First Citizens BancShares, Inc. (FCNCA) on Q1 2021 Results - Earnings Call Transcript
Operator: 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. 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:
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.
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.
Operator: 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.
Operator: 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.
Operator: 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 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 . 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.
Operator: 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.
Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.
