First Citizens BancShares

First Citizens reported steady second-quarter results, with net interest margin up 1 basis point from the prior quarter to 3.10%. The bank also tightened its 2026 net interest income guidance range to $6.60 billion to $6.75 billion (prior: $6.5 billion to $6.8 billion).

Why it matters: We expected industrywide deposit competition and First Citizens' paydown of the FDIC purchase money note to pressure deposit costs. Interest-bearing deposit costs held up better than expected, up 3 basis points sequentially and not a large outlier compared with regional peers under our coverage. Management guided to a relatively stable net interest margin in the second half of the year, assuming 0 to 1 rate hike by the Federal Reserve, largely in line with our prior expectation. First Citizens screens as the most asset-sensitive regional bank under our coverage, but elevated deposit funding costs will offset part of the benefit from a potential 25-basis-point rate hike.

The bottom line: As we digest the latest results and updated guidance, we don't expect to make a material change to our $2,310 fair value estimate for no-moat-rated First Citizens. We assess shares as fairly valued. Over the long term, we would like to see the bank make more progress in improving its core deposit franchise and bring down deposit funding costs.

Between the lines: We continue to expect the FDIC purchase money note paydown to weigh on net interest margin over the next several quarters, as the bank replaces the 3.5% fixed-rate FDIC borrowings mostly with direct bank (online banking) and brokered deposits. Direct bank and brokered deposit balances grew by $2.8 billion and $1.5 billion, respectively, sequentially. Management noted that direct bank deposit rates were 3.70% in the second quarter, above the effective federal-funds rate of around 3.63% and the cost of the FDIC purchase money note.

First Citizens now expects to close its acquisition of certain BMO branches in the third quarter, which will add around $700 million in loan balances and $5.3 billion in deposit balances.

Our fair value estimate for First Citizens is $2,430 per share. Our base case includes a 0.25% increase in the federal-funds rate in December 2026 as well as the 0.25% hike in September 2026, and we expect the Federal Reserve to start cutting short-term interest rates in the second half of 2027. Our long-term rate assumptions remain unchanged. First Citizens Bank is one of the most rate-sensitive regional banks under our coverage, though higher funding costs will partly offset the positive impact of higher interest rates. We expect the bank to increase its net interest income at a CAGR of 2.9% from 2025 to 2030. Our fair value estimate is equivalent to 1.4 times tangible book value as of June 30, 2026. We assume an 8.9% cost of equity.

Consistent with other banks, growth in net interest income, driven by changes in the net interest margin and balance-sheet growth, growth in fee-based income, and operating expenses are the key valuation drivers.

After adjusting for the rental income from its small, noncore railcar leasing business, First Citizens derives around 80% of its revenue from net interest income. The bank’s NII has many different moving parts. Following the 2022 acquisition of CIT Group and the 2023 acquisition of Silicon Valley Bridge Bank, the bank’s net interest margin was skewed higher by purchase accounting accretion from 2022 to 2025. We expect its 2026 adjusted NIM, excluding PAA, to be about 3.02%, with unadjusted NIM at about 3.09%. For 2026, the bank is also paying down some portion of its $33 billion fixed-rate 3.5% borrowings from the FDIC (related to the SVBB acquisition) due in 2028, and replacing the funding mostly with excess liquidity on its balance sheet. We forecast around 13.5% growth in deposits in 2026, and we expect the bank to continue growing its direct bank segment deposits (higher-cost online deposits) at a faster pace than its branch deposits, which would also put some pressure on deposit costs in 2026. Marrying these levers, we forecast a decline of 1.7% in 2026 NII, following a 4.6% decline in 2025.

Longer term, we project First Citizens’ net interest margin to normalize around 3.07%, which reflects our expectation of an upward-sloping yield curve and a midcycle federal-funds rate around 2.5%. We expect the bank to grow its loans at a compound annual growth rate of 3.4% from 2025 to 2035. This results in an NII CAGR of 2.8%.

On the fee-income side, we forecast around 5.4% growth in 2026, excluding rental income from railcar leasing and gain on sale of equipment. We expect normalized adjusted fee income (excluding rental leasing income) growth of around 3.6% for the bank in the long run.

Turning to expenses, we forecast adjusted expense growth of about 3.9% in 2026, excluding railcar leasing-related expenses and other noncore expenses. While this represents a slowdown from the 8.0% growth in 2025 and 16% growth in 2024, expenses remain elevated due to ongoing investment in risk management and control systems. Over time, we expect the bank’s adjusted efficiency ratio (excluding the rental business and other noncore expenses) to normalize around 60%. Although this falls well short of management’s mid-50s, it's still an improvement from its past decade average of around 61.7%.

For its railcar leasing business, which accounts for less than 5% of its earnings, we expect the bank’s net rental income from railcar leasing (after adjusting for depreciation and maintenance expenses) to grow at a CAGR of 3.3% from 2025 to 2035.

Finally, we forecast First Citizens’ 2026 net charge-off ratio at 0.33%, down from 0.44% in 2025. We expect the bank’s net charge-off ratio to normalize around 0.41% through the cycle, which is higher than legacy First Citizens levels, reflecting higher credit costs associated with SVB and CIT Group. Overall, we expect an average return on tangible common equity of 11.7% over the next 10 years, which is higher than our 8.9% cost of equity estimate for the firm.

We assign First Citizens a Morningstar Economic Moat Rating of none because we do not believe the bank has durable cost advantages consistent with our bank moat framework. While we think the bank’s track record of acquiring troubled banks is impressive, we do not believe this alone constitutes a moat. While we forecast the bank to generate returns on tangible equity in the low teens on a normalized basis, the spread is thin when compared with its 8.9% cost of equity, and we are not confident enough that the bank can consistently outearn its COE over the 10-year time horizon that would be suggestive of a narrow moat rating. We would like to see further improvement in the bank’s funding costs and operating efficiency, as well as the development of more robust fee-income businesses, before considering a narrow moat rating for First Citizens.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see cost advantages stemming from three primary factors: a low-cost funding base, excellent operating efficiency, and conservative underwriting. Regulatory costs must also be considered.

We don’t think First Citizens has a funding-cost advantage because of the two large acquisitions it made over the past five years. First Citizens quadrupled its asset size between its 2022 acquisition of CIT Group and its 2023 acquisition of Silicon Valley Bridge Bank, but neither independently boasted a significant base of low-cost deposits. CIT Group lacked strong retail deposit-gathering capabilities, as evidenced by around 70% of its deposits from brokered and online deposits (two of the most expensive deposit sources) in the fourth quarter of 2020. Silicon Valley Bank saw deposit costs rise sharply after the acquisition (despite First Citizens stabilizing deposit outflows within months) as noninterest-bearing deposits shifted into interest-bearing accounts and rates on those accounts increased. As a result, First Citizens' cost of deposits of 2.07% was the highest among our regional banks, 51 basis points above the peer average (or 33% higher) in the second quarter of 2026. We do not believe First Citizens has a funding-cost advantage, which matters given the bank derives between 75% and 80% of its adjusted revenue from net interest income.

We also don’t view First Citizens as being advantaged in operating efficiency. Its adjusted operating efficiency ratio (excluding railcar leasing and acquisition gains) was impressive in 2023 and 2024, in the high-50s (lower is better), but most of this reflects robust net interest income, buoyed by the rate environment and purchase accounting marks. We estimate its adjusted normalized operating efficiency ratio is likely around 60%, more in line with no-moat regional bank peers, though still an improvement from its historical high-60s average. Weak fee income and suboptimal deposit market share in its core markets, despite improved scale from recent acquisitions, explain much of this disadvantage. First Citizens' 2025 adjusted fee income (excluding railcar leasing) represented only 19% of revenue, well below the typical moaty regional banks' 30%-plus mix. It has attractive fee-income products, including wealth management, merchant fees, and deposit service fees, but we don't expect these to grow much faster than its balance sheet. It also holds top deposit share in only a few markets, making it harder to spread its largely fixed branch-network costs. Excluding the $48 billion in online deposits (30% of its deposit base) booked in Raleigh, the bank derived around 23% of deposits from North Carolina (ranks fourth excluding online deposits), 8% from South Carolina (also fourth), and 31% from California (seventh), per FDIC data as of June 2025. Moaty peers typically derive most deposits from a top-5 local market share.

On credit costs, we think First Citizens has a strong underwriting culture. While the bank made two large, transformational acquisitions that may have diluted some of its edge, we believe First Citizens’ management team can institutionalize its strong underwriting culture and that the bank will remain a solid performer on credit costs going forward.

Lastly, regulatory costs matter both at the industry level and for First Citizens, specifically. The US banking system has improved over the last decade, with capital levels at all-time highs and stronger postcrisis regulation. Despite intense competition, the largest banks by assets have earned higher returns on equity for decades and still do. Our long-run outlook is positive given the US' stable democracy, steady GDP growth, and reserve currency status.

First Citizens is not large enough to be a global systemically important bank and avoids some of the more burdensome regulatory requirements. It is currently a Category IV bank, subject to the Federal Reserve's stress test every two years, with 2026 being its first year facing the test. Management has been investing in risk management capabilities, including Category III-related spending. Category III requirements trigger if assets exceed $250 billion (our expectation is around 2028), subjecting the bank to annual stress tests, liquidity coverage requirements, and the supplementary leverage ratio. It should manage this transition well. The March 2026 Basel III endgame proposal and 2025 stress test changes are mostly positive for First Citizens. The key change for banks between $100 billion and $700 billion in assets is including accumulated other comprehensive income in common equity Tier 1 capital, which it should handle well: it carried minimal negative AOCI marks as of June 30, 2026, and had a common equity Tier 1 ratio of 10.8% as of June 30, 2026, well above its 7% regulatory minimum.

First Citizens' California and Southeast footprint has attractive growth potential. If the bank successfully gains more deposit market share, it can improve its funding and return profile.

The bank could see higher balance sheet growth from its early- and growth-stage clients if more private equity and venture capital dry powder is put to work.

If the bank can bring more of the legacy SVB clients’ money back to its platform, it could see more balance-sheet growth or even growth in wealth management fee income.

In a recession, the bank would face slower balance-sheet growth and higher credit costs.

First Citizens derives around 80% of revenue from net interest income, and its NII is very sensitive to changes in short-term rates, which puts its net interest income under great pressure if the Fed has to cut rates aggressively.

As of June 30, 2026, the bank has about $28 billion in fixed-rate debt (3.5% rate) due in 2028. If the bank has to issue long-term debt to replace that funding at a significantly higher rate, its net interest margin could compress further.