First Citizens BancShares, Inc. — Second-Quarter 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company operates through First-Citizens Bank & Trust Company, a full-service commercial bank headquartered in Raleigh, North Carolina. The filing reflects the October 2014 Bancorporation merger and the February 2015 FDIC-assisted acquisition of Capitol City Bank & Trust Company (CCBT).
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net interest income | $234.7 million | $165.7 million | $454.8 million | $326.6 million |
| Noninterest income | $107.5 million | $66.6 million | $258.2 million | $128.9 million |
| Noninterest expense | $264.7 million | $199.0 million | $522.9 million | $390.1 million |
| Provision for loan and lease losses | $7.7 million | $(7.3) million credit | $13.5 million | $(9.2) million credit |
| Net income | $44.5 million | $26.7 million | $111.7 million | $49.2 million |
| Diluted earnings per share as reported | $3.71 | $2.77 | $9.30 | $5.11 |
- Second-quarter net income increased 66.8% year over year, while six-month net income increased 127.2%. The comparisons were substantially affected by the Bancorporation merger and CCBT acquisition.
- Taxable-equivalent net interest margin was 3.31% in the second quarter and 3.24% for the first six months, compared with 3.29% and 3.27%, respectively, in the comparable 2014 periods.
- Second-quarter return on average assets and equity was 0.58% and 6.42%; six-month returns were 0.74% and 8.19%.
- Total assets were $30.90 billion at June 30, 2015, compared with $30.08 billion at December 31, 2014. Shareholders’ equity was $2.79 billion, compared with $2.69 billion.
- Total loans and leases were $19.52 billion, up $750.7 million, or 8.0% annualized, from year-end. Non-PCI loans increased $814.0 million, partly offset by a $63.3 million decline in PCI loans.
- Total deposits were $26.51 billion, up $833.3 million from year-end and $7.96 billion from June 30, 2014.
- The allowance for loan and lease losses was $208.3 million, or 1.07% of total loans and leases, compared with 1.09% at year-end and 1.52% a year earlier. Second-quarter net charge-offs were $5.0 million, or 0.10% annualized of average loans and leases.
- Nonperforming assets were $155.4 million, or 0.79% of loans, leases and OREO, down from $170.9 million at year-end and $175.8 million a year earlier.
- Free liquidity was $4.15 billion. FHLB advances totaled $300.3 million, with approximately $2.09 billion of additional borrowing capacity; federal funds lines and other facilities totaled $740.0 million.
- At June 30, 2015, Basel III capital ratios were 12.52% common equity Tier 1, 12.66% Tier 1 risk-based, 14.10% total risk-based and 8.92% leverage. Management stated that BancShares and its bank subsidiary remained well-capitalized.
Material changes versus comparable periods
- Net interest income rose 41.6% year over year in the second quarter and 39.2% year to date, primarily from the Bancorporation merger, organic loan growth, higher investment securities balances and lower funding costs.
- Noninterest income increased 61.4% year over year in the second quarter and doubled year to date. The six-month increase included a $42.9 million CCBT acquisition gain, including a $5.4 million fair-value adjustment recognized retroactively in the first quarter.
- Noninterest expense increased 33.0% year over year in the second quarter and 34.1% year to date, mainly due to the Bancorporation merger, higher staffing, technology depreciation, merchant-processing costs and merger-related expenses.
- Compared with the first quarter of 2015, second-quarter net income declined from $67.2 million to $44.5 million because the first quarter included the $42.9 million acquisition gain. Second-quarter net interest income increased $14.5 million sequentially, while noninterest income declined $43.3 million.
- Nonperforming assets declined sequentially by $27.6 million, driven by lower OREO and nonaccrual loans. PCI loans declined $129.3 million during the second quarter due to payoffs and problem-asset resolution.
- CCBT contributed $145.1 million of loans and $137.1 million of deposits at June 30, 2015. One Atlanta branch acquired in the transaction was closed during the second quarter.
Outlook, risks and unusual items
- Management cited continuing organic loan growth, improving credit quality, stronger investment yields and low funding costs. No quantitative earnings guidance was provided.
- The CCBT acquisition gain and related fair values remain subject to refinement for up to one year after closing. The gain had a $26.2 million after-tax impact.
- BancShares estimated total Bancorporation merger-related costs of $28.0 million to $32.0 million; $14.3 million had been incurred through June 30, 2015.
- Loss-share coverage expired for certain Sun American Bank and First Regional Bank assets during the second quarter. Protection for certain Williamsburg First National Bank assets was scheduled to expire at the beginning of the fourth quarter of 2015. The FDIC loss-share receivable was $5.8 million, while the estimated FDIC clawback payable was $122.0 million.
- Unfunded commitments were $7.72 billion and standby letters of credit were $77.6 million. Mortgage-sale representation and warranty reserves were $3.1 million.
- Management identified risks from merger integration, information-security breaches, reliance on third-party vendors, technology investments, operational disruptions, credit performance, collateral values, interest rates, regulatory actions and deposit attrition.
- The company had spent $99.1 million of an estimated $130 million technology modernization program through June 30, 2015, including $11.2 million expensed and $87.9 million capitalized. Management expected additional expenses as remaining projects were completed.
- Interest-rate sensitivity modeling estimated that a parallel 300-basis-point increase would reduce projected 24-month net interest income by 2.55% and economic value of equity by 2.58%, based on June 30, 2015 assumptions.
- Legal proceedings arose in the ordinary course of business; management stated that expected liabilities were not material, although ultimate outcomes could not be determined.
Investor verification checklist
- Separate recurring operating earnings from the $42.9 million CCBT acquisition gain and other acquisition-related effects.
- Verify whether organic loan growth and net interest margin can continue after PCI loan runoff and the normalization of purchase-accounting accretion.
- Monitor noncovered nonperforming assets, commercial and industrial credit quality, TDR migration and the adequacy of the $208.3 million allowance.
- Assess the financial effect and execution risk of completing Bancorporation integration and the technology modernization program.
- Review the timing and potential cash impact of FDIC loss-share expirations, the $122.0 million clawback liability and remaining FDIC receivable.
- Evaluate deposit retention, funding costs, liquidity capacity and the sensitivity of earnings and capital to changing interest rates.
- Confirm the effect of the Basel III phase-out of trust-preferred securities on future capital ratios.