First Citizens BancShares, Inc. — 2018 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 unaudited filing covers the quarter and six months ended June 30, 2018, with comparative periods ended June 30, 2017. The business is focused on commercial and retail banking, deposits, lending, wealth management, cardholder and merchant services, mortgage banking, and related financial services.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Interest income | $303.9 million | $272.5 million | $596.5 million | $533.4 million |
| Net interest income | $296.2 million | $261.6 million | $580.7 million | $512.0 million |
| Provision for loan losses | $8.4 million | $12.3 million | $16.0 million | $20.6 million |
| Noninterest income | $100.9 million | $217.6 million | $223.6 million | $317.3 million |
| Noninterest expense | $266.0 million | $255.0 million | $534.1 million | $491.7 million |
| Net income | $93.3 million | $134.7 million | $193.5 million | $202.3 million |
| Net income per share | $7.77 | $11.21 | $16.11 | $16.84 |
- Second-quarter taxable-equivalent net interest margin was 3.64%, compared with 3.28% in the prior-year quarter. Six-month margin was 3.61%, compared with 3.27%.
- Second-quarter annualized return on average assets was 1.08% and return on average equity was 11.00%. Six-month figures were 1.13% and 11.59%, respectively.
- At June 30, 2018, total assets were $35.09 billion, loans and leases were $24.54 billion, deposits were $30.41 billion, and shareholders’ equity was $3.45 billion.
- The allowance for loan and lease losses was $224.9 million, or 0.92% of total loans and leases. Annualized second-quarter net charge-offs were 0.11% of average loans and leases.
- Nonperforming assets were $133.3 million, or 0.54% of loans, leases, and other real estate owned, versus $144.3 million at December 31, 2017.
- Cash provided by operating activities for the first six months was $520.0 million. Investing activities used $255.0 million and financing activities used $340.6 million, resulting in a $75.6 million decrease in cash and due from banks to $260.5 million.
- Long-term obligations declined to $241.4 million from $870.2 million at December 31, 2017, primarily after the extinguishment of $675.0 million of Federal Home Loan Bank obligations. Short-term borrowings were $614.0 million.
- Regulatory capital remained strong: BancShares reported a 13.06% Tier 1 risk-based capital ratio, 13.06% common equity Tier 1 ratio, 14.43% total risk-based capital ratio, and 9.99% leverage ratio.
Material changes versus comparable periods
- Second-quarter net income declined approximately 30.7% from the prior-year quarter, primarily because the prior-year period included a $122.7 million acquisition gain. Excluding that gain, second-quarter noninterest income increased $6.0 million, or 6.3%.
- Six-month net income declined approximately 4.3% year over year. The prior-year period included $134.7 million of acquisition gains, while 2018 included a $25.8 million gain from extinguishment of debt and the benefit of a lower federal tax rate.
- Net interest income increased 13.2% in the second quarter and 13.4% year to date, driven by loan growth, higher loan and investment yields, and lower borrowing costs.
- Loans increased $941.6 million, or 8.0% annualized, from December 31, 2017. Non-PCI loans grew to $23.86 billion, while PCI loans declined to $674.3 million due to portfolio runoff, partially offset by HomeBancorp additions.
- Deposits increased $1.14 billion, or 3.9%, from year-end, including approximately $582.2 million acquired from HomeBancorp. Growth in demand, savings, and interest-bearing checking balances was partly offset by time-deposit runoff.
- Noninterest expense increased 4.3% in the second quarter and 8.6% year to date, primarily because of higher personnel, processing, occupancy, and acquisition-related costs.
- The effective tax rate decreased to 24.0% in the second quarter and 23.9% for the six months, compared with 36.4% and 36.2%, respectively, principally due to the Tax Cuts and Jobs Act.
Outlook, commentary, risks, and unusual items
- Management emphasized growth in core deposits and loans, expansion of noninterest income, expense discipline, branch optimization, technology investment, and an interest-rate profile intended to benefit net interest income in a rising-rate environment.
- HomeBancorp was acquired on May 1, 2018 for total consideration of $112.7 million. The transaction added approximately $842.7 million of assets, $619.6 million of deposits, and $57.6 million of goodwill. Fair values remain preliminary.
- Capital Commerce Bancorp was announced as a pending acquisition for approximately $28.1 million, subject to regulatory and shareholder approvals and expected to close by the fourth quarter of 2018.
- On July 25, 2018, the company announced the planned acquisition of Palmetto Heritage Bancshares for approximately $30.3 million, subject to approvals and expected to close in the fourth quarter of 2018.
- Management expects to contribute $50.0 million to the BancShares pension plan during 2018. No contributions had been made through June 30.
- Active FDIC shared-loss arrangements generated an estimated payable of $103.5 million, with potential clawback payment dates in March 2020 and March 2021. Shared-loss protection remained on $62.1 million of single-family residential loans.
- Unfunded commitments included $10.12 billion of unused commitments to extend credit, $87.6 million of standby letters of credit, and $77.6 million of affordable-housing commitments. Management stated that legal proceedings were not expected to have a material effect, but ultimate liabilities cannot be determined.
- Interest-rate sensitivity analysis estimated that a 100-basis-point increase in rates would increase 24-month net interest income by 3.13%, while a 100-basis-point decrease would reduce it by 10.45%. A 300-basis-point increase would reduce economic value of equity by 5.22%.
- The company expects to adopt the current expected credit loss standard in the first quarter of 2020; the impact had not been determined. Lease accounting adoption was planned for the first quarter of 2019, with a preliminary estimated $65 million to $85 million increase in lease assets and liabilities and a four- to six-basis-point adverse capital impact.
Important facts for investors to verify
- Whether continued commercial loan growth and rising yields offset PCI loan runoff, deposit pricing pressure, and higher operating expenses.
- The sustainability and quality of earnings excluding the 2018 debt-extinguishment gain, equity-security gains, tax-rate benefit, and prior-period acquisition gains.
- The final purchase accounting adjustments and contribution of HomeBancorp, as well as regulatory approval and closing terms for Capital Commerce and Palmetto Heritage.
- Credit performance in the growing commercial mortgage, commercial and industrial, and residential mortgage portfolios, including trends in nonaccrual loans, charge-offs, TDRs, and the allowance.
- The effect of rising interest rates on securities valuations, accumulated other comprehensive loss, deposit migration, mortgage activity, and net interest income.
- The ultimate amount and timing of FDIC shared-loss clawback payments, pension contributions, legal contingencies, and the impact of future CECL adoption.