First Citizens BancShares, Inc. — Form 10-Q Summary
Business Context and Reporting Period
First Citizens BancShares, Inc., through First-Citizens Bank & Trust Company, provides consumer and commercial banking, lending, leasing, factoring, wealth management, investment, and rail equipment leasing services through more than 500 branches and offices in 30 states.
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023. Results include Silicon Valley Bridge Bank (“SVBB”) operations from the March 27, 2023 FDIC-assisted acquisition. Interim results are not necessarily indicative of full-year results.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $1.99 billion | $795 million | $4.80 billion | $2.14 billion |
| Provision for credit losses | $192 million | $60 million | $1.13 billion | $566 million |
| Noninterest income | $615 million | $433 million | $11.53 billion | $1.71 billion |
| Noninterest expense | $1.42 billion | $760 million | $3.84 billion | $2.32 billion |
| Net income | $752 million | $315 million | $10.95 billion | $841 million |
| Net income available to common stockholders | $737 million | $303 million | $10.91 billion | $805 million |
| Diluted EPS | $50.67 | $19.25 | $750.19 | $50.70 |
| Net interest margin | 4.07% | 3.42% | 3.94% | 3.08% |
| Return on average assets | 1.41% | 1.16% | 7.81% | 1.04% |
Q3 net income increased 10% from $682 million in Q2 2023, primarily because lower noninterest expense and higher net interest income more than offset higher credit-loss provision. Q3 net interest income included $275 million of purchase-accounting accretion on acquired loans.
For the nine-month period, results were dominated by a preliminary $9.89 billion after-tax gain on the SVBB acquisition. The gain was recognized because the estimated fair value of acquired net assets exceeded purchase price consideration. Consequently, reported earnings, EPS, ROA, noninterest income, and the effective tax rate are not representative of recurring operating performance.
Balance Sheet, Liquidity, Debt, and Capital
| Balance-sheet metric | September 30, 2023 | December 31, 2022 | Change |
|---|---|---|---|
| Total assets | $213.77 billion | $109.30 billion | +96% |
| Loans and leases | $133.20 billion | $70.78 billion | +88% |
| Total deposits | $146.23 billion | $89.41 billion | +64% |
| Total borrowings | $37.71 billion | $6.65 billion | +$31.07 billion |
| Stockholders’ equity | $20.39 billion | $9.66 billion | +111% |
- SVB loans totaled $56.86 billion and SVB deposits totaled $39.97 billion at September 30, 2023, down from $68.47 billion and $56.01 billion, respectively, at the acquisition date.
- The FDIC Purchase Money Note was approximately $36.07 billion, bears interest at 3.50%, and matures in March 2028.
- Liquid assets totaled $57.02 billion, including $35.90 billion of cash and interest-earning deposits and $21.12 billion of high-quality liquid securities.
- Contingent liquidity sources totaled $88.61 billion, including a potential $70 billion FDIC credit facility, $13.53 billion of FHLB capacity, $4.99 billion of Federal Reserve capacity, and a $100 million unsecured line.
- Regulatory capital remained above well-capitalized thresholds: BancShares’ CET1 ratio was 13.24%, total risk-based capital ratio was 15.64%, and Tier 1 leverage ratio was 9.73%.
Material Changes Versus Prior Comparable Period
- The SVBB acquisition more than doubled total assets and materially expanded loans, deposits, borrowings, investment securities, and the operating footprint.
- Nine-month net interest income increased 124%, driven by acquired SVB assets, higher interest rates, organic loan growth, and purchase-accounting accretion.
- Credit-loss provision increased 99% year over year, including $716 million of SVBB acquisition-related “day 2” provisions and higher recurring provisions.
- Noninterest expense increased 66% year over year, reflecting acquired operations, higher salaries and benefits, equipment costs, and acquisition-related expenses.
- Deposits in the SVB segment declined from $56.01 billion at acquisition to $39.97 billion at quarter-end, while deposits in other businesses increased, particularly through the Direct Bank.
- Nonaccrual loans increased to $899 million from $627 million at December 31, 2022, although the nonaccrual ratio improved to 0.68% from 0.89% because of the substantially larger loan base.
- Net charge-offs increased to $383 million for the first nine months, compared with $55 million in the prior-year period; Q3 charge-offs were concentrated in commercial, office real estate, equipment finance, and SVB investor-dependent loans.
Guidance, Outlook, Management Commentary, Risks, and Unusual Items
- No formal earnings or revenue guidance is provided in the filing.
- Management expects continued sensitivity to interest rates, deposit pricing, deposit retention, economic growth, inflation, recession risk, geopolitical developments, and financial-market volatility.
- Management identified deterioration in macroeconomic forecasts, including commercial real estate and general office conditions, as drivers of the Q3 allowance build. The modeled allowance range under alternative macroeconomic scenarios was approximately $1.31 billion to $2.15 billion; recorded allowance was $1.67 billion.
- The SVBB purchase accounting valuations, including acquired loans, core deposit intangibles, tax items, and certain assets and liabilities, remain preliminary. The measurement period can continue for up to one year after the acquisition date, and the final settlement with the FDIC remains pending for certain items.
- The FDIC shared-loss agreement covers an estimated $60 billion of commercial loans. The FDIC generally absorbs 50% of losses above $5 billion, subject to agreement terms, while First Citizens may owe a future true-up of up to $1.5 billion if specified conditions are met.
- The company expects a potential one-time FDIC special assessment of approximately $30 million based on the FDIC’s proposal; the final amount and timing remain uncertain.
- Proposed Basel III endgame and long-term-debt rules could increase capital and funding requirements. Management expects it may need to raise additional long-term debt if the proposed requirements become effective.
- Investment securities had $3.12 billion of gross unrealized losses at quarter-end, including $1.18 billion on available-for-sale securities. Accumulated other comprehensive loss was $880 million.
- Management reported effective disclosure controls. Integration-related evaluation and implementation of internal controls following the SVBB acquisition remained ongoing.
- Legal proceedings are considered unlikely to have a material adverse effect on financial condition based on currently available information, but management estimates reasonably possible litigation losses of up to $10 million above established reserves and insurance for matters that can be estimated.
- On October 24, 2023, the board declared a $1.64 per common share quarterly dividend, up from $0.75 in prior 2023 quarters.
Most Important Facts for Investors to Verify
- How much of reported earnings is recurring after excluding the $9.89 billion SVBB acquisition gain, purchase-accounting accretion, day 2 provisions, and acquisition-related expenses.
- The final FDIC settlement and measurement-period adjustments, including the final purchase money note balance and acquired-asset valuations.
- SVB deposit retention, runoff trends, liquidity needs, and the performance of the $56.86 billion SVB loan portfolio, particularly investor-dependent, global fund banking, and commercial real estate exposures.
- Allowance adequacy, charge-offs, nonaccrual migration, and credit trends in general office, commercial real estate, equipment finance, technology, life sciences, and venture-capital-related lending.
- The effect of elevated deposit costs and interest-rate movements on net interest margin and earnings sensitivity.
- The potential cost of the FDIC special assessment and the impact of proposed capital and long-term-debt rules.
- The company’s statement that it had not filed all reports required under Exchange Act Sections 13 or 15(d) during the preceding 12 months; investors should verify whether this cover-page checkmark is accurate or a filing presentation error.