First Citizens BancShares, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
First Citizens BancShares, Inc. is a bank holding company headquartered in Raleigh, North Carolina, operating through First-Citizens Bank & Trust Company with more than 550 branches in 22 states. The filing covers the quarter and six months ended June 30, 2022. Results include CIT Group Inc. and CIT Bank activity following completion of the CIT Merger on January 3, 2022; therefore, 2022 results are not directly comparable with pre-merger 2021 results.
The company reports General Banking, Commercial Banking and Rail operating segments, plus Corporate. The merger added commercial lending, factoring, equipment leasing and a rail portfolio.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $700 million | $346 million | $1.349 billion | $686 million |
| Provision for credit losses | $42 million | $(20) million benefit | $506 million | $(31) million benefit |
| Noninterest income | $424 million | $133 million | $1.274 billion | $270 million |
| Noninterest expense | $745 million | $300 million | $1.555 billion | $597 million |
| Net income | $255 million | $153 million | $526 million | $300 million |
| Net income available to common stockholders | $238 million | $148 million | $502 million | $291 million |
| Diluted EPS | $14.86 | $15.09 | $31.48 | $29.63 |
| Net interest margin | 3.04% | 2.67% | 2.89% | 2.73% |
| Return on average assets | 0.95% | 1.13% | 0.97% | 1.14% |
Q2 net income increased 67% year over year, while diluted EPS declined 2% because the merger substantially increased the share count. Compared with Q1 2022, net income declined 6% and diluted EPS declined 11%, primarily because Q1 included the $431 million preliminary acquisition gain and Q2 had higher preferred dividends.
- Interest income was $757 million in Q2 and $1.467 billion year to date, driven by the CIT-acquired portfolio, loan growth and higher rates.
- Rental income from operating leases was $213 million in Q2 and $421 million year to date. Rail generated $160 million of Q2 rental income and $66 million of net revenue on operating leases.
- The Q2 provision for credit losses reflected loan growth and less favorable economic forecasts. The six-month provision included a $454 million initial provision for acquired non-PCD loans and commitments.
- Merger-related expenses were $34 million in Q2 and $169 million year to date.
- The Q2 effective tax rate was 24.2%; the six-month rate was unusually low at 6.3%, primarily because the preliminary acquisition gain was not taxable.
Balance sheet, liquidity and capital
| Balance-sheet measure | June 30, 2022 | December 31, 2021 |
|---|---|---|
| Total assets | $107.673 billion | $58.309 billion |
| Loans and leases | $67.735 billion | $32.372 billion |
| Allowance for credit losses | $850 million | $178 million |
| Total deposits | $89.329 billion | $51.406 billion |
| Total borrowings | $4.459 billion | $1.784 billion |
| Total stockholders’ equity | $10.642 billion | $4.738 billion |
- Q2-end loans and leases increased 13.5% annualized from Q1, while deposits declined 9.9% annualized as rate-sensitive money market and time deposits ran off. Noninterest-bearing deposits increased $747 million sequentially.
- The loan-to-deposit ratio was 75.83%. Estimated uninsured deposits were $31.0 billion.
- Liquid assets were $18.884 billion, consisting of $6.340 billion of available cash and $12.544 billion of high-quality liquid securities. Additional contingent liquidity sources were $15.827 billion, including $11.562 billion of FHLB capacity and $4.190 billion of FRB capacity.
- Regulatory capital remained well above minimums: BancShares’ CET1 ratio was 11.35%, Tier 1 risk-based capital ratio was 12.37%, total risk-based capital ratio was 14.46% and Tier 1 leverage ratio was 9.85%.
Material changes versus comparable periods
- The CIT Merger added approximately $53.8 billion of assets, $39.4 billion of deposits, $32.7 billion of loans and leases, $7.8 billion of operating lease equipment and $6.6 billion of investment securities at fair value.
- The company recorded a preliminary $431 million gain on acquisition because the estimated fair value of acquired net assets exceeded purchase consideration. Purchase accounting remains preliminary and may be adjusted through the one-year measurement period.
- Common shares increased by approximately 6.1 million through the merger, and preferred stock increased by $541 million of merger consideration.
- Available-for-sale securities had a $647 million pretax unrealized loss at June 30, 2022, compared with a $12 million loss at December 31, 2021, primarily due to higher interest rates. The loss reduced AOCI to $(465) million from $10 million.
- Nonaccrual loans increased to $513 million from $121 million at year-end, primarily reflecting the acquired CIT portfolio. Nonperforming assets were $558 million, or 0.83% of loans, leases and OREO.
- The ACL ratio was 1.26%, compared with 0.55% at year-end. Net charge-offs were $22 million in Q2 and $37 million for the first six months.
Outlook, management commentary, risks and unusual items
Management describes the company as positioned for continued growth through organic expansion and strategic acquisitions, supported by its branch network, commercial banking activities and leasing businesses. No formal earnings or revenue guidance is provided in the filing.
- Management expects the benefits of cost savings and revenue synergies from the CIT acquisition, but the unaudited pro forma information does not reflect expected operating cost savings or other synergies.
- The company is asset-sensitive to interest rates. Its modeled 12-month NII sensitivity at June 30, 2022 was approximately positive 1.34% for a 25-basis-point increase, positive 5.17% for a 100-basis-point increase and positive 10.20% for a 200-basis-point increase. Actual results may differ materially from these simulations.
- Primary risks include rising inflation, further Federal Reserve rate increases, recession, geopolitical events, supply-chain disruption, credit deterioration, deposit outflows, higher funding costs, commercial real estate exposure, rail-equipment values and utilization, derivative counterparty risk, cybersecurity and execution of the CIT integration.
- Unrealized securities losses and AOCI may remain volatile as rates change. Management concluded that the losses were rate-related rather than credit-related and recorded no securities ACL.
- At June 30, 2022, commitments included $22.463 billion of financing commitments, $1.897 billion of deferred purchase agreements, $701 million of lessor commitments and $243 million of affordable-housing investment commitments.
- The company disclosed an $18.5 million settlement of inherited CIT litigation concerning HAMP, FHA and VA programs. The settlement was approved after quarter-end, and funds were disbursed August 4, 2022. Management estimated reasonably possible litigation losses of up to $10 million above established reserves and insurance, excluding matters for which a loss estimate was not reasonably possible.
- On July 26, 2022, the board authorized repurchases of up to 1.5 million Class A shares through July 28, 2023. No repurchases occurred during Q2.
Most important facts for investors to verify
- Whether loan growth, acquired-credit performance and the $850 million ACL remain appropriate under worsening economic forecasts.
- The final purchase-price allocation for the CIT Merger and whether the $431 million acquisition gain or other acquired-asset valuations are revised.
- Deposit retention, uninsured deposit levels, deposit pricing and the effect of rate increases on liquidity and net interest margin.
- The sustainability of earnings excluding the one-time acquisition gain, merger-related expenses and other unusual items.
- Trends in available-for-sale securities losses, AOCI, capital ratios and potential effects of further interest-rate increases.
- Rail utilization, lease repricing, residual values, depreciation and maintenance costs, particularly amid recessionary or commodity-market pressure.
- Execution of the CIT integration, expected synergies, inherited litigation and the company’s transition of LIBOR-linked contracts to SOFR or other replacement rates.