FIRST CITIZENS BANCSHARES INC quarterly report, Q2 FY2023

First Citizens BancShares, Inc. — Form 10-Q Summary

Business context and reporting period

First Citizens BancShares, Inc. is a financial holding company operating through First-Citizens Bank & Trust Company. It provides consumer and commercial banking, lending, leasing, factoring, wealth management, investment and rail equipment leasing services through more than 560 branches in 23 states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023.

The results include the FDIC-assisted acquisition of substantially all loans and certain assets of Silicon Valley Bridge Bank, N.A. and the assumption of its customer deposits and certain liabilities, completed March 27, 2023. A new Silicon Valley Banking segment was established.

Financial performance and key metrics

Metric	Three months ended June 30, 2023	Six months ended June 30, 2023
Net interest income	$1.961 billion	$2.811 billion
Provision for credit losses	$151 million	$934 million
Noninterest income	$658 million	$10.917 billion
Noninterest expense	$1.572 billion	$2.427 billion
Net income	$682 million	$10.200 billion
Net income available to common stockholders	$667 million	$10.171 billion
Diluted EPS	$45.87	$699.53
Net interest margin	4.10%	3.86%
Return on average assets	1.31%	12.62%

The six-month results include a preliminary after-tax gain of $9.879 billion from the SVBB Acquisition, including a $55 million second-quarter measurement-period adjustment. The gain substantially distorts year-to-date revenue, net income, EPS and return metrics.

Total assets were $209.502 billion at June 30, 2023, compared with $109.298 billion at December 31, 2022.
Loans and leases were $133.015 billion, up 88% from $70.781 billion at year-end; SVB loans represented $58.799 billion.
Deposits were $141.164 billion, up 58% from $89.408 billion at year-end. SVB deposits were $40.860 billion at quarter-end, down from $55.899 billion acquired and $49.259 billion at March 31, 2023.
Total borrowings were $40.139 billion, including a $36.072 billion Purchase Money Note payable to the FDIC at 3.50%.
Stockholders’ equity was $19.771 billion, compared with $9.662 billion at December 31, 2022.
The allowance for credit losses on loans and leases was $1.637 billion, or 1.23% of loans, compared with 1.30% at year-end.
Nonaccrual loans were $929 million and total nonperforming assets were $993 million. The nonaccrual ratio was 0.70% of loans.
Net charge-offs were $157 million in the second quarter and $207 million year to date; annualized net charge-off ratios were 0.47% and 0.39%, respectively.

Cash flow, liquidity, capital and debt

Cash provided by operating activities was $554 million for the six months ended June 30, 2023, versus $1.231 billion in the prior-year period.
Investing activities provided $6.541 billion, primarily reflecting a $6.284 billion net decrease in loans, cash acquired in the SVBB transaction and other investing activity.
Financing activities used $6.697 billion, including repayments of long-term borrowings and changes in deposits.
Cash and due from banks totaled $917 million at June 30, 2023.
Liquid assets were $53.421 billion, consisting of $37.152 billion of available cash and $16.269 billion of high-quality liquid securities.
Additional contingent liquidity included $11.124 billion of FHLB capacity, $4.817 billion of Federal Reserve capacity, $85 million of unused unsecured capacity and access to a five-year FDIC credit facility of up to $70 billion, subject to its terms and limitations.
BancShares remained above well-capitalized thresholds, with a 13.38% common equity Tier 1 ratio, 14.00% Tier 1 risk-based capital ratio, 15.84% total risk-based capital ratio and 9.50% Tier 1 leverage ratio.

Material changes versus comparable periods

Second-quarter net income declined 93% from $9.518 billion in the linked quarter because the first quarter included the approximately $9.82 billion after-tax SVBB acquisition gain. Second-quarter net interest income increased 131% sequentially to $1.961 billion as SVB contributed for a full quarter and purchase accounting accretion increased.
Compared with the second quarter of 2022, net interest income increased from $700 million to $1.961 billion, while net income increased from $255 million to $682 million. The increase reflected the SVBB transaction, higher interest rates and larger loan balances, partially offset by higher deposit and borrowing costs.
Year-to-date net income increased from $526 million to $10.200 billion, primarily because the SVBB acquisition gain exceeded the $431 million CIT merger gain recognized in the prior-year period.
Second-quarter noninterest expense increased 84% sequentially to $1.572 billion, driven by a full quarter of SVB operations, higher salaries and benefits, equipment costs and $205 million of acquisition-related expenses.
Second-quarter provision expense declined from $783 million in the linked quarter because the linked quarter included $716 million of SVBB day-two provisions. Excluding that item, the current-quarter provision increased due to higher charge-offs, specific reserves and unfavorable commercial real estate assumptions.

Outlook, management commentary, risks and unusual items

No formal earnings or revenue guidance is provided in the filing. Management states that interim results are not necessarily indicative of full-year results.
The SVBB acquisition accounting remains provisional. Final settlement with the FDIC and measurement-period adjustments could change acquired balances, deferred taxes and the preliminary gain on acquisition for up to one year after closing.
The FDIC shared-loss agreement covers an estimated $60 billion of commercial loans. The FDIC reimburses 50% of losses above $5 billion, while First Citizens reimburses 50% of recoveries; the agreement also includes a potential true-up payment of up to $1.5 billion under specified conditions.
Management identifies continued interest-rate volatility, recession risk, inflation, market volatility, deposit outflows, uninsured deposit concentrations, unrealized securities losses, regulatory changes and the integration of SVB as important risks.
Approximately 40% of deposits, or $56.39 billion, were estimated to be uninsured at June 30, 2023. SVB deposits were approximately 72% uninsured.
Commercial real estate, particularly the general office portfolio, is a focus of credit-risk monitoring. General office loans totaled $2.8 billion, with an 8.96% nonperforming-loan ratio and a 4.44% ACL ratio for that portfolio.
The Federal Reserve continued raising rates during 2023. Management reported that a hypothetical 100-basis-point increase in rates would increase projected 12-month net interest income by 9.5%, while a 100-basis-point decrease would reduce it by 9.7%; actual results may differ materially.
U.S. dollar LIBOR ceased being representative after June 30, 2023. First Citizens is transitioning affected contracts, loans, derivatives and preferred-stock provisions primarily to SOFR-based rates.
The filing states that the FDIC proposed a special assessment based on estimated uninsured deposits and that regulators proposed higher capital requirements. The final impact and timing were not yet determined.
Pending litigation is not expected by management to have a material adverse effect on financial condition, although it could materially affect results or cash flows in a particular period. Estimated reasonably possible losses were up to $10 million above reserves and insurance for identified matters, excluding matters for which an estimate was not reasonably possible.

Most important facts for investors to verify

Final FDIC settlement and all measurement-period adjustments related to the SVBB Acquisition, including the sustainability of the $9.879 billion preliminary after-tax gain.
SVB deposit retention, uninsured deposit runoff and the pace of repayment or refinancing of the $36 billion FDIC Purchase Money Note.
Credit performance of SVB global fund banking, investor-dependent, technology and life-science portfolios, as well as commercial real estate and general office loans.
Future net interest margin after purchase accounting accretion declines and deposit pricing costs increase.
Changes in the allowance for credit losses, charge-offs and nonaccrual loans as acquired portfolios season.
Final FDIC special-assessment rules and proposed Basel III capital changes.
The cover page indicates “No” was checked for filing all required reports during the prior 12 months; investors should verify whether this reflects a filing-status issue or a presentation error.