First Citizens BancShares, Inc. — 3Q 2015 Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc., headquartered in Raleigh, North Carolina, is a financial holding company operating primarily through First-Citizens Bank & Trust Company. The filing covers the unaudited quarter and nine months ended September 30, 2015. The bank operated 564 branches as of November 4, 2015 and provides commercial banking, treasury, cardholder, merchant, wealth management and related services.
Results include the October 1, 2014 Bancorporation merger and the February 13, 2015 FDIC-assisted acquisition of Capitol City Bank & Trust Company. Accordingly, comparisons with 2014 are materially affected by acquisition accounting and expanded balance-sheet scale.
Key financial metrics
| Metric | 3Q 2015 | 3Q 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net interest income | $239.4 million | $166.2 million | $694.2 million | $492.9 million |
| Noninterest income | $109.8 million | $78.6 million | $368.0 million | $207.5 million |
| Income before taxes | $88.8 million | $41.5 million | $265.5 million | $116.2 million |
| Net income | $56.0 million | $26.5 million | $167.6 million | $75.7 million |
| Diluted earnings per share as reported | $4.66 | $2.76 | $13.96 | $7.87 |
| Net interest margin, FTE | 3.29% | 3.26% | 3.26% | 3.27% |
| Return on average assets | 0.71% | 0.48% | 0.73% | 0.46% |
| Return on average equity | 7.86% | 4.89% | 8.07% | 4.77% |
Third-quarter net income increased 111% year over year, while nine-month net income increased 121%. Management attributed the improvement primarily to the Bancorporation merger, the CCBT acquisition, organic loan growth and improved credit performance. The nine-month period included a $42.9 million pretax gain on the CCBT acquisition, with an after-tax impact of $26.4 million.
- Total assets were $31.45 billion at September 30, 2015, compared with $30.08 billion at December 31, 2014.
- Total loans and leases were $19.86 billion, up $1.09 billion, or 7.7% annualized, from year-end. Non-PCI loans increased to $18.81 billion, while PCI loans declined to $1.04 billion.
- Total deposits were $26.72 billion, up 4.1% from year-end and 45.2% from September 30, 2014, primarily due to acquisitions and organic growth.
- Investment securities available for sale totaled $6.69 billion, compared with $7.17 billion at year-end.
- The allowance for loan and lease losses was $205.5 million, or 1.03% of total loans, versus 1.09% at year-end.
- Net charge-offs were $3.0 million in the quarter, or 0.06% annualized of average loans, versus $5.0 million, or 0.10%, in the second quarter and $6.9 million, or 0.20%, in the third quarter of 2014.
- Provision expense was $107 thousand in the third quarter and $13.6 million for the first nine months, compared with $1.5 million and a $7.7 million provision credit, respectively, in the prior-year periods.
- Operating cash flow was $197.5 million for the first nine months, compared with $67.5 million in 2014. Investing cash flow was negative $1.13 billion, primarily reflecting loan growth and investment-security activity; financing cash flow was positive $876.1 million.
- Cash and due from banks totaled $546.4 million at September 30, 2015. Management identified $4.31 billion of primary liquidity from excess cash and unencumbered securities, $2.07 billion of additional FHLB borrowing capacity and $740 million of Federal Funds lines and other facilities.
- Short-term borrowings were $759.8 million and long-term obligations were $705.4 million. Long-term obligations increased primarily because of $350 million of new FHLB borrowings.
- Book value per share was $238.34 at September 30, 2015. The quarterly dividend was $0.30 per share, or $0.90 per share for the first nine months.
Material changes versus comparable periods
- Net interest income rose 44.0% year over year in the quarter, principally because of the Bancorporation merger and organic loan growth. Funding costs declined, but loan yields remained under pressure from low rates and competitive pricing.
- Noninterest income increased to $109.8 million in the quarter and $368.0 million year to date. In addition to acquisition-related scale, results benefited from $5.6 million of third-quarter securities gains and lower FDIC loss-share receivable adjustments. Processing-service fees declined substantially because much of the 2014 amount related to payments from Bancorporation before the merger.
- Noninterest expense rose 28.9% year over year in the quarter and 32.3% year to date, largely because of the Bancorporation merger. Merger-related expense was $3.7 million in the quarter and $11.2 million year to date.
- The CCBT acquisition added $42.9 million of pretax gain and $154.5 million of loans at acquisition. CCBT-related loans generated approximately $2.3 million of interest income in the third quarter and $6.0 million since acquisition.
- Nonperforming assets were $162.5 million, or 0.82% of loans, leases and OREO, compared with $170.9 million, or 0.91%, at year-end and $157.1 million, or 1.13%, at September 30, 2014. Non-PCI nonaccrual loans increased, partly offset by lower PCI nonaccrual loans and OREO.
- Total troubled debt restructurings declined to $145.7 million from $151.5 million at year-end, although nonaccruing TDRs increased to $26.5 million from $15.5 million.
- The Bancorporation systems and customer-account conversion was completed during the quarter. Estimated total merger-related costs were reduced to approximately $20.0 million, of which $17.5 million had been incurred by September 30, 2015.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management described the operating environment as one of moderate economic expansion, improving employment and housing activity, historically low interest rates and continued competitive pressure on loan pricing. Management expects ongoing loan growth but noted that margins may remain affected by low rates, competition and runoff of higher-yielding PCI loans.
- Capital remained above regulatory minimums and the bank remained well-capitalized under Basel III: BancShares reported a 12.63% common equity Tier 1 ratio, 12.77% Tier 1 risk-based ratio, 14.18% total risk-based ratio and 8.97% leverage ratio.
- Loss-share protection is declining as agreements expire. Only $296.5 million of loans remained covered at September 30, 2015; protection on $7.0 million of Williamsburg First National Bank loans was scheduled to expire at the beginning of the fourth quarter.
- The estimated FDIC clawback payable was $124.0 million, while the FDIC loss-share receivable was $9.3 million. Reimbursements may be delayed or disallowed if agreement requirements are not met, and disagreements over coverage may arise.
- Interest-rate sensitivity increased at higher-rate scenarios: management estimated a 1.34% decrease in 24-month net interest income under a 300-basis-point increase and a 2.86% decrease in economic value of equity under the same scenario.
- Management considers the allowance adequate, but future adjustments may be required based on economic conditions, collateral values, borrower performance or regulatory examinations.
- October 2015 flooding in South Carolina was under preliminary review; the filing states that its potential effect on earnings could not yet be reasonably assessed.
- Other continuing risks include merger integration, cybersecurity, dependence on third-party vendors, operational controls, regulatory actions, borrower repayment capacity, real-estate values, litigation and changing interest rates.
- The company had $7.76 billion of unused credit commitments, $85.2 million of standby letters of credit and $3.1 million of reserves for mortgage-loan sale representations and warranties.
- The company approved a plan to repurchase up to 100,000 Class A shares from November 1, 2015 through October 31, 2016; purchases are discretionary and shares acquired will be canceled.
Facts investors should verify
- How much of the reported earnings improvement is recurring after excluding the $42.9 million CCBT acquisition gain, securities gains, PCI accretion and other acquisition-related effects.
- The sustainability of organic loan growth and the effect of competitive pricing and PCI portfolio runoff on future net interest margin.
- Trends in non-PCI nonaccrual loans, commercial-loan downgrades, residential mortgage delinquencies and nonaccruing TDRs.
- The adequacy of the $205.5 million allowance as FDIC loss-share protection expires and acquired loan marks are absorbed.
- Progress and final cost of Bancorporation integration, including the remaining estimated $2.5 million of merger-related costs.
- The effect of Basel III phase-in, the reduction of trust-preferred securities eligible for Tier 1 capital and continued loan growth on capital ratios.
- Liquidity retention, deposit pricing and funding requirements if customers move deposits into higher-yielding products as interest rates rise.
- The eventual financial effect of the South Carolina flooding, cybersecurity incidents, vendor disruptions, litigation or other contingencies identified in the filing.