Business Context and Reporting Period
First Citizens BancShares, Inc. is a Delaware financial holding company operating primarily through First-Citizens Bank & Trust Company. The bank provides retail and commercial banking, lending, deposit, mortgage, trust, wealth-management and investment services through 550 branches in 21 states. This Form 10-K covers the fiscal year ended December 31, 2016, with comparison to 2015 and 2014.
Total assets were $32.99 billion at December 31, 2016. During 2016, the bank completed the Cordia Bancorp/Bank of Virginia merger and FDIC-assisted acquisitions of North Milwaukee State Bank and First CornerStone Bank. Harvest Community Bank was acquired after year-end, on January 13, 2017.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net income | $225.5 million | $210.4 million | +7.2% |
| Net income per share | $18.77 | $17.52 | +7.1% |
| Net interest income | $944.7 million | $924.9 million | +2.1% |
| Net interest margin, taxable equivalent | 3.14% | 3.22% | -8 basis points |
| Noninterest income | $488.1 million | $467.1 million | +4.5% |
| Noninterest expense | $1.05 billion | $1.04 billion | +0.9% |
| Return on average assets | 0.70% | 0.68% | +2 basis points |
| Return on average equity | 7.51% | 7.52% | -1 basis point |
- Balance sheet: Total assets increased 4.8% to $32.99 billion. Loans and leases increased 7.4% to $21.74 billion, driven primarily by $1.41 billion of organic non-PCI loan growth and the Cordia acquisition. Deposits increased 4.6% to $28.16 billion, primarily through growth in demand and interest-bearing checking accounts.
- Credit quality: Net provision expense increased to $32.9 million from $20.7 million. Net charge-offs were $20.4 million, or 0.10% of average loans and leases, versus 0.10% in 2015. The allowance for loan and lease losses rose to $218.8 million, equal to 1.01% of total loans versus 1.02% in 2015. Nonperforming assets declined 13.0% to $147.0 million, or 0.67% of loans, leases and other real estate owned.
- Cash flow: Operating activities provided $232.4 million. Investing activities used $1.10 billion, principally for net loan growth and investment securities purchases. Financing activities provided $873.6 million, mainly from deposit growth and $150.0 million of new long-term borrowings. Cash and due from banks increased $5.7 million to $539.7 million.
- Debt and liquidity: Short-term borrowings were $603.5 million and long-term obligations were $832.9 million. Primary liquidity sources included $3.88 billion of cash, excess Federal Reserve balances, correspondent balances and unencumbered securities, $715.0 million of available unsecured borrowing capacity and approximately $4.84 billion of additional secured FHLB borrowing capacity.
- Capital: BancShares remained well-capitalized, with a 12.42% Tier 1 risk-based capital ratio, 12.42% common equity Tier 1 ratio, 13.85% total risk-based capital ratio and 9.05% leverage ratio. The capital conservation buffer was 5.85%, above the applicable requirement.
Material Changes Versus the Prior Comparable Period
- Net income increased $15.1 million, primarily from higher net interest income, loan growth and noninterest income, partly offset by higher provision expense and operating costs.
- Net interest margin declined because higher-yielding purchased credit-impaired loans continued to run off; this was partly offset by loan growth, better investment yields and low deposit funding costs.
- Noninterest income benefited from $26.7 million of securities gains, $5.8 million of acquisition gains, a $16.6 million positive net impact from terminating five FDIC shared-loss agreements, and a $17.6 million increase in merchant and cardholder income. These items make the year-over-year comparison less representative of recurring earnings.
- Noninterest expense grew less than 1%, reflecting cost-control initiatives and lower personnel and merger-related expenses, offset by higher merchant and card processing, occupancy, FDIC insurance and operational-loss costs.
- PCI loans declined $141.3 million to $809.2 million, while non-PCI loans increased $1.64 billion to $20.93 billion. Loans to medical, dental and related borrowers totaled $4.66 billion, or 21.5% of total loans.
- Available-for-sale securities increased to $7.01 billion. Pre-tax unrealized losses expanded to $72.7 million from $24.5 million, primarily due to higher market interest rates; management concluded that no other-than-temporary impairment existed.
- Accumulated other comprehensive loss increased to $135.2 million from $64.4 million, largely due to investment-security losses and pension liability changes.
Guidance, Outlook, Commentary and Risks
- Management did not provide formal quantitative earnings guidance. It expects future loan growth to depend on economic conditions, intense loan competition, deposit retention and the success of product-expansion initiatives.
- Management is targeting growth in commercial real estate, commercial and industrial lending, high-net-worth products, credit cards, merchant services and wealth management. Efficiency initiatives include automation, technology upgrades, branch-network optimization and vendor-cost reductions.
- Management expects a moderately growing economy and gradual increases in federal funds rates. Its interest-rate strategy is designed to benefit from a rising-rate environment, although higher deposit costs could compress margins.
- Principal risks include concentrations in medical and dental lending, commercial and residential real estate exposure, junior-lien home-equity loans, credit-loss estimation uncertainty, interest-rate risk, deposit and liquidity pressure, competition, cybersecurity and operational failures, regulatory and compliance costs, acquisition integration, goodwill impairment, litigation and reliance on dividends from FCB.
- Approximately 64.3% of outstanding revolving mortgage balances were secured by junior liens, and approximately 80.5% of that portfolio related to properties in North Carolina and South Carolina. Management also identified $8.81 billion of unused loan commitments and $83.8 million of standby letters of credit.
- Material unusual items included the $16.6 million net benefit from FDIC shared-loss termination, $26.7 million of securities gains, acquisition gains, Hurricane Matthew-related building repairs and a $70.8 million increase in accumulated other comprehensive loss.
- Legal proceedings arise in the ordinary course of business, but management stated that no pending legal action was expected to have a material effect on the consolidated financial statements. Internal controls over financial reporting received effective assessments from management and the independent auditor, although the 2016 assessment excluded the three 2016 acquisitions.
Most Important Facts for Investors to Verify
- Whether loan growth remains organic and profitable after separating acquired-loan effects and nonrecurring acquisition-related income.
- Whether the increase in non-PCI provision expense continues as the loan portfolio expands, particularly in commercial construction, commercial and industrial, residential mortgage and consumer lending.
- Trends in net interest margin as PCI loans run off and deposit pricing responds to higher interest rates.
- Credit performance of medical and dental borrowers, commercial real estate exposures and junior-lien home-equity loans.
- The sustainability of noninterest income after securities gains, FDIC shared-loss benefits and acquisition gains are excluded.
- Remaining FDIC clawback obligations, shared-loss protection and the effect of further expiration or termination of those agreements.
- Liquidity under deposit outflow or stressed funding conditions, including the availability and collateral requirements of FHLB and other borrowing facilities.
- Integration, valuation and subsequent accounting effects of the 2016 acquisitions and the January 2017 Harvest Community Bank acquisition.