Q1 2021 First Citizens BancShares Inc (Delaware) Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to the first citizens Bancshares first quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.

A question during this session you need to press star one on your telephone if you require any operator assistance. During the program. Please press Star then zero as a reminder, today's conference is being recorded I would now like to introduce the host for today's conference call. Mr. Hart Senior Vice President of Investor Relations you may begin.

Yes.

Okay.

Thank you Whitney and 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. Thanks for.

And Craig will provide an overview of our first quarter 2021 results and we'll be referencing our investor presentation, which you can find on our Investor Relations website.

We're 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 risks and uncertainties that may cause our results to differ materially from expectations.

These risks are outlined for your review on page two of the presentation. We also reference non-GAAP financial measures within the presentation.

Conciliations on these measures against comparable GAAP results are available in the appendix with that I'll hand, it over to Frank.

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

We are pleased to report 147 $3 billion 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, new PPP loans to support approximately 9600 customers.

We've 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 towards completion of our transformational merger with C. I T.

The largest and most significant in our history.

When our merger with <unk> is completed together will 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 on.

Make more of their futures the bottom line is we're taking our company and our future for the next level.

I'll now highlight page three of our Investor day to provide an update on our activities surrounding the merger.

In February we received approval from the North color 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.

Our remaining regulatory approvals.

As we noted last quarter, we have established a core merger and integration management team to promote and oversee.

Coordinated approach to closing and conversion.

This team is committed to ensuring we remain focused and has completed a number of task 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.

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 will open the line for questions Greg Okay. Thank you, Brian and good morning, everyone. It's for.

I mentioned, we released strong first quarter financial results today.

I will now walk through our investor presentation, and provide additional detail on commentary on the more significant component of our financial results during the first quarter.

Starting on page for net income totaled $147 3 million, a 158% increase over the first quarter of 2020.

On an increase of six 7% over the linked quarter.

Earnings translated into a return on average assets assets of 1.16 per shop, and a return on average equity of 14, 7%.

Net income per common share totaled $14 53 set up.

Up $9 seven over the first quarter of 2020, driven primarily by increases in pre provision net revenue.

Our release of provision due to low 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 one per cent.

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 a historic low of four basis points compared to 10 basis points, a year ago and seven basis points from the linked quarter nonperforming assets remained stable during the quarter.

Pages, five and six public trend 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 $21 7 million dollar 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 in commercial lines and.

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 pending merger with <unk>.

T.

This factor contributed to 10 basis points of the margin decline during the quarter.

In addition, the decline in the SBA PPP loan Youll I mentioned earlier contributed to seven basis points of the decline the remainder of the decline was primarily due to a decline in the ex PPP loan yield.

I'll only partially offset by a decline in deposit costs as most of the benefit from lower rates has been realized.

While the recently, 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 on PPP, we expect a decline in margin to moderate over the remaining quarters in 2021.

If you turn to page seven we will take a look at non interest 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 service 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 non interest 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-19 levels due to elevated deposit balances.

If you'll return to page eight we will take a look at non interest 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 net expenses declined by $9 4 million from the fourth quarter.

The decline was primarily due to lower Oreo losses occupancy expense in other core non interest expenses. These favorable changes were partially offset by slightly higher personnel costs during the quarter due to annual S. H, a contribution and the reset of social security and for <unk>.

K limits on 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 non interest expense.

Ex merger related costs to.

To remain stable and in line with the recent run rate.

Turning to page nine we provide balance sheet highlights and key ratios I'll cover the significant component of the balance sheet on the subsequent slides.

Page 10 provides information about trends in our loan portfolio.

The first quarter loans increased $389 million or about four 8% on an annualized basis of this growth we experienced a $364 million net increase in SBA PPP loans.

PPP loans 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 markets.

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

As Frank mentioned in his comments, we remain active on the program during the first quarter funding, an additional $1 1 billion in loans, bringing our total originations in round, one and two of the program to $4 $3 billion.

As of the end of the first quarter of 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 one loan them out and have received funds from the SBA on $43 nine 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 five quarter credit quality trends.

The net charge off ratio for the first quarter was four basis points, continuing the trend of low net charge offs.

Our nonperforming assets ratio held stable at 8% consistent with the prior two linked quarters and down from eight 6% from the second quarter of last year.

First quarter 2020 results included a 21 and a half million dollars reserve build related to the uncertainty surrounding surrounding COVID-19.

Given improving macroeconomic factors.

<unk> from 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 impacts of the pandemic on our credit losses, but we were 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 towards pre pandemic levels.

Turning to page 13, our ally.

<unk> for credit losses ratio was six 9% ex PPP loans at the end of the first quarter.

Which was down from 77, 4% 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 four years.

While we do not expect that the net charge off level will remain constant at four basis points.

We have seen little indication that charge offs going for we will have a significant impact on the level of our allowance.

Moving on to pages 14 and 15.

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 for personnel.

On a year over year basis deposits were up by $12 billion or by 44 per cent.

While we acknowledge that our deposit growth during the first quarter continued to be positively impacted by government stimulus and PPP loans fundings, we experienced strong organic growth in both a line on both a linked quarter and year over year basis.

We attribute this organic growth to three broad factors, including one our day to day go to market strategy, which emphasizes deposit gathering to low consumer spending in three broad market uncertainty, leading our commercial and business customers to hold more cash in their deposit accounts.

At March 31st deposits represented $96 one per cent of our total funding base largely changed are largely unchanged from the linked quarter.

We were pleased that non interest bearing deposits accounted for $43 three per cent of total deposits at the end of the first quarter.

Total deposit cost declined to eight basis points in the first quarter from 10 basis points from the linked quarter driven by a decline in time deposits and money market rates as well as an increase in non interest 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 picks up.

Turning to page 16, our capital position remained strong and within both internal and regulatory guidelines.

The majority of the growth in all of our risk based capital ratios as a crude attributable to strong earnings during the first quarter.

As we noted last quarter, our tier one leverage ratio continues to be impacted by significant asset growth.

Both from government stimulus on 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.

Moving about excess liquidity and low interest rates, only partially offset by nominal improvements and 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, we 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.

We believe that mortgage production remained strong due to the absolute low level of interest rates, we believe that it will moderate as higher mortgage rates low 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 offs and as the impact of economic stimulus subsides.

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 an additional leases may be possible as the ACL moves closer to pre pandemic levels, depending on portfolio and overall macro macroeconomic trends.

Non interest expense ex merger related costs 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 for deposit growth on the same range.

To close our focus on the second quarter will be on one the integration of first citizens in CIP to continued organic growth and profitability three.

Maintaining discipline on credit quality customer selection and retention and finally for prudent expense control.

Thank you all for joining US today, we will now open it up for Q&A.

Ladies and gentlemen, if you had a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone for card.

Courtesy to others on the call. We ask that you limit yourself to one question and one follow up and then return on return to the call queue. If you have for additional question for you.

<unk> has been answered and wish to remove yourself from the queue. Please press the pound key well pause for just a moment took on Powell our Q&A roster.

Okay.

Your first question is from the line of Brad Gailey.

Yeah, It's it's Brady Gailey good morning, guys.

Good morning.

So I wanted to start with.

The loan yield on loan yield fell a little more than I was anticipating on a quarter on a your Craig you mentioned, some PPP noise, there, but relative to to the $3 90 to 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.

You know the line.

First quarter decline, we saw on the war on Yelp.

Okay.

I'm going to ask.

Tom Ekland, our treasurer to address that question.

Yeah. So.

Quarter over quarter on new loan yields remained relatively stable at around 3% on the ER business, the commercial and on the mortgage side as the Steepening of the yield card really have some price 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 on what we're quoting to clients currently sort of works its way through the pipeline.

Okay Alright.

It's 3% flat to low in Europe.

As a day.

We sent them out a ways from the portfolio yield I mean, do you expect to see.

Some decent decline in that loan yields are.

Going forward.

There, there's a couple of things when I say, 3%, that's really on our business and commercial loan yields and on our mortgage loan yields. So yes, there's there there's a little bit of room left for fall, but it's not a debt.

Not necessarily representative on the entire portfolio itchy count higher yielding products, such as credit card other consumer loans et cetera.

But but needless to say theres, a little bit of a GAAP, there, but but again I think at the first quarter starts pricing through our quoted yields had ticked up in the range of 30 to 35 basis points on new volume.

Okay.

Alright, and then my next question is just on regulatory approval, it's great to see you.

You guys got approval from the state or you're still waiting on the FDIC on the fed I believe.

Any update there is there anything.

Going on I'm not sure if there was the euro community protest or anything that could potentially.

Delay the closing of this deal.

We don't anticipate anything of that nature are completed merger applications on the.

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 is pending the regulatory approval and customary closing conditions, but there's really nothing underlying that gives us significant concerns.

Okay, and maybe just one more question if I 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 for.

12% of average earning assets this quarter. So its notable liquidity.

No.

<unk> plays nicely into that with you all using some of that liquidity to pay off some of their high cost funding, but outside of CIC. I mean, do you think about putting some of that excess liquidity.

On the FC NCA Bond book at this point.

We're doing that Opportunistically I will say that by design, we are certainly building up excess liquidity.

To give us provide us with flexibility and optimizing our funding mix with C. I T.

In normal times for much more comfortable with our cash position in the 3% to 4% on earning assets range and right now I think its around 12, so that certainly has.

Provided a drag to margin, but we believe that debt having this excess liquidity provides us with opportunities for funding synergies. Once we combine first citizens and C. I T. So it's about it is by design, we would not be comfortable with a 12%.

Cash to earning assets position, if we were not.

If we did not have a pending merger.

Alright, great well, thanks for the color guys.

Thank you and good questions.

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

Hey, good morning, everyone.

Good morning, good morning, Kevin.

Just wondering I know I appreciate the outlook about on.

This on the heels of the negative provision that you could affirm or to.

To come and I'm, just curious how we should think of.

The ACL ratio in terms of if ever you know and I know that varies quarter to quarter based on what youre, putting in the seasonal model, but how we should think about that ratio settling on and I know, it's going to get very complicated with <unk> coming on board, but.

When we think about.

The need to build that you know you're making a clear you're not you don't need to build it any further but.

It seems like you're you're sending a message that there could be further releases.

Releases going forward is that the.

Is that the message.

Yeah, Yeah yeah.

Kevin I don't Wanna get prescriptive about the absolute level of the allowance as we move for 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 for $36 $1 million reserve related to COVID-19, if you really.

Reserve money sort of fungible, but if you really isolated what we did on the current quarter there would've been approximately a $13 million relief for those reserves. So if you do the math there was likely the $23 million.

Dollars out there related to COVID-19 uncertainty.

So that that's 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 go you can 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.

Overtime.

Okay I appreciate that and just on the combined company. Obviously, you all provided some some outlook on 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 it's kind of sensitive timing because you got to closing coming up but are you can you give any broad brushstrokes on on how those assumptions.

We have changed from from when you originally announced the deal.

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 the 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's credit quality trends in the fourth quarter.

So I think just directionally things have improved but theres a lot of time between now and when we will be providing those numbers.

Mid hopefully mid 2021, when we produce our first quarter combined we'll share that but generally we're encouraged with where the weighted trends are moving and that should bode well, but not.

I'm not ready to call that at this point in time.

And just as a for.

Follow up to Brady's question about the timeline on regulatory approval is is it you know in your opinion.

Pinion 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 on these.

These kind of approvals or as opposed to anything really specific that's that's holding up the approval the deal.

We don't see anything specific holding it up in fact, we think these timelines are normal and customary on the transaction for the size and I'm not going to speculate on on the other other matters.

Okay, and then just one one last one for me a broad question a lot of time has passed from.

When you announced for the city 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 <unk>.

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

Our teams are in constant coordination working towards integration and <unk>.

Personally I'll, let Frank speak on this too I'm more excited so we're ready to roll on.

Kevin This is for Nick holding I'll Echo Craig's comments.

On the.

Anticipation is building here I think our optimism is building here.

The more time, we spent with.

Our counterparts with GIC growth.

For a more energetic.

We become.

So we're ready to.

We're ready to go ahead, Mike it happened.

Okay. Thanks, Frank day. Thanks.

Thanks, Kevin.

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

Good morning, maybe just to follow on that last question.

It speaks to the deposit trends.

I guess, what strikes me when I look across the two results. This morning.

E book is shrinking, but with a significantly reduced cost.

Books growing and obviously the cost is rock bottom.

I find them you know it looks like you are actually putting up pretty nice combined deposit growth and the.

The pro forma deposit costs are quickly converging with the typical retail bank. So I wonder if you could just step back holistically and think about that deposit opportunity across the two banks.

Is that the right way to think about it and as maybe some of that funding synergies.

Which were always there, but not included in the deal targets starting to come through a little quicker decisions.

Well, we certainly knowledge the sort of natural decline in the combined deposit costs.

Just due to the rate environment with respect to deposit growth.

I mean, we do attribute some of that to government stimulus and companies are holding on to cash balances.

But even stripped out if you strip out the impact of reciprocal PPP deposits government stimulus.

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 is there has the consumer is holding on the higher cash balances in business as well. So that's contributing some of that organic growth, but those are really strong.

Internal growth rates in that that in and of itself will provide us with flexibility in funding, earning assets as we can buy on the companies. So we're.

We're not ready to quantify what those funding synergies on.

But we do believe that they are out there and we are encouraged with the way.

Deposit trends and costs are moving.

This is Brian holding we are smiling at your question.

We are observing the same thing that youre observing on that.

It is the synergies are appearing at a rate that exceeded our expectations initially.

Hello, I have come to expect.

So I'm happy to come on Smile.

The trends on the $112 million core non interest income.

I Wonder you sites on cross currency mortgage may be a headwind merchant and in wealth that tailwind.

Should we think about $112 million is kind of a new base is it maybe a little high in somewhere between the 100 203 million where it was before.

As we think about the kind of overall level those core fees are going to be able to be able to sustain any any kind of points you could give us.

We're gonna, let Elliot Howard director of F. PNA address that question.

No I think for $112 million and tours pretty representative of a run rate going forward. I mean, we did have the $3 million release of MSR impairment, Greg mentioned, but I think when you think about our non interest income I mean, it's really stable recording sources and so from yeah from the wealth of merchant I mean, I think it's they're really.

Here today mortgage we're certainly watchful there demand is still strong we think that'll moderate.

From a higher rate environment.

Great. Thanks for taking the questions.

Thank you Brian.

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

Okay.

Thank you and thank you everyone for joining us this morning as always we appreciate and thank for your ongoing interest in our company. If you have any further questions or need additional information. Please feel free to reach out all have a great day.

Ladies and gentlemen. This concludes today's conference call. You May now disconnect came from a wonderful day.

Right.

Okay.

Okay.

Okay.

Right.

Great.

Thanks, everybody.