Business Context and Reporting Period
First Citizens BancShares, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company operates through First-Citizens Bank & Trust Company, with more than 550 branches in 22 states. Results include CIT Group Inc. operations following the January 3, 2022 merger; prior-period comparisons are therefore not directly comparable.
The post-merger organization reports General Banking, Commercial Banking, Rail and Corporate segments. The CIT transaction added approximately $53.8 billion of assets at fair value, including loans, investment securities and operating lease equipment.
Key Financial Metrics
| Metric | Q3 2022 | YTD 2022 | Comparable Period |
|---|---|---|---|
| Interest income | $906 million | $2.373 billion | Q3 2021: $363 million; YTD 2021: $1.080 billion |
| Net interest income | $795 million | $2.144 billion | Q3 2021: $347 million; YTD 2021: $1.033 billion |
| Net interest margin | 3.40% | 3.06% | Q3 2021: 2.61%; YTD 2021: 2.69% |
| Provision for credit losses | $60 million | $566 million | Q3 2021: $1 million benefit; YTD 2021: $32 million benefit |
| Noninterest income | $433 million | $1.707 billion | Q3 2021: $124 million; YTD 2021: $394 million |
| Noninterest expense | $760 million | $2.315 billion | Q3 2021: $314 million; YTD 2021: $911 million |
| Income before taxes | $408 million | $970 million | Q3 2021: $158 million; YTD 2021: $548 million |
| Net income | $315 million | $841 million | Q3 2021: $124 million; YTD 2021: $424 million |
| Net income available to common stockholders | $303 million | $805 million | Q3 2021: $119 million; YTD 2021: $410 million |
| Diluted EPS | $19.25 | $50.70 | Q3 2021: $12.17; YTD 2021: $41.79 |
| Return on average assets | 1.16% | 1.03% | Q3 2021: 0.88%; YTD 2021: 1.05% |
| Return on average common equity | 12.49% | 11.18% | Q3 2021: 11.29%; YTD 2021: 13.50% |
- Total assets were $109.3 billion at September 30, 2022, compared with $58.3 billion at December 31, 2021.
- Total loans and leases were $69.8 billion, up from $32.4 billion at year-end 2021 and $67.7 billion at June 30, 2022. Commercial loans represented 76% of the portfolio.
- Total deposits were $87.6 billion, up from $51.4 billion at year-end 2021 but down from $89.3 billion at June 30, 2022. Management attributed the quarterly decline to rate-sensitive customers moving funds as interest rates increased.
- Operating lease equipment was $8.0 billion, primarily railcars and locomotives. Rail segment operating lease utilization was 96.2%, with approximately 118,500 railcars.
- The allowance for credit losses was $882 million, or 1.26% of loans and leases, compared with $178 million, or 0.55%, at December 31, 2021. Non-accrual loans were $454 million and non-performing assets were $508 million.
- Net cash provided by operating activities was $1.771 billion for the first nine months of 2022. Investing activities provided $786 million, while financing activities used $2.414 billion. Ending cash and due from banks was $481 million.
- Total borrowings were $8.343 billion, compared with $1.784 billion at December 31, 2021. Long-term borrowings were $5.215 billion and short-term borrowings were $3.128 billion.
- Liquid assets were $19.161 billion, consisting of $6.050 billion of available cash and $13.111 billion of high-quality liquid securities. Additional contingent liquidity sources totaled $11.704 billion.
- BancShares remained well capitalized: CET1 was 10.37%, Tier 1 risk-based capital was 11.36%, total risk-based capital was 13.46% and Tier 1 leverage was 9.31%.
Material Changes Versus Prior Periods
- The CIT merger materially increased the scale and composition of the company, adding commercial lending, factoring, consumer mortgages, rail leasing, deposits, borrowings and preferred stock.
- YTD net income increased 98% and diluted EPS increased 21%, primarily because of the merger and related higher earning assets. Q3 net income increased 154% year over year.
- Net interest income rose 129% in Q3 and 108% year to date. Management attributed the increase to the CIT merger, loan growth and rising interest rates, partly offset by lower SBA-PPP income.
- Noninterest income increased substantially, including $219 million of Q3 operating lease rental income and a $431 million preliminary gain on acquisition recorded year to date.
- Noninterest expense increased materially because of the combined company, including operating lease depreciation and maintenance, higher personnel costs and $202 million of merger-related expenses year to date.
- The nine-month credit-loss provision included a $454 million initial provision for acquired non-PCD loans and unfunded commitments, while the acquired PCD portfolio included a $272 million initial ACL established through purchase accounting.
- Accumulated other comprehensive loss increased to $729 million, largely because of after-tax unrealized losses on available-for-sale securities. The securities losses were attributed to rising interest rates rather than credit impairment.
- During Q3, the company repurchased 1,027,414 Class A shares at an average price of $819.80. It subsequently repurchased another 472,586 shares, completing the authorized 1.5 million-share program.
Outlook, Risks, Contingencies and Unusual Items
- Management described an asset-sensitive interest-rate profile. Modeled 12-month net interest income sensitivity was positive 3.44% for a 100-basis-point rate increase and negative 3.63% for a 100-basis-point decrease. Actual results may differ materially from simulations.
- The Federal Reserve raised the federal funds target range to 3.00%–3.25% by September 2022, with possible additional increases noted for November and December. Management identified inflation, recession risk, market volatility, geopolitical events and the Russia-Ukraine conflict as significant uncertainties.
- Management increased downside economic-scenario weighting in its CECL estimate because inflation and higher rates could pressure home prices, commercial real estate values and other economic variables. ACL scenario outcomes ranged from approximately $630 million to $1.1 billion; the recorded ACL was $882 million.
- Deposit runoff and higher funding costs are risks. The company used additional FHLB borrowings to replace declining interest-bearing deposits and fund loan growth. It estimated uninsured deposits of $31.0 billion.
- The acquired rail and leasing portfolio creates asset-value, utilization, residual-value, maintenance and obsolescence risks. Operating lease equipment is subject to impairment testing and market-value fluctuations.
- The company has $23.4 billion of financing commitments, $2.152 billion of deferred purchase agreements, $922 million of equipment leasing and rail purchase commitments, and $459 million of letters of credit. These amounts do not necessarily represent future cash outflows.
- The company settled an inherited HAMP, FHA and VA-related qui tam lawsuit for $18.5 million in August 2022. Management estimated aggregate reasonably possible litigation losses of up to $10 million above established reserves and insurance for other matters, although the estimate is not a maximum exposure.
- The CIT purchase-price allocation remained preliminary for portions of the loan and lease portfolios, operating lease equipment, deposits and taxes. Adjustments may continue through the one-year measurement period after the merger.
- The company expects to adopt ASU 2022-01 and ASU 2022-02 on January 1, 2023 and was evaluating their effects. LIBOR transition work was substantially in place, with SOFR identified as the preferred replacement index.
- On October 25, 2022, the board increased the common dividend to $0.75 per share from $0.47 per share, payable December 15, 2022.
Investor Verification Priorities
- Verify the sustainability of merger-related earnings, particularly the $431 million acquisition gain and the effect of purchase accounting accretion on net interest income.
- Assess deposit retention, deposit pricing and the increased reliance on FHLB and other borrowings as interest rates rise.
- Review commercial real estate, commercial and industrial, healthcare and rail exposures, including criticized loans, non-accrual trends and residual-value assumptions.
- Reconcile the $882 million ACL with changing macroeconomic forecasts, the acquired loan portfolio and potential downside scenarios.
- Monitor the $995 million pre-tax unrealized loss on available-for-sale securities and its effect on tangible capital, liquidity and securities-sale flexibility.
- Evaluate the quality and recurring nature of operating lease revenue and the related depreciation, maintenance and impairment risks.
- Confirm final purchase accounting adjustments, integration costs, expected cost savings and any remaining legal or regulatory contingencies.