First Citizens BancShares(US:FCNCA)2023-11-02 16:00Part One — Financial Information Financial Statements Consolidated financial statements for September 30, 2023, reflect significant growth in assets, liabilities, and equity, primarily driven by the SVBB acquisition Consolidated Balance Sheet Highlights (Unaudited) | Item | September 30, 2023 (millions) | December 31, 2022 (millions) | | :--- | :--- | :--- | | Total assets | $213,765 | $109,298 | | Loans and leases, net | $131,529 | $69,859 | | Total deposits | $146,233 | $89,408 | | Total borrowings | $37,712 | $6,645 | | Total stockholders' equity | $20,389 | $9,662 | | Total liabilities and stockholders' equity | $213,765 | $109,298 | Consolidated Income Statement Highlights (Unaudited) | Item | Nine Months Ended Sep 30, 2023 (millions) | Nine Months Ended Sep 30, 2022 (millions) | | :--- | :--- | :--- | | Net interest income | $4,801 | $2,144 | | Provision for credit losses | $1,126 | $566 | | Total noninterest income | $11,532 | $1,707 | | Gain on acquisition | $9,891 | $431 | | Total noninterest expense | $3,843 | $2,315 | | Net income | $10,952 | $841 | - The significant increase in financial metrics is primarily due to the acquisition of Silicon Valley Bridge Bank, N.A. (SVBB) on March 27, 202338 NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION The company conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (FCB), with over 500 branches in 30 states - The company conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (FCB), with over 500 branches in 30 states32 - 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 FDIC38 - In the first quarter of 2023, a new reportable segment, Silicon Valley Banking (SVB), was added to include the operations from the SVBB Acquisition40 - The company adopted ASU 2022-02 on January 1, 2023, which eliminates the Troubled Debt Restructuring (TDR) recognition and measurement guidance and requires new disclosures for loan modifications to borrowers experiencing financial difficulty58 NOTE 2 — BUSINESS COMBINATIONS This section details the accounting for business combinations, primarily focusing on the SVBB acquisition and its financial impact - On March 27, 2023, FCB completed the acquisition of SVBB from the FDIC. The transaction resulted in a preliminary after-tax gain on acquisition of $9.89 billion6273 SVBB Acquisition Purchase Price Allocation (as of March 27, 2023) | Item | Fair Value (millions) | | :--- | :--- | | Purchase price consideration | $36,308 | | Total assets acquired | $107,539 | | Total liabilities assumed | $61,340 | | Fair value of net assets acquired | $46,199 | | Preliminary gain on acquisition, after income taxes | $9,891 | - Key terms of the SVBB deal include a five-year, ~$36 billion Purchase Money Note to the FDIC, a five-year, up to $70 billion line of credit from the FDIC, and a commercial shared-loss agreement covering an estimated $60 billion of commercial loans676970 - The merger with CIT Group Inc. on January 3, 2022, resulted in a non-taxable gain on acquisition of $431 million9294 NOTE 3 — INVESTMENT SECURITIES This section provides a summary of the company's investment securities portfolio, including amortized cost, fair value, and unrealized gains or losses Investment Securities Summary (Amortized Cost & Fair Value) | Item | Amortized Cost (Sep 30, 2023) (millions) | Fair Value (Sep 30, 2023) (millions) | Amortized Cost (Dec 31, 2022) (millions) | Fair Value (Dec 31, 2022) (millions) | | :--- | :--- | :--- | :--- | :--- | | Available for sale | $17,836 | $16,661 | $9,967 | $8,995 | | Held to maturity | $10,082 | $8,152 | $10,279 | $8,795 | | Total | $27,993 | $24,888 | $20,321 | $17,885 | - As of September 30, 2023, the investment portfolio had total gross unrealized losses of $3.12 billion, compared to $2.46 billion at December 31, 202297 - For the nine months ended September 30, 2023, the company recognized a net realized loss of $26 million on the sale of investment securities available for sale, primarily from municipal bonds acquired in the SVBB Acquisition103104 NOTE 4 — LOANS AND LEASES This section details the composition of the loan and lease portfolio, including categories, past due status, and non-accrual loans Total Loans and Leases by Category | Item | September 30, 2023 (millions) | December 31, 2022 (millions) | | :--- | :--- | :--- | | Commercial | $58,050 | $53,455 | | Consumer | $18,288 | $17,326 | | SVB | $56,864 | $— | | Total loans and leases | $133,202 | $70,781 | - Total past due loans (30+ days) were $1.17 billion (0.88% of total loans) at September 30, 2023, compared to $864 million (1.22% of total loans) at December 31, 2022117 - Non-accrual loans increased to $899 million at September 30, 2023, from $627 million at December 31, 2022, with the SVB portfolio contributing $163 million of the non-accrual balance119 - For the nine months ended September 30, 2023, gross charge-offs totaled $437 million, with $209 million from the Commercial portfolio and $208 million from the SVB portfolio138 NOTE 5 — ALLOWANCE FOR LOAN AND LEASE LOSSES This section outlines the activity and balance of the Allowance for Loan and Lease Losses (ALLL), including provisions and charge-offs Allowance for Loan and Lease Losses (ALLL) Activity | Item | Nine Months Ended Sep 30, 2023 (millions) | | :--- | :--- | | Balance at beginning of period | $922 | | Initial PCD ALLL (SVBB) | $220 | | Day 2 provision for loan and lease losses (SVBB) | $462 | | Provision for loan and lease losses | $452 | | Charge-offs | ($437) | | Recoveries | $54 | | Balance at September 30, 2023 | $1,673 | - The total provision for credit losses for the nine months ended September 30, 2023 was $1.126 billion, which included a $914 million provision for loan and lease losses and a $212 million provision for off-balance sheet credit exposure163 NOTE 10 — DEPOSITS This section details the composition of the company's deposit base, categorized by type and interest-bearing status Deposit Composition | Item | September 30, 2023 (millions) | December 31, 2022 (millions) | | :--- | :--- | :--- | | Noninterest-bearing demand | $43,141 | $24,922 | | Checking with interest | $23,461 | $16,202 | | Money market | $30,082 | $21,040 | | Savings | $32,513 | $16,634 | | Time | $17,036 | $10,610 | | Total deposits | $146,233 | $89,408 | - Time deposits with a denomination of $250,000 or more were $4.23 billion at September 30, 2023, up from $2.22 billion at December 31, 2022187 NOTE 11 — BORROWINGS This section provides a summary of the company's short-term and long-term borrowings, including details on the Purchase Money Note related to the SVBB Acquisition Borrowings Summary | Item | September 30, 2023 (millions) | December 31, 2022 (millions) | | :--- | :--- | :--- | | Short-term borrowings | $453 | $2,186 | | Long-term borrowings | $37,259 | $4,459 | | Total borrowings | $37,712 | $6,645 | - Long-term borrowings significantly increased due to the $36.07 billion Purchase Money Note payable to the FDIC related to the SVBB Acquisition, which has a fixed rate of 3.50% and matures in March 2028193 NOTE 17 — REGULATORY CAPITAL This section presents the company's regulatory capital ratios, demonstrating compliance with Basel III requirements and well-capitalized status BancShares Regulatory Capital Ratios | Ratio | September 30, 2023 | December 31, 2022 | Basel III Requirement | | :--- | :--- | :--- | :--- | | Common equity Tier 1 | 13.24% | 10.08% | 7.00% | | Tier 1 risk-based capital | 13.83% | 11.06% | 8.50% | | Total risk-based capital | 15.64% | 13.18% | 10.50% | | Tier 1 leverage | 9.73% | 8.99% | 4.00% | - Both BancShares and its subsidiary bank, FCB, exceed all Basel III requirements and are considered well-capitalized under Prompt Corrective Action (PCA) thresholds249 NOTE 21 — BUSINESS SEGMENT INFORMATION This section provides an overview of the company's business segments, including the newly added Silicon Valley Banking segment and net income contributions - A new segment, Silicon Valley Banking, was added following the SVBB acquisition. It serves commercial clients in innovation markets like healthcare and technology, as well as private equity and venture capital firms264268 Net Income by Segment (Nine Months Ended Sep 30, 2023) | Item | Net Income (millions) | | :--- | :--- | | General Banking | $684 | | Commercial Banking | $141 | | Silicon Valley Banking | $381 | | Rail | $68 | | Corporate | $9,678 | | Total BancShares | $10,952 | - The Corporate segment's net income includes the preliminary gain on the SVBB acquisition, day 2 provision for credit losses, and purchase accounting adjustments272 Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights the SVBB acquisition's transformative financial impact and ongoing regulatory considerations - The SVBB acquisition expanded the client base to private equity and venture capital clients, diversifying the loan portfolio and business mix, particularly in technology and life sciences298 - Management is evaluating several Notices of Proposed Rulemaking (NPRs) from federal banking agencies, including a potential one-time FDIC special assessment of approximately $30 million, enhanced capital requirements (Basel III endgame), and new long-term debt requirements for banks with over $100 billion in assets307308311 Financial Performance Summary (Nine Months Ended) | Item | September 30, 2023 (millions) | September 30, 2022 (millions) | | :--- | :--- | :--- | | Net interest income | $4,801 | $2,144 | | Provision for credit losses | $1,126 | $566 | | Noninterest income | $11,532 | $1,707 | | Net income | $10,952 | $841 | | Diluted EPS | $750.19 | $50.70 | RESULTS OF OPERATIONS This section analyzes the company's financial performance, including net interest income, provision for credit losses, noninterest income, and noninterest expense - Net interest income for Q3 2023 was $1.99 billion, a 2% increase from Q2 2023, driven by higher loan yields and purchase accounting accretion, which offset higher deposit costs. Net interest margin (NIM) slightly decreased by 3 bps to 4.07%336 - The provision for credit losses in Q3 2023 was $192 million, up from $151 million in Q2 2023, reflecting deterioration in macroeconomic factors and higher net charge-offs343 - Noninterest income for Q3 2023 was $615 million, a decrease from $658 million in Q2 2023, primarily due to a smaller positive adjustment to the preliminary gain on acquisition ($12 million vs. $55 million)352 - Noninterest expense decreased 10% to $1.42 billion in Q3 2023 from $1.57 billion in Q2 2023, largely due to lower acquisition-related costs and salaries357 RESULTS BY BUSINESS SEGMENT This section provides a detailed breakdown of financial results by the company's key business segments: General Banking, Commercial Banking, Silicon Valley Banking, and Rail - General Banking: Q3 net income was $241 million. Deposits grew to $101.0 billion, primarily driven by the Direct Bank channel363365 - Commercial Banking: Q3 net income was $37 million. The provision for credit losses remained elevated at $132 million, with a focus on the general office real estate portfolio367 - Silicon Valley Banking: Q3 net income was $157 million. Loans declined to $56.9 billion from $58.8 billion in Q2, mostly in Global Fund Banking. Deposits stabilized at $40.0 billion370374375 - Rail: Q3 net income was $28 million. Adjusted rental income increased to $90 million, benefiting from strong utilization (98.7%) and re-pricing of leases at 138% of prior rates378379 BALANCE SHEET ANALYSIS This section analyzes key balance sheet components, including loans, deposits, and borrowings, highlighting the impact of the SVBB acquisition - Total loans and leases were $133.2 billion at September 30, 2023, an 88% increase from year-end 2022, primarily due to the addition of $56.9 billion in SVB loans402 - Total deposits reached $146.2 billion, a 64% increase from year-end 2022. This includes $40.0 billion from the SVB segment and strong growth in the Direct Bank409 - Total borrowings stood at $37.7 billion, up from $6.6 billion at year-end 2022, mainly due to the $35.8 billion Purchase Money Note from the FDIC related to the SVBB acquisition415 RISK MANAGEMENT This section outlines the company's risk management framework, including credit risk, interest rate risk, and liquidity management - The company maintains a moderate risk appetite and a comprehensive Risk Management Framework overseen by the Board's Risk Committee421 - The Allowance for Loan and Lease Losses (ALLL) was $1.67 billion, or 1.26% of total loans, at September 30, 2023. The increase from year-end was driven by the SVBB acquisition and deteriorating macroeconomic forecasts437438 - The company is asset-sensitive to interest rate changes. A +100 basis point parallel rate shock is estimated to increase Net Interest Income (NII) by 9.2% over 12 months484486 - Total liquid assets were $57.0 billion (26.7% of total assets) at September 30, 2023, with an additional $88.6 billion in contingent liquidity sources, including a $70 billion credit facility from the FDIC504506 Quantitative and Qualitative Disclosures about Market Risk The company's market risk profile significantly changed post-SVBB Acquisition, with interest rate risk being the primary concern - The company's market risk profile as of September 30, 2023, has changed since December 31, 2022, primarily due to the SVBB Acquisition539 Controls and Procedures Management concluded disclosure controls were effective, with ongoing integration of SVBB internal controls - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2023540 - The evaluation of internal controls over financial reporting related to the SVBB Acquisition is ongoing. No other material changes were identified during the quarter541 Part Two — Other Information Legal Proceedings The company is involved in various legal actions, none of which are expected to materially affect financial statements - In management's opinion, no currently existing legal actions would be material to BancShares' consolidated financial statements544 Risk Factors No material changes to risk factors occurred in Q3 2023, beyond those related to the SVBB Acquisition previously disclosed - No material changes in risk factors occurred during the third quarter of 2023, other than those previously disclosed in the Q1 2023 Form 10-Q related to the SVBB Acquisition545 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no repurchases of its stock during the three months ended September 30, 2023 - There were no repurchases of the company's stock during the third quarter of 2023546