First Citizens BancShares, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc. is a financial holding company conducting banking operations through First-Citizens Bank & Trust Company. The unaudited filing covers the three months ended March 31, 2020, and was filed May 5, 2020. Results reflect the initial effects of COVID-19, the February 1, 2020 Community Financial acquisition, and adoption of the current expected credit loss model under ASC 326.
Key financial metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable / December 31, 2019 |
|---|---|---|
| Net interest income | $338.4 million | $320.5 million in Q1 2019 |
| Provision for credit losses | $28.4 million | $11.8 million in Q1 2019 |
| Noninterest income | $64.0 million | $103.7 million in Q1 2019 |
| Noninterest expense | $300.0 million | $267.7 million in Q1 2019 |
| Net income | $57.2 million | $111.4 million in Q1 2019 |
| Earnings per common share | $5.46 | $9.67 in Q1 2019 |
| Taxable-equivalent net interest margin | 3.55% | 3.86% in Q1 2019 |
| Return on average assets / equity | 0.57% / 6.24% | 1.27% / 12.86% in Q1 2019 |
| Total assets | $41.59 billion | $39.82 billion at December 31, 2019 |
| Loans and leases | $29.24 billion | $28.88 billion at December 31, 2019 |
| Total deposits | $35.35 billion | $34.43 billion at December 31, 2019 |
| Allowance for credit losses | $209.3 million, or 0.72% of loans | $225.1 million, or 0.85% at December 31, 2019 |
| Borrowings | $1.94 billion | $1.33 billion at December 31, 2019 |
Net income declined 48.7% year over year. Results included a $51.4 million pretax decline in the fair value of marketable equity securities and a $21.5 million provision increase related to anticipated COVID-19 credit impacts. Net interest income rose 5.6% on loan and balance-sheet growth, but margin compressed because of lower asset yields and higher funding costs.
Cash flow, liquidity, capital and credit
- Operating cash flow was $17.6 million, compared with $140.0 million in Q1 2019.
- Investing activities used $1.44 billion, principally reflecting purchases of available-for-sale, held-to-maturity and marketable equity securities.
- Financing activities provided $1.50 billion, including $345.9 million of subordinated-note proceeds and $340.0 million of preferred-stock proceeds.
- Cash and due from banks ended at $454.2 million.
- Management reported approximately $5.5 billion of liquid assets and $11.3 billion of contingent liquidity sources at March 31, 2020. The loan-to-deposit ratio was 83.7%, and total deposit cost was 0.28%.
- Regulatory capital ratios remained well above well-capitalized requirements: total risk-based capital 13.7%, Tier 1 risk-based capital 11.4%, common equity Tier 1 10.4%, and Tier 1 leverage 9.0%.
- Net charge-offs were $7.5 million, or 0.10% annualized of average loans, compared with 0.11% in Q1 2019. Nonperforming assets were $230.3 million, or 0.79% of loans, leases and other real estate owned.
Material changes versus prior comparable periods
- Net interest income increased $17.9 million, while the taxable-equivalent margin fell 31 basis points.
- Noninterest income decreased $39.7 million, primarily because of marketable equity-security losses, partly offset by $19.8 million of realized gains on available-for-sale securities.
- Noninterest expense increased $32.3 million, driven by personnel, digital-banking processing, merger-related and pension costs.
- Loans increased $359.5 million from year-end, or 5.0% annualized; deposits increased $915.5 million, or 10.7% annualized.
- BancShares adopted ASC 326 on January 1, 2020. The adoption reduced the allowance by $37.9 million and increased retained earnings by $36.9 million after tax-related effects and the reserve for unfunded commitments.
- Nonaccrual loans increased partly because the new standard dissolved prior PCI loan pools and brought $47.0 million of previously excluded nonaccrual loans into reported nonaccrual balances.
Outlook, management commentary, risks and unusual items
Management stated that COVID-19 created heightened credit, market, liquidity, operational, capital, compliance and financial-reporting risks. As of May 4, 2020, the company had approved or processed payment extensions on approximately $6.5 billion of loans, representing approximately $200 million of deferred payments. Extensions were concentrated in dental, medical and hospitality exposures. Management reported no significant shifts in credit-line utilization or overall credit quality through May 4, 2020, but acknowledged that the duration, severity and economic consequences of the pandemic remained uncertain.
The company processed approximately 5,000 initial-round SBA Paycheck Protection Program applications representing $1.8 billion of customer funding and approximately 18,000 additional applications representing $1.6 billion in the second phase. The filing provides no formal earnings guidance.
- On March 4, 2020, BancShares issued $350 million of 3.375% fixed-to-floating subordinated notes due 2030.
- On March 12, 2020, it issued $345 million of Series A preferred stock, with a 5.375% non-cumulative perpetual dividend.
- The company repurchased 349,390 Class A shares for $159.7 million during the quarter and an additional 111,700 shares for $37.3 million through April 30, 2020.
- A $99.5 million payment was made to the FDIC during the quarter, reducing the FDIC shared-loss payable to $14.7 million; the remaining clawback liability payment date is March 2021.
- Mortgage servicing-rights valuation declined as lower rates increased expected prepayments, producing a $3.0 million valuation allowance increase.
- On April 17, 2020, the company completed the required sale of three North Carolina branches to Select Bank; the filing does not provide a separate gain or loss for the sale.
- Legal proceedings arise in the ordinary course of business; management does not expect them to have a material effect, although ultimate liabilities cannot be determined.
Important facts for investors to verify
- Whether COVID-19-related deferrals and SBA-PPP exposures lead to higher provisions, charge-offs or nonperforming assets in subsequent quarters.
- The sensitivity of earnings to marketable equity-security valuations, interest rates, deposit pricing and the 3.55% net interest margin.
- The adequacy of the $209.3 million allowance under ASC 326 as unemployment, GDP, real-estate values and other forecasts change.
- The effect of the $695 million capital raise, continued share repurchases and preferred dividends on common equity returns and per-share results.
- Changes in liquidity, deposit retention, borrowing capacity and collateral availability if market stress or customer withdrawals increase.
- The remaining $14.7 million FDIC clawback liability and the March 2021 payment obligation.
- Subsequent results from the Community Financial acquisition and the completed divestiture of the three Entegra-related branches.