First Citizens BancShares, Inc. — Q1 2023 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. Its businesses include consumer and commercial banking, lending, leasing, factoring, wealth management, and rail equipment leasing. The filing covers the three months ended March 31, 2023. Results include Silicon Valley Bridge Bank, N.A. (“SVBB”) beginning March 27, 2023; therefore, reported Q1 2023 results are not directly comparable with prior periods.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net interest income | $850 million | $649 million |
| Provision for credit losses | $783 million | $464 million |
| Noninterest income | $10.26 billion | $850 million |
| Noninterest expense | $855 million | $810 million |
| Net income | $9.52 billion | $271 million |
| Net income available to common stockholders | $9.50 billion | $264 million |
| Diluted earnings per share | $653.64 | $16.70 |
| Net interest margin | 3.41% | 2.73% |
| Return on average assets | 33.23% | 1.00% |
| Net cash provided by operating activities | $(362) million | $577 million |
Net income was dominated by a preliminary $9.82 billion after-tax gain on the SVBB acquisition. Excluding this unusual acquisition gain, the filing does not present a single consolidated adjusted earnings figure in the provided text.
Balance sheet, liquidity, credit and capital
- Total assets were $214.66 billion, compared with $109.30 billion at December 31, 2022.
- Loans and leases were $138.29 billion, including $66.17 billion of SVB loans, versus $70.78 billion at year-end 2022.
- Deposits were $140.05 billion, including $49.26 billion of SVB deposits, versus $89.41 billion at year-end.
- Total borrowings increased to $46.09 billion from $6.65 billion, primarily because of the $35.15 billion FDIC Purchase Money Note and higher Federal Home Loan Bank borrowings.
- Liquid assets totaled $51.42 billion, comprising $37.67 billion of available cash and $13.75 billion of high-quality liquid securities. Contingent liquidity sources totaled $79.49 billion, including a potential FDIC credit facility of up to $70 billion.
- The allowance for credit losses was $1.61 billion, or 1.16% of loans, compared with $922 million, or 1.30%, at December 31, 2022. The allowance included $662 million for SVB loans.
- Nonaccrual loans were $828 million and nonperforming assets were $875 million. The annualized net charge-off ratio was 0.27%.
- Regulatory capital remained above well-capitalized thresholds: BancShares’ CET1 ratio was 12.53%, total risk-based capital ratio was 14.86%, and Tier 1 leverage ratio was 16.72%.
Material changes versus comparable periods
- FCB completed the FDIC-assisted SVBB acquisition on March 27, 2023. It acquired assets with estimated fair value of $106.60 billion, including $68.50 billion of loans and $35.28 billion of cash and interest-earning deposits, and assumed $55.96 billion of deposits.
- The acquisition produced a preliminary $13.13 billion pretax gain, or $9.82 billion after tax, because the fair value of net assets acquired exceeded purchase consideration.
- The acquisition generated a $716 million day-two provision for credit losses, consisting of $462 million for acquired loans and $254 million for acquired unfunded commitments.
- SVB deposits declined from $55.96 billion at the acquisition date to $49.26 billion at March 31 and approximately $41.43 billion by April 28, 2023. Management stated that the pace of decline had slowed by late April.
- Net interest income increased 31% from Q1 2022, while interest expense increased substantially to $361 million from $61 million as deposit and borrowing costs rose.
- Accumulated other comprehensive loss improved to $669 million from $735 million at year-end, principally due to an after-tax $58 million gain on available-for-sale securities.
Outlook, commentary, risks and unusual items
- Management expects the effects of the SVBB acquisition on average balances, net interest income, deposits, loans, and borrowings to be more significant beginning in Q2 2023 because Q1 included only five days of SVB operations.
- The SVBB purchase accounting remains preliminary. Valuations of acquired loans, core deposit intangibles, tax items, and other assets and liabilities may change through the measurement period, and final settlement with the FDIC was expected in Q2 2023.
- The commercial shared-loss agreement covers approximately $60 billion of commercial loans. The FDIC reimburses 50% of covered losses above the first $5 billion, subject to agreement terms and loan-servicing requirements. First Citizens may also owe a future true-up payment of up to $1.5 billion.
- The FDIC exercised the value appreciation instrument, resulting in a $500 million payment by First Citizens on April 4, 2023.
- Key risks include SVB deposit runoff, uninsured deposit concentrations, integration and retention challenges, exposure to technology, life sciences, healthcare, private equity and venture capital borrowers, higher funding costs, interest-rate volatility, potential recession, regulatory changes, and the ability to maintain liquidity.
- The company reported $69.96 billion of estimated uninsured deposits, or approximately 50% of total deposits. SVB deposits represented 35.2% of total deposits at March 31.
- The investment portfolio had $2.29 billion of gross unrealized losses at March 31, including $897 million in available-for-sale securities and $1.39 billion in held-to-maturity securities.
- Management stated that pending litigation was not expected to have a material adverse effect on financial condition; estimated reasonably possible litigation losses were up to $10 million above established reserves and insurance, excluding matters for which an estimate was not reasonably possible.
Important facts investors should verify
- Final FDIC settlement and any changes to the preliminary SVBB purchase accounting, gain, deferred taxes, loan discounts, and allowance for credit losses.
- Post-acquisition SVB deposit trends, retention rates, funding costs, and use of the FDIC credit facility.
- Credit performance of the $66.17 billion SVB loan portfolio, particularly early-stage, investor-dependent, technology, life sciences, healthcare, and private equity-related exposures.
- Compliance with the FDIC shared-loss agreement and potential future true-up obligations.
- Quarterly earnings excluding the $9.82 billion acquisition gain and the recurring effect of acquired loan discount accretion.
- Changes in regulatory capital, liquidity, uninsured deposits, securities unrealized losses, and borrowing levels as the enlarged balance sheet is integrated.
- Execution of operational controls and internal-control integration for the acquired SVB business; management stated that this evaluation remained ongoing.