First Citizens BancShares, Inc. — 2Q17 Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc. is a bank holding company operating primarily through First-Citizens Bank & Trust Company. The filing covers the unaudited quarter and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods and December 31, 2016 balance-sheet data.
Operations include commercial and retail banking, deposits, loans and leases, treasury services, cardholder and merchant services, wealth management, mortgage banking and other financial services.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net interest income | $261.6 million | $232.2 million | $512.0 million | $464.9 million |
| Provision for loan and lease losses | $12.3 million | $4.6 million | $20.6 million | $9.4 million |
| Total noninterest income | $248.2 million | $140.3 million | $375.5 million | $245.5 million |
| Noninterest expense | $285.6 million | $258.3 million | $550.0 million | $510.0 million |
| Net income | $134.7 million | $69.3 million | $202.3 million | $121.4 million |
| Net income per share | $11.21 | $5.77 | $16.84 | $10.11 |
- Second-quarter taxable-equivalent net interest margin was 3.28%, compared with 3.13% in the prior-year quarter; six-month margin was 3.27%, compared with 3.16% in 2016.
- Second-quarter annualized return on average assets was 1.58% and return on average equity was 17.10%; six-month figures were 1.20% and 13.11%, respectively.
- Total assets were $34.77 billion at June 30, 2017, up from $32.99 billion at December 31, 2016. Shareholders’ equity was $3.24 billion, compared with $3.01 billion at year-end.
- Loans and leases were $22.87 billion, up from $21.74 billion at December 31, 2016. Deposits were $29.46 billion, up from $28.16 billion.
- The allowance for loan and lease losses was $228.8 million, or 1.00% of total loans and leases. Non-PCI allowance coverage was 0.98%; PCI allowance coverage was 1.51%.
- Nonperforming assets were $150.2 million, or 0.65% of loans, leases and other real estate owned, versus $147.0 million and 0.67% at December 31, 2016.
- Six-month operating cash flow was $190.9 million, compared with $94.5 million in 2016. Investing activities used $585.6 million, while financing activities provided $411.8 million. Cash and due from banks ended at $556.8 million.
- At June 30, 2017, the company reported Tier 1 risk-based and common equity Tier 1 ratios of 12.69%, total risk-based capital of 14.07% and leverage capital of 9.33%; management stated that the company remained well capitalized.
Material changes versus comparable periods
- Net income increased 94.3% year over year in the second quarter and 66.6% for the first six months. The principal driver was a $122.7 million pretax gain from the Guaranty Bank acquisition.
- Net interest income increased 12.7% in the second quarter and 10.1% year to date, reflecting loan growth, higher investment and overnight-investment yields, and lower deposit costs.
- Noninterest expense rose 10.6% in the second quarter and 7.8% year to date, primarily from personnel, technology, processing and merger-related expenses.
- The provision for loan and lease losses increased materially, reflecting loan growth, higher net charge-offs, consumer credit-card growth and updated loss assumptions for certain PCI loan pools.
- Loans increased $1.13 billion from year-end, including $512.0 million of organic non-PCI growth and $535.9 million of Guaranty non-PCI loans. Deposits increased $1.29 billion, supported by organic demand-deposit growth and acquired balances.
- Accumulated other comprehensive loss improved to $102.8 million from $135.2 million at year-end, primarily due to lower unrealized losses on available-for-sale securities.
Acquisitions, outlook, risks and unusual items
- In May 2017, the company acquired selected assets and assumed liabilities of Guaranty Bank. Assets acquired had estimated fair value of $875.1 million, including $689.1 million of loans; deposits assumed were $982.3 million. The transaction generated a $122.7 million gain and $6.7 million of merger-related expense. The fair values were preliminary and subject to refinement for up to one year.
- In January 2017, the company acquired selected assets and liabilities of Harvest Community Bank, recording a $12.0 million acquisition gain and $0.7 million of year-to-date merger-related expense.
- Management’s strategy emphasizes core deposit growth, loan growth, noninterest-income expansion, expense control, branch optimization and technology investment. No quantitative earnings guidance was provided.
- Management reported $4.54 billion of cash in excess of reserve requirements and unencumbered securities, $4.72 billion of additional FHLB borrowing capacity, $1.99 billion of additional Federal Reserve borrowing capacity and $715.0 million of available Federal Funds lines and other borrowing facilities.
- The company’s interest-rate profile is asset sensitive: modeled 24-month net interest income increased 4.32% under a 100-basis-point instantaneous rate increase, 5.54% under 200 basis points and 3.01% under 300 basis points.
- Risks include credit deterioration, borrower repayment capacity, real-estate collateral values, interest-rate and liquidity risk, deposit attrition, competition, regulatory actions, integration of FDIC-assisted acquisitions and changes in economic conditions.
- Shared-loss protection remained only for approximately $73.2 million of single-family residential loans. The related FDIC receivable was $3.8 million and the estimated FDIC clawback payable was $99.1 million.
- Off-balance-sheet exposures included $9.19 billion of unused commitments to extend credit, $81.1 million of standby letters of credit and $67.4 million of unfunded affordable-housing commitments. Mortgage-sale representation and warranty reserves were $3.0 million.
- Legal proceedings arose in the ordinary course of business; management stated that any ultimate liability was not expected to materially affect the consolidated financial statements. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Separate recurring earnings from the $122.7 million Guaranty acquisition gain and other securities or FDIC-related items.
- Guaranty and HCB integration costs, preliminary purchase-accounting marks and the future contribution of acquired loans and deposits.
- Loan growth quality, consumer and medical/dental credit performance, PCI cash-flow assumptions and the adequacy of the $228.8 million allowance.
- Deposit retention and funding costs as interest rates rise, including reliance on FHLB advances, repurchase agreements and other borrowings.
- Potential effects of interest-rate movements on net interest income, securities valuations, mortgage servicing rights and accumulated other comprehensive income.
- Future consequences of the expiration or termination of FDIC shared-loss agreements, including exposure to losses previously covered by the FDIC.
- Implementation effects of forthcoming accounting standards, particularly expected credit losses, leases, revenue recognition and financial-instrument measurement.