First Citizens BancShares, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014, with fourth-quarter results included. The company is a bank holding company operating primarily through First-Citizens Bank & Trust Company. It operated 572 branches and employed approximately 6,440 people at year-end.
Business context and major transactions
- FCB acquired 1st Financial Services Corporation and Mountain 1st Bank & Trust on January 1, 2014, for $10.0 million, including $8.0 million to retire TARP securities.
- BancShares acquired First Citizens Bancorporation on October 1, 2014. The transaction added approximately $4.49 billion of loans, $2.01 billion of investment securities and $7.17 billion of deposits. BancShares issued approximately $564.2 million of common stock and paid $30.4 million in cash.
- FCB-SC, acquired through the Bancorporation transaction, merged into FCB on January 1, 2015, leaving FCB as BancShares’ single banking subsidiary.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net income | $138.6 million | $166.9 million | Down 17.0% |
| Earnings per share | $13.56 | $17.35 | Down 21.8% |
| Net interest income | $710.1 million | $740.2 million | Down 4.1% |
| Noninterest income | $340.4 million | $267.4 million | Up 27.3% |
| Noninterest expense | $846.3 million | $771.4 million | Up 9.7% |
| Net interest margin, taxable equivalent | 3.21% | 3.82% | Down 61 basis points |
| Return on average assets | 0.57% | 0.78% | Down 21 basis points |
| Return on average equity | 6.14% | 8.62% | Down 248 basis points |
- Fourth quarter: Net income was $62.9 million, or $5.24 per share, compared with $27.0 million, or $2.81 per share, in the fourth quarter of 2013. The increase primarily reflected the Bancorporation merger and a $29.1 million gain on Bancorporation shares previously owned by BancShares.
- Balance sheet: Total assets were $30.08 billion, loans and leases were $18.77 billion, deposits were $25.68 billion, and shareholders’ equity was $2.69 billion at December 31, 2014.
- Loan growth: Loans increased 42.9% year over year, primarily from the Bancorporation merger and $1.30 billion of originated loan growth. FDIC-assisted loans declined as expected.
- Credit quality: Net charge-offs declined to $29.6 million from $60.7 million. Nonperforming assets were $170.9 million, or 0.91% of loans, leases and other real estate owned, versus 1.25% in 2013.
- Allowance: The allowance for loan and lease losses was $204.5 million, or 1.09% of total loans, compared with 1.78% in 2013. The lower ratio primarily reflects acquisition accounting and fair-value discounts on acquired loans.
- Provision: The company recorded $0.6 million of provision expense in 2014, compared with a $32.3 million provision credit in 2013.
- Cash flow: Operating activities provided $182.2 million; investing activities used $17.7 million; financing activities used $94.0 million. Cash and due from banks increased to $604.2 million.
- Liquidity: Free liquidity was approximately $4.29 billion. The company had access to approximately $1.96 billion of additional secured FHLB borrowing capacity and $750.0 million of unsecured overnight borrowing lines.
- Debt: Short-term borrowings were $987.2 million and long-term obligations were $351.3 million at year-end. Trust preferred securities totaling $128.5 million were included in Tier 1 capital before regulatory phase-out adjustments.
- Capital: BancShares reported Tier 1 risk-based, total risk-based and leverage ratios of 13.61%, 14.69% and 8.91%, respectively, and remained well-capitalized.
Material changes versus the prior comparable period
- Net income declined despite higher noninterest income because of lower FDIC-assisted loan accretion, margin compression and higher operating expenses.
- Noninterest income benefited from the Bancorporation merger, the $29.1 million securities gain and higher cardholder, merchant, deposit-service and wealth-management fees.
- Noninterest expense increased by $74.9 million, including higher salaries, occupancy, equipment, advertising and $13.1 million of merger-related costs.
- FDIC-assisted loan accretion income fell to $95.6 million from $224.7 million, reflecting portfolio runoff and expiring loss-share protection.
- The company early adopted ASU 2014-01 for qualified affordable housing investments, resulting in a $2.4 million cumulative decrease to retained earnings as of January 1, 2012 and reclassification of related amortization into income tax expense.
Guidance, outlook, risks and unusual items
- Management expected originated loan growth to continue in 2015, subject to economic conditions and other external factors.
- Management cited improved economic conditions and credit quality but continued pressure from low interest rates, competitive loan pricing and the declining FDIC-assisted portfolio.
- The Bancorporation integration was expected to produce cost savings, efficiencies and other benefits, but the filing cautions that integration difficulties, customer attrition, employee losses or system-conversion problems could delay or prevent those benefits.
- The company’s core technology modernization program was expected to cost more than $130 million through 2016, with future equipment, depreciation and occupancy expenses expected to increase.
- FDIC loss-share protection was scheduled to expire for additional First Regional, Sun American and Williamsburg First National Bank assets during 2015. The company estimated $28.7 million of future FDIC cash receipts but recorded a $116.5 million payable for expected clawback payments.
- Basel III capital requirements became effective January 1, 2015 and trust preferred securities began losing Tier 1 capital treatment. Management stated that the company would remain well-capitalized on a pro forma basis excluding those securities.
- Key risks include interest-rate and net-interest-margin pressure, credit losses, real-estate collateral declines, concentrations in medical and dental lending, regulatory and CFPB requirements, cybersecurity and operational risks, litigation, liquidity pressures and goodwill impairment.
- On February 13, 2015, FCB agreed to purchase certain assets and assume certain liabilities of Capitol City Bank & Trust Company in Atlanta. Preliminary fair-value estimates were not available when the filing was issued.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The assessment excluded FCB-SC, which represented 28% of consolidated assets and 8% of consolidated revenue.
Important facts for investors to verify
- Whether the Bancorporation integration produces the anticipated cost savings and revenue retention after the 2014 acquisition.
- The sustainability of loan growth and whether originated-loan yields offset the continuing runoff of high-yield FDIC-assisted assets.
- The effect of Basel III implementation and the phase-out of $128.5 million of trust preferred securities from Tier 1 capital.
- The adequacy of the $204.5 million allowance as acquired-loan discounts decline and credit risk becomes more concentrated in the expanded portfolio.
- The timing and amount of FDIC reimbursements, loss-share expirations and the $116.5 million estimated clawback obligation.
- The impact of the more than $130 million technology investment program on future operating expenses and cash flow.
- The financial and operational implications of the February 2015 Capitol City Bank transaction, for which the filing did not provide clear preliminary valuation amounts.