First Citizens BancShares, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
First Citizens BancShares, Inc. is a Delaware financial holding company operating primarily through First-Citizens Bank & Trust Company. The filing covers the fiscal year ended December 31, 2013, with comparative 2012 and 2011 results and fourth-quarter 2013 data. FCB operated 397 branches across 18 states and Washington, D.C.; North Carolina represented 72.3% of deposits.
The business is primarily community and commercial banking, including deposits, commercial and consumer lending, wealth management, cardholder and merchant services, mortgage banking and trust services. The company continued to manage loans and assets acquired through six FDIC-assisted transactions.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net income | $167.7 million | $134.3 million | 25% increase |
| Diluted/basic earnings per share | $17.43 | $13.11 | Increase |
| Net interest income | $740.2 million | $914.7 million | 19.1% decrease |
| Noninterest income | $263.6 million | $189.3 million | 39.3% increase |
| Noninterest expense | $771.4 million | $766.9 million | 0.6% increase |
| Provision for loan and lease losses | $(32.3) million credit | $142.9 million expense | Favorable change |
| Return on average assets | 0.79% | 0.64% | Improved |
| Return on average equity | 8.63% | 7.01% | Improved |
| Taxable-equivalent net yield | 3.82% | 4.84% | Down 102 basis points |
Total assets were $21.20 billion at year-end, compared with $21.28 billion in 2012. Total loans and leases were $13.13 billion, down 1.9%; originated loans increased 4.6% to $12.10 billion, while acquired loans declined 43.1% to $1.03 billion. Deposits declined 1.2% to $17.87 billion, reflecting a $699.0 million reduction in time deposits that was partly offset by higher demand and other transaction deposits.
Shareholders’ equity increased to $2.08 billion from $1.86 billion. The allowance for loan and lease losses declined to $233.4 million from $319.0 million. Total risk-based capital was 16.42%, tier 1 risk-based capital was 14.92%, and the leverage ratio was 9.82%; management stated that BancShares and FCB remained well-capitalized.
Operating cash flow was $331.0 million, compared with $201.3 million in 2012. Investing activities used $225.0 million, and financing activities used $212.2 million. Cash and due from banks ended at $533.6 million. Free liquidity was $3.39 billion, including cash, overnight investments and unpledged available-for-sale securities.
Short-term borrowings were $511.4 million and long-term obligations were $510.8 million at December 31, 2013. FCB had access to $665.0 million of unsecured overnight borrowing capacity and approximately $1.14 billion of additional secured FHLB borrowing capacity.
Fourth-quarter 2013 results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Net income | $27.2 million | $21.7 million |
| Earnings per share | $2.83 | $2.15 |
| Net interest income | $176.6 million | $262.9 million |
| Provision for loan and lease losses | $7.3 million expense | $64.9 million expense |
| Noninterest income | $69.2 million | $33.2 million |
| Noninterest expense | $196.3 million | $198.7 million |
| Taxable-equivalent net yield | 3.55% | 5.44% |
Fourth-quarter net income increased 25.2%, driven by lower credit costs and higher noninterest income, partly offset by sharply lower net interest income. Acquired-loan accretion income fell to $44.9 million from $110.6 million.
Material changes versus the prior comparable period
- Profitability improved despite a substantial decline in net interest income, primarily because the loan-loss provision moved from expense to a credit and noninterest income increased.
- Net interest income was pressured by declining acquired-loan balances, lower accretion income, low interest rates and competitive loan and deposit pricing.
- Noninterest income benefited from acquired-loan recoveries, lower amortization of the FDIC receivable and a gain from selling most client-bank processing relationships. Processing-fee revenue subsequently declined.
- Credit quality improved: nonperforming assets declined to $165.6 million, or 1.25% of loans, leases and other real estate, from $310.4 million, or 2.29%, in 2012. Originated-loan net charge-offs declined to $25.8 million from $43.9 million.
- Originated commercial mortgage, residential mortgage, commercial and industrial loans and leases grew, while consumer and revolving mortgage balances declined.
- Available-for-sale securities increased to $5.39 billion, but the portfolio moved from a $33.8 million net unrealized gain to a $16.6 million net unrealized loss as interest rates rose. Management concluded that no other-than-temporary impairment existed.
- Accumulated other comprehensive loss improved to $25.3 million from $82.1 million, primarily due to improved pension funded status, partly offset by securities losses.
Guidance, outlook, commentary, risks and unusual items
- Management expected originated loan growth to continue in 2014 as economic stability improved, but cautioned that growth depends on economic conditions and other external factors.
- Management expected acquired-loan accretion and other FDIC-assisted transaction benefits to decline as acquired balances run off. These items create earnings volatility and are difficult to forecast.
- Loss-share protection was scheduled to expire for certain non-single-family residential assets during 2014 and 2015. The company expected $38.4 million of additional FDIC cash reimbursements but recorded a $109.4 million payable for estimated contingent clawback payments.
- On January 1, 2014, FCB merged with 1st Financial Services Corporation and Mountain 1st Bank & Trust Company. The transaction added $316.3 million of loans, $237.4 million of securities, $11.6 million of other real estate and $631.9 million of deposits; $24.5 million of goodwill was recorded. Estimated merger costs were $6.0 million to $7.0 million.
- The company began a multi-year technology modernization, business-continuity and operational-risk program expected to cost more than $100 million through 2016. Future equipment, occupancy, consulting and implementation costs are expected to increase.
- Basel capital requirements begin applying in 2015 and phase in through 2019. Trust preferred securities totaling $93.5 million were included in tier 1 capital at year-end; 75% was scheduled for exclusion beginning in 2015 and the remainder in 2016. Management stated that the company remained well-capitalized on a pro forma basis.
- Key risks include interest-rate compression, declining deposit funding, real-estate and junior-lien exposure, medical-industry concentration, FDIC loss-share interpretations and clawbacks, regulatory changes, merger integration, technology execution, cybersecurity, vendor dependence and litigation.
- The filing disclosed $5.84 billion of unused loan commitments, $54.8 million of standby letters of credit and $90.8 million of operating lease obligations. Management believed pending legal matters would not materially affect consolidated financial statements.
- Management and the independent auditor concluded that internal control over financial reporting was effective, and the financial statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether reported earnings remain sustainable as FDIC-assisted loan accretion, recoveries and provision credits decline.
- The trajectory of net interest margin, loan yields and acquired-loan runoff in subsequent quarters.
- Credit performance of the originated commercial real estate, medical-related and junior-lien revolving mortgage portfolios.
- Actual cash receipts, clawback settlements and expiration effects under the FDIC loss-share agreements.
- The financial and operational impact of the 1st Financial merger, including branch closures, integration costs and goodwill.
- Actual spending and benefits from the technology modernization program, whose estimated cost exceeds $100 million.
- Capital ratios after the phaseout of trust preferred securities and the implementation of Basel requirements.
- The effect of deposit mix changes and rising interest rates on liquidity, funding costs and securities valuations.