First Citizens BancShares, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
First Citizens BancShares, Inc. is a financial holding company operating primarily through First-Citizens Bank & Trust Company. The company provides retail and commercial banking, lending, deposits, mortgage, wealth management, trust, investment and cardholder services through 551 branches in 19 states. The filing covers the fiscal year ended December 31, 2018, with fourth-quarter comparisons to the three months ended December 31, 2017. The company reported total assets of $35.41 billion at year-end.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net income | $400.3 million | $323.8 million | +23.6% |
| Net income per share | $33.53 | $26.96 | +24.4% |
| Net interest income | $1.209 billion | $1.060 billion | +14.1% |
| Noninterest income | $400.1 million | $522.0 million | -23.3% |
| Noninterest expense | $1.077 billion | $1.012 billion | +6.4% |
| Provision for loan losses | $28.5 million | $25.7 million | +$2.8 million |
| Return on average assets | 1.15% | 0.94% | +21 basis points |
| Return on average equity | 11.69% | 10.10% | +159 basis points |
| Taxable-equivalent net interest margin | 3.69% | 3.30% | +39 basis points |
Interest income increased to $1.246 billion from $1.104 billion, driven by loan growth and higher loan and investment yields. Interest expense declined to $36.9 million from $43.8 million, primarily because the company extinguished $745.0 million of Federal Home Loan Bank debt during the first quarter. The efficiency pressure from higher operating costs remained evident: noninterest expense increased $64.5 million, mainly from personnel, occupancy, equipment and processing costs.
Cash provided by operating activities was $765.8 million, compared with $355.3 million in 2017. Investing activities used $210.9 million, including a $1.024 billion net increase in loans and $155.1 million of net cash paid for acquisitions. Financing activities used $563.6 million, reflecting debt repayments of $752.4 million, stock repurchases of approximately $163.1 million and dividends paid of $16.8 million, partially offset by $125.0 million of new long-term borrowings and deposit growth.
Loans and leases increased 8.2% to $25.52 billion, while deposits increased 4.8% to $30.67 billion. Shareholders’ equity rose to $3.49 billion from $3.33 billion. Long-term obligations declined to $319.9 million from $870.2 million, and short-term borrowings declined to $572.3 million from $693.8 million.
Liquidity remained strong. Cash and due from banks plus overnight investments totaled approximately $1.12 billion at year-end. The company reported $3.11 billion of unencumbered securities and excess cash, $6.18 billion of additional FHLB borrowing capacity, $2.19 billion of additional Federal Reserve lendable collateral value and $690.0 million of available unsecured federal funds lines.
Asset quality improved overall. Nonperforming assets declined to $133.9 million, or 0.52% of loans, leases and other real estate owned, from $144.3 million, or 0.61%. The allowance for loan and lease losses was $223.7 million, equal to 0.88% of total loans versus 0.94% in 2017. Net charge-offs on non-purchased credit-impaired loans increased to $26.5 million from $22.3 million, with consumer credit cards a principal contributor.
BancShares remained well-capitalized under Basel III. At December 31, 2018, the company reported a common equity Tier 1 ratio of 12.67%, total risk-based capital ratio of 13.99% and leverage ratio of 9.77%, all above applicable well-capitalized standards.
Material changes and unusual items
- Tax reform: Income tax expense fell to $103.3 million from $219.9 million, and the effective tax rate declined to 20.5% from 40.5%. A $15.7 million benefit was recorded in 2018 to update provisional Tax Act accounting.
- Acquisitions: The company completed acquisitions of HomeBancorp, Capital Commerce and Palmetto Heritage, adding loans, deposits, markets and $85.7 million of goodwill. Merger-related expenses totaled $6.5 million.
- Prior-year comparison: 2017 included $134.7 million of acquisition gains, primarily from FDIC-assisted transactions. No comparable acquisition gain was recorded in 2018, which explains much of the decline in reported noninterest income.
- Debt restructuring: Early debt extinguishment generated a $26.6 million gain in 2018. The company also transferred $2.49 billion of mortgage-backed securities from available-for-sale to held-to-maturity, leaving a $71.1 million after-tax unrealized loss in accumulated other comprehensive income.
- Marketable equity securities: Adoption of new accounting guidance required fair-value changes to be recorded in earnings. The company recorded a $7.6 million net loss in 2018, including an $16.9 million fourth-quarter loss.
- Shareholder returns: The company repurchased 382,000 Class A shares for $165.3 million and paid $17.2 million of dividends. The board authorized repurchases of up to 800,000 shares through October 31, 2019.
Guidance, outlook, commentary and risks
Management did not provide formal quantitative earnings guidance. Its stated priorities are continued organic and acquisition-related growth, expansion of fee income from wealth management, cardholder and merchant services, cost control, branch optimization, automation and digital banking investment. Management expects to continue customized capital and liquidity stress testing even though the 2018 regulatory changes eliminated the requirement for company-run Dodd-Frank stress tests for bank holding companies below $100 billion in assets.
Pending transactions disclosed after year-end included the proposed acquisitions of First South Bancorp for approximately $37.5 million and Biscayne Bancshares for approximately $118.7 million, both expected to close in the second quarter of 2019 subject to regulatory and shareholder approvals.
- Credit risk is concentrated in real estate-secured lending, including junior-lien home equity lines, and in medical, dental and related industries. Medical and dental-related loans totaled $4.98 billion, or 19.5% of loans.
- Approximately 64.9% of revolving mortgage balances were secured by junior liens, creating sensitivity to declining real estate values and borrower payment increases as interest-only periods end.
- Interest-rate changes could affect loan yields, deposit costs, net interest margin, borrower repayment capacity and the value of securities. A 100-basis-point increase was modeled to increase 24-month net interest income by 2.38%, while a 100-basis-point decrease was modeled to reduce it by 10.67%.
- The company had an estimated $105.6 million FDIC clawback liability, with payment dates in March 2020 and March 2021.
- Other risks include cybersecurity and third-party technology failures, regulatory and compliance costs, litigation, acquisition integration, goodwill impairment, LIBOR transition, deposit attrition, economic weakness and potential increases in loan-loss provisions.
- The company expects adoption of the current expected credit loss standard in the first quarter of 2020; the eventual retained-earnings impact had not been determined. Lease accounting adoption in 2019 was estimated to increase assets and liabilities by $70 million to $80 million and reduce capital by approximately three to four basis points.
Important facts for investors to verify
- Whether loan growth and the higher net interest margin can offset rising deposit costs and operating expenses.
- The sustainability of earnings excluding the 2018 tax benefit, debt-extinguishment gain and other unusual items.
- Credit performance in commercial real estate, junior-lien HELOCs, consumer cards and medical and dental lending.
- The final purchase accounting, integration costs and financial contribution of the 2018 acquisitions and pending 2019 transactions.
- The timing and amount of FDIC clawback payments and the remaining shared-loss protection.
- The eventual impact of the current expected credit loss standard, lease accounting, LIBOR transition and other regulatory changes.
- The effect of continued share repurchases and dividend payments on capital ratios and parent-company liquidity.
- Management’s assessment of internal controls and the auditor’s unqualified opinions; the 2018 control assessment excluded the three companies acquired during 2018.