FIRST CITIZENS BANCSHARES INC quarterly report, Q3 FY2013

First Citizens BancShares, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2013. First Citizens BancShares is a financial holding company operating primarily through First-Citizens Bank & Trust Company, with 397 branches as of November 7, 2013. The bank provides commercial banking, deposit, lending, treasury, cardholder, merchant, wealth management and related services.

Financial performance and condition

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Net interest income	$179.2 million	$215.4 million	$563.6 million	$651.7 million
Provision for loan losses	$(7.7) million	$17.6 million	$(39.5) million	$78.0 million
Noninterest income	$71.9 million	$51.8 million	$194.4 million	$156.1 million
Noninterest expense	$192.1 million	$190.1 million	$575.1 million	$568.2 million
Net income	$41.0 million	$39.5 million	$140.5 million	$112.6 million
Net income per share	$4.26	$3.85	$14.60	$10.96
Net yield on interest-earning assets	3.67%	4.51%	3.90%	4.63%

Profitability: Q3 net income increased 3.7% year over year; nine-month net income increased 24.8%. Annualized return on average assets was 0.76% in Q3 and 0.89% for nine months; return on average equity was 8.32% and 9.79%, respectively.
Balance sheet: Total assets were $21.51 billion at September 30, 2013, compared with $21.28 billion at December 31, 2012. Shareholders’ equity rose to $1.98 billion from $1.86 billion.
Loans: Total loans and leases were $13.07 billion, down from $13.39 billion at year-end. Originated loans increased 2.7% to $11.88 billion, while acquired loans declined 34.3% to $1.19 billion.
Deposits and debt: Deposits were $18.06 billion, broadly stable from year-end. Short-term borrowings were $604.4 million and long-term obligations were $511.0 million.
Cash flow: Nine-month operating activities provided $266.3 million; investing activities used $407.2 million; financing activities provided $70.3 million. Cash and due from banks ended at $569.1 million.
Liquidity: Free liquidity was $3.84 billion at September 30, 2013, including cash, overnight investments and unpledged available-for-sale securities. The bank also reported $1.07 billion of additional FHLB borrowing capacity and $665.0 million of unsecured borrowing access.
Capital: Tier 1 risk-based capital was 15.04%, total risk-based capital was 16.54% and the tier 1 leverage ratio was 9.84%, each above well-capitalized requirements. The tier 1 common equity ratio excluding trust preferred securities was 14.36%.

Material changes versus comparable periods

Net interest income declined 16.8% in Q3 and 13.5% for the first nine months, primarily because acquired-loan balances and related discount accretion declined, while asset yields remained low. Q3 accretion income was $47.9 million versus $67.6 million in Q3 2012.
The provision for loan losses shifted to a $7.7 million credit in Q3 from $17.6 million of expense, and to a $39.5 million credit for nine months from $78.0 million of expense. The improvement primarily reflected reversals of acquired-loan impairment and lower post-acquisition deterioration.
Noninterest income increased 38.7% in Q3 and 24.6% year to date, driven by acquired-loan recoveries, stronger merchant and cardholder services, mortgage income and wealth management revenue. These benefits were partly offset by larger unfavorable FDIC receivable adjustments and lower processing-services fees following the sale of a substantial portion of that business.
Noninterest expense increased 1.1% in Q3 and 1.2% year to date. Higher employee benefits, pension expense, consulting, advertising and technology costs were partly offset by lower foreclosure-related expenses.
The effective tax rate increased to 38.5% in Q3 and 36.9% for nine months, compared with 33.6% and 30.3%, respectively, primarily because North Carolina tax-rate reductions required a deferred tax asset revaluation. The 2012 nine-month rate also benefited from a $6.4 million state-tax audit credit.
Nonperforming assets declined to $195.1 million, or 1.48% of loans, leases and other real estate, from $310.4 million, or 2.29%, at December 31, 2012. Total troubled debt restructurings declined to $209.7 million from $333.2 million.
The allowance for loan and lease losses was $237.8 million at September 30, 2013, including $178.3 million for originated loans and $59.5 million for acquired loans. Management stated that the allowance was adequate, but noted that future additions could be required.

Guidance, outlook, risks and unusual items

Management observed improving economic conditions and stronger loan demand in Q3. It expected originated-loan growth to continue through the remainder of 2013 and expressed hope for improved growth in 2014, while noting that economic deterioration or other external factors could change this outlook.
Acquired-loan accounting and FDIC loss-share arrangements create significant earnings volatility. Future accretion income, provision reversals, loan recoveries and FDIC receivable adjustments are affected by unpredictable repayments, revised cash-flow estimates and credit performance.
The FDIC receivable was $100.6 million, including $28.5 million expected from future reimbursements and $72.1 million expected to be recovered through prospective amortization. The related FDIC clawback payable was $107.4 million. Reimbursements may be delayed or disallowed for noncompliance, and covered losses may fall outside applicable agreement periods.
In August 2013, FCB entered into an agreement to merge Mountain 1st Bank & Trust Company and its parent, 1st Financial Services Corporation, into FCB. Closing was expected by the first quarter of 2014, subject to regulatory approvals, shareholder approval and other conditions. Cash consideration was $10.0 million.
The company began a core technology and business-process modernization program expected to continue through 2016, with total costs estimated to exceed $100 million. Future equipment, depreciation, maintenance and occupancy expenses are expected to increase.
Key credit risks include real-estate concentration, junior-lien revolving mortgage loans, medical and dental industry exposure, borrower repayment capacity, collateral values and continued unemployment. Approximately 83.7% of originated loans were secured by real estate, and medical-related borrowers represented 27.6% of originated loans.
Interest-rate risk remains material. Management estimated that a 200-basis-point rise in rates would increase net interest income by 6.5% over 24 months; the estimated economic value of equity would decline 0.1% under that scenario.
Trust preferred securities totaling $93.5 million were included in tier 1 capital but will be phased out beginning in 2015 and fully excluded by 2016. Management indicated the company would remain well-capitalized on a pro forma basis.
Other risks include changing banking regulation, Basel III implementation, FDIC and regulatory oversight, liquidity and deposit migration, litigation, cybersecurity, vendor dependence, operational disruptions, goodwill impairment and competition.

Most important facts for investors to verify

Whether future earnings can be sustained without large acquired-loan accretion, provision credits or acquired-loan recoveries.
The durability of originated-loan growth and the effect of low interest rates on loan yields and net interest margin.
Trends in nonperforming assets, charge-offs, troubled debt restructurings and the adequacy of the allowance for loan and lease losses.
The timing and collectability of FDIC loss-share reimbursements, as well as potential clawback obligations and agreement expirations.
The financial and regulatory impact of the proposed Mountain 1st Bank acquisition.
Execution risk and total spending for the technology modernization program, estimated to exceed $100 million.
The impact of trust-preferred capital phaseout, Basel III requirements and future regulatory changes on capital flexibility and acquisition capacity.