First Citizens BancShares, Inc. — 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 bank provides commercial and retail banking, treasury, cardholder and merchant services, wealth management, mortgage and insurance services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods and to December 31, 2020 for balance-sheet data.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net income | $124.1 million | $142.7 million | $424.2 million | $353.6 million |
| Net income available to common shareholders | $119.4 million | $138.0 million | $410.3 million | $344.2 million |
| Earnings per common share | $12.17 | $14.03 | $41.79 | $33.96 |
| Net interest income | $346.9 million | $353.7 million | $1.033 billion | $1.029 billion |
| Taxable-equivalent net interest margin | 2.61% | 3.06% | 2.69% | 3.23% |
| Noninterest income | $122.9 million | $120.6 million | $393.7 million | $350.0 million |
| Noninterest expense | $312.8 million | $291.7 million | $910.3 million | $883.3 million |
| Provision for credit losses | $(1.1) million benefit | $4.0 million expense | $(31.7) million benefit | $52.9 million expense |
| Return on average assets | 0.88% | 1.18% | 1.05% | 1.05% |
| Return on average equity | 11.29% | 14.93% | 13.50% | 12.59% |
Amounts in the table are as reported; income-statement amounts are in millions. The filing reports balance-sheet amounts in thousands.
- Total assets were $56.9 billion at September 30, 2021, up from $50.0 billion at December 31, 2020.
- Total deposits were $50.1 billion, up $6.6 billion, or 20.4% on an annualized basis, from year-end 2020. Noninterest-bearing deposits were $21.5 billion and interest-bearing deposits were $28.6 billion.
- Loans and leases were $32.5 billion, down $275.8 million from year-end. Excluding SBA-PPP loans, loans increased approximately $1.0 billion, or 4.6% on an annualized basis.
- Net loans and leases were $32.3 billion after an allowance for credit losses of $183.2 million.
- Investment securities totaled $10.9 billion at fair value, while overnight investments totaled $9.9 billion.
- Total borrowings were $1.9 billion, including $645.7 million of Federal Home Loan Bank borrowings and $497.4 million of subordinated debt.
- Shareholders’ equity was $4.6 billion, compared with $4.2 billion at December 31, 2020.
- Operating cash flow was negative $461.8 million for the first nine months, compared with positive $216.3 million in the prior-year period. Investing cash flow was negative $6.2 billion, principally reflecting increased overnight investments and purchases of securities, while financing cash flow was positive $6.6 billion, primarily from deposit growth.
- Liquidity sources included $15.1 billion of cash in excess of reserve requirements and unencumbered securities, $8.5 billion of additional FHLB borrowing capacity, $3.8 billion of Federal Reserve borrowing capacity and $556.0 million of available federal funds and other credit lines.
- BancShares remained well-capitalized: total risk-based capital was 14.30%, Tier 1 risk-based capital was 12.32%, common equity Tier 1 capital was 11.34% and the Tier 1 leverage ratio was 7.68%.
Material changes versus comparable periods
- Third-quarter net income declined 13.0%, and earnings per common share declined 13.3%, primarily reflecting lower net interest income, a substantially lower margin and higher operating expenses.
- Nine-month net income increased 19.9% and earnings per common share increased 23.1%, helped by the credit-loss benefit, higher noninterest income and lower interest expense.
- Net interest margin contracted 45 basis points year over year in the third quarter and 54 basis points for the nine-month period. Management attributed the pressure to low rates, lower loan yields, reduced SBA-PPP fee income and excess liquidity held in lower-yielding overnight investments.
- Noninterest income rose 2.0% in the third quarter and 12.5% year to date. Wealth management, deposit service charges, cardholder services and merchant services improved, while mortgage income and realized securities gains declined. Marketable equity securities gains were $31.0 million year to date versus $10.5 million in 2020.
- Noninterest expense increased 7.3% in the third quarter and 3.1% year to date, driven mainly by salaries, technology and third-party processing costs, and merger-related expenses.
- The allowance for credit losses declined from $224.3 million at year-end 2020 to $183.2 million at September 30, 2021. Management cited strong credit performance, low net charge-offs and improved macroeconomic forecasts.
- Nonperforming assets declined to $204.4 million, or 0.63% of loans, leases and other real estate owned, from $242.4 million, or 0.74%, at year-end. Nonaccrual loans were $163.8 million and other real estate owned was $40.6 million.
- No Class A common shares were repurchased during the 2021 periods. The most recent repurchase authorization expired July 31, 2020.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects continued monitoring of COVID-19, variants, vaccination trends, economic conditions, interest rates and credit quality.
- SBA-PPP loans outstanding were $1.1 billion at September 30, 2021. Approximately 98% of first-round forgiveness decisions had been received, representing more than $3.1 billion of payments; approximately 14% of second-round decisions had been received, representing more than $175 million of payments. Remaining deferred fees were $39.4 million.
- The proposed CIT Group merger remained subject to approval by the Federal Reserve Board and other customary closing conditions. The parties extended the termination date to March 1, 2022. Closing timing was not certain as of the filing date, although management expected closing as soon as practicable after approval.
- Merger-related expenses were $19.6 million for the first nine months, including $7.0 million in the third quarter.
- Interest-rate sensitivity analysis estimated that a 100-basis-point increase in rates would increase 24-month net interest income by 7.42%, while a 100-basis-point decrease would reduce it by 6.94%. The filing notes that excess liquidity and deposit growth affect interest-rate exposure and margins.
- The bank continued transitioning away from LIBOR and intended to cease issuing LIBOR-indexed loans by December 31, 2021. Management did not expect a material financial impact from the transition.
- Unused commitments to extend credit were $12.8 billion and standby letters of credit were $116.3 million at September 30, 2021. These commitments create potential credit and liquidity exposure but do not necessarily represent future cash requirements.
- Pending litigation arose in the ordinary course of business and from certain acquired institutions. Management stated that no currently identified legal action was expected to have a material effect on the consolidated financial statements.
- The filing states that there were no material changes to the risk factors disclosed in the 2020 Form 10-K and that disclosure controls and procedures remained effective.
Important facts for investors to verify
- Whether the CIT merger receives final Federal Reserve approval, closes by the revised deadline and produces the expected integration costs, capital effects and earnings benefits.
- Whether deposit growth remains durable as economic conditions normalize and whether excess liquidity can be deployed at attractive yields.
- Whether net interest margin continues to decline in the low-rate environment or improves as rates and loan demand change.
- Whether credit quality remains strong as COVID-19-related loan extensions enter repayment and SBA-PPP forgiveness progresses.
- Whether the reserve release and marketable equity securities gains are recurring; both materially affected reported results.
- The sensitivity of earnings and capital to interest-rate movements, unrealized securities losses and changes in deposit behavior.
- The effect of technology investments, compensation growth and merger-related costs on future operating efficiency.