First Citizens BancShares, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023, with fourth-quarter results for the three months ended December 31, 2023. Comparisons are primarily with 2022. The results are not fully comparable because the Silicon Valley Bridge Bank acquisition closed on March 27, 2023.
Business context
First Citizens is a bank holding company operating First-Citizens Bank & Trust Company through more than 600 branches and offices in 30 states, plus a nationwide digital bank. Businesses include General Banking, Commercial Banking, Silicon Valley Banking, Rail, wealth management, factoring, leasing and equipment finance. Total assets were $213.76 billion at year-end, placing BancShares in the $100 billion-to-$250 billion Category IV enhanced-prudential-regulatory framework.
The major strategic event was the FDIC-assisted acquisition of substantially all loans and certain other assets, and assumption of deposits and certain liabilities, of Silicon Valley Bridge Bank. The acquisition added a Silicon Valley Banking segment serving technology, life sciences, healthcare, private equity and venture capital clients.
Financial performance and key metrics
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Net interest income | $6.71 billion | $2.95 billion | +128% |
| Provision for credit losses | $1.38 billion | $645 million | +$730 million |
| Noninterest income | $12.08 billion | $2.14 billion | +$9.94 billion |
| Noninterest expense | $5.34 billion | $3.08 billion | +74% |
| Net income | $11.47 billion | $1.10 billion | +$10.37 billion |
| Net income available to common stockholders | $11.41 billion | $1.05 billion | +$10.36 billion |
| Diluted EPS | $784.51 | $67.40 | +1,064% |
| Return on average assets | 5.90% | 1.01% | +489 bps |
| Net interest margin | 3.92% | 3.16% | +76 bps |
The reported earnings increase was dominated by the $9.81 billion preliminary after-tax gain on the SVBB acquisition. Excluding the acquisition gain and other acquisition-related effects would provide a more meaningful view of recurring profitability; the filing does not present a single fully adjusted recurring earnings figure in the supplied text.
Fourth-quarter 2023 results
| Metric | Q4 2023 | Q3 2023 | Q4 2022 |
|---|---|---|---|
| Net interest income | $1.91 billion | $1.99 billion | $802 million |
| Provision for credit losses | $249 million | $192 million | $79 million |
| Noninterest income | $543 million | $615 million | $429 million |
| Noninterest expense | $1.49 billion | $1.42 billion | $760 million |
| Net income | $514 million | $752 million | $257 million |
| Net income available to common stockholders | $499 million | $737 million | $243 million |
| Diluted EPS | $34.33 | $50.67 | $16.67 |
| Net interest margin | 3.86% | 4.07% | 3.39% |
Compared with the linked quarter, Q4 net income fell 32%, primarily because of lower net interest income, lower noninterest income and higher expenses. Net interest income declined as deposit costs increased and purchase-accounting accretion fell to $198 million from $275 million. The quarter included $116 million of acquisition-related expenses, a $64 million FDIC special-assessment expense and an $83 million reduction in the preliminary acquisition gain from a deferred-tax true-up.
Balance sheet, liquidity and capital
- Total loans and leases were $133.30 billion, up 88% year over year. SVB loans were $55.01 billion, or 41% of total loans.
- Total deposits were $145.85 billion, up 63%. SVB deposits were $38.48 billion at year-end, down from $56.01 billion at acquisition; Direct Bank deposits were $37.67 billion.
- Estimated uninsured deposits were $54.15 billion, or 37.1% of total deposits, versus 32.6% in 2022.
- Total borrowings were $37.65 billion, including a $35.85 billion carrying value for the FDIC Purchase Money Note due March 2028 at a 3.50% fixed rate.
- Liquid assets totaled $57.28 billion, consisting of $32.69 billion of cash and interest-earning deposits and $24.59 billion of high-quality liquid securities.
- Contingent liquidity sources totaled $33.94 billion, including $15.11 billion of current FDIC facility capacity, $13.62 billion of FHLB capacity and $5.12 billion of Federal Reserve capacity. The FDIC facility was not drawn at year-end.
- Regulatory capital remained above well-capitalized thresholds: BancShares CET1 was 13.36%, total risk-based capital was 15.75% and Tier 1 leverage was 9.83%; FCB’s corresponding ratios were 13.99%, 15.56% and 9.88%.
Cash flow and asset quality
- Operating activities provided $2.66 billion of cash, investing activities provided $2.43 billion and financing activities used $4.70 billion. Cash and due from banks increased $390 million to $908 million.
- The allowance for loan and lease losses increased to $1.75 billion from $922 million, or 1.31% of loans versus 1.30% in 2022. The reserve for off-balance-sheet credit exposures was $316 million.
- Net charge-offs increased to $560 million from $79 million; the net charge-off ratio increased to 0.47% from 0.12%.
- Nonaccrual loans increased to $969 million from $627 million, while the ratio of nonaccrual loans to total loans declined to 0.73% from 0.89% because of substantial loan growth.
- Total nonperforming assets were $1.03 billion, or 0.77% of loans, leases, OREO and repossessed assets.
- Credit risk increased in certain commercial portfolios, particularly general office, and in SVB investor-dependent portfolios. General office loans were $2.93 billion and had an indicated 11.38% nonperforming-loan ratio and 4.77% allowance ratio.
Material changes versus the prior comparable period
- The SVBB acquisition more than doubled total assets from $109.30 billion to $213.76 billion and added $107.54 billion of acquired assets, including $68.47 billion of loans and $35.31 billion of cash and interest-earning deposits.
- The acquisition generated a preliminary after-tax gain of $9.81 billion and added $716 million of day-two credit-loss provisions, $470 million of acquisition-related expenses and $64 million of FDIC special-assessment expense.
- Loan and deposit composition shifted materially toward Silicon Valley Banking, technology and life sciences, private equity and venture capital, and larger uninsured deposit relationships.
- Average interest-bearing liabilities increased substantially, and the average rate paid rose to 3.00% from 0.68%, reflecting higher deposit pricing and the FDIC Purchase Money Note.
- Investment securities increased to $30.00 billion. The portfolio had a $752 million pretax unrealized loss in available-for-sale securities, while total investment securities had a $2.22 billion difference between amortized cost and fair value at year-end.
- Rail segment net income declined to $90 million from $112 million as higher rental income was more than offset by higher interest expense.
Outlook, management commentary and risks
Management identified integration of the SVBB acquisition, retention of acquired customers and employees, operational efficiency, liquidity optimization and regulatory readiness as key priorities. The filing provides no formal quantitative earnings or revenue guidance. Management noted that the Federal Reserve could begin reducing rates in 2024, but lower rates could reduce net interest income because the balance sheet is generally asset-sensitive and assets reprice faster than liabilities.
- Regulatory proposals affecting institutions with more than $100 billion of assets could increase capital, liquidity, long-term-debt and compliance requirements. Management expects it may need to raise additional long-term debt.
- The company will submit a capital plan in 2024 and participate in the Federal Reserve’s CCAR supervisory stress-testing process for the first time. Results could affect dividends, repurchases and other capital distributions.
- The FDIC commercial shared-loss agreement covers approximately $60 billion of acquired commercial loans, with 50% reimbursement for losses above the first $5 billion, subject to the agreement’s terms. The FDIC loss-sharing period is five years and the company’s recovery-sharing obligation is eight years.
- Critical estimates include the allowance for credit losses and preliminary fair values of acquired loans and core deposit intangibles. Management’s modeled ALLL range was approximately $1.39 billion under an upside scenario to $2.22 billion under a downside scenario, compared with the recorded $1.75 billion.
- Key risks include deposit runoff, the 37% uninsured-deposit mix, interest-rate and funding-cost pressure, commercial real estate deterioration, credit losses in technology and investor-dependent borrowers, acquisition integration, cybersecurity, third-party operational risk and heightened regulatory scrutiny.
- The FDIC special assessment was $64 million at December 31, 2023. Future FDIC assessments could increase if bank failures or resolution costs rise.
- Management reported no cybersecurity incident determined to be materially affecting, or reasonably likely to materially affect, the company. Management and KPMG concluded internal control over financial reporting was effective, although SVBB operations representing approximately 26% of assets and 13% of revenues were excluded from management’s assessment.
- Legal proceedings are considered not material to consolidated financial statements based on current information; management estimated reasonably possible litigation losses of up to $10 million above established reserves and insurance, excluding matters for which an estimate was not reasonably possible.
Most important facts for investors to verify
- Recurring earnings excluding the $9.81 billion preliminary SVBB acquisition gain, purchase-accounting accretion and other acquisition-related items.
- SVB deposit retention, deposit pricing, uninsured-deposit runoff and the effect on liquidity and funding costs.
- Credit performance of SVB investor-dependent loans, global fund banking, technology and life sciences, general office and other commercial portfolios.
- Actual quarterly purchase-accounting accretion and the resulting trajectory of net interest income and net interest margin.
- Potential effects of Basel III endgame, long-term-debt, liquidity and CCAR requirements, including required future debt issuance and capital distributions.
- Finalization of SVBB purchase-accounting estimates, including acquired-loan fair values, deferred taxes, shared-loss economics and the preliminary acquisition gain.
- Progress integrating SVBB systems and controls, given the exclusion of acquired operations from the year-end internal-control assessment.