First Citizens' Margin Stabilizes as Reserve Release Lifts ROA to 1.15%
First Citizens Bancshares (FCNCA) posted its first sequential net interest income gain in three quarters, with net interest margin edging up 1bp to 3.10% after back-to-back quarters of compression.
First Citizens Bancshares (FCNCA), the Raleigh-based acquisitive regional bank built through a string of failed-bank deals including Silicon Valley Bank's remains, turned a corner on net interest margin in the second quarter. NIM stabilized at 3.10%, up 1bp quarter over quarter, after two straight quarters of compression that had taken it from 3.26% to 3.09% since the fourth quarter of 2023. Asset yields rose 4bps to 5.34%, outpacing a 2bp increase in funding costs to 2.95%, a reversal of the margin-pressure narrative that had dominated the bank's prior two releases.
The margin turn showed up directly in net interest income, which rose $35 million quarter over quarter to $1.66 billion, the first sequential increase after declines of $101 million in the first quarter and $12 million in the fourth quarter of 2023. Higher loan yields and balances did the work, aided by an $18 million drop in borrowing costs following prepayment of the Purchase Money Note tied to the SVB acquisition. Loan growth reaccelerated alongside it: period-end loans rose $2.34 billion, or 1.6%, quarter over quarter to $151.03 billion, concentrated in the Commercial Bank and Global Fund Banking segment, which added $2.37 billion, a sharp pickup from average loan growth of just 0.4% in the first quarter.
Deposits grew $2.59 billion, or 1.5%, to $173.43 billion, led by $4.28 billion of growth in Corporate/Direct Bank and brokered balances. The funding mix shifted less favorably, however: noninterest-bearing deposits fell $1.13 billion, or 2.6%, and slipped to 24.5% of total deposits from 25.5% in the first quarter, while the overall deposit cost ticked up to 2.07% from 2.04%. The bank leaned on marketing to defend the Direct Bank deposit franchise, adding $15 million in promotional spend even as personnel costs fell $25 million on lower incentive compensation, holding total expense growth to just 0.9% quarter over quarter.
Credit quality improved on every measure. First Citizens booked a $10 million benefit for credit losses in the second quarter, versus a $72 million provision in the first quarter and $54 million in the fourth quarter of 2023, driven by a $74 million reserve release compared with an $8 million release the prior quarter. The allowance for loan and lease losses fell to 0.98% of loans from 1.05% quarter over quarter and 1.18% a year earlier, while net charge-offs eased to 0.29% of average loans from 0.30%, extending a steady decline from the 0.65% peak recorded in the third quarter of 2023.
Fee income added further lift. Noninterest income jumped $84 million, or 12.1%, to $776 million, reversing a $23 million decline in the first quarter, on a $27 million derivative fair-value gain and a $17 million gain from tax-credit investment sales. Combined with the reserve release, the fee surge pushed return on assets to 1.15% from 0.93% and diluted earnings per share to $55.52 from $42.63, a 30.2% quarter-over-quarter increase.
Capital return accelerated alongside the results. First Citizens repurchased $600 million of stock in the quarter, 298,907 shares, and prepaid the $2.5 billion Purchase Money Note, even as buybacks in the two prior quarters had each run at $900 million. CET1 stood at 10.77% at June 30, 2024, leaving room for the bank to keep buying back stock while funding the note prepayment out of the same capital base.
The BMO branch acquisition, First Citizens' next inorganic growth lever, came with smaller numbers attached this quarter. Deposit and loan assumptions were revised down to roughly $5.3 billion and $700 million, respectively, from the approximately $5.7 billion and $1.1 billion disclosed in the fourth- and third-quarter 2023 releases, and the expected close slipped to the third quarter of 2024 from prior guidance of mid- to second-half 2024.
The net effect is a bank whose organic engine reaccelerated just as an inorganic deal shrank in scope and slipped in timing. With NIM stabilizing, credit costs reversing to a benefit, and buybacks running alongside a large debt prepayment, First Citizens is generating capital faster than it is deploying it into new acquisitions, at least for now.