit intangibles.
- Loss-share protection for certain TVB and Venture Bank assets expired during Q3. Protection for specified Sun American Bank and all First Regional Bank assets was expected to expire in Q1 2015. The FDIC loss-share receivable was $45.1 million, while the estimated FDIC clawback payable was $116.9 million.
- Unused commitments to extend credit were $6.19 billion and standby letters of credit were $59.8 million. Mortgage-sale representation and warranty reserves were $2.9 million.
- Management identified merger integration, information security, technology-project execution, vendor dependence, operational failures, credit deterioration, interest-rate movements, deposit attrition and regulatory actions as material risks. Technology modernization projects had an estimated total spend of approximately $130 million.
- Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the final purchase accounting, consideration transferred, goodwill, fair-value marks and integration costs for the Bancorporation merger.
- Monitor the effect of acquired-loan runoff and FDIC loss-share expirations on net interest income, credit provisions, capital and noninterest income.
- Assess whether originated-loan growth and improved asset quality offset continued margin compression and higher operating costs.
- Review the adequacy of the $200.9 million loan-loss allowance, including management’s enhanced troubled-debt-restructuring impairment methodology.
- Track liquidity, deposit retention, short-term borrowing levels and the availability of FHLB and other secured funding.
- Evaluate execution and cost risk associated with the Bancorporation systems conversion and the approximately $130 million technology program.