Q4 2020 First Citizens BancShares Inc (Delaware) Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the first citizens Bancshares, Inc Earnings Conference call at.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
Can I ask a question during the session you will need to press star one on your telephone.
If you require operator assistance during the program. Please press star zero.
As a reminder, today's conference is being recorded.
I'd now like to introduce the dose of this conference call Mr. Tom Shaw Director of Investor Relations you may begin.
Thank you Angie good morning, and thank you so much for joining us. It is my pleasure to introduce our chairman and Chief Executive Officer, Frank holding as well as our Chief Financial Officer, Correct, Nicks, who will provide an overview of our results after which we will be happy to take any questions. You may have we are on.
Also pleased to have several other members of the team with us as well, including our Chief risk Officer, Laurie Rapp, Our Chief Credit Officer, Jim Brian Our Treasurer, Tom <unk>, Our Chief Accounting Officer, Robert Holley, our head of analysis in the M&A Elliott Howard and lab.
Lastly, Brian Paul of risk and data analytics.
Our remarks today will reference an earnings presentation that is available that first set of some dot com slash earnings presentation.
I should note that statements made during the call and statements included in the presentation materials may be forward looking statements and the factors that could cause actual results to differ materially from those statements are listed on the earnings press release, the presentation materials and the company's SEC file.
And if any non-GAAP financial measures will be discussed on the call or Inc. Or are included in the presentation materials that reconciliations of those measures to the comparable GAAP measures are available in the presentation materials, which are posted on the website and with that.
I'm going to hand, it over to Frank.
Thank you Tom and good morning, everybody. We appreciate you joining us.
You've seen despite the challenging environment, we've got a very good fourth quarter on a full year 2020.
This all translated into record earnings for first citizens. Our performance was broad based and I'm exceptionally proud of our team.
Their hard work on the efforts they have made the C. Our clients and communities through this challenging period.
I'll, let Craig mix, our CFO to walk you through our financial performance in more detail, but before I do on wanted to make a couple of high level comments first.
First it's very clear to me that the investments we've made in recent years in both people and technology that have paid off handsomely.
Testament to the to.
To that fact is that in this tough environment, we've not skip a beat and I believe our significant activity and PPP demonstrates just one example of the power of our people on the underlying franchise the.
The team is hard at work on round two of PPP now.
As we plan to continue to help our clients navigate these tough times.
As you know, we announced a transformational partnership with C. I T. This past October.
And while we spent many months on the front of you on carefully understanding the opportunity since that time, we've been.
We've had even more time with.
With the C. I T team as of today I can tell you that we're even more excited about this opportunity given the quality of the combined team and our underlying capabilities of the combined entity.
On page three of the Investor deck.
We provide an update of our activities surrounding our planned merger with the I T draws.
Drawing from both organizations, we've established core merger and integration planning teams to promote a coordinated approach the enterprise issues drive execution and a key decisions.
We filed key regulatory applications in December 2020.
We have as we have scheduled a shareholder meeting to approve the merger in February.
Subject to regulatory and shareholder approval, we are targeting legal close at the beginning of the second quarter.
We formed an integration management office.
To provide governance structure and facilitate reported.
As we move forward, we will be finalizing organizational personnel decisions as well as completion of our business unit of integration plans.
We continue to plan operational conversion in 2022.
Both first citizens of NCI T have been active in M&A and our experience in this process and understand its importance. Consequently, we're going to great lengths to do it carefully and to do it right.
We remain confident.
We will accomplish just the.
I'd like the close by thanking our employees for their steadfast commitment to their customers.
We're a very challenging year and with that I'll turn it over to Craig for a closer look at our result.
And then we will take your questions Greg.
Thank you Frank and good morning, everyone.
As I am sure you are aware.
We released our fourth quarter earnings yesterday, along with the press release and Investor Day, I will touch on our significant fourth quarter and full year financial highlights in my comments today.
As Frank mentioned in his comments, we're very pleased to report a strong fourth quarter as well as full year results pages, four and five of the Investor deck provided our earnings highlights for the fourth quarter and for the year ended 2020.
During the fourth quarter, we earned $133 4 million.
An increase of 31% over the fourth quarter of 2019.
Earnings translated into a return on average assets of 1.11% and the return on average equity of 14 point of 2%.
<unk> was up 42, 3%.
<unk> the positive impact of higher earnings in our earlier share repurchases.
I will touch on some of the drivers behind our fourth quarter results on the ensuing pages that the inquiries on quarter over quarter earnings was primarily driven by a 29, 3% increase in pre provision net revenue.
Credit quality remained strong with comparable quarter net charge offs declining from 14 basis points to seven basis points.
For the full year 2020, we earned $477 7 billion.
This translated into a return on average assets of one point of 7% and the return on average equity of 12, 96%.
Earnings for the full year were up four 4%, while EPS was up 15, 7% again, reflecting the positive impact of higher earnings and of share repurchases.
Similar to the quarterly results pre provision net revenue growth was the primary driver behind the improved year over year earnings, but the impact was partially blunted by $36 1 million dollar reserve build related to uncertainty around COVID-19.
On page six we take a look at net interest income and net interest margin.
As we stated at the end of the third quarter, while we expected net interest margin to continue to decline we expected it to decline at a much more modest pace. This is what happened is net interest margin declined by four basis points on a linked quarter basis compared to a 41 basis points drop between the first and second quarter.
While the margin did decline during the quarter net interest income was up by just over $5 million driven primarily by acceleration of SBA PPP interest income as loan forgiveness has picked up.
I won't cover page seven in detail, but the page rolls forward the drivers behind our margin change of the linked quarters and for the comparable quarters.
Before I leave margin of few points out of like to make.
We have ample liquidity on the balance sheet and see that potentially going up due to strong core deposit growth.
While our liquidity is strong this does present margin pressure as we keep increased levels of cash at the fed and the reinvestment opportunity is challenging given the low interest rate environment.
We are prudently optimistic opportunistic throughout the quarter reinvesting cash flows and selling securities per gains to offset some of the margin pressure, but for the most part have remained retained a conservative posture with this liquidity.
Our thinking here is that we see opportunities when we combine on our balance sheet, what's the I T. Hopefully during the second quarter.
So at this point, we believe there is value of being conservative with our liquidity.
And so the margin looking forward, we expect deposit costs. The continued to decline, but they will not fall much further so the most of the benefit of lower deposit cost has already been realized.
We expect that SBA PPP interest income will continue to be of positive contributor to net interest margin and net interest income.
The debt that its impact will largely be offset by excess liquidity and lower earning asset yields.
If you turn to page eight we will take a look at noninterest income.
In general each of our fee income producing businesses did well and they remain very important to our customer relationship offering wealth management card merchant and mortgage all had good quarters and while deposit fees have not yet rebounded to pre COVID-19 levels. They continued to rebound during the quarter.
If you turn to page nine we will take a look at our noninterest expense.
We did see a slight uptick relative to the third quarter. So I want to give you a bit of color.
Some of the more significant factors that threw us off of our run rate first revenue producing lines of business finished out of the year strong.
Solving and higher incentive expense second building repairs and maintenance that were delayed in the second and third quarters due to COVID-19 were incurred and paid during the fourth quarter and finally foreclosure expense was up related to losses on the sale of two Oreo properties during the quarter.
Given the lumpy nature of these expenses, we do not expect fourth quarter to be reflective of our noninterest expense run rate moving forward on.
All in our efficiency ratio in the fourth quarter was $64, two 8% well within an acceptable range for us, giving both of our operating strategy and the low interest rate environment.
Page 10 provides a snapshot of the balance sheet I will discuss the loans and deposits in the next couple of pages, but I would like to point out of few things here.
First total assets grew by over 25 per cent during the year, finishing the year of just under $50 billion.
Asset growth was funded by strong organic core deposit growth and our loan to deposit ratio ex PPP ended the year at 71, 5%.
Second thing I'd point out of the tangible book value per share of measure that we play close attention to ended the year at over $357 per share up 18, 9% on a year over year basis.
Page 11 provides a snapshot of our loan composition and growth for the year of loans were up 13, 5%.
Stripping out both PPP and the impact of acquisitions growth was four 9%, which.
We were pleased with particularly given the current operating backdrop.
During the fourth quarter loans were slightly down by <unk>, 6%.
But if you look ex PPP paydowns.
The loans grew at an annualized rate of seven 9% indicative of the loan activity picking up.
Most of the loan growth for both the linked quarter and the year over year period was driven by owner occupied commercial real estate loans.
Going to page 12, we wanted to give you a few comments on PPP.
We are pleased that we helped our clients secure a meaningful amount of PPP loans, a vast majority of the loans went to small businesses.
As of year end, we had received applications for forgiveness totaling to over 43% of the original loan amount to almost 34% of the number of loans.
We have received approximately 23% of the original loan amount from the SBA.
We are actively managing the forgiveness process and expect the activity to continue to be meaningful during the first quarter. In addition, we will see more funding coming in the form of PPP round two.
Overall of the program has been very impactful to the business community and has been one more way for us to affirms our clients of the true value of our focus on relationship banking.
Pages 13 through 15 summarize our credit quality on allowance for credit losses trends.
Credit quality trends continued for both the fourth quarter and for the full year net.
Net charge offs were seven basis points for the quarter and eight basis points for the year.
Npa's have have been relatively stable throughout the year. They did spike during the first quarter of the year, but this was a function of both seasonal accounting for PCI loan pools as well as a bucket of acquired loans, we classified as P. C D.
We didn't we did not take any further COVID-19 related reserve in the fourth quarter that had taken $36 1 million in total during the first and second quarters of the year.
Overall, the allowance for credit losses, as point of 74% of loans ex P. P. Representing 9.25 times annual net charge offs on a loan on a loan book with an average life of approximately four years.
Turning to page 16, I want to briefly touch on deposits.
Total deposits grew at an annualized rate of 11, 1% during the fourth quarter and by 26, 1% on a year over year basis.
Adjusting for acquisitions and estimated PPP deposits deposits grew by almost 23% organically on a year over year basis.
Our deposit base continues to be generated from our core relationship oriented oriented clientele noninterest bearing deposits grew by over $5 billion during the year, whereby over 39% and stood at 41, 5% of total deposits as of year end.
We continue we continue to attribute our strong core deposit growth to many factors, including day to day focus on relationship banking of flight to quality in challenging economic times, lower consumer spending and consequently, higher deposit balances and commercial and business customers holding more cash in their deposits.
The positive accounts due to economic uncertainty.
Page 17 shows the deposits continued to make up the bulk of our funding the only real change of note in our funding profile. Since 2019 is that we did opportunistically add some subordinated debt during the first quarter to round out our capital stack and to support earning asset growth.
Of note is that our cost of interest bearing deposits decreased by five basis points during the quarter and by 27 basis points since the first quarter. Our overall cost of deposits declined by 18 point since the first quarter and by three basis points on a linked quarter basis and stood at 10 basis points at year end.
We expect this may fall to mid to upper single digits next year, so not much more room to fall from here.
On page 18, we give you a quick snapshot of the capital ratios and their evolution since the end of 2019.
All of our capital ratios are healthy and well within both regulatory and internal guidelines.
I will call out that our tier one leverage ratio has been most impacted by the asset growth. We have experienced this year, particularly as a result of the SBA PPP loan program the <unk>.
The tier one leverage ratio was 786% at year end, but ex <unk> would have been $8 45 per cent.
We are comfortable operating at our current capital levels.
Finally on page 19, we wanted to give you a general outlook on the first quarter.
While we expect net interest margin to decline, we think the worst of it is behind US. We expect that net interest income will decrease slightly on a linked quarter basis due to the impact of lower earning asset yields more than offsetting the acceleration of PPP interest income loan growth and lower deposit costs.
Fee income generating businesses continued to do well and should hold their trend, but it remains dependent on the continuance of the economic recovery.
We are expecting a slight uptick in net charge offs, primarily because they are currently at such historically low levels and the temporary impacts of economic stimulus could subside, but overall, we do not expect credit quality trends to change significantly they should remain relatively consistent and continued to be a.
Source of strength.
Noninterest expense should return to normal normalized levels as the benefits of converting acquired banks are realized.
We expect loan growth ex P. P to be low to mid single digits and we expect to see continued deposit growth in the same range.
The clothes are focused on the fourth and the first quarter will be one integration of the first citizens and the I T.
Two continued organic growth and profitability three maintaining discipline on credit quality customer selection and retention and four maintaining prudent expense control.
Thank you all for joining us today I'll now open it up for Q&A.
We would like to ask the audio question. Please press star one on your telephone keypad again, Thats star one to ask an audio question.
Your first question comes from the line of buying flooring with autonomous.
Hi, good morning.
Maybe wanted to start when you announced the city deal you put up an illustrative of $70 per share in 2022, and I know, it's only been three months or so since then but I wonder if you could just kind of talk anything thats going better or worse than you expected relative to those enbridge.
And on assumptions.
And especially maybe in the context of.
The deposit growth and the credit quality performance.
Is there anything thats kind of maybe trending a little better than that $70 originally assumed.
Okay, Craig Nicks here.
We have not updated those pro forma <unk> and we're going to and we will be doing that here soon.
We do acknowledge that the economic outlook in general has improved since we established our original March and establish those pro forma we are also encouraged with the Cit's fourth quarter results.
We did create our marks on assumptions based on the best information we had at the time in the fall of last year and again, we plan to establish final marks at transit at transaction close and we will consider the facts and circumstances of that time.
But right now we're not ready to provide additional guidance, but we are I can tell you. We are encouraged our eyes on the ball and integrating to the I T and.
We don't we don't think things have gotten any worse.
Okay.
And maybe one follow up.
Separate question really.
The most common question I get on your stock is did you have a little bit of an unusual setup and I hesitate to call. It.
The things that could be shareholder friendly because ultimately the stock that goes up and outperforms overtime as the ultimate shareholder friendly set up and you guys have certainly delivered on that.
So the existing setup the served you well over time.
But maybe if I call it like shareholder broadening and things like the class a class b the level of the dividend index inclusion.
You know all the all the things that would go in that bucket I Wonder if you could just share your outlook you know what things are under consideration and anything that's not on the table of our.
You know not subject to change over time, just if you think about the next two or three years.
What could that shareholder broadening transition look quite great.
Brian This is Frank holding.
Oh.
I think in terms of shareholder broadening we look forward to having a much broader shareholder base with our friends with combined with our friends at CIP.
If youre asking on the question about are we planning something that would.
Change our.
Share of class structure.
Eight of B.
We have no plans for that.
But thank you for your compliment all of our total shareholder returns.
<unk>.
I believe we've we've done a reasonable job there and find keep of that recognition.
You asked of.
Part of your portion of also was about dividends.
And I would say we are of a long history of having a very modest dividend.
And while we demonstrate that we move it nominally.
Occasionally.
I think we have no intention of changing our path from having a modest dividend.
Great. Thank you for taking the questions.
If you would like to ask a question. Please press star one on your telephone keypad.
Yes.
Okay.
Yeah.
We do have a follow up question from Brian Foran with autonomous.
I figured we just make it a fireside chat.
I guess one other question I get a lot is on your owner occupied CRE I mean, certainly your ability to grow core loans right now is a pretty nice differentiator.
I think maybe it is not always as clear to people the differences in the owner occupied CRE book you happen.
Even sometimes I kind of scratch my head on on some of the opportunities you might be finding now I wonder if you could just talk about.
As you look at the recent owner occupied CRE growth over the past three months six to nine months.
Help us understand a little bit where that opportunity is coming from in <unk>.
What makes it different than the typical retail or hotel or whenever that might be a little bit on COVID-19.
Covid concerning right now.
I'm going to ask Jim, Brian Our Chief Credit officer to address that question.
Thank you Craig.
We have had nice nice growth this past year in that category and our focus is on small business medical professional activities and owner occupied as compared to non owner occupied.
Obviously as that credit the debt.
The business cash flow repays the credit so it's supporting the housing of the business.
The debt debt.
That business needs to operate.
We continue to see opportunity in that area across all sectors of Inc.
Including our medical and professional activity small business.
Primarily outside of that restaurant.
That impacted category.
And a lot of that has to do with consolidation within the industry merger and acquisition that creates opportunity for us.
In fact, if you if you want to rephrase. The question if I haven't answered properly if you want on asking additional questions not the glad the hill.
No I think that's helpful in and.
I guess, maybe the follow on I mean is it.
If I think about that kind of stereotypical medical property that is the owner occupied CRE of our piece of it.
Is it about growth in the market right now is it about gaining market share or new geographies, I mean, where are you finding the incremental growth.
In that portfolio.
I think of us a little bit of both because we were seeing that growth both on our what we would consider our legacy footprint of North Carolina, South Carolina, Virginia, and also in our other markets as well. So so it's a combination of of gaining new clients along with growth within our existing.
<unk>.
Client base, where they would continue to expand and grow.
And.
So those opportunities on both sides of the ledger.
And I don't know if this is for Craig of Frank but maybe on capital.
I think he put out of nine 5% CET one at deal close if I remember and I think that might even fully loaded merger costs. So it might even been a little conservative.
I guess on the one hand earnings for both of you and city of coming in pretty good maybe that CET one ratio the marks might might improve some of that CET one ratio of come higher but you did reference the tier one leverage.
Being a little depressed right now by PPP by cash on the balance sheet.
As we think about post deal close which one do you think will be the limiting factor.
Number one and then number two when you do re emerge into an excess capital position.
How do you think about the relative attractiveness of maybe of buyback versus maybe another deal.
Our other uses of capital. So so I guess, what's the limiting factor of post the deal close and they're not.
You can get back into an excess position what are what's kind of the waterfall of priorities.
Sure very good question with respect to both CET, one and leverage we'd really don't see either as a limiting factor.
We are comfortable operating within those ranges.
Our within that that level, it's falls within our ranges. So we're comfortable operating there.
And we do see both rebounding nicely as we start the earning stream of the combined company starts to kick in.
So we have we have no concerns of operating at those levels with respect to acquisitions and repurchases our first priority.
In 2021 will be to integrate CIP. So you wouldn't see certainly anything in that in that activity on that right away but.
But we certainly see in a long long long term strategy is to be a.
Opportunistic with the M&A opportunities and that would include buying back our on staff.
If I could sneak one last one in.
Your noninterest bearing deposit your demand deposit growth. This year was pretty phenomenal on the order of 50% year over year.
And I'm.
Im assuming PPP played a part of that maybe some companies getting cash in.
Not fully using it yet and I wonder if you kind of have any thoughts on the stickiness of those noninterest bearing deposits going forward.
Once you get fully pass PPP.
Any kind of insights you have into how much of that might stick around or could you actually continue to grow from these levels.
Tom Echo on our Treasurer will address that question, Yes, I think you mentioned the PBT growth when we look at the PPP program. We initially had.
Basically one per ones, we had 3 billion dollar in the checking growth, resulting from the PPP program. However, when looking at by the end of the year using sort of the using sort of the watermark approach on that those balances were down to about $1 billion.
Of the 9 billion, we grew for the year about 1 billion came from that PPP program.
When looking at it another way of that $9 billion.
Total deposit growth, we did see two 5 billion of that coming from new clients with.
That was not clients with the going into 2020. So so I think it's a little bit of both of you are seeing both existing clients going back to Craig's point earlier, holding more cash on their balance sheets.
Which resulted in about $6 $5 million of the growth and then $2 5 billion.
The very strong year for us, where we were able to capitalize on some opportunities and add new clients as well on top of that.
That's great. Thank you for taking all of my questions.
Okay.
Our final question comes from the line of Moshe Orenbuch with credit Suisse.
Great Thanks and.
Maybe you could just expand a little on one of the points that you raised.
The liquidity and.
Yes.
How do you see it actually working in terms of the deploying your excess liquidity into Cit's book like what.
What's the process, how long will it take I assume.
At some point get rid of some of the funding that they've got on the assets can you just talk through like what that will look like.
I guess in the.
From the second quarter on.
Sure.
Yes sure. This is Tom Heckman again.
I think the way we're thinking about it is I think we've been very clear on the sort of from the business perspective, we're not looking to make any changes there. We're excited about the opportunities from the direct banks and some of the broader client footprint that the tid brings to the table of however, obviously when looking at the balance sheet.
Assuming we can accomplish the deal structure as proposed.
The waterfall for us really starts with looking at some of the senior debt opportunity to some of the non core sort of funding thesis and see what we can do there to replace with ideally with the low cost deposits. I mean, you mentioned, we're at the 10 basis points total deposit cost per the year. So obviously that provides.
Potential synergistic opportunities for us in the future as we're able to reposition that.
The maturity schedule.
Of those mean that not all of that comes in early.
That will be phased in over time as we start looking at those.
Debt instruments come up on maturity.
Thank you.
I would now like to turn the conference to Mr. Tom Hayes for any additional or closing remarks.
Okay.
Yeah.
Angie that's all we're good and thank you very much. Thank you all for joining us.
Thank you for participating on today's conference call. You May now disconnect your lines at this time.
Okay.
Yeah.
Sure.
Yeah.
Right.
Yes.
Yes.