First Citizens BancShares(FCNCA) - 2023 Q2 - Quarterly Report

Part One — Financial Information Item 1. Financial Statements Presents unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, detailing the SVBB Acquisition's impact Consolidated Balance Sheets (Unaudited) Unaudited balance sheets show substantial increases in assets, loans, deposits, and borrowings as of June 30, 2023, primarily due to the SVBB Acquisition Consolidated Balance Sheet Highlights (millions USD): | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Total Assets | $209,502 | $109,298 | | Loans and leases, net | $131,378 | $69,859 | | Total Deposits | $141,164 | $89,408 | | Total Borrowings | $40,139 | $6,645 | | Total Stockholders' Equity | $19,771 | $9,662 | Consolidated Statements of Income (Unaudited) Unaudited income statements show significant growth in net interest income and net income for Q2 and YTD 2023, driven by the SVBB Acquisition and higher interest rates Consolidated Statements of Income Highlights (millions USD, except per share data): | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Interest Income | $2,953 | $757 | $4,164 | $1,467 | | Total Interest Expense | $992 | $57 | $1,353 | $118 | | Net Interest Income | $1,961 | $700 | $2,811 | $1,349 | | Provision for Credit Losses | $151 | $42 | $934 | $506 | | Total Noninterest Income | $658 | $424 | $10,917 | $1,274 | | Total Noninterest Expense | $1,572 | $745 | $2,427 | $1,555 | | Net Income | $682 | $255 | $10,200 | $526 | | Diluted EPS | $45.87 | $14.86 | $699.53 | $31.48 | Consolidated Statements of Comprehensive Income (Unaudited) Consolidated comprehensive income statements show net income and other comprehensive loss, with total comprehensive income significantly higher for YTD June 30, 2023, due to substantial net income Consolidated Statements of Comprehensive Income (millions USD): | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | $682 | $255 | $10,200 | $526 | | Other comprehensive loss, net of tax | $(103) | $(160) | $(37) | $(475) | | Total Comprehensive Income | $579 | $95 | $10,163 | $51 | Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Details movements in stockholders' equity, reflecting net income, other comprehensive loss, stock-based compensation, and dividend declarations - Total stockholders' equity increased from $9,662 million at December 31, 2022, to $19,771 million at June 30, 2023, primarily driven by net income of $10,200 million for the six months ended June 30, 2023[14][23] - Cash dividends declared for Class A common stock were $0.75 per share for the three and six months ended June 30, 2023[22][23] Consolidated Statements of Cash Flows (Unaudited) Consolidated cash flow statements illustrate cash sources and uses, with investing activities providing significant net inflow, influenced by the SVBB Acquisition, and financing activities resulting in net outflow Consolidated Statements of Cash Flows Highlights (millions USD): | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $554 | $1,231 | | Net cash provided by investing activities | $6,541 | $2,692 | | Net cash used in financing activities | $(6,697) | $(3,678) | | Change in cash and due from banks | $398 | $245 | | Cash and due from banks at end of period | $917 | $583 | - A significant non-cash investing activity in 2023 was the Purchase Money Note of $35,808 million issued as consideration for the SVBB Acquisition[27] Notes to the Unaudited Consolidated Financial Statements These notes provide detailed explanations and disclosures for the unaudited consolidated financial statements, covering accounting policies, business combinations, financial instruments, and risk management, emphasizing the SVBB Acquisition's impact NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION Outlines core operations, consolidation principles, estimates, and accounting methods for business combinations, highlighting the SVBB Acquisition and new Silicon Valley Banking segment - First Citizens BancShares, Inc. (BancShares) is a financial holding company operating through its banking subsidiary, First-Citizens Bank & Trust Company (FCB), with over 560 branches in 23 states, offering commercial and consumer banking services, including lending, leasing, and wealth management[29] - BancShares accounts for business combinations using the acquisition method, where acquired assets and assumed liabilities are recorded at estimated fair value, and any excess of fair value of identifiable net assets over purchase price is recognized as a gain on acquisition[34] - On March 27, 2023, FCB acquired substantially all loans and certain other assets, and assumed all customer deposits and certain other liabilities, of Silicon Valley Bridge Bank, N.A. (SVBB) from the FDIC[35] - During the first quarter of 2023, BancShares added the Silicon Valley Banking (SVB) reportable segment, which includes the assets acquired, liabilities assumed, and related operations from the SVBB Acquisition[37] NOTE 2 — BUSINESS COMBINATIONS Provides extensive details on the SVBB Acquisition, including fair value of acquired assets and liabilities, preliminary gain, and related financial instruments, also mentioning the CIT Merger - FCB acquired assets with an estimated total fair value of approximately $107.26 billion (primarily $68.46 billion of loans and $35.31 billion of cash/interest-earning deposits) and assumed liabilities of approximately $61.07 billion (primarily $55.90 billion of customer deposits) in the SVBB Acquisition[63] - A preliminary after-tax gain on acquisition of $9.88 billion was recognized for the six months ended June 30, 2023, representing the excess of the fair value of net assets acquired over the purchase price. This includes a $55 million increase from Measurement Period adjustments in Q2 2023[69][70] - In connection with the SVBB Acquisition, FCB issued a five-year Purchase Money Note of approximately $36 billion payable to the FDIC and a $500 million Cash Settled Value Appreciation Instrument[64][65] - FCB also entered into a five-year, up to $70 billion line of credit with the FDIC and a commercial shared loss agreement covering an estimated $60 billion of commercial loans[66][67] NOTE 3 — INVESTMENT SECURITIES Details composition, amortized cost, fair value, and unrealized gains/losses of BancShares' investment securities portfolio, distinguishing between AFS and HTM categories Investment Securities Amortized Cost and Fair Value (millions USD): | Investment Type | June 30, 2023 Amortized Cost | June 30, 2023 Fair Value | December 31, 2022 Amortized Cost | December 31, 2022 Fair Value | | :-------------------------------- | :--------------------------- | :----------------------- | :--------------------------- | :----------------------- | | Investment securities available for sale | $12,923 | $11,894 | $9,967 | $8,995 | | Investment securities held to maturity | $10,201 | $8,652 | $10,279 | $8,795 | | Total Investment Securities | $23,199 | $20,622 | $20,321 | $17,885 | | Gross Unrealized Losses (AFS) | N/A | $(1,029) | N/A | $(973) | | Gross Unrealized Losses (HTM) | N/A | $(1,549) | N/A | $(1,484) | - As of June 30, 2023, there were 389 investment securities available for sale with continuous unrealized losses for more than 12 months, primarily government-sponsored enterprise-issued mortgage-backed securities, government agency securities, or U.S. Treasury securities[100] - No Allowance for Credit Losses (ACL) was required for U.S. Treasury, government agency, and government-sponsored entity debt securities due to their strong credit ratings and history of no credit losses. However, three corporate bonds carried credit-related losses of $3 million as of June 30, 2023[100][101] NOTE 4 — LOANS AND LEASES Provides a comprehensive breakdown of the loan and lease portfolio by class, delinquency, and credit quality, highlighting the significant increase in total loans due to the SVBB Acquisition and loan modifications Loans by Class (millions USD): | Loan Class | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Commercial | $56,169 | $53,455 | | Consumer | $18,047 | $17,326 | | SVB | $58,799 | — | | Total Loans and Leases | $133,015 | $70,781 | - Total loans and leases increased by $62.23 billion (88%) from December 31, 2022, to June 30, 2023, primarily due to the $58.80 billion in SVB loans acquired in the SVBB Acquisition[107] - Non-accrual loans increased to $929 million at June 30, 2023, from $627 million at December 31, 2022, largely due to the addition of $213 million in SVB non-accrual loans[115] - Loan modifications made to debtors experiencing financial difficulty for the six months ended June 30, 2023, totaled $399 million, with term extensions being the most common modification type[139] NOTE 5 — ALLOWANCE FOR CREDIT LOSSES Details the Allowance for Credit Losses (ACL) for loans, leases, unfunded commitments, and investment securities, emphasizing the significant increase due to the SVBB Acquisition and changes in net charge-offs Allowance for Credit Losses (millions USD): | ACL Component | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | ACL for Loans and Leases | $1,637 | $922 | | ACL for Unfunded Commitments | $335 | $106 | | ACL for Investment Securities | $3 | — | - The $715 million increase in ACL for loans and leases from December 31, 2022, was primarily due to the SVBB Acquisition, including an initial PCD ACL of $220 million and a day 2 provision of $462 million[154][416] - Net charge-offs for the six months ended June 30, 2023, were $207 million, an increase from $37 million in the prior year, with a significant portion related to SVB loans[154][422] NOTE 6 — LEASES Details BancShares' lease activities as both a lessee for offices and bank locations, and a lessor for equipment, primarily long-lived rail equipment, to commercial end-users - As a lessee, operating lease Right of Use (ROU) assets were $360 million and operating lease liabilities were $368 million at June 30, 2023, with a weighted-average remaining lease term of 9.0 years[159] - As a lessor, rental income on operating lease equipment was $238 million for the three months ended June 30, 2023, and $471 million for the six months ended June 30, 2023[163] NOTE 7 — GOODWILL AND CORE DEPOSIT INTANGIBLES Discusses goodwill and core deposit intangibles, noting the SVBB Acquisition and CIT Merger resulted in a gain on acquisition, but new core deposit intangibles were recognized and are being amortized - BancShares had goodwill of $346 million at June 30, 2023, related to business combinations completed prior to the SVBB Acquisition and CIT Merger, all within the General Banking segment[164] - Core deposit intangibles increased to $347 million at June 30, 2023, from $140 million at January 1, 2023, primarily due to $230 million related to the SVBB Acquisition[166] NOTE 8 — VARIABLE INTEREST ENTITIES Provides information on BancShares' unconsolidated variable interest entities (VIEs), primarily investments in qualified affordable housing projects, and details the associated maximum exposure to loss - Total assets associated with unconsolidated VIEs were $1,973 million at June 30, 2023, an increase from $762 million at December 31, 2022, mainly due to investments in qualified affordable housing projects acquired in the SVBB Acquisition[174] - Liabilities for commitments to tax credit investments were $926 million at June 30, 2023, representing commitments to invest in qualified affordable housing investments[174] NOTE 9 — OTHER ASSETS Details components of other assets, highlighting significant increases primarily from the SVBB Acquisition, including affordable housing tax credit investments, accrued interest receivable, and derivative financial instruments Other Assets (millions USD): | Other Asset Component | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Affordable housing tax credit and other unconsolidated investments | $2,010 | $762 | | Right of use assets for operating leases, net | $360 | $345 | | Pension assets | $359 | $343 | | Accrued interest receivable | $732 | $329 | | Fair value of derivative financial instruments | $758 | $159 | | Total Other Assets | $5,769 | $4,369 | NOTE 10 — DEPOSITS Provides a detailed breakdown of deposit types and maturities, emphasizing the substantial increase in total deposits due to the SVBB Acquisition Deposit Types (millions USD): | Deposit Type | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Noninterest-bearing demand | $44,547 | $24,922 | | Checking with interest | $24,809 | $16,202 | | Money market | $29,149 | $21,040 | | Savings | $26,389 | $16,634 | | Time | $16,270 | $10,610 | | Total Deposits | $141,164 | $89,408 | - Total deposits increased by $51.76 billion from December 31, 2022, to June 30, 2023, primarily reflecting deposits acquired in the SVBB Acquisition[178] - Time deposits with a denomination of $250,000 or more totaled $4.95 billion at June 30, 2023[178] NOTE 11 — BORROWINGS Details BancShares' short-term and long-term borrowings, highlighting the significant increase in long-term borrowings due to the SVBB Acquisition's Purchase Money Note and pledged assets for borrowing capacity Borrowings (millions USD): | Borrowing Type | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Short-term borrowings | $454 | $2,186 | | Long-term borrowings | $39,685 | $4,459 | | Total Borrowings | $40,139 | $6,645 | - The Purchase Money Note to FDIC, fixed at 3.50% and due March 2028, accounted for $36,072 million of long-term borrowings at June 30, 2023, issued in connection with the SVBB Acquisition[184] - BancShares had $30.0 billion of loans pledged to the FHLB and FRB at June 30, 2023, with available borrowing capacity of $11.12 billion from FHLB and $4.82 billion from FRB[185][187] NOTE 12 — DERIVATIVE FINANCIAL INSTRUMENTS Presents the notional amount and fair value of BancShares' derivative financial instruments, not designated as hedging instruments, primarily consisting of interest rate and foreign exchange contracts Notional Amount and Fair Value of Derivative Financial Instruments (millions USD): | Derivative Type | June 30, 2023 Notional Amount | June 30, 2023 Asset Fair Value | June 30, 2023 Liability Fair Value | | :-------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | | Interest rate contracts | $24,597 | $553 | $(624) | | Foreign exchange contracts | $12,847 | $203 | $(200) | | Other contracts | $826 | $2 | $(1) | | Total Derivatives | $38,270 | $758 | $(825) | - Gains on non-qualifying hedges recognized in the Consolidated Statements of Income were $9 million for the three months ended June 30, 2023, and $28 million for the six months ended June 30, 2023[192] NOTE 13 — OTHER LIABILITIES Details components of other liabilities, showing a substantial increase primarily due to deferred taxes and commitments to fund tax credit investments, largely influenced by the SVBB Acquisition Other Liabilities (millions USD): | Other Liability Component | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Fair value of derivative financial instruments | $825 | $486 | | Lease liabilities | $368 | $352 | | Commitments to fund tax credit investments | $926 | $295 | | Deferred taxes | $3,147 | $286 | | ACL for unfunded commitments | $335 | $106 | | Total Other Liabilities | $7,361 | $2,588 | NOTE 14 — FAIR VALUE Explains the fair value hierarchy (Level 1, 2, 3) and presents assets and liabilities measured at fair value on recurring and non-recurring bases, focusing on investment securities, derivatives, and certain loans - Investment securities available for sale are primarily classified as Level 2 ($11,743 million) with a portion of corporate bonds as Level 3 ($151 million) at June 30, 2023[198][199] - Derivative assets and liabilities are mostly valued using Level 2 inputs, with a small portion of other derivative contracts classified as Level 3[198][202] - Loans held for sale and collateral-dependent loans are measured at fair value on a non-recurring basis, primarily using Level 3 inputs due to unobservable market inputs and assumptions[209][210][211] NOTE 15 — STOCKHOLDERS' EQUITY Provides information on common stock activity, preferred stock, and authorized shares, noting an increase in authorized shares of Class A Common Stock and Preferred Stock following stockholder approval - As of June 30, 2023, there were 13,514,849 Class A Common Stock shares and 1,005,185 Class B Common Stock shares outstanding[225] - On April 25, 2023, stockholders approved amendments to increase the number of authorized shares of Class A Common Stock from 16 million to 32 million and Preferred Stock from 10 million to 20 million[229] NOTE 16 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME Details components and changes in Accumulated Other Comprehensive (Loss) Income (AOCI), primarily driven by unrealized losses on available-for-sale securities, net of income taxes - Total accumulated other comprehensive loss was $(772) million at June 30, 2023, compared to $(735) million at December 31, 2022[230] - The primary component of AOCI is the unrealized loss on securities available for sale, which was $(781) million (net of tax) at June 30, 2023[230] NOTE 17 — REGULATORY CAPITAL Presents BancShares' and FCB's regulatory capital ratios, demonstrating both entities exceed Basel III and PCA well-capitalized thresholds, and discusses dividend restrictions Regulatory Capital Ratios (BancShares, June 30, 2023): | Capital Ratio | Basel III Requirements | PCA Well Capitalized Thresholds | Amount (millions) | Ratio | | :---------------------- | :--------------------- | :------------------------------ | :---------------- | :---- | | Total risk-based capital | 10.50% | 10.00% | $22,504 | 15.84% | | Tier 1 risk-based capital | 8.50% | 8.00% | $19,898 | 14.00% | | Common equity Tier 1 | 7.00% | 6.50% | $19,017 | 13.38% | | Tier 1 leverage | 4.00% | 5.00% | $19,898 | 9.50% | - FCB could have paid an additional $8.09 billion in dividends to the Parent Company while continuing to meet the requirements for well-capitalized banks at June 30, 2023[242] NOTE 18 — EARNINGS PER COMMON SHARE Provides computation of basic and diluted earnings per common share, showing significant increases for current periods due to higher net income available to common stockholders Earnings Per Common Share (millions USD, except per share data): | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income available to common stockholders | $667 | $238 | $10,171 | $502 | | Basic EPS | $45.90 | $14.87 | $700.10 | $31.52 | | Diluted EPS | $45.87 | $14.86 | $699.53 | $31.48 | NOTE 19 — INCOME TAXES Discusses BancShares' effective income tax rates and the SVBB Acquisition's impact on deferred tax liabilities and the release of valuation allowances - The global effective income tax rate was 23.9% for the three months ended June 30, 2023, and 1.6% for the six months ended June 30, 2023. The decrease for the six-month period was primarily due to the non-taxable preliminary gain on acquisition relating to the SVBB Acquisition[244] - Net deferred tax liabilities increased by approximately $3.28 billion as a result of the SVBB Acquisition[247] - BancShares released approximately $12 million of its $70 million valuation allowance during the second quarter of 2023, following further assessment of information related to the SVBB Acquisition[248] NOTE 20 — EMPLOYEE BENEFIT PLANS Outlines the components of net periodic benefit cost for BancShares' non-contributory defined benefit pension plans Net Periodic Benefit Cost (millions USD): | Component | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Service cost | $3 | $4 | $5 | $7 | | Interest cost | $15 | $11 | $30 | $22 | | Expected return on assets | $(22) | $(22) | $(43) | $(44) | | Amortization of net actuarial loss | — | $3 | — | $6 | | Net periodic benefit | $(4) | $(4) | $(8) | $(9) | NOTE 21 — BUSINESS SEGMENT INFORMATION Describes BancShares' five reportable segments: General Banking, Commercial Banking, Silicon Valley Banking, Rail, and Corporate, presenting condensed income statement data by segment, highlighting the SVBB Acquisition's impact - BancShares' segments include General Banking, Commercial Banking, the new Silicon Valley Banking (SVB) segment (from the SVBB Acquisition), Rail, and Corporate[251][255] Segment Net Income (millions USD): | Segment | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2023 | | :-------------------- | :--------------------------- | :--------------------------- | | General Banking | $227 | $429 | | Commercial Banking | $28 | $122 | | Silicon Valley Banking | $189 | $224 | | Rail | $18 | $40 | | Corporate | $220 | $9,385 | | Total BancShares | $682 | $10,200 | NOTE 22 — COMMITMENTS AND CONTINGENCIES Details BancShares' off-balance sheet financial instruments, including financing commitments, letters of credit, and deferred purchase agreements, and discusses estimated possible losses from legal proceedings - Total financing commitments were $69,292 million at June 30, 2023, a significant increase from $23,452 million at December 31, 2022, with the increase primarily due to the SVBB Acquisition[262] - Standby letters of credit totaled $3,090 million at June 30, 2023, also reflecting an increase due to the SVBB Acquisition[262] - Management estimates an aggregate range of reasonably possible losses from litigation of up to $10 million in excess of established reserves and insurance[274] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on BancShares' financial condition and results, analyzing earnings, balance sheet changes, and risk management, extensively covering the SVBB Acquisition and economic developments EXECUTIVE OVERVIEW Introduces First Citizens BancShares, Inc. as a bank holding company providing diverse financial services, emphasizing strategic expansion into Silicon Valley Banking through recent acquisition - BancShares operates through its wholly-owned subsidiary, FCB, offering retail and mortgage banking, wealth management, commercial and middle market banking, factoring, and leasing services[283] - The SVBB Acquisition expanded BancShares' client base to serve private equity and venture capital clients, complementing existing wealth management and diversifying the loan portfolio across technology and life sciences/healthcare industries[285] Significant Events in 2023 The SVBB Acquisition on March 27, 2023, was the most significant event, involving FCB acquiring substantial assets and liabilities, resulting in a significant gain and a new business segment - FCB acquired approximately $107.26 billion in assets (including $68.46 billion in loans and $35.31 billion in cash/interest-earning deposits) and assumed $55.90 billion in deposits from SVBB[291] - A preliminary after-tax gain on acquisition of $9.88 billion was recognized for the six months ended June 30, 2023, with a $55 million increase in Q2 2023 due to Measurement Period adjustments[291] - A new Silicon Valley Banking (SVB) business segment was added to reflect the acquired operations from the SVBB Acquisition[290] Recent Economic and Industry Developments Discusses Federal Reserve's interest rate hikes to combat inflation, recession concerns, and increased banking industry volatility following bank failures, leading to proposed regulatory changes - The Federal Open Market Committee (FOMC) raised the federal funds rate to a range between 5.25% - 5.50% in 2023 in an effort to combat inflation, increasing concerns over a possible recession[292] - Increased volatility in the banking industry due to recent bank failures has led to proposed FDIC special assessments and revised Basel III Capital Rules, which BancShares is currently evaluating[294][295][296] Financial Performance Summary Provides key financial highlights, emphasizing the SVBB Acquisition's substantial impact on net income, net interest income, and balance sheet growth for current quarter and year-to-date periods Selected Quarterly and Year-to-Date Financial Data (millions USD, except per share data): | Metric | Q2 2023 | Q1 2023 | YoY Q2 Change | YTD Q2 2023 | YTD Q2 2022 | YoY YTD Change | | :-------------------------------- | :------ | :------ | :------------ | :---------- | :---------- | :------------- | | Net Income | $682 | $9,518 | $(8,836) | $10,200 | $526 | +$9,674 | | Diluted EPS | $45.87 | $653.64 | $(607.77) | $699.53 | $31.48 | +$668.05 | | Net Interest Income | $1,961 | $850 | +$1,111 | $2,811 | $1,349 | +$1,462 | | Net Interest Margin | 4.10% | 3.41% | +0.69% | 3.86% | 2.89% | +0.97% | | Total Loans & Leases (Q-end) | $133,015 | $138,288 | $(5,273) | N/A | N/A | N/A | | Total Deposits (Q-end) | $141,164 | $140,050 | +$1,114 | N/A | N/A | N/A | - The significant increase in net income and net interest income for YTD 2023 was primarily due to the preliminary after-tax gain on the SVBB Acquisition and higher net interest income[303][306] - Total assets increased to $209.50 billion at June 30, 2023, from $109.30 billion at December 31, 2022, mainly due to the SVBB Acquisition[306] Funding, Liquidity and Capital Overview Overview of BancShares' funding, strong liquidity, and robust capital, highlighting the SVBB Acquisition's impact on deposit composition and contingent liquidity availability - Deposits represent approximately 78% of total funding at June 30, 2023. Total uninsured deposits were approximately $56.39 billion, or 40% of total deposits, an increase from $29.13 billion (33%) at December 31, 2022, due to deposits in the SVB segment[307][308] - SVB deposits declined from $55.90 billion at the SVBB Acquisition Date to $40.86 billion at June 30, 2023, but began to stabilize early in the second quarter[309] - BancShares maintained a strong liquidity position with $53.42 billion in liquid assets and $86.03 billion in contingent liquidity sources, including a $70 billion line of credit with the FDIC[310][480] - All regulatory capital ratios for BancShares and FCB significantly exceed the Prompt Corrective Action (PCA) well-capitalized thresholds and Basel III Requirements[313] RESULTS OF OPERATIONS Detailed analysis of BancShares' operating results, including net interest income, provision for credit losses, noninterest income, noninterest expense, and income taxes, focusing on quarter-over-quarter and year-over-year changes NET INTEREST INCOME AND NET INTEREST MARGIN Analyzes Net Interest Income (NII) and Net Interest Margin (NIM) drivers, attributing increases to the SVBB Acquisition, higher average loans, and increased asset yields, partially offset by higher funding costs - Net Interest Income (NII) for Q2 2023 was $1.96 billion, an increase of $1.11 billion (131%) from $850 million for Q1 2023, primarily due to the full quarter impact of SVBB acquired loans and interest-earning deposits, and higher purchase accounting accretion[318] - Net Interest Margin (NIM) for Q2 2023 was 4.10%, an increase of 69 basis points from 3.41% for Q1 2023[318] - Average interest-earning assets for Q2 2023 increased by $90.64 billion (90%) to $191.54 billion from Q1 2023, reflecting increases in average loans and leases and interest-earning deposits at banks due to the SVBB Acquisition[318] - Average interest-bearing liabilities for Q2 2023 increased by $57.97 billion (77%) to $133.30 billion from Q1 2023, with the average rate on interest-bearing liabilities increasing by 104 basis points to 2.98%[318] PROVISION FOR CREDIT LOSSES Details provision for credit losses, noting a significant Q2 2023 decrease from Q1 due to the SVBB Acquisition's 'day 2 provision' in the prior quarter, but an overall year-to-date increase - Provision for credit losses for Q2 2023 was $151 million, an 81% decrease from $783 million for Q1 2023. This decrease was primarily due to the $716 million 'day 2 provision' for SVBB acquired loans and unfunded commitments recognized in Q1[325] - For the six months ended June 30, 2023, the provision for credit losses was $934 million, an 84% increase from $506 million for the prior year, driven by the higher 'day 2 provision' for SVBB and increased net charge-offs[328] NONINTEREST INCOME Analyzes noninterest income, highlighting a substantial Q2 2023 decrease from Q1 due to the preliminary gain on acquisition in the prior quarter, but noting increases in client investment and international fees from the SVBB Acquisition - Noninterest income for Q2 2023 was $658 million, a 94% decrease from $10.26 billion for Q1 2023. This decrease was primarily related to the preliminary after-tax gain on acquisition of $9.82 billion recognized in Q1[336] - Client investment fees and international fees were new revenue streams added with the SVBB Acquisition, contributing to a net increase in other noninterest income in Q2 2023[332][337] - Rental income on operating lease equipment increased to $238 million in Q2 2023 from $233 million in Q1 2023[335] NONINTEREST EXPENSE Examines noninterest expenses, showing a significant Q2 2023 increase from Q1, mainly due to the full quarter impact of SVBB Acquisition-related operations, including higher salaries, benefits, and acquisition costs - Noninterest expense for Q2 2023 was $1.57 billion, an 84% increase from $855 million for Q1 2023, primarily due to a full quarter impact from the SVBB Acquisition[339][342] - Salaries and benefits increased by $355 million, and acquisition-related expenses increased by $177 million in Q2 2023 compared to Q1 2023, both largely due to the SVBB Acquisition[345] INCOME TAXES Discusses the effective tax rate (ETR), noting a significant Q2 2023 increase from Q1, primarily due to the non-taxable preliminary gain on acquisition from the SVBB Acquisition in the prior quarter - The effective tax rate (ETR) was 23.9% for Q2 2023, an increase from (0.5)% for Q1 2023, primarily related to the non-taxable nature of the preliminary gain on acquisition for the SVBB Acquisition in the linked quarter[344] - The ETR was 1.6% for the six months ended June 30, 2023, compared to 6.3% in the prior year, also driven by the non-taxable nature of the preliminary gain on acquisition for the SVBB Acquisition[344] RESULTS BY BUSINESS SEGMENT Provides a detailed breakdown of financial results by BancShares' five business segments: General Banking, Commercial Banking, Silicon Valley Banking, Rail, and Corporate, highlighting each's unique contributions and challenges General Banking General Banking reported increased net income driven by higher net interest income from loan portfolio growth and improved yields, despite facing higher deposit costs - Net income for General Banking was $227 million in Q2 2023, up from $202 million in Q1 2023, primarily due to higher net interest income[349] - Loans and leases increased to $44,719 million at June 30, 2023, from $43,353 million at March 31, 2023, with growth concentrated in commercial and business loans[349][350] - Deposits increased to $95,323 million at June 30, 2023, from $85,982 million at March 31, 2023, primarily driven by growth in the Direct Bank[349][351] Commercial Banking Commercial Banking experienced decreased net income due to a higher provision for credit losses, despite growth in net interest income from increased loan volumes and yields - Net income for Commercial Banking was $28 million in Q2 2023, down from $94 million in Q1 2023, mostly due to a higher provision for credit losses[353] - Loans and leases increased to $29,433 million at June 30, 2023, from $28,684 million at March 31, 2023, reflecting growth in industry verticals such as maritime, healthcare, and energy[353][354] Silicon Valley Banking The new Silicon Valley Banking segment significantly contributed to net interest and noninterest income in its first full quarter, despite a post-acquisition decline in loans and deposits - Net income for SVB was $189 million in Q2 2023, with net interest income of $635 million and noninterest income of $169 million, reflecting a full quarter of operations[356] - SVB loans declined by $7.37 billion to $58.80 billion at June 30, 2023, from $66.17 billion at March 31, 2023, primarily in Global Fund Banking loans[358] - SVB deposits declined to $40.86 billion at June 30, 2023, from $49.26 billion at March 31, 2023, but began to stabilize early in the second quarter[359] Rail Rail segment's net income slightly decreased due to higher interest expense, offsetting increased adjusted rental income from an expanded railcar fleet and improved utilization rates - Net income for the Rail segment was $18 million in Q2 2023, down from $22 million in Q1 2023[361] - Adjusted rental income on operating leases was $77 million in Q2 2023, up slightly due to an increased number of rail cars owned and leased[361] - Railcar utilization, including commitments to lease, was 98.3% at June 30, 2023[363] Corporate Corporate segment's net income significantly decreased from Q1 2023, which included the initial preliminary gain on acquisition and day 2 provision for credit losses related to SVBB, but benefited from loan purchase accounting adjustment accretion in Q2 - Net income for Corporate was $220 million in Q2 2023, significantly lower than $9,165 million in Q1 2023, which included the initial $9.82 billion preliminary gain on acquisition and $716 million day 2 provision for credit losses related to SVBB[368] - The current quarter benefited from $233 million in accretion for the loan purchase accounting adjustment related to the SVBB Acquisition[369] BALANCE SHEET ANALYSIS Detailed analysis of BancShares' balance sheet components, focusing on interest-earning assets, operating lease equipment, and interest-bearing liabilities, highlighting the SVBB Acquisition's substantial impact INTEREST-EARNING ASSETS Analyzes composition and changes in interest-earning assets, including deposits at banks, investment securities, and loans and leases, all significantly impacted by the SVBB Acquisition and market conditions - Interest-earning deposits at banks totaled $37.85 billion at June 30, 2023, an increase of $32.82 billion from December 31, 2022, primarily related to $33.93 billion acquired in the SVBB Acquisition[371] - The carrying value of investment securities increased to $22.17 billion at June 30, 2023, from $19.37 billion at December 31, 2022, reflecting purchases and acquired investment securities from the SVBB Acquisition[374] - Loans and leases held for investment were $133.02 billion at June 30, 2023, an 88% increase from $70.78 billion at December 31, 2022, reflecting approximately $58.80 billion of SVB loans[385] OPERATING LEASE EQUIPMENT, NET Provides an overview of the operating lease equipment portfolio, which is predominantly comprised of rail assets Operating Lease Equipment, Net (millions USD): | Asset Type | June 30, 2023 | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------ | :------------- | :---------------- | | Railcars and locomotives | $7,790 | $7,612 | $7,433 | | Other equipment | $741 | $719 | $723 | | Total | $8,531 | $8,331 | $8,156 | INTEREST-BEARING LIABILITIES Analyzes interest-bearing liabilities, noting a significant increase driven by SVBB Acquisition deposits, the Purchase Money Note, and General Banking deposit growth, partially offset by FHLB repayments - Total interest-bearing liabilities increased to $136.76 billion at June 30, 2023, from $71.13 billion at December 31, 2022, primarily due to deposits assumed in the SVBB Acquisition and the Purchase Money Note[389] - Total deposits were $141.16 billion at June 30, 2023, including $40.86 billion of SVB deposits, and showed growth in the Direct Bank and Community Association Banking (CAB)[391] - FHLB borrowings decreased to $2.43 billion at June 30, 2023, from $4.25 billion at December 31, 2022, reflecting significant repayments during the period[398] RISK MANAGEMENT Outlines BancShares' comprehensive risk management framework, including risk appetite, Board oversight, and stress testing, detailing credit, market, and liquidity risks, emphasizing SVBB integration CREDIT RISK Describes BancShares' credit risk management practices, including underwriting, reviews, and ACL estimation, highlighting the SVBB Acquisition's impact on loan classifications and non-performing assets - BancShares employs a dual ratings system (Probability of Default and Loss Given Default) for commercial loans and evaluates consumer loans based on credit profile and delinquency status[409][410] - Silicon Valley Banking (SVB) loan ratings and ACL forecasting models are being integrated into BancShares' existing risk management processes, with SVB's existing models maintained during the transition[412] - The ACL at June 30, 2023, was $1.64 billion, an increase of $715 million from $922 million at December 31, 2022, primarily due to the SVBB Acquisition's initial PCD ACL ($220 million) and day 2 provision ($462 million)[415][416] - Non-accrual loans increased to $929 million at June 30, 2023, from $627 million at December 31, 2022, largely due to the addition of $213 million in SVB non-accrual loans[428] MARKET RISK Addresses BancShares' market risk management, specifically interest rate risk, through NII and EVE Sensitivity, and the SVBB Acquisition's impact on the company's rate sensitivity profile - BancShares evaluates and monitors interest rate risk primarily through Net Interest Income (NII) Sensitivity (short-term earnings risk) and Economic Value of Equity (EVE) Sensitivity (longer-term balance sheet risk)[454] - The SVBB Acquisition significantly increased BancShares' balance sheet and changed its rate sensitivity, with approximately 65%-70% of loans having floating contractual reference rates[456][460] Net Interest Income Sensitivity Simulation Analysis (Estimated % Change in NII over 12 months): | Change in interest rate (bps) | June 30, 2023 | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :------------- | :---------------- | | -100 | (9.7)% | (11.1)% | (4.0)% | | -25 | (2.4)% | (2.8)% | (0.9)% | | +25 | 2.4% | 2.8% | 0.8% | | +100 | 9.5% | 11.1% | 3.4% | | +200 | 18.9% | 22.0% | 6.7% | LIQUIDITY RISK Details BancShares' liquidity risk management strategy, ensuring adequate cash, collateral, and funding capacity through diverse sources, including deposits, FHLB, FRB, and the new FDIC Credit Facility, especially after the SVBB Acquisition - At June 30, 2023, BancShares had $53.42 billion of total Liquid Assets (25.5% of total assets) and $86.03 billion of contingent liquidity sources available[478][480] - A five-year, up to $70 billion Credit Facility was established with the FDIC in connection with the SVBB Acquisition to support liquidity, including for deposit withdrawal or runoff[485] - Available borrowing capacity with the FHLB was $11.12 billion and with the FRB was $4.82 billion at June 30, 2023[482][483] CAPITAL Discusses BancShares' capital management, regulatory capital ratios, and dividend policies, emphasizing capital levels exceed minimum requirements and the significant asset increase due to the SVBB Acquisition - BancShares' total assets increased from $109.30 billion at December 31, 2022, to $209.50 billion at June 30, 2023, primarily due to the SVBB Acquisition[489] - All regulatory capital ratios (Total risk-based, Tier 1 risk-based, Common equity Tier 1, Tier 1 leverage) for BancShares and FCB exceeded well-capitalized thresholds at June 30, 2023[497] - Quarterly dividends of $0.75 per common share were paid on Class A and Class B Common Stock during the first and second quarters of 2023, and a similar dividend was declared for Q3 2023[491] CRITICAL ACCOUNTING ESTIMATES Identifies Allowance for Credit Losses (ACL) and fair values of acquired loans and core deposit intangibles from business combinations as critical accounting estimates, requiring significant management judgment - The Allowance for Credit Losses (ACL) and the fair values of loans acquired in and the core deposit intangibles associated with a business combination (such as the SVBB Acquisition) are considered critical accounting estimates[498][499] - These estimates require management to make certain assumptions about discount rates, future expected cash flows, and market conditions, which are highly subjective and may require adjustments[499] RECENT ACCOUNTING PRONOUNCEMENTS Lists recent FASB accounting pronouncements not yet effective for BancShares, including updates related to Reference Rate Reform and Investments in Tax Credit Structures - ASU 2020-04, ASU 2021-01, and ASU 2022-06 (Reference Rate Reform) provide optional expedients for contract modifications and hedge relationships, with BancShares continuing to assess their impact[501] - ASU 2023-02 (Investments—Equity Method and Joint Ventures) allows entities to elect the proportional amortization method for qualifying tax equity investments, effective for BancShares as of January 1, 2024[501] NON-GAAP FINANCIAL MEASUREMENTS Explains BancShares' use of non-GAAP financial measures, specifically 'Adjusted Rental Income on Operating Lease Equipment' for the Rail segment, to provide additional transparency and an alternative means of assessing operating results - BancShares provides non-GAAP financial measures to offer investors additional data and transparency for evaluating its operations, acknowledging they should be considered in addition to GAAP measures[502] - 'Adjusted rental income on operating lease equipment' for the Rail segment is a non-GAAP measure calculated as gross revenue earned on rail car leases less depreciation and maintenance, used to monitor segment profitability[504] Forward-Looking Statements Contains a cautionary statement regarding forward-looking statements, outlining inherent risks, uncertainties, and factors that could cause actual financial results and performance to differ materially from projections - Forward-looking statements are subject to inherent risks, uncertainties, and changes in circumstances, including general competitive, economic, political, and geopolitical conditions, fluctuations in interest rates, regulatory actions, and the failure to realize anticipated benefits from acquisition transactions like the SVBB Acquisition[508] Item 3. Quantitative and Qualitative Disclosures about Market Risk States BancShares' market risk profile changed since December 31, 2022, primarily due to the SVBB Acquisition, referring to Management's Discussion and Analysis for further details - BancShares' market risk profile has changed since December 31, 2022, primarily due to the SVBB Acquisition[510] - Market risk is defined as the potential economic loss resulting from changes in market prices and interest rates, which can affect the fair values of financial instruments or reduce net interest income[510] Item 4. Controls and Procedures Reports on the evaluation of BancShares' disclosure controls and procedures, concluding their effectiveness, and details ongoing changes in internal control over financial reporting related to the SVBB Acquisition EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023, concluding they were effective - BancShares' disclosure controls and procedures were evaluated and concluded to be effective as of June 30, 2023, providing reasonable assurance of timely and accurate financial reporting[511] CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Reports on the commencement of evaluation and implementation of new controls related to the SVBB Acquisition, with no other material changes to internal control over financial reporting during the period - During the first quarter of 2023, BancShares commenced the evaluation of acquired entities' controls and designed and implemented new controls as needed, as a result of the SVBB Acquisition[512] - There were no other material changes in internal control over financial reporting during the three months ended June 30, 2023[512] Part Two — Other Information Item 1. Legal Proceedings States BancShares is involved in various legal actions, but management believes no current actions are material to consolidated financial statements, with an estimated range of reasonably possible losses - Management believes no legal actions currently exist that would be material to BancShares' consolidated financial statements[514] - For litigation matters where losses are reasonably possible, management estimates an aggregate range of reasonably possible losses of up to $10 million in excess of any established reserves and insurance[274] Item 1A. Risk Factors Refers to the 2022 Form 10-K for risk factors, noting no material changes during 2023 except for those related to the SVBB Acquisition disclosed in the Q1 2023 10-Q - There have been no material changes in the risk factors during 2023 from those reported in the 2022 Form 10-K, except for new and updated risk factors related to the SVBB Acquisition disclosed in the Form 10-Q for the quarter ended March 31, 2023[515] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no repurchases of the company's stock during the three months ended June 30, 2023 - There were no repurchases of BancShares' stock during the three months ended June 30, 2023[516] Item 5. Other Information States no directors or officers adopted or terminated any 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during Q2 2023 - None of the Company's directors or officers adopted or terminated any 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the second quarter of 2023[517] Item 6. Exhibits Lists exhibits filed as part of the Form 10-Q, including extensions to the Purchase and Assumption Agreement, CEO/CFO certifications, and various XBRL data files - Exhibits filed include extensions of time to the Purchase and Assumption Agreement for SVBB, Certifications of the Chief Executive Officer and Chief Financial Officer, and various Inline XBRL documents[519] Signatures Contains the required signatures for the Form 10-Q, certifying its submission on behalf of First Citizens BancShares, Inc. by its Chief Financial Officer - The report was duly signed on behalf of First Citizens BancShares, Inc. by Craig L. Nix, Chief Financial Officer, on August 4, 2023[521]