Business Context and Reporting Period
First Citizens BancShares, Inc. is a financial holding company operating primarily through First-Citizens Bank & Trust Company. The bank provides commercial and retail banking, deposit, lending, cardholder, merchant, wealth-management, mortgage and related services. This unaudited Form 10-Q covers the three and six months ended June 30, 2016; comparisons are primarily with the same periods of 2015 and December 31, 2015.
Key Financial Metrics
| Metric | Q2 2016 | Six months 2016 | Comparable period |
|---|---|---|---|
| Net income | $69.3 million | $121.4 million | Q2 2015: $44.5 million; six months 2015: $111.7 million |
| Earnings per share | $5.77 | $10.11 | Q2 2015: $3.71; six months 2015: $9.30 |
| Net interest income | $232.2 million | $464.9 million | Q2 2015: $234.7 million; six months 2015: $454.8 million |
| Noninterest income | $140.3 million | $245.5 million | Q2 2015: $107.5 million; six months 2015: $258.2 million |
| Noninterest expense | $258.3 million | $510.0 million | Q2 2015: $264.7 million; six months 2015: $522.9 million |
| Net interest margin | 3.13% | 3.16% | Q2 2015: 3.31%; six months 2015: 3.24% |
| Return on average assets | 0.87% | 0.76% | Q2 2015: 0.58%; six months 2015: 0.74% |
| Return on average equity | 9.33% | 8.26% | Q2 2015: 6.42%; six months 2015: 8.19% |
- Total assets were $32.23 billion at June 30, 2016, compared with $31.48 billion at December 31, 2015.
- Loans and leases were $20.74 billion, up $502.6 million, or 5.0% on an annualized basis, from year-end. Non-PCI loans increased to $19.82 billion, while PCI loans declined to $921.5 million.
- Total deposits were $27.26 billion, up $327.0 million from year-end. Cash and due from banks were $507.6 million, and overnight investments were $2.28 billion.
- Shareholders’ equity was $3.04 billion, compared with $2.87 billion at December 31, 2015. Book value per share was $252.76.
- The allowance for loan and lease losses was $208.0 million, equal to 1.00% of total loans and leases, compared with 1.02% at year-end and 1.07% at June 30, 2015.
- Net charge-offs were $3.3 million in the second quarter, or 0.06% of average loans and leases on an annualized basis. Nonperforming assets were $159.9 million, or 0.77% of loans, leases and other real estate owned.
- Operating cash flow was $94.5 million for the first six months. Investing cash flow used $563.2 million, while financing activities provided $442.2 million. Cash and due from banks declined $26.5 million from year-end.
- Short-term borrowings were $728.6 million and long-term obligations were $850.5 million at June 30. The company had $4.03 billion of primary liquidity sources, $5.34 billion of additional FHLB borrowing capacity and $690.0 million of available Federal Funds lines and other borrowing facilities.
- Basel III capital ratios remained above well-capitalized thresholds: Tier 1 risk-based capital 12.63%, common equity Tier 1 12.63%, total risk-based capital 14.10% and leverage capital 9.09%.
Material Changes Versus Prior Comparable Period
- Second-quarter net income increased 55.7% from the prior-year quarter; six-month net income increased 8.7%. The quarterly improvement was substantially affected by unusual noninterest income.
- Q2 noninterest income included a $16.6 million pretax net benefit from terminating five FDIC loss-share agreements, $12.5 million of securities gains and $3.3 million of acquisition gains. These items are not necessarily recurring.
- Net interest income declined 1.0% year over year in the second quarter despite loan growth. PCI loan accretion income declined to $20.4 million from $34.1 million, reflecting continued runoff of acquired credit-impaired loans. The six-month net interest income increase was supported by originated loan growth, improved investment yields and lower deposit costs.
- Loan growth was concentrated in the originated commercial portfolio. Non-PCI commercial loans increased $1.13 billion from June 30, 2015, while PCI loans declined $201.8 million.
- Noninterest expense decreased 2.4% year over year in Q2 and 2.5% for the first six months, primarily due to lower personnel and merger-related costs, partly offset by higher merchant and card-processing costs and $2.3 million of litigation-related costs.
- Credit indicators improved from year-end: nonperforming assets declined $9.1 million and total TDRs declined to $139.3 million from $144.8 million. However, nonaccrual non-PCI loans increased from the prior-year quarter due to several large commercial mortgage relationships and residential mortgage additions.
- Accumulated other comprehensive loss improved to $15.0 million from $64.4 million at year-end, principally because of higher unrealized gains on available-for-sale securities.
Outlook, Commentary, Risks and Unusual Items
- Management’s strategy emphasizes core revenue growth, expense control, branch-network optimization, technology investment and additional strategic acquisitions. The filing does not provide formal earnings or revenue guidance.
- The company agreed to acquire Cordia Bancorp and Bank of Virginia for estimated cash consideration of $35.0 million, subject to shareholder and regulatory approvals; closing was expected no later than the fourth quarter of 2016. Cordia reported assets of $347.8 million at March 31, 2016.
- FDIC loss-share protection was materially reduced: five agreements were terminated, non-single-family residential protection for United Western Bank expired, and only certain single-family residential loans remained covered under the remaining agreements. Future losses and recoveries on previously covered assets will generally be borne by the company.
- Management expects low interest rates and global economic uncertainty to continue affecting margins, funding costs, securities values and loan demand. The June 2016 U.K. referendum increased market volatility.
- Interest-rate sensitivity modeling estimated that a 100-basis-point instantaneous increase in rates would increase 24-month net interest income by 5.01% and economic value of equity by 6.62%; a 300-basis-point increase would increase net interest income by 3.79% and EVE by 2.96%.
- Key risks include credit deterioration, real-estate collateral values, deposit retention, interest-rate and liquidity risk, securities exposure to other financial institutions, acquisition integration and regulatory approvals. Unused credit commitments were $8.26 billion and standby letters of credit were $82.3 million at June 30, 2016.
- The interest-rate swap hedging $93.5 million of variable-rate trust-preferred obligations expired in June 2016. The company also entered into forward-starting FHLB advances totaling $200.0 million scheduled to fund in June 2018.
- Management stated that pending legal actions arising from ordinary business activities were not expected to have a material effect, although ultimate liability cannot be determined.
Important Facts for Investors to Verify
- Separate recurring operating earnings from the $16.6 million FDIC loss-share benefit, $12.5 million securities gains and $3.3 million acquisition gains in assessing Q2 profitability.
- Monitor the effect of PCI loan runoff and declining accretion income on net interest margin and future revenue.
- Evaluate originated commercial-loan growth, nonaccrual commercial mortgages, nonperforming assets and the adequacy of the $208.0 million allowance after loss-share protection has declined.
- Confirm the timing, regulatory approvals, consideration and integration risks associated with the proposed Cordia transaction.
- Assess liquidity and funding resilience, including deposit trends, FHLB borrowings, repurchase agreements, available borrowing capacity and $8.26 billion of unfunded commitments.
- Review the company’s exposure to securities of other financial institutions, interest-rate sensitivity and the potential effects of sustained low rates or future rate increases.