FCNCA First Citizens Bancshares, Inc

Deanna Hart Investor Relations
Frank Holding Chairman of the Board and Chief Executive Officer
Craig Nix Chief Financial Officer
Tom Eklund Treasurer
Elliot Howard Director Financial Planning & Analysis
Brady Gailey Keefe, Bruyette, & Woods, Inc.
Kevin Fitzsimmons D.A. Davidson Companies
Brian Foran Autonomous Research LLP
Call transcript

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens Bancshares First Quarter Earnings Conference Call. At this time, all the participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce the host for today's conference call, Ms. Deanna Hart, Senior Vice President of Investor Relations.

You may begin.

Deanna Hart

Thank you, [Etna] [ph]. Good morning, and thank you for joining us today. It is my pleasure to introduce our Chairman and Chief Executive Officer, Frank Holding, and our Chief Financial Officer, Craig Nix. Frank and Craig will provide an overview of our first quarter 2021 results and will be referencing our investor presentation, which you can find on our Investor Relations website.

We are also pleased to have several other members of our leadership team here with us today who will be available for questions after the presentation.

As a reminder, our comments today will include forward-looking statements, which are subject to risk and uncertainties that may cause our results to differ materially from expectations. These risks are outlined for your review on Page 2 of the presentation.

We also reference non-GAAP financial measures within the presentation. Reconciliations of these measures against comparable GAAP results are available in the appendix. With that, I will hand it over to Frank.

Frank Holding

Thank you, Deanna, and good morning, everyone. We appreciate you joining us for our first quarter earnings call.

We are pleased to report $147.3 million in earnings for the first quarter as our business model continues to demonstrate strength and stability.

On the heels of a year that challenged even the best of companies, I'm proud that our team remains focused and continues to support our customers and communities during these challenging times.

This quarter, we've been hard at work on the second round of PPP funding and originated $1.1 billion in new PPP loans to support approximately 9,600 customers. We made additional improvements to our forgiveness process, allowing for streamlined application and processing with our customers and the SBA. Also with respect to the most recent round of stimulus payments, we provided even better customer experience thanks to the proactive efforts of our bankers and support teams. These continue to be exciting times for First Citizens and we remain pleased with our progress toward completion of our transformational merger with CIT, the largest and most significant in our history. When our merger with CIT is completed, together we'll be a stronger and better bank, better for our associates, our customers and our communities.

Our complementary strengths will position us to help customers do more with their money and make more of their futures. The bottom line is we're taking our company and our future to the next level. I'll now highlight Page 3 of our investor deck to provide an update on our activities surrounding the merger. In February, we received approval from the North Carolina Commissioner of Banks as well as from the stockholders of both companies.

We continue to prepare for an anticipated closing in mid-2021, subject to satisfaction of customary closing conditions, including receipt of our remaining regulatory approvals.

As we noted last quarter, we have established a core merger and integration management team to promote and oversee a coordinated approach to closing and conversion. This team is committed to ensuring we remain focused and has completed a number of tasks, which include initial plans for organizational structure and business unit integration. Early in the first quarter, we announced the senior leadership team and defined who will lead various business units upon closing. This team includes skilled and proven leaders from both organizations, which we believe embody the capabilities necessary to ensure a smooth merger integration and provide us the best opportunity to achieve our strategic objectives. With that, I'll turn it over to Craig for a closer look at our financial results. And then, we'll open the line for questions. Craig?

Craig Nix

Hey, thank you, Frank, and good morning, everyone.

As Frank mentioned, we released strong first quarter financial results today. I will now walk through our investor presentation and provide additional detail and commentary on the more significant components of our financial results during the first quarter. Starting on Page 4, net income totaled $147.3 million, a 158% increase over the first quarter of 2020 and an increase of 6.7% over the linked quarter. Earnings translated into a return on average assets of 1.16% and a return on average equity of 14.7%. Net income per common share totaled $14.53, up $9.07 over the first quarter of 2020, driven primarily by increases in pre-provision net revenue, a release of provision due to lower net charge-offs, strong credit performance and improving macroeconomic conditions and 2020 share repurchase activity. Compared to a year ago, pre-provision net revenue increased by $77.9 million or about 76.1%. The largest driver behind this increase was a $67.4 million favorable change in the fair value adjustment on our marketable equity securities portfolio, but we also benefited from core noninterest income growth in our fee-based lines of business. Credit quality remained strong with net charge-offs near historic low of 4 basis points compared to 10 basis points a year ago and 7 basis points in the linked quarter. Nonperforming assets remained stable during the quarter. Pages 5 and 6 cover trends in net interest income and net interest margin. Net interest income declined by $19.1 million from the linked quarter. Most of the decline was due to a $21.7 million decline in loan interest income. Of the $21.7 million decline, $12.2 million related to a decline in fee and interest income on SBA-PPP loans due primarily to a decline in forgiveness activity during the quarter. Net interest income was fairly stable when compared to the first quarter of 2020, as loan growth including both PPP loans and commercial lines and a decline in interest expense due to lower deposit rates offset the impact of lower earning asset yields.

During the first quarter, we experienced a 22 basis points decline in net interest margin from the linked quarter.

As we stated last quarter, we have maintained a conservative posture with respect to excess liquidity given our impending merger with CIT. This factor contributed to 10 basis points of the margin decline during the quarter.

In addition, the decline in the SBA-PPP loan yield I mentioned earlier, contributed to 7 basis points of the decline. The remainder of the decline was primarily due to a decline in the ex-PPP loan yields, all only partially offset by a decline in deposit costs as most of the benefit from lower rates has been realized.

While the recent steepening of the yield curve has increased new loan rates, we do expect continued pressure on margin as higher-yielding loans mature or are refinanced.

While there will be continued noise in the margin from excess liquidity and PPP, we expect a decline in margin to moderate over the remaining quarters in 2021.

If you turn to Page 7, we'll take a look at noninterest income, which totaled $136.6 million for the first quarter, up almost $10 million over the linked quarter and by approximately $73 million over the comparable quarter a year ago. Noninterest income compared to the linked quarter primarily benefited from a strong quarter in the wealth management and merchant services lines of business. Mortgage banking revenue remained strong during the quarter but did benefit from a $3.1 million reversal of previously recorded MSR impairment.

As mentioned earlier, the $73 million increase in noninterest income over the comparable quarter a year ago was due to a $67.4 million favorable change in the fair market value adjustment on our marketable equity securities portfolio. The remaining increase was primarily due to an increase in mortgage and wealth management revenues, partially offset by a decline in service charges driven by elevated deposit balances.

We expect noninterest income to continue to benefit from merchant services and wealth management income, all reflecting continued improvement in the economic conditions.

While we expect that mortgage production will remain strong, we expect originations to moderate in the coming quarters as higher mortgage rates slow refinance activity. In the near-term, despite organic deposit growth, we expect deposit service charges to remain below pre-COVID levels due to elevated deposit balances.

If you'll turn to Page 8, we will take a look at noninterest expense. We noted last quarter that we did not expect fourth quarter expenses to be reflective of our go-forward run rate.

We are pleased to report that expenses declined by $9.4 million from the fourth quarter. The decline was primarily due to lower OREO losses, occupancy expense and other core noninterest expenses. These favorable changes were partially offset by slightly higher personnel costs during the quarter due to annual FHA contributions and the reset of social security and 401(k) limits. All in all, we remain pleased with our expense management and the level of our efficiency ratio, especially given the pressure on our net interest margin that I discussed earlier.

We expect core noninterest expense ex-merger-related costs to remain stable and in line with the recent run rate.

Turning to Page 9, we provide balance sheet highlights and key ratios. I'll cover the significant components of the balance sheet on the subsequent slides. Page 10 provides information about trends in our loan portfolio.

During the first quarter, loans increased $389 million, or by 4.8% on an annualized basis. Of this growth, we experienced a $364 million net increase in SBA-PPP loans. Ex-PPP loan growth was modest during the quarter, which was consistent with our expectations entering the year. We do anticipate that annualized growth ex-PPP will pick up during the year to mid-single-digits as the economic recovery continues, but this will be dependent upon continued economic expansion and positive reopening trends in our market.

Turning to Page 11, we provide information on our PPP loans.

As Frank mentioned in his comments, we remained active in the program during the first quarter, funding an additional $1.1 billion in loans, bringing our total originations in rounds 1 and 2 of the program to $4.3 billion.

As of the end of the first quarter, PPP loans net of fees totaled $2.8 billion and have contributed $121 million in additional interest and fee income since inception. We've received applications for forgiveness on 69.2% of our round 1 loan amount and have received funds from the SBA on $43.9 million of the original loan amount. We made enhancements to our application and forgiveness portal during the quarter, which have been well received by our customers.

Forgiveness activity has recently accelerated and we expect this to continue into the second half of the year.

Turning to Page 12, we summarize our rolling 5-quarter credit quality trends. The net charge-off ratio for the first quarter was 4 basis points continuing the trend of low net charge-offs.

Our nonperforming assets ratio held stable at 0.8%, consistent with the prior 2 linked quarters and down from 0.86% from the second quarter of last year.

First quarter 2020 results included a $21.5 million reserve build related to the uncertainty surrounding COVID-19.

Given improving macroeconomic factors, continued strong credit quality trends and low net charge-offs, provision for loan losses was an $11 million credit during the quarter.

We continue to stay in touch with our customers and monitor our portfolios to understand the potential impact of the pandemic on our credit losses but we are pleased with our credit quality.

Moving forward, absent an unexpected external shock to the economy, we expect to benefit from strong credit quality to continue as our allowance moves toward pre-pandemic level.

Turning to Page 13.

Our allowance for credit losses ratio was 0.69% ex-PPP loans at the end of the first quarter, which was down from 0.74% at the end of the fourth quarter. We remain comfortable with our ACL level, which represented 17.25 times annual net charge-off at the end of the first quarter, and this compares to a loan book with an average life of approximately 4 years.

While we do not expect that the net charge-off level will remain constant at 4 basis points, we have seen no indication that charge-offs going forward will have a significant impact on the level of our allowance.

Moving on to Pages 14 and 15, I will cover deposit trends and our funding mix. Deposit growth remains a bright spot.

During the first quarter, deposits grew by $3.9 billion or at an annualized rate of 36.4%. On a year-over-year basis, deposits were up by $12 billion or by 34%.

While we acknowledge that our deposit growth during the first quarter continued to be positively impacted by government stimulus and PPP loan fundings, we experienced strong organic growth on both a linked quarter and year-over-year basis. We attribute this organic growth to 3 broad factors, including: 1, our day-to-day go-to-market strategy, which emphasizes deposit gathering; 2, low consumer spending; and 3, broad market uncertainty leading our commercial and business customers to hold more cash in their deposit accounts. At March 31, deposits represented 96.1% of our total funding base, largely changed - largely unchanged from the linked quarter.

We are pleased that noninterest-bearing deposits accounted for 43.3% of total deposits at the end of the first quarter. Total deposit costs declined to 8 basis points in the first quarter from 10 basis points in the linked quarter, driven by a decline in time deposit and money market rates as well as an increase in noninterest-bearing demand deposits.

Looking forward, we expect deposit growth to continue to be a strong part of our financial performance.

However, deposit growth could begin to moderate as business and commercial customers put their cash to use and/or consumer spending pick up.

Turning to Page 16.

Our capital position remains strong and within both internal and regulatory guidelines. The majority of the growth in all of our risk-based capital ratios is attributable to strong earnings during the first quarter.

As we noted last quarter, our Tier 1 leverage ratio continues to be impacted by significant asset growth both from government stimulus and organic deposit growth, but it remains above internal thresholds, and we are comfortable with the current level.

Turning to Page 17. I will close by providing our outlook for the remainder of 2021.

We expect that net interest margin will remain a headwind due to lower yields on interest-earning assets driven by excess liquidity and low interest rates, only partially offset by nominal improvements in new loan yields, lower deposit rates and PPP income.

We expect deposits to continue to provide low-cost funding, but the drop in deposit rates moving forward will not have a significant positive impact on margin, given that they don't have much further to fall. With respect to our fee income producing lines of business, we remain positive about merchant services and wealth management due to improving macroeconomic conditions.

While we believe that mortgage production will remain strong due to the absolute low level of interest rates, we believe that it will moderate as higher mortgage rates slow refinance activity.

Our net charge-off ratio is projected to remain low, but we may see some slight increase given the low absolute level of net charge-off and as the impact of economic stimulus subside. We do not expect credit quality trends to change significantly and believe they will continue to be a source of strength. Further reserve build is not expected and additional releases may be possible as the ACL moves closer to pre-pandemic levels, depending on portfolio and overall macroeconomic trend. Noninterest expense, ex-merger-related cost, is expected to remain stable as we remain focused on operational efficiency.

We expect loan growth ex-PPP to be low- to mid-single digits, and we expect to see deposit growth in the same range. To close, our focus in the second quarter will be on: 1, the integration of First Citizens and CIT; 2, continued organic growth and profitability; 3, maintaining discipline on credit quality, customer selection and retention; and finally, 4, prudent expense control. Thank you all for joining us today.

We will now open it up for Q&A.


[Operator Instructions] Your first question is from the line of Brad Gailey.

Brady Gailey

Yeah, it's Brady Gailey. Good morning, guys.

Frank Holding

Good morning.

Brady Gailey

So I wanted to start with the loan yield. The loan yield fell a little more than I was anticipating in the quarter. I know, Craig, you mentioned some PPP noise there. But relative to the 3.92% loan yield, what was the new loan yield coming on in the quarter, if you look at the first quarter's production? Just any other commentary about the linked quarter decline we saw on the loan yield?

Craig Nix

Okay. I'm going to ask Tom Eklund, our Treasurer, to address that question.

Tom Eklund

Yeah, so quarter-over-quarter our new loan yields remain relatively stable at around 3% on the business, commercial and on the mortgage side.

As the steepening of the yield curve really hasn't priced through yet, what we're seeing and what we're expecting is really an improvement here into the second quarter, as the steepening of the yield curve and what we're quoting to clients currently sort of works its way through the pipeline.

Brady Gailey

Okay. All right, so is 3% flat new loan yield is a decent amount of ways from the portfolio yield? I mean, do you expect to see some decent decline in that loan yield going forward?

Tom Eklund

There is a couple of things that - when I say 3%, that's really on our business and commercial loan yield and on our mortgage loan yields.

So, yes, there's a little bit of room left to fall, but it's not necessarily representative of the entire portfolio, if you count higher-yielding products such as credit cards, other consumer loans, et cetera. But needless to say, there's a little bit of a gap there. But again, I think as the first quarter starts pricing through, our quoted yields have ticked up in the range of 30 to 35 basis points on new volume.

Brady Gailey

Okay. All right. And then my next question is just on regulatory approval. It's great to see you guys got approval from the state.

You're still waiting on the FDIC and the fed, I believe. Any update there? Is there anything going on? I'm not sure if there is a community protest or anything that could potentially delay the closing of this deal?

Craig Nix

We don't anticipate anything of that nature.

Our completed merger applications are with the Fed and the FDIC. We've had ongoing communications with them and the dialogue I would say has been constructive and productive.

So we anticipate completion of the merger mid-2021, but that's pending the regulatory approval and customary closing conditions. But there's really nothing underlying that gives us significant concerns.

Brady Gailey

Okay. And maybe just one more question, if I can.

If you look at the excess liquidity that's on your balance sheet, it continues to grow. It went from 9% of average earning assets up to 12% of average earning assets this quarter.

So it's notable liquidity. I know the CIT deal plays nicely into that, with you all using some of that liquidity to pay off some of their high-cost funding. But outside of CIT, I mean, do you think about putting some of that excess liquidity in the FCNCA bond book at this point?

Craig Nix

We're doing that opportunistically. I will say that by design we are certainly building up excess liquidity to provide us with flexibility in optimizing our funding mix with CIT. In normal times, we're much more comfortable with our cash position in the 3% to 4% of earning assets range. And right now, I think it's around 12%.

So that certainly has provided a drag to margin, but we believe that having this excess liquidity provides us with opportunities for funding synergies once we combine First Citizens and CIT.

So it is by design. We would not be comfortable with a 12% cash to earning asset position if we were not - if we do not have a pending merger.

Brady Gailey

Yeah. All right, great. Well, thanks for the color, guys.

Craig Nix

Yeah. Thank you. Good questions.


Your next question is from the line of Kevin Fitzsimmons with D.A. Davidson.

Kevin Fitzsimmons

Hey, good morning everyone.

Craig Nix

Good morning.

Frank Holding

Good morning, Kevin.

Kevin Fitzsimmons

Just wondering, I know, I appreciate the outlook about on the heels of the negative provision that you could have further to come. And I'm just curious how we should think of the ACL ratio in terms of - and I know that varies quarter-to-quarter based on what you're inputting in the CECL model, but how we should think about that ratio settling? And I know it's going to get very complicated with CIT coming on board, but when we think about the need to build that you're making it clear, you're not - you don't need to build it any further, but it seems like you're sending a message that there could be further releases going forward. Is that the message?

Craig Nix

Yeah. Kevin, I don't want to get prescriptive about the absolute level of the allowance as we move forward, but I would say that if trends continue as they have in terms of just really good credit quality indicators across the board, we did put up a $36.1 million reserve related to COVID-19.

If you really - and reserve money is sort of fungible, but if you really isolated what we did in the current quarter, there would have been approximately a $13 million release of those reserves.

So if you do the math there, there's likely - there's $23 million out there related to COVID uncertainty.

So that's a number we'll continue to look at going forward. But in terms of the absolute level of the allowance, I think, what we would say is that you could look back to where it was pre-pandemic. And I think you could anticipate if things continue to - if credit quality trends hold up that you could see us drift back to those levels over time.

Kevin Fitzsimmons

Okay. I appreciate that. And just on the combined company, obviously, you all provided some outlook on the allowance ratio and credit marks and things like that. And it seems like we've come a long way in terms of how everyone's thinking about credit over the last several months. And are you all - I know, it's kind of sensitive timing, because you've got the closing coming up, but are you - can you give any broad brush strokes on how those assumptions may have changed from when you originally announced the deal?

Craig Nix

I would say just directionally, we're pleased with the macroeconomic trends that we're seeing out there. And I think those trends sort of translate over.

Although, we're not ready to provide specific guidance on where those absolute level of the combined ACL will be, but we are encouraged by what we're seeing in the environment. We were encouraged with CIT credit quality trends in the fourth quarter.

So I think just directionally things have improved, but there's a lot of time between now and when we will be providing those numbers, hopefully, mid-2021 when we produce our first quarter combined, we'll share that. But generally, we're encouraged with the way trends are moving and that should bode well, but not ready to call that at this point in time.

Kevin Fitzsimmons

And just as a follow-up to Brady's question about the timeline on regulatory approval. Is it, in your opinion, more a matter of just the size and complexity of this deal? Or is it that we have a new administration and there's maybe a different tone on these kind of approvals, or as opposed to anything really specific that's holding up the approval of the deal?

Craig Nix

We don't see anything specific holding it up.

In fact, we think these timelines are normal and customary on the transaction the size. And I'm not going to speculate on the other matters.

Kevin Fitzsimmons

Okay. And then - and just one last one for me a broad question. A lot of time has passed from when you announced the CIT deal and you guys outlined the positives. Anything noteworthy that has changed over this time, either - or maybe both in terms of you being more excited about it or that you feel it's going to be incrementally more of a challenge than you might have thought when you announced the deal related to CIT.

Craig Nix

We remain very enthusiastic about this deal both companies have great talent and teams.

Our teams are in constant coordination, working towards integration. And personally, I'll let Frank speak on this too, I'm more excited.

So we're ready to roll.

Frank Holding

Kevin, this is Frank Holding. I'll echo Craig's comment. The anticipation is building here.

I think our optimism is building here. The more time we spend with our counterparts at CIT Group, the more energetic we become.

And so we're ready to go ahead and make it happen.

Kevin Fitzsimmons

Okay. Thanks, Frank. Thanks, Craig.

Frank Holding

Thanks, Kevin.

Craig Nix

Thanks, Kevin.


Your next question is from the line of Brian Foran with Autonomous.

Brian Foran

Good morning. Maybe just to follow on that last question. I'm [Technical Difficulty] speak to the deposit trends. I guess, what strikes me when I look across the 2 results this morning, CIT's book is shrinking, but with a significantly reduced cost.

Your book is growing, and obviously, the cost is rock bottom. But when I find them, it looks like you're actually putting up pretty nice combined deposit growth. And the pro forma deposit costs are quickly converging with the typical regional bank.

So I wonder if you could just - if you step back holistically and think about that deposit opportunity across the 2 banks, is that the right way to think about it? And is maybe some of that funding synergies, which were always there, but not included in the deal targets starting to come through a little quicker than maybe envisioned?

Craig Nix

Well, we certainly acknowledge the sort of natural decline in the combined deposit costs just due to the rate environment. With respect to deposit rate, I mean, we do attribute some of that to government stimulus and companies holding on the cash balances. But even strip out - if you strip out the impact of reciprocal PPP deposits, government stimulus at First Citizens, I'll speak to our deposit growth about half of that annualized growth in the quarter was related to organic growth. And I'll go back to - I'll attribute that to our go-to-market strategy, which really does emphasize deposit gathering, obviously, there's - the consumer is holding on the higher cash balances and businesses as well, so that's contributing some of that organic growth. But those are really strong internal growth rates. And that in and of itself will provide us with flexibility in funding earning assets as we combine the companies, so we're not ready to quantify what those funding synergies are, but we do believe that they are out there. And we are encouraged with the way deposit trends, and costs are moving.

Frank Holding

I would - this is Frank Holding.

We are smiling at your question. And we're observing the same thing that you're observing. And that is that these synergies are appearing at a rate that exceeded our expectations initially.

Brian Foran

Thanks a lot and I've come to a [Technical Difficulty]. The fee trends, the $112 million core noninterest income, I wonder - you cite some cross-currents, mortgage, maybe headwinds, merchant and in wealth a tailwind. Should we think about $112 million as kind of a new base? Is it maybe a little high and somewhere between the $102 million, $103 million where it was before? Just as we think about the kind of overall level, those core fees are going to maybe be able to sustain, any kind of points you would give us?

Craig Nix

We're going to let Elliot Howard, Director FP&A, address that question.

Elliot Howard

Yeah. Thanks.

I think the $112 million in core is pretty representative of a run-rate going forward. I mean, we did have the $3 million release of the MSR impairment, as Craig mentioned, but I think when you think about our noninterest income, I mean, it's really stable recurring sources.

And so, from the wealth and merchant, I mean, I think they are really here to stay. Mortgage, we're certainly watchful there. Demand is still strong. We think that will moderate given the higher rate environment.

Brian Foran

Great. Well, thank you for taking the questions.

Frank Holding

Thank you, Brian.


This ends our Q&A session, and I'd like to turn the call back over to our host for any closing remarks.

Deanna Hart

Thank you. And thank you, everyone, for joining us this morning.

As always, we're appreciative of your ongoing interest in our company.

If you have any further questions or need additional information, please feel free to reach out. I hope you all have a great day.


Ladies and gentlemen, this concludes today's conference call.

You may now disconnect. Have a wonderful day.