First Citizens BancShares, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
First Citizens BancShares, Inc. is a financial holding company operating primarily through First-Citizens Bank & Trust Company. The filing covers the unaudited quarter ended March 31, 2021, compared primarily with the quarter ended March 31, 2020 and the December 31, 2020 balance sheet. Operations include commercial and retail banking, wealth management, cardholder and merchant services, mortgage lending, and other banking services.
Financial performance and key metrics
| Metric | Q1 2021 | Comparable / change |
|---|---|---|
| Net income | $147.3 million | Up 157.7% from $57.2 million |
| Net income available to common shareholders | $142.7 million | Up from $57.2 million |
| Earnings per common share | $14.53 | Up from $5.46 |
| Net interest income | $339.7 million | Up 0.4% from $338.4 million |
| Taxable-equivalent net interest margin | 2.80% | Down from 3.55% |
| Noninterest income | $136.6 million | Up 113.5% from $64.0 million |
| Noninterest expense | $295.9 million | Down 1.3% from $300.0 million |
| Provision for credit losses | $(11.0) million credit | Compared with $28.4 million expense |
| Return on average assets | 1.16% | Up from 0.57% |
| Return on average common equity | 14.70% | Up from 6.34% |
| Net charge-off ratio | 0.03% | Down from 0.10% |
Net interest income benefited from SBA-PPP interest and fee income, loan growth, and lower deposit funding costs, but the margin contracted because of lower asset yields and increased low-yield overnight liquidity. Noninterest income benefited substantially from a $67.4 million favorable year-over-year change in marketable equity securities valuation, higher mortgage income, and stronger wealth management revenue. The filing does not provide a single consolidated revenue measure comparable to non-GAAP total revenue.
Cash provided by operating activities was $104.9 million, compared with $17.6 million in Q1 2020. Investing activities used $4.0 billion, primarily reflecting a $3.2 billion increase in overnight investments and purchases of investment securities. Financing activities provided $3.9 billion, principally from deposit growth. Cash and due from banks ended at $410.5 million.
At March 31, 2021, total assets were $53.9 billion, up from $50.0 billion at year-end 2020. Loans and leases were $33.2 billion, up $388.9 million, while net loans and leases were $33.0 billion. Total deposits were $47.3 billion, up $3.9 billion, or 36.4% annualized. Shareholders’ equity was $4.3 billion.
Total borrowings were $1.9 billion, including $648.7 million of Federal Home Loan Bank borrowings, $497.2 million of subordinated debt, and $680.7 million of customer repurchase agreements. Available liquidity sources included $12.8 billion of cash in excess of reserve requirements and unencumbered securities, $8.2 billion of additional FHLB borrowing capacity, $3.4 billion of Federal Reserve borrowing capacity, and $606.0 million of available federal funds and other credit lines.
The allowance for credit losses was $210.7 million, or 0.63% of total loans and leases, down from $224.3 million and 0.68% at December 31, 2020. Nonaccrual loans were $194.5 million, other real estate owned was $48.5 million, and total nonperforming assets were $243.0 million, or 0.73% of loans, leases, and OREO.
Material changes versus prior periods
- Net income increased primarily because of substantially higher noninterest income, a credit for expected credit losses rather than provision expense, and lower noninterest expense.
- Noninterest income included $16.0 million of net gains on marketable equity securities versus a $51.4 million net loss in Q1 2020. Realized investment-security gains declined to $9.2 million from $19.8 million.
- Net interest margin fell 75 basis points to 2.80%, despite average interest-earning assets increasing by $10.7 billion to $48.7 billion.
- SBA-PPP loans outstanding increased to $2.8 billion. BancShares originated approximately 9,600 second-round loans totaling $1.1 billion during the quarter and recorded $30.9 million of related interest and fee income.
- Deposits grew much faster than loans, driven by organic growth, SBA-PPP funding, and stimulus payments. The resulting excess liquidity was invested largely in overnight assets.
- The allowance for credit losses declined by $13.7 million, primarily because of improved macroeconomic forecasts, strong credit performance, and low net charge-offs.
- Accumulated other comprehensive income declined to an after-tax loss of $33.7 million from income of $12.3 million, primarily because of lower unrealized gains on available-for-sale securities.
- No Class A common shares were repurchased in Q1 2021; 349,390 shares were repurchased for $159.7 million in Q1 2020.
- The $16.1 million FDIC shared-loss payable was settled during the quarter and had a zero balance at March 31, 2021.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide formal earnings guidance. Management reported that approximately 98% of COVID-19-related loan extensions had begun repayment, with delinquency trends in line with the rest of the portfolio and no significant overall decline in credit quality. COVID-19 uncertainty remains, although vaccine distribution and other factors improved the economic outlook.
The pending CIT Group merger received shareholder and certain regulatory approvals, with closing anticipated in mid-2021 subject to remaining regulatory approvals and customary closing conditions. The transaction is expected to be completed through a series of mergers, with CIT common stock generally converted at an exchange ratio of 0.06200 BancShares Class A shares per CIT share.
Management’s credit-loss forecast used a consensus baseline economic scenario. The filing identifies projected unemployment improvement to below 5% by the end of 2022, peak GDP growth of approximately 6% in Q2 and Q3 2021, home-price growth above 4% in 2021, and a potential commercial real estate index decline of up to 10% by the end of 2021.
Interest-rate sensitivity increased because of the substantial growth in non-maturity deposits. Management estimated that a 100-basis-point immediate increase in rates would increase 24-month net interest income by 9.06%, while a 100-basis-point decrease would reduce it by 7.62%. Key risks include merger execution and regulatory approval, COVID-19 effects, credit deterioration, interest-rate and liquidity risk, deposit outflows, collateral values, competition, regulatory actions, and litigation. Management stated that existing legal proceedings are not expected to have a material effect, although ultimate liabilities cannot be determined.
Most important facts for investors to verify
- Remaining regulatory approvals, timing, consideration, accounting treatment, and integration risks for the CIT merger.
- Sustainability of the unusually high noninterest income contribution from marketable equity securities gains and other market-sensitive items.
- Future net interest margin performance as excess liquidity remains elevated and rates change.
- Deposit retention and liquidity effects if stimulus-related or other non-maturity deposits decline.
- Credit performance after COVID-19 payment deferrals expire, including nonaccrual loans, TDRs, commercial real estate exposure, and SBA-PPP forgiveness and repayment.
- Whether the $11.0 million credit for credit losses and $13.7 million reserve release remain appropriate under changing economic forecasts.
- Capital and distribution capacity after completion of the CIT transaction; the filing reports BancShares as well-capitalized with a 14.1% total risk-based capital ratio, 12.0% Tier 1 risk-based capital ratio, 11.0% common equity Tier 1 ratio, and 7.8% leverage ratio.
- Potential volatility in accumulated other comprehensive income from changes in securities valuations and interest rates.