First Citizens BancShares, Inc. — Q2 2021 Form 10-Q Summary
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 and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods and December 31, 2020 balance sheet data.
The company provides commercial and retail banking, wealth management, cardholder and merchant services, treasury services, mortgage banking and related financial services. The company continued participating in the SBA Paycheck Protection Program and was preparing for its proposed merger with CIT Group Inc.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $346.4 million | $337.4 million | $686.0 million | $675.8 million |
| Provision/(credit) for credit losses | $(19.6) million | $20.6 million | $(30.6) million | $48.9 million |
| Noninterest income | $134.2 million | $165.4 million | $270.8 million | $229.4 million |
| Noninterest expense | $301.6 million | $291.7 million | $597.5 million | $591.7 million |
| Net income | $152.8 million | $153.8 million | $300.1 million | $211.0 million |
| EPS available to common shareholders | $15.09 | $14.74 | $29.63 | $20.04 |
| Taxable-equivalent net interest margin | 2.68% | 3.14% | 2.74% | 3.33% |
| Return on average assets | 1.13% | 1.36% | 1.14% | 0.98% |
| Return on average equity | 14.64% | 16.43% | 14.67% | 11.40% |
Second-quarter net income declined 0.6% year over year, while six-month net income increased 42.3%. The year-to-date improvement primarily reflected lower credit-loss provisions and higher noninterest income. Q2 earnings benefited from a $19.6 million credit for credit losses but were adversely affected by lower noninterest income and higher operating expenses.
- Interest and fee income from SBA-PPP loans was $27.2 million in Q2 and $58.1 million year to date.
- Noninterest income decreased in Q2 primarily because Q2 2020 included unusually high marketable equity securities gains. Wealth management, cardholder and merchant service income increased.
- Noninterest expense increased 3.4% in Q2, driven mainly by personnel costs, incentives, health insurance claims and technology-related processing fees.
Balance sheet, credit quality, debt and liquidity
- Total assets were $55.2 billion at June 30, 2021, up from $50.0 billion at December 31, 2020.
- Total loans and leases were $32.7 billion, down $102.3 million from year-end. Excluding SBA-PPP loans, loans increased $604.7 million, or 3.7% on an annualized basis.
- SBA-PPP loans outstanding were $1.7 billion at June 30, 2021. The company originated approximately 12,000 second-round loans totaling approximately $1.2 billion during the first half.
- Total deposits were $48.4 billion, up $5.0 billion, or 23.1% on an annualized basis, from December 31, 2020. Growth reflected organic growth and government stimulus effects.
- Total borrowings were $1.9 billion, including $646.7 million of Federal Home Loan Bank borrowings and $497.3 million of subordinated debt.
- The allowance for credit losses was $189.1 million, or 0.58% of total loans, compared with $224.3 million, or 0.68%, at year-end. Excluding SBA-PPP loans, the allowance ratio was 0.61%.
- Net charge-offs were $2.0 million in Q2 and $4.6 million year to date. The annualized net charge-off ratio was 0.02% in Q2 and 0.03% year to date.
- Nonperforming assets were $231.1 million, or 0.71% of loans, leases and other real estate owned, compared with $242.4 million, or 0.74%, at year-end.
- Regulatory capital remained well above required levels: total risk-based capital was 14.15%, common equity Tier 1 capital was 11.14% and the Tier 1 leverage ratio was 7.67%.
- Liquidity included $13.2 billion of excess cash and unencumbered securities, $8.3 billion of additional FHLB borrowing capacity, $3.5 billion of Federal Reserve borrowing capacity and $606.0 million of available Federal Funds and other credit lines.
Operating cash flow was $(598.1) million for the first six months, compared with $100.8 million provided in the prior-year period. Investing cash flow was $(4.4) billion, primarily reflecting purchases of investment securities and increases in overnight investments. Financing cash flow was $5.0 billion, mainly from deposit growth. Cash and due from banks increased to $395.4 million.
Material changes versus comparable periods
- Q2 net interest income increased 2.7%, but the net interest margin contracted 46 basis points because of lower asset yields and a larger mix of low-yielding overnight investments, partially offset by lower deposit funding costs and SBA-PPP income.
- Year-to-date net income increased $89.1 million, or 42.3%, primarily because 2020 included COVID-19-related reserve builds while 2021 reflected reserve releases.
- Q2 noninterest income fell 18.9%, principally because Q2 2020 contained $64.6 million of marketable equity securities gains versus $11.7 million in Q2 2021.
- The allowance for credit losses declined $35.2 million from year-end, reflecting improved macroeconomic forecasts, strong credit performance and low net charge-offs.
- The FDIC shared-loss payable was eliminated after a $16.1 million payment during the first quarter; no balance remained at June 30, 2021.
- No Class A common shares were repurchased in the first half of 2021, compared with 695,390 shares repurchased for $286.7 million in the first half of 2020.
Outlook, risks, contingencies and unusual items
The filing does not provide formal earnings or revenue guidance. Management reported improving economic conditions and reduced uncertainty but cautioned that COVID-19, including variants, could continue to affect the economy, customers and financial results. More than 99% of COVID-19-related loan extensions had entered repayment by June 30, 2021, and management reported no significant deterioration in overall credit quality.
The proposed CIT merger had shareholder, North Carolina Commissioner of Banks and FDIC approval, but still required Federal Reserve approval and satisfaction of customary closing conditions. Closing was expected in the third quarter of 2021. The transaction would involve stock consideration of 0.06200 BancShares Class A shares for each eligible CIT common share and could materially change the company’s scale, capital structure, integration costs and risk profile.
- Interest-rate sensitivity modeling indicated estimated 24-month net interest income changes of negative 5.93% under a 100-basis-point decline, positive 7.82% under a 100-basis-point increase and positive 14.48% under a 200-basis-point increase.
- Major risks include credit losses, real estate collateral values, deposit outflows as stimulus effects subside, low interest rates, changing borrower behavior, competition, regulatory actions, operational and technology risks, and merger execution.
- Off-balance-sheet exposures included $12.4 billion of unused commitments to extend credit and $132.3 million of standby letters of credit.
- Management stated that pending litigation arising from ordinary business and acquired-bank activities was not expected to have a material effect, although ultimate liability could not be determined.
- Available-for-sale securities had $26.5 million of unrealized losses at June 30, 2021. Management attributed the losses to interest-rate movements rather than credit impairment and recorded no related allowance.
Investor verification checklist
- Verify Federal Reserve approval, closing timing and final consideration for the CIT merger, together with integration expenses and pro forma capital effects.
- Assess the sustainability of deposit growth and liquidity if government stimulus balances decline or customers migrate to higher-yielding products.
- Monitor net interest margin pressure from low market rates, excess liquidity and future deposit repricing.
- Reconcile the allowance reduction with subsequent credit performance, particularly commercial real estate, consumer mortgages and PCD loans.
- Track SBA-PPP forgiveness, remaining deferred fees and the effect of loan runoff on future interest income.
- Evaluate the comparability of earnings given unusually high marketable equity securities gains in Q2 2020 and the 2021 reserve release.
- Review off-balance-sheet commitments, merger-related contingencies, interest-rate sensitivity and COVID-19-related borrower performance.