First Citizens BancShares, Inc. — 3Q 2019 Form 10-Q Summary
Business Context and Reporting Period
First Citizens BancShares, Inc. is a financial holding company operating primarily through First-Citizens Bank & Trust Company. Its business includes commercial and retail banking, deposits, lending, treasury services, cardholder and merchant services, wealth management, mortgage banking and related fee-based services. The filing covers the unaudited quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods and December 31, 2018 balance-sheet amounts.
Key Financial Metrics
| Metric | Three months ended September 30, 2019 | Year-over-year change | Nine months ended September 30, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net interest income | $336.4 million | Up 9.5% | $984.2 million | Up 10.8% |
| Net interest margin, taxable equivalent | 3.80% | Up 7 bps | 3.83% | Up 18 bps |
| Provision for loan and lease losses | $6.8 million | Up from $0.8 million | $23.7 million | Up from $16.9 million |
| Noninterest income | $100.9 million | Up 6.8% | $311.5 million | Down 1.2% |
| Noninterest expense | $270.4 million | Up 1.1% | $811.5 million | Up 1.2% |
| Net income | $124.8 million | Up 6.4% | $355.5 million | Up 14.4% |
| Diluted earnings per share as reported | $11.27 | Up 15.0% | $31.50 | Up 21.6% |
| Return on average assets | 1.32% | Down 1 bp | 1.29% | Up 9 bps |
| Return on average equity | 13.83% | Up 42 bps | 13.41% | Up 119 bps |
At September 30, 2019, total assets were $37.75 billion, loans and leases were $27.20 billion, deposits were $32.74 billion and shareholders’ equity was $3.57 billion. Loans increased $1.67 billion, or 9.5% annualized, from year-end; approximately $1.02 billion came from 2019 acquisitions and $657.3 million represented organic growth. Deposits increased $2.07 billion, or 9.0% annualized, including $1.02 billion from acquisitions and $1.05 billion of organic growth.
The allowance for loan and lease losses was $226.8 million, equal to 0.83% of total loans versus 0.88% at year-end. The third-quarter annualized net charge-off ratio was 0.10%, unchanged from the prior-year quarter. Nonperforming assets were $155.9 million, or 0.57% of loans, leases and other real estate owned, up from $133.9 million at December 31, 2018. Nonaccrual loans increased to $109.6 million, primarily because of new commercial mortgage nonaccruals.
Nine-month cash provided by operating activities was $399.2 million, compared with $330.1 million in 2018. Investing activities used $1.10 billion, mainly reflecting loan growth and substantial investment-security purchases. Financing activities provided $660.7 million, primarily from deposit growth, partly offset by $321.3 million of common-stock repurchases. Cash and due from banks ended at $288.9 million.
Total borrowings were $976.1 million versus $892.2 million at year-end, including $112.2 million of other borrowings related primarily to a new term loan. Available liquidity included $4.05 billion of cash, excess Federal Reserve balances and unencumbered securities, $6.35 billion of additional FHLB borrowing capacity, $2.78 billion of lendable Federal Reserve collateral and $615.0 million of available Federal Funds and other credit lines.
The company remained well capitalized at September 30, 2019: total risk-based capital was 13.09%, common equity Tier 1 and Tier 1 risk-based capital were each 11.80%, and the leverage ratio was 9.18%.
Material Changes Versus Prior Comparable Period
- Net income increased despite higher provisions and a materially higher effective tax rate in the third quarter. The nine-month effective tax rate was 22.8% versus 19.8% in 2018; the third-quarter 2019 rate was 22.1% versus 12.1% in 2018.
- Net interest income benefited from higher average loan balances, acquisition-related growth and higher asset yields. Interest expense rose substantially as rates paid on time deposits and money-market accounts increased.
- Nine-month noninterest income declined because 2018 included a $26.5 million gain on extinguishment of debt. This decline was partly offset by higher cardholder services, mortgage income and realized gains on available-for-sale securities.
- Noninterest expense increased due primarily to salaries, acquisition-related headcount, equipment investment and merger expenses, partly offset by lower FDIC insurance, legal and foreclosure-related costs.
- First Citizens completed acquisitions of Biscayne Bancshares on April 2 and First South Bancorp on May 1, adding approximately $1.08 billion and $253.0 million of assets, respectively, at closing. These transactions added approximately $46.5 million and $13.9 million of goodwill.
- The company repurchased 295,900 Class A shares for $135.4 million during the quarter and 744,400 shares for $325.9 million during the first nine months. Shares outstanding declined materially as a result.
- Accumulated other comprehensive loss improved to $171.8 million from $235.2 million at year-end, primarily because of gains on available-for-sale securities and pension-related items.
Guidance, Outlook, Risks and Unusual Items
- Management stated that recent net-interest-margin expansion is unlikely to continue. Declining new-loan yields, lower forward-rate expectations and competition were expected to produce margin compression during the remainder of 2019.
- The Federal Reserve lowered the federal funds target range by 75 basis points during the latter half of 2019. Interest-rate sensitivity modeling indicated estimated 24-month net-interest-income changes of negative 10.53% under a 100-basis-point decline, positive 4.23% under a 100-basis-point increase and positive 5.93% under a 200-basis-point increase.
- First Citizens agreed to acquire Entegra Financial for an estimated $219.8 million, subject to regulatory approval and required divestitures, and agreed to acquire Community Financial for $2.3 million, with closing expected in the first quarter of 2020. The Entegra transaction was expected to close in the fourth quarter of 2019 or first quarter of 2020.
- FDIC shared-loss arrangements remained for $47.3 million of single-family residential loans. The estimated FDIC clawback liability was $110.6 million, with payment dates in March 2020 and March 2021.
- The company planned to adopt the current expected credit loss standard in the first quarter of 2020. Management expected the aggregate allowance for credit losses to decrease, but stated that the final magnitude remained subject to portfolio composition, credit quality, economic conditions, models and forecasts and was not expected to be material relative to total assets, retained earnings or regulatory capital.
- Off-balance-sheet exposure included $10.51 billion of unused commitments to extend credit and $92.6 million of standby letters of credit. Management said existing legal proceedings were not expected to have a material effect, although ultimate liabilities could not be determined.
- The company adopted the new lease standard in 2019, recording approximately $70.7 million of operating lease right-of-use assets and $71.8 million of operating lease liabilities. The filing stated that the adoption did not materially affect net income.
Important Facts for Investors to Verify
- Whether commercial-mortgage nonaccrual growth and the increase in nonperforming assets persist in subsequent quarters.
- The extent of expected net-interest-margin compression as deposit costs rise and new-loan yields decline.
- Final regulatory approvals, branch or asset divestitures and closing dates for the Entegra and Community Financial transactions.
- The final first-quarter 2020 CECL adjustment and its effect on the allowance, retained earnings and regulatory capital.
- Future FDIC clawback payments and the expiration or remaining protection under shared-loss agreements.
- The sustainability of earnings excluding marketable-equity valuation changes, securities gains, PCI recoveries and other acquisition-related or unusual items.
- The pace and valuation of continued share repurchases, including the additional 146,100 shares repurchased through October 31, 2019.