FIRST CITIZENS BANCSHARES INC quarterly report, Q1 FY2019

First Citizens BancShares, Inc. — 1Q 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. The filing covers the unaudited three months ended March 31, 2019, with comparisons to March 31, 2018 and December 31, 2018. Activities include commercial and retail banking, lending, deposit gathering, treasury services, cardholder and merchant services, wealth management, mortgage banking and insurance.

Financial Performance and Key Metrics

Metric	1Q 2019	Comparable period
Net interest income	$320.5 million	$284.4 million in 1Q 2018
Taxable-equivalent net interest margin	3.89%	3.57% in 1Q 2018
Noninterest income	$103.7 million	$122.7 million in 1Q 2018
Noninterest expense	$267.7 million	$268.1 million in 1Q 2018
Income before taxes	$144.7 million	$131.5 million in 1Q 2018
Net income	$111.4 million	$100.2 million in 1Q 2018
Diluted net income per share	$9.67	$8.35 in 1Q 2018
Return on average assets, annualized	1.27%	1.19% in 1Q 2018
Return on average equity, annualized	12.86%	12.20% in 1Q 2018
Effective tax rate	23.1%	23.8% in 1Q 2018

Net income increased 11.1% year over year, while earnings per share rose 15.8%, aided by share repurchases.
Interest income increased to $336.9 million from $292.6 million. Interest expense rose to $16.5 million from $8.2 million, primarily because of higher deposit costs.
The provision for loan and lease losses was $11.8 million, compared with $7.6 million in 1Q 2018.
Marketable equity securities produced net gains of $11.3 million, compared with $1.0 million in the prior-year quarter.
The prior-year period included a $25.8 million gain on extinguishment of debt; no comparable gain was recorded in 1Q 2019.

Balance Sheet, Capital, Debt and Liquidity

Total assets were $35.96 billion at March 31, 2019, up from $35.41 billion at December 31, 2018.
Total deposits were $31.20 billion, an increase of $525.6 million, or 6.9% annualized, from year-end. Noninterest-bearing deposits increased to $12.38 billion.
Loans and leases were $25.46 billion, down $59.5 million from year-end, or 0.9% on an annualized basis. Net loans and leases were $25.24 billion after the allowance.
Total borrowings were approximately $849.6 million, compared with $892.2 million at December 31, 2018. This included $189.6 million of Federal Home Loan Bank borrowings and $136.5 million of subordinated debentures.
Cash and due from banks totaled $268.6 million, while overnight investments totaled $1.39 billion. Management reported $4.21 billion of cash in excess of reserve requirements, correspondent balances and unencumbered securities, compared with $3.11 billion at year-end.
Available liquidity included approximately $6.18 billion of additional FHLB borrowing capacity, $2.23 billion of Federal Reserve borrowing capacity based on lendable collateral, and $690.0 million of available Federal Funds lines.
At March 31, 2019, BancShares reported a 12.69% Tier 1 risk-based capital ratio, a 12.69% common equity Tier 1 ratio, a 14.02% total risk-based capital ratio and a 9.80% leverage ratio. Management stated that BancShares and its bank subsidiary remained well capitalized.
Operating lease adoption under ASC 842 added $70.7 million of right-of-use assets and $71.8 million of operating lease liabilities, without a material income statement effect.

Credit Quality and Other Asset Metrics

The allowance for loan and lease losses increased to $228.8 million from $223.7 million at year-end, equal to 0.90% of total loans and leases versus 0.88% at year-end.
Annualized net charge-offs were 0.11% of average loans and leases, unchanged from 1Q 2018.
Nonperforming assets were $133.9 million, essentially unchanged from year-end, and represented 0.53% of loans, leases and other real estate owned.
Nonaccrual loans and leases increased to $90.6 million from $85.8 million, primarily because of new commercial mortgage nonaccrual loans. Other real estate owned declined to $43.3 million from $48.0 million.
Total troubled debt restructurings declined to $153.5 million from $156.1 million at year-end.

Cash Flow and Capital Allocation

Operating activities generated $140.0 million of cash, compared with $458.4 million in 1Q 2018. The prior-year amount benefited from significant working-capital movements and the debt-extinguishment gain.
Investing activities used $578.0 million, principally reflecting a $589.1 million increase in overnight investments and purchases of investment securities.
Financing activities provided $379.1 million, primarily from deposit growth, partially offset by $98.1 million of common-stock repurchases.
Cash and due from banks declined $58.8 million during the quarter to $268.6 million.
The company repurchased 243,000 Class A shares for approximately $100.7 million at an average price of $414.58. It paid a quarterly dividend of $0.40 per share. Through May 6, 2019, it repurchased an additional 63,400 Class A shares for approximately $27.4 million.

Material Changes Versus Prior Comparable Period

Net interest income increased 12.7%, driven by higher average loan balances and loan yields, partially offset by higher deposit funding costs.
Average loans increased $1.85 billion year over year, while average interest-earning assets increased $1.11 billion.
Noninterest income decreased 15.5%, primarily because 1Q 2018 included the $25.8 million debt-extinguishment gain. Excluding that unusual item, 1Q 2019 noninterest income benefited from higher marketable equity securities gains, cardholder services income and wealth-management income.
Noninterest expense was broadly stable despite higher salaries, headcount and technology investment; lower FDIC insurance, collection and foreclosure-related costs offset these increases.
Loans declined modestly from year-end, while deposits grew substantially, increasing liquidity and funding capacity.
Accumulated other comprehensive loss improved to $206.9 million from $235.2 million at year-end, primarily because of improved unrealized securities valuations.

Guidance, Outlook, Management Commentary and Risks

The filing does not provide formal earnings or revenue guidance. Management’s stated strategy is to maintain an interest-rate-risk profile that benefits net interest income in a rising-rate environment, emphasize core deposits and targeted loan growth, expand noninterest income, control expenses, optimize the branch network and invest in technology and delivery channels.

The Federal Reserve maintained the federal funds target range at 2.25% to 2.50% during the quarter. Management noted that higher rates supported loan and overnight-investment yields but increased deposit costs.
Interest-rate sensitivity analysis estimated that a 100-basis-point decline in rates would reduce 24-month net interest income by 10.67%, while a 100-basis-point increase would increase it by 3.05%. A 200-basis-point increase was estimated to increase net interest income by 3.85%.
Management identified credit deterioration, borrower repayment capacity, real-estate values, interest rates, deposit retention, competition, regulatory actions, operating risks and acquisition integration as material risk factors.
BancShares expects to adopt the current expected credit loss standard in the first quarter of 2020 through a cumulative-effect adjustment to retained earnings. The filing states that the impact had not yet been determined.
As of March 31, 2019, shared-loss protection remained on $53.9 million of acquired single-family residential loans. The estimated FDIC clawback liability was $107.3 million, with payment dates in March 2020 and March 2021.
Subsequent to quarter-end, BancShares completed the Biscayne Bancshares merger on April 2 and the First South Bancorp merger on May 1. It also announced the proposed acquisition of Entegra Financial for an anticipated transaction value of approximately $219.8 million, subject to regulatory and shareholder approvals and expected to close in the second half of 2019.
Legal proceedings arise in the ordinary course of business. Management did not expect current matters to have a material effect, but ultimate liabilities could not be determined.

Most Important Facts for Investors to Verify

Reconcile the 11.1% net-income increase with the unusually high 1Q 2018 debt-extinguishment gain and the 1Q 2019 marketable-equity-securities gains.
Monitor deposit pricing and retention, since interest-bearing deposit expense more than tripled year over year and is a key pressure on net interest margin.
Assess credit trends in commercial mortgage lending, nonaccrual loans, criticized assets and the allowance as the loan portfolio changes.
Evaluate the effect of the Biscayne and First South acquisitions and the pending Entegra transaction on capital, liquidity, earnings, expenses and integration risk.
Confirm the eventual cumulative effect of CECL adoption in 2020, which management had not quantified in this filing.
Review interest-rate sensitivity, FDIC clawback obligations and the $10.19 billion of unused commitments to extend credit when assessing liquidity and contingent risk.