First Citizens BancShares, Inc. — 2Q 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 unaudited filing covers the quarter and six months ended June 30, 2019, with comparisons to the same periods in 2018 and to December 31, 2018.
Management’s strategy emphasizes commercial and retail banking, loan and deposit growth, net interest margin management, noninterest-income expansion, expense control, technology investment and strategic acquisitions.
Financial performance and key metrics
| Metric | Three months ended June 30, 2019 | Change vs. 2018 | Six months ended June 30, 2019 | Change vs. 2018 |
|---|---|---|---|---|
| Net interest income | $327.3 million | Up 10.5% | $647.8 million | Up 11.6% |
| Noninterest income | $106.9 million | Up 5.9% | $210.5 million | Down 5.9% |
| Noninterest expense | $273.4 million | Up 2.8% | $541.1 million | Up 1.3% |
| Income before taxes | $155.6 million | Up 26.8% | $300.4 million | Up 18.2% |
| Net income | $119.4 million | Up 27.9% | $230.7 million | Up 19.2% |
| Diluted earnings per share | $10.56 | Up 35.9% | $20.23 | Up 25.6% |
| Taxable-equivalent net interest margin | 3.79% | Up 15 basis points | 3.84% | Up 23 basis points |
| Return on average assets | 1.29% | Up 21 basis points | 1.28% | Up 15 basis points |
| Return on average equity | 13.50% | Up 250 basis points | 13.19% | Up 160 basis points |
Interest income increased to $350.7 million in the second quarter and $687.6 million year to date, driven primarily by loan growth and higher loan yields. Interest expense rose materially to $23.4 million in the quarter and $39.8 million year to date, principally from higher deposit balances and rates paid on time deposits and money-market accounts.
Provision for loan and lease losses was $5.2 million in the second quarter and $16.9 million year to date. The allowance for loan and lease losses was $226.6 million, or 0.85% of total loans and leases, at June 30, 2019. The annualized net charge-off ratio was 0.11% for both the quarter and year-to-date period.
Balance sheet, capital, debt and liquidity
- Total assets were $37.66 billion, up from $35.41 billion at December 31, 2018.
- Loans and leases were $26.73 billion, up $1.20 billion, or approximately 9.5% annualized. Acquisitions contributed approximately $1.01 billion of non-PCI loans; excluding acquired loans, loan growth was approximately 1.4% annualized.
- Total deposits were $32.72 billion, up $2.05 billion, or approximately 13.5% annualized. Excluding acquired deposits, organic growth was approximately 6.6% annualized.
- Total borrowings were $914.4 million, compared with $892.2 million at year-end. Major components included $544.5 million of customer repurchase agreements, $197.1 million of FHLB borrowings and $154.3 million of subordinated debentures.
- Cash and due from banks were $284.1 million. Unencumbered securities and cash in excess of reserve requirements totaled approximately $4.07 billion. Additional FHLB borrowing capacity was approximately $6.26 billion, Federal Reserve borrowing capacity was approximately $2.09 billion based on pledged loans, and available Federal Funds lines were $732.7 million.
- Shareholders’ equity was $3.57 billion. BancShares remained well capitalized, with a 12.03% Tier 1 risk-based capital ratio, 12.03% common equity Tier 1 ratio, 13.34% total risk-based capital ratio and 9.35% leverage ratio.
- Operating lease right-of-use assets and liabilities recognized upon adoption of the new lease standard were approximately $70.7 million and $71.8 million, respectively.
Six-month cash flow from operating activities was $219.8 million, compared with $521.0 million in 2018. Investing activities used $978.7 million, primarily reflecting securities purchases, loan growth and acquisitions. Financing activities provided $715.6 million, principally from deposit growth, partly offset by $187.0 million of share repurchases. Cash and due from banks decreased by $43.3 million during the first six months.
Material changes and unusual items
- Biscayne Bancshares was acquired on April 2, 2019 for approximately $118.9 million. It contributed approximately $1.08 billion of assets, $863.4 million of loans and $786.5 million of deposits at closing; $46.5 million of goodwill was recorded.
- First South Bancorp was acquired on May 1, 2019 for approximately $37.5 million. It contributed approximately $253.0 million of assets, $179.2 million of loans and $207.6 million of deposits; $13.9 million of goodwill was recorded.
- Merger-related expenses were $4.1 million in the second quarter and $5.8 million year to date.
- An agreement was signed to acquire Entegra Financial Corp. for an estimated $219.8 million. Closing was expected in the fourth quarter of 2019, subject to regulatory approval and customary conditions. Entegra reported approximately $1.66 billion of assets, $1.09 billion of loans and $1.25 billion of deposits as of June 30, 2019.
- Second-quarter noninterest income included $5.7 million of realized securities gains, compared with none in the prior-year quarter. Year-to-date 2018 included a $25.8 million gain on extinguishment of debt that did not recur in 2019.
- Class A share repurchases totaled 205,500 shares, or $89.8 million, in the second quarter and 448,500 shares, or $190.5 million, year to date. An additional 69,600 shares were repurchased for $31.7 million between quarter-end and August 2, 2019.
- Nonperforming assets increased to $151.2 million from $133.9 million at year-end, primarily due to higher nonaccrual commercial mortgage loans and acquired nonaccrual loans. The ratio of nonperforming assets to loans, leases and other real estate owned was 0.57%.
- Total troubled debt restructurings increased to $164.9 million from $156.1 million at year-end, including $41.1 million of nonaccruing TDRs.
Guidance, outlook, risks and contingencies
Management stated that recent net interest margin expansion is unlikely to continue. Declining new-loan yields, increased competition, higher deposit expense and rising deposit betas are expected to cause margin compression during the remainder of 2019.
Key risks include credit deterioration, borrower repayment capacity, real estate and collateral values, deposit retention and funding costs, interest-rate sensitivity, acquisition integration and regulatory approvals. The filing identifies no material changes to the risk factors disclosed in the 2018 Form 10-K.
Interest-rate sensitivity modeling estimated that a 100-basis-point decline in rates would reduce net interest income by 11.18% over 24 months, while a 100-basis-point increase would increase it by 3.66%. The filing also reports potential litigation arising from ordinary banking activities and acquired institutions; management does not expect current matters to materially affect consolidated financial statements.
FDIC shared-loss protection remained on approximately $50.2 million of single-family residential loans. The estimated FDIC clawback liability was $108.9 million, with payment dates in March 2020 and March 2021. The company was implementing the current expected credit loss standard and had not determined its eventual impact; adoption was planned for the first quarter of 2020.
Most important facts for investors to verify
- Whether deposit repricing and lower loan yields produce the margin compression management anticipated.
- Credit trends, particularly the increase in nonaccrual commercial mortgage loans, nonperforming assets and TDRs.
- Integration results, cost synergies and credit performance of the Biscayne and First South acquisitions.
- Regulatory approval and closing of the proposed Entegra acquisition, including final purchase accounting and funding.
- The quantified impact of CECL adoption on retained earnings, reserves and regulatory capital.
- Cash deployment through continued share repurchases relative to loan growth, capital needs and liquidity targets.
- Settlement and timing of FDIC clawback obligations and the effect of interest-rate changes on earnings and economic value of equity.