Business Context and Reporting Period
First Citizens BancShares, Inc. is a financial holding company operating primarily through First-Citizens Bank & Trust Company. Its principal activities are commercial and retail banking, including deposits, loans and leases, treasury, cardholder, merchant, wealth management and mortgage services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods and December 31, 2019 balance-sheet data.
The filing reflects the effects of COVID-19, the SBA Paycheck Protection Program (SBA-PPP), adoption of the current expected credit loss (CECL) model on January 1, 2020, and the February 2020 Community Financial acquisition. On October 15, 2020, after quarter-end, BancShares announced an agreement to acquire CIT Group Inc.; closing was expected in the first half of 2021, subject to customary conditions.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total interest income | $374.3 million | $362.3 million | 3.3% increase |
| Net interest income | $353.7 million | $336.4 million | 5.1% increase |
| Provision for credit losses | $4.0 million | $6.8 million | 40.3% decrease |
| Noninterest income | $120.6 million | $100.9 million | 19.5% increase |
| Noninterest expense | $291.7 million | $270.4 million | 7.9% increase |
| Net income | $142.7 million | $124.8 million | 14.3% increase |
| Net income available to common shareholders | $138.0 million | $124.8 million | 10.6% increase |
| Net income per common share | $14.03 | $11.27 | 24.5% increase |
| Taxable-equivalent net interest margin | 3.06% | 3.77% | 71 basis-point decline |
| Return on average assets | 1.18% | 1.32% | 14 basis-point decline |
| Return on average common equity | 14.93% | 13.83% | 110 basis-point increase |
| Metric | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|
| Net interest income | $1.03 billion | $984.2 million |
| Provision for credit losses | $52.9 million | $23.7 million |
| Noninterest income | $350.0 million | $311.5 million |
| Noninterest expense | $883.3 million | $811.5 million |
| Net income | $353.6 million | $355.5 million |
| Net income available to common shareholders | $344.2 million | $355.5 million |
| Net income per common share | $33.96 | $31.50 |
| Taxable-equivalent net interest margin | 3.23% | 3.80% |
| Return on average assets | 1.05% | 1.29% |
| Return on average common equity | 12.59% | 13.41% |
At September 30, 2020, total assets were $48.67 billion, compared with $39.82 billion at December 31, 2019. Loans and leases were $32.85 billion, including $3.11 billion of SBA-PPP loans, versus $28.88 billion at year-end. Net loans and leases were $32.62 billion after a $223.9 million allowance for credit losses.
Total deposits were $42.25 billion, up from $34.43 billion at December 31, 2019. Total borrowings were $1.95 billion, compared with $1.33 billion at year-end, including $504.4 million of subordinated debt. Shareholders’ equity was $4.07 billion, compared with $3.59 billion at year-end.
Nine-month operating cash flow was $216.3 million, compared with $399.2 million in 2019. Investing activities used $8.64 billion, principally for loan growth and purchases of investment securities. Financing activities provided $8.40 billion, primarily from deposit growth, long-term borrowings, subordinated notes and preferred stock issuance. Cash and due from banks ended at $352.4 million.
Management reported approximately $8.51 billion of liquid assets, equal to 17.5% of consolidated assets, and approximately $11.37 billion of contingent liquidity sources. At September 30, 2020, BancShares’ total risk-based capital ratio was 13.7%, Tier 1 risk-based capital ratio was 11.5%, common equity Tier 1 ratio was 10.4%, and Tier 1 leverage ratio was 7.8%.
Material Changes Versus Prior Periods
- Third-quarter earnings benefited from loan growth, lower deposit funding costs, $29.8 million of SBA-PPP interest and fee income, mortgage activity and $21.4 million of realized gains on available-for-sale securities.
- Year-to-date net income declined 0.5% despite higher net interest and noninterest income, primarily because provision expense increased by $29.2 million and noninterest expense increased by $71.8 million.
- The net interest margin contracted materially as market rates declined. Lower asset yields, particularly on overnight investments and variable-rate loans, more than offset lower deposit costs.
- Loans increased $3.96 billion from year-end, of which $3.11 billion represented SBA-PPP loans. Excluding SBA-PPP loans, loans increased approximately $851 million, or 3.9% annualized.
- Deposits increased $7.82 billion from year-end. Excluding approximately $1.30 billion of SBA-PPP-related deposits, deposits increased $6.52 billion, or 25.3% annualized.
- CECL adoption reduced the allowance for credit losses by $37.9 million and increased retained earnings by $36.9 million, net of related effects. A subsequent $36.1 million reserve build largely offset the initial allowance reduction.
- Nonperforming assets increased to $239.2 million from $168.3 million at year-end, and the nonperforming-assets ratio rose to 0.73% from 0.58%. Management attributed a portion of the increase to CECL-related reclassification of previously pooled acquired loans.
- BancShares raised $695 million in the first quarter through $350 million of subordinated notes and $345 million of Series A preferred stock. It repurchased $333.8 million of Class A common stock during the first nine months, but the repurchase authorization expired on July 31, 2020 and activity ceased thereafter.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that COVID-19 impacts remain uncertain and that SBA-PPP loans and payment extensions could delay recognition of credit deterioration. More than 94% of COVID-19-related loan extensions had begun repayment by September 30, 2020, and remaining COVID-19-related extensions totaled approximately $466.6 million, including approximately $13.4 million in payment deferrals.
Management expects SBA-PPP fee income recognition to accelerate as forgiveness applications are approved and payments are received from the SBA. The filing reports $76.0 million of unamortized SBA-PPP deferred fees and costs at September 30, 2020.
Key risks include the duration and severity of COVID-19, unemployment, borrower defaults, collateral values, changing government support, deposit outflows, market and interest-rate volatility, cybersecurity and operational disruption, and the impact of low interest rates on margins. A 100-basis-point rate decline was modeled to reduce 24-month net interest income by 3.44%, while a 100-basis-point increase was modeled to increase it by 8.37%.
The proposed CIT transaction is subject to shareholder, regulatory and other closing conditions. Risks include delay or failure to close, required divestitures or restrictions, integration difficulties, customer or employee attrition, substantial transaction expenses and failure to realize anticipated benefits.
The filing also reports a $99.5 million payment to the FDIC during the first quarter related to a shared-loss agreement. The remaining FDIC clawback liability was $15.3 million at September 30, 2020, with the remaining payment date scheduled for March 2021. Legal proceedings were not expected by management to have a material effect, although ultimate liabilities could not be determined.
Important Facts for Investors to Verify
- Whether COVID-19-related payment extensions, SBA-PPP forgiveness activity and government support continue to mask underlying credit deterioration.
- Future allowance for credit losses, net charge-offs, nonaccrual loans, troubled debt restructurings and nonperforming assets as borrower accommodations expire.
- The sustainability of third-quarter realized securities gains, mortgage income and SBA-PPP-related interest and fee income.
- Net interest margin sensitivity to continued low rates, deposit repricing and the unusually large increase in non-maturity deposits.
- The final amount, timing, regulatory approvals, shareholder approvals and integration costs associated with the proposed CIT acquisition.
- The effect of the expired share-repurchase authorization on capital deployment and per-share results.
- The remaining FDIC clawback payment and the adequacy of liquidity and capital after funding loan growth and the proposed transaction.