First Citizens BancShares, Inc. — 2020 Q2 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 quarter and six months ended June 30, 2020. Results reflect the COVID-19 pandemic, CARES Act programs, SBA Paycheck Protection Program (SBA-PPP) activity, adoption of the current expected credit loss (CECL) model, and the February 2020 Community Financial acquisition.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net income | $153.8 million | $119.4 million | $211.0 million | $230.7 million |
| Net income available to common shareholders | $149.0 million | $119.4 million | $206.2 million | $230.7 million |
| Net income per common share | $14.74 | $10.56 | $20.04 | $20.23 |
| Net interest income | $337.4 million | $327.3 million | $675.8 million | $647.8 million |
| Provision for credit losses | $20.6 million | $5.2 million | $48.9 million | $16.9 million |
| Noninterest income | $165.4 million | $106.9 million | $229.4 million | $210.5 million |
| Noninterest expense | $291.7 million | $273.4 million | $591.7 million | $541.1 million |
| Taxable-equivalent net interest margin | 3.14% | 3.77% | 3.33% | 3.81% |
| Return on average assets | 1.36% | 1.29% | 0.98% | 1.28% |
Second-quarter net income increased 28.8%, primarily due to $64.6 million of marketable equity securities gains, $19.0 million of SBA-PPP interest and fee income, and $13.8 million of investment-security gains. These benefits were partly offset by higher credit-loss provisions and lower asset yields. Six-month net income declined 8.6% because first-quarter results were more affected by credit provisions and lower operating performance.
- Total assets were $47.87 billion at June 30, 2020, compared with $39.82 billion at December 31, 2019.
- Total loans and leases were $32.42 billion, including $3.08 billion of SBA-PPP loans; net loans were $32.20 billion.
- Total deposits were $41.48 billion, up from $34.43 billion at year-end 2019.
- Investment securities totaled $9.51 billion at fair value, up from $7.17 billion at year-end 2019.
- Allowance for credit losses was $222.5 million, or 0.69% of total loans; excluding SBA-PPP loans, coverage was 0.76% of loans.
- Net charge-offs were $7.4 million in the second quarter, with an annualized net charge-off ratio of 0.09%.
- Nonperforming assets were $251.6 million, or 0.77% of loans, leases and other real estate owned; nonaccrual loans were $197.8 million.
- Operating cash flow was $100.8 million for the first six months. Investing cash flow used $7.83 billion, primarily for loan and securities growth, while financing activities provided $7.74 billion.
Liquidity, capital and debt
- Liquid assets were approximately $8.04 billion, or 16.8% of consolidated assets. Additional contingent liquidity sources totaled approximately $11.68 billion.
- At June 30, 2020, regulatory capital ratios were 13.6% total risk-based capital, 11.4% Tier 1 risk-based capital, 10.3% common equity Tier 1, and 8.1% Tier 1 leverage.
- Total borrowings were $2.00 billion, compared with $1.33 billion at December 31, 2019. The increase included $350 million of subordinated notes issued in March 2020.
- The company also issued $345 million of Series A preferred stock in March 2020. Preferred dividends totaled $4.8 million in the second quarter and six months.
- Class A share repurchases totaled $127.0 million in the second quarter and $286.7 million year to date. Repurchases were suspended after the authorization was completed on July 31, 2020.
Material changes versus prior comparable periods
- Loan growth accelerated because of $3.08 billion of SBA-PPP originations. Excluding SBA-PPP loans, acquisitions and divestitures, loans grew 3.1% on an annualized basis from year-end 2019.
- Deposits increased substantially, including approximately $2.99 billion of SBA-PPP-related reciprocal deposits and $526 million of government stimulus deposits.
- Net interest margin contracted 63 basis points in the second quarter and 48 basis points year to date, reflecting lower market rates and asset yields.
- Noninterest income benefited from unusually large equity-security and investment-security gains, while service-charge and wealth-management revenue declined because of reduced customer activity and branch closures.
- Noninterest expense rose 6.7% in the second quarter and 9.4% year to date, driven by personnel, processing, COVID-19 facility measures, pension costs and merger-related expenses.
- CECL adoption on January 1, 2020 reduced the allowance by $37.9 million and increased retained earnings by $36.9 million after tax effects. A subsequent $36.1 million reserve build reflected potential COVID-19 credit losses.
- Nonperforming assets increased from $168.3 million at March 31, 2020 and $168.3 million at December 31, 2019? The filing reports $168.3 million at December 31, 2019 and $251.6 million at June 30, 2020; part of the increase resulted from CECL-related reclassification of previously pooled acquired loans.
Outlook, management commentary, risks and unusual items
- Management stated that capital and liquidity remained strong and that credit quality and credit-line utilization had not shown significant COVID-19 deterioration through June 30.
- COVID-19-related loan extensions covered approximately $5.6 billion of balances at June 30, including approximately $166 million of payment deferrals. By July 31, extensions had declined to approximately $1.5 billion, with $43 million of payment deferrals; management reported that 91% of accounts returning to active status had made their first scheduled payment.
- The company originated approximately 23,000 SBA-PPP loans. Management expects accelerated recognition of deferred SBA-PPP fees as forgiveness requests are processed, although the timing depends on final procedures and regulatory developments.
- COVID-19 remains the principal risk, with potential effects on borrower defaults, unemployment, collateral values, credit provisions, deposit stability, liquidity, operations, cybersecurity, compliance and financial reporting.
- Management estimates the remaining FDIC shared-loss clawback liability at $15.0 million, with the remaining payment date in March 2021.
- Unfunded commitments to extend credit were $11.71 billion and standby letters of credit were $104.7 million at June 30, 2020. The reserve for unfunded commitments was $13.7 million.
- The effective tax rate was 19.3% in the second quarter, favorably affected by a $6.9 million tax benefit. Management estimated an effective tax rate of approximately 21% for the remainder of 2020, subject to future income, expenses and discrete tax effects.
- The filing provides no formal earnings or revenue guidance.
Important facts for investors to verify
- Whether SBA-PPP fee recognition accelerates as expected and how loan forgiveness affects future interest income.
- Whether COVID-19 loan extensions convert into delinquencies, nonaccrual loans, charge-offs or additional reserve requirements after government support expires.
- The adequacy of the $222.5 million ACL, particularly because SBA-PPP loans carry no recorded allowance and CECL estimates depend on uncertain economic forecasts.
- The sustainability of second-quarter earnings given the $64.6 million equity-security gain and $13.8 million investment-security gain.
- The effect of prolonged low interest rates on the 3.14% net interest margin, deposit pricing, mortgage servicing rights and overall profitability.
- The timing and amount of the remaining $15.0 million FDIC clawback payment and any additional acquisition-related obligations.
- Whether share repurchase activity remains suspended and how capital issuance, dividends and repurchases affect per-share results.