First Citizens BancShares, Inc. — Q1 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. The company operates more than 600 branches across 22 states and reports General Banking, Commercial Banking, Rail and Corporate segments.
This unaudited Form 10-Q covers the three months ended March 31, 2022. Results include CIT Group Inc. and CIT Bank activity following completion of the CIT Merger on January 3, 2022. Prior-year and year-end comparisons are therefore not fully comparable.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Interest income | $710 million | $355 million |
| Net interest income | $649 million | $340 million |
| Provision for credit losses | $464 million | $(11) million benefit |
| Noninterest income | $850 million | $137 million |
| Noninterest expense | $810 million | $297 million |
| Income before taxes | $225 million | $191 million |
| Net income | $271 million | $147 million |
| Net income available to common stockholders | $264 million | $143 million |
| Diluted EPS | $16.70 | $14.53 |
| Net interest margin | 2.73% | 2.79% |
| Return on average assets | 1.00% | 1.16% |
| Return on average common equity | 11.18% | 14.70% |
Net cash provided by operating activities was $400 million, compared with $126 million in Q1 2021. Investing activities provided $2.4 billion, primarily reflecting a $2.7 billion reduction in interest-earning deposits at banks and acquisition-related cash flows. Financing activities used $2.6 billion, including $3.0 billion of long-term debt repayments. Cash and due from banks ended at $523 million.
At March 31, 2022, total assets were $108.6 billion, loans and leases were $65.5 billion, net loans were $64.7 billion, deposits were $91.6 billion and stockholders’ equity was $10.6 billion. Total borrowings were approximately $3.3 billion, including $2.7 billion of long-term borrowings.
Liquidity included $21.5 billion of liquid assets and $17.5 billion of contingent liquidity sources, for total available liquidity of approximately $39.0 billion. The loan-to-deposit ratio was 71.53%.
Regulatory capital remained above well-capitalized thresholds: BancShares reported a 14.47% total risk-based capital ratio, 12.39% Tier 1 risk-based capital ratio, 11.34% common equity Tier 1 ratio and 9.55% Tier 1 leverage ratio. FCB reported a 14.25% total risk-based capital ratio and a 9.81% Tier 1 leverage ratio.
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.
- The company recorded a preliminary, nontaxable gain on acquisition of $431 million because the estimated fair value of net assets acquired exceeded purchase consideration of $6.0 billion.
- Loans and leases increased $32.5 billion from December 31, 2021, while deposits increased $40.2 billion. These increases primarily reflect the merger.
- Noninterest income increased substantially due to the acquisition gain, $208 million of rental income on operating leases, factoring commissions and other acquired activities.
- Noninterest expense increased primarily from acquired personnel and operations, $124 million of operating-lease depreciation and maintenance costs, and $135 million of merger-related expenses.
- The company redeemed approximately $2.9 billion of senior unsecured debt assumed in the merger and recognized a $6 million gain on extinguishment of debt.
- Unrealized losses on available-for-sale securities increased to $442 million gross, compared with $57 million at December 31, 2021. The resulting after-tax accumulated other comprehensive loss was $305 million, and total comprehensive income was a loss of $44 million.
- The allowance for credit losses increased to $848 million from $178 million. The increase primarily reflected a $284 million initial PCD allowance and a $454 million initial provision for acquired non-PCD loans and leases, partly offset by a $53 million subsequent credit-loss benefit.
Credit, liquidity, outlook and risks
Asset quality remained relatively strong but reported nonperforming assets increased with the acquired portfolio. Nonaccrual loans were $538 million, nonperforming assets were $581 million, the nonaccrual-loan ratio was 0.82%, and the allowance-to-loans ratio was 1.29%. Net charge-offs were $15 million, or 0.09% annualized.
Management stated that the company expects continued growth from its expanded banking, commercial lending, factoring and rail-leasing businesses and anticipates cost savings and other synergies from the CIT acquisition, although those synergies were not reflected in the pro forma information. No quantitative earnings guidance was provided.
The company’s interest-rate profile was asset-sensitive. Its modeled 12-month net interest income sensitivity indicated estimated increases of 1.60% for an immediate 25-basis-point rate increase, 6.10% for a 100-basis-point increase and 12.20% for a 200-basis-point increase. Actual results may differ materially from these simulations.
Key risks include integration of the CIT Merger, realization of expected cost savings and revenue synergies, credit deterioration, commercial real estate and industry concentrations, rail-equipment values and utilization, interest-rate and deposit-pricing changes, liquidity and uninsured-deposit outflows, derivative counterparty exposure, inflation, supply-chain disruption, geopolitical events, cyber risk and the transition from LIBOR to alternative reference rates.
The acquired business combination valuations remained preliminary at March 31, 2022 and may be adjusted through the one-year measurement period. The company also disclosed a qui tam litigation matter related to legacy CIT and OneWest activities; on May 5, 2022, the parties reached an agreement in principle to settle for $18.5 million, subject to approvals and definitive documentation. Management estimated reasonably possible litigation losses of up to $10 million above established reserves and insurance for other matters, excluding matters for which a loss estimate was not reasonably possible.
In early April 2022, management lifted internal COVID-19 operating restrictions and returned to business-as-usual operations, while continuing to monitor related credit and operational risks.
Most important facts for investors to verify
- Whether preliminary CIT purchase-accounting valuations, including the $431 million acquisition gain, $143 million core deposit intangible and $52 million lease-related intangible liability, are subsequently revised.
- The recurring earnings contribution of acquired operations after excluding the acquisition gain, initial CECL provision, merger expenses, debt-redemption gain and postretirement-plan reversal.
- Progress toward integration milestones, cost savings and revenue synergies, including potential costs under the Merger Performance Plan adopted May 5, 2022.
- Trends in acquired-portfolio nonaccrual loans, criticized assets, charge-offs and the $848 million allowance for credit losses.
- Deposit retention, particularly the $31.3 billion of estimated uninsured deposits, and the resulting effect on liquidity and funding costs.
- Exposure to unrealized securities losses, rising interest rates, deposit betas and modeled interest-rate sensitivity.
- Performance and residual-value risk of the approximately $8.0 billion operating-lease portfolio, including rail utilization of 95.5% and approximately 119,600 railcars.
- Status and final cost of the $18.5 million proposed settlement and other litigation or regulatory matters.