Q2 2021 First Citizens BancShares Inc (Delaware) Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by and welcome to first citizens Bancshares, Inc. Second quarter earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

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A reminder, today's conference is being recorded.

I would now like to introduce host of todays conference midyear and Hart Senior Vice President of Investor Relations you may begin.

Thank you Margaret good morning, and thank you for joining US today. It is my pleasure to introduce our chairman and Chief Executive Officer, Frank holding as well as our Chief Financial Officer, Craig net Frank and Craig will provide an overview of our second quarter 2021 result, and we will be referencing our investor presentation.

Which you can find on our Investor Relations website. We are pleased to have several other members of our leadership team here with us today, who will be available for questions as needed.

For the presentation, we'll be happy to take questions you may have.

As we have not closed the transaction with the I T. Great. We will be speaking today on first citizens Bancshares Standalone performance only we will also provide an update on our planned merger with C. I T. Our comments will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from.

Expectation these.

These risks are outlined for your review on page 2 of the presentation. We will also reference non-GAAP financial measures within the presentation. Reconciliations of these measures against comparable GAAP measures are available in the appendix with that I'll hand, it over to Frank.

Thank you Deanna and good morning to everyone. We appreciate all of you joining us today and your interest in our company.

As you can imagine where smith for first half of 2021 focused on our upcoming merger with C. A T.

I'm pleased with progress on both teams to prepare us for legal close and the integration of our companies.

We remain excited about our merger with C. T. I look forward to capitalizing on the expertise of our companies to deliver value to our shareholders.

Stakeholders.

Subject to approval and customary closing conditions, we expect to close the merger during the third quarter.

In addition to merger and integration planning our team has executed on a number of financial and strategic objectives that we laid out in our 2021 strategic plan.

1 key area of focus is expanding our customer our relationship model to improve our customers' experience.

We've made good progress leveraging data to provide our bankers a comprehensive view of our customers, allowing us to better serve their financial needs.

In the digital space.

We recently expanded the functionality of our consumer banking platform and are in the progress and the process.

Book grading, our commercial online platform.

While serving customers has been a big focus.

Also focused on talent development and retention of our associates.

The objective here is to ensure that we attract retain and develop associates to create a high performing sustainable company.

That will meet the strategic financial and operational goals for the combined organization.

We have continued to focus on organic loan and deposit growth both of which have been positive contributors to our success in 2021.

Excluding the impact of SBA PPP.

We grew loans by 4% on annualized basis since December.

And achieved an annualized growth rate during the second quarter of 7%.

Additionally, deposit growth has remained strong on an annualized rate of 23% since the year end.

Our focus on operational efficiency has continued as we expand and enhance our revenue generating lines of business, while continuing to maintain prudent expense control.

We're pleased with our progress to date and optimistic that we can meet our strategic and financial goals for 2021, while remaining focused on the merger with <unk> T.

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. Thank you Frank and good morning, everyone. Starting on page 3 of the Investor presentation I'll cover our second quarter earnings highlights.

We achieved another quarter of strong earnings net income totaled $152.8 million, an increase of $5.5 million over the linked quarter and a slight decline from the second quarter of 2020.

We are pleased to announce that earnings translated into return on average assets of 1.13% and return on average equity of $14.6 4% net.

Net income per common share was $15.09 up from $14.53 from the first quarter.

$14.70 for the comparable quarter a year ago.

Pre provision net revenue narrowly declined compared to the first quarter. The most significant factor, causing the decline was related to higher personnel costs associated with merit increases, which took effect at the beginning of the quarter.

Mortgage servicing rights impairment net negatively affected noninterest income otherwise are revenue producing lines of business posted another good quarter.

Net interest income was a bright spot during the quarter, increasing by $6.7 million over the linked quarter. This was mostly attributed attributable to opportunistically, putting some of our excess liquidity to work on the investment portfolio, increasing the port folio of balance and improving the yield we continued to experience.

On credit quality and low net charge offs during the second quarter. In addition, macroeconomic factors continued to improve resulting in a further reserve release.

As a result, the benefit from provision for credit losses increased from $11 million during the first quarter to $19.6 million during the second quarter to date as macroeconomic factors have improved and we have sustained good credit quality.

We have released $35.3 million in reserves compared to a reserve bill build of $36.1 million during the first half of last year related to the uncertainty surrounding COVID-19.

Compared to the second quarter of 2020 provision pre provision net revenue declined by $32.2 million or about 15, 2%.

Solid core net revenue growth was more than offset by $52.9 million decline in the fair market value adjustment on marketable equity securities.

As a reminder, during the first quarter of last year, given what we saw with severe dislocation in the bank equity market, where many banks for trading below 1 times tangible book value, we opportunistically bolt up our bank equity portfolio.

During the second quarter of last year. These bank equity prices rebounded and we sold the bulk of the securities for realized gains and experienced improvement in the fair market value of the portfolio debt remained this resulted in a positive fair market value adjustment during the second quarter of last year totaling $64.6 million.

During the current quarter, the fair market value improved by $11.7 million, resulting in the $52 million decline.

The fair market value adjustment decline was partially offset by a lower provision for credit losses higher core non interest income and higher net interest income, resulting in a minimal decline in net income for the comparable quarters.

On pages, 4 and 5 I will cover trends and the net and net interest income and net interest margin.

After experiencing a decline in net interest income during the first quarter compared to the fourth quarter net interest income increased during the current quarter as we opportunistically put some of our excess liquidity to work on the investment portfolio, increasing the average balance by $770.777 million.

And the yield by 8 basis points net interest income grew by $9.1 million over the comparable quarter in 2020 due to lower rates paid on interest bearing deposits as well as increased interest and fee income on SBA PPP loans, both only partially offset by a decline in the yield on earning assets.

Yes.

While we were pleased with the increase in the absolute level of net interest income during the quarter as expected net interest margin declined by 12 basis points from the linked quarter.

As we discussed last quarter, given the significant increase in deposits, which continued during the second quarter and the pending merger with <unk> T. We continue to operate with liquidity above normal operating ranges, which put downward pressure on our net interest margin.

Excess liquidity negatively impact impacted the change in margin from the first quarter by 13 basis points.

Therefore, compared to prior quarters the rate environment had a minimal positive impact on margin, primarily lower deposit costs and higher investment yield.

While asset mix was the primary factor contributing to the decline in margin.

As we mentioned last quarter loans continues to come on the books at rates lower than maturing loans. This.

This has put downward pressure on margin in recent quarters, but did moderate during the second quarter as rates on business and commercial loans increased by approximately 25 basis points. In fact, the yield on loans X P. P. Ex PPP did not change compared to the first quarter. We expect the net interest margin will continue to be a head.

And throughout the remainder of 2021, but the decline will continue to moderate in the coming quarters as it did in the second quarter.

Turning to page 6 I will cover non interest income, which totaled $134.2 million during the second quarter.

Non interest income declined about $2.5 million compared to the linked quarter. The most significant factor in the decline was a decrease in mortgage income, which was primarily the result of mortgage servicing rights impairment in the second quarter births versus mortgage servicing rights impairment recapture in the first quarter.

For <unk>.

This occurred as mortgage rates after increasing in the first quarter decrease in the second quarter, we did opportunistically sell securities during the quarter for a gain of $15.8 million, an increase of $6.6 million over the linked quarter.

Outside of mortgage income, we had a good quarter from a core noninterest income standpoint, cardholder services income increased to increased due to higher sales volumes well in merchant services had good quarters with income remaining fairly consistent.

With the first quarter.

Noninterest income declined $31.3 million when compared to the second quarter of 2020, due primarily to the $52.9 million decline in fair market value adjustments on marketable equity securities that I discussed earlier.

Core non interest income grew over the comparable quarter in 2020 by $20 million as.

As wealth management income cardholder, and merchant services income and deposit related fees, all increased offsetting a decline in mortgage income.

For the remainder of 2021, we expect continued strength in the areas that have performed well so far this year.

<unk> well card and merchant.

We expect mortgage volume to decline as refinance activities slows, but the climb will be somewhat offset by service charges, returning closer to pre pandemic levels.

On sign here is that we expect core noninterest income in the third and fourth quarters to be in the $109 million to $110 million range. So its fairly consistent with the second quarter isolating for mortgage servicing rights impairment.

Turning to page 7 I will cover noninterest expense.

Noninterest expense increased by $5.7 million over the linked quarter, primarily as a result of merit increases effective at the beginning of the second quarter. Other expenses were generally generally in line with their normal quarterly trend.

Noninterest expense increased by $9.9 million over the comparable quarter. In 2020 also primarily driven by higher personnel expense.

We remain pleased with the level of expenses and a year over year decline in our efficiency ratio. We expect core noninterest expense ex merger related costs to remain in line with the recent run rate.

Turning to page 8 we provide balance sheet highlights and key ratios I'll cover the significant components of the balance sheet on the subsequent slides.

On page 9 I will cover loan growth for the linked quarter and year over year periods. During the linked quarter. We saw a solid pick up in loan growth with the largest category in owner occupied commercial real estate loans, which was more than offset by forgiveness of a large portion of our PPP loans ex PPP loans grew organically at.

On an annualized rate of 7% during the second quarter.

The story with for milk was somewhat similar on the on a year to date basis. The total loans relatively stable as PPP forgiveness, almost completely offset a $5.1 per cent increase on the organic loans.

Overall, we were pleased with organic loan growth during the first half for the year and expect organic loan balances to continue to grow during the second half of the year in the mid single digit percentage range. The.

The ultimate level of loan growth will ultimately be dependent on continued economic expansion in our markets.

Turning to pages 10, and 11, I will cover our credit quality trends and allowance for credit losses credit continues to perform well as we experience further improvement in the economy.

As indicated by historically low net charge off ratio of 3 basis points during the second quarter and a nonperforming asset ratio of 7.4% the lowest ratio over the past 5 linked quarters and the lowest level since the second quarter of 2019 gear.

Given these trends and improvement in the macroeconomic factors, we've recognized a credit provision benefit of $30.6 million through the first 2 quarters of this year compared to a reserve build of 36.1.

$36.1 million during the same period last year related to uncertainty surrounding the pandemic, our allowance ratio ex PPP loans.

<unk> declined from 6.9% in the first quarter to 6.1% in the second covering net charge offs during the quarter by 20, 233 times and covering average net charge offs over the last 5 quarters 11.3 times.

These coverage ratios compared to a loan book with an average life of approximately 4 years.

We are now operating with an allowance ratio approximating where it was when we adopted <unk> on January 1.2020, we're looking at it another way near the pre pandemic level.

While we saw no significant portfolio deterioration during the worst of the pandemic, we will continue to monitor industry risks.

So David with the impact that additional outbreaks may have on our loan portfolio performance.

We remain comfortable with our allowance level and while we do not expect that net charge offs will remain at these historically low levels, we have seen little indication that charge offs going forward will have a significant impact on the level of our allowance.

Moving on to pages, 12, and 13 I'll cover deposit trends.

And our funding mix.

We continued to experience strong deposit growth rate during the second quarter with demand deposits and checking with interest accounts, leading the way deposits grew on an annualized rate of 9.2 since the end of the first quarter and by 16, 7% on a year over year basis.

Our balance sheet continues to be funded predominantly by core deposits with deposits representing over 96% of our funding base at the end of the quarter.

We were pleased that most of our deposit growth has occurred in core checking accounts and at the end of the second quarter noninterest bearing deposits accounted for approximately 43% of our total deposits.

Total deposit cost ended the quarter at 7 basis points, which was down 1 basis point from the first quarter and down 11 basis points from the same quarter a year ago.

Looking forward, while our go to market strategy will continue to stress core deposit growth.

We do expect growth to begin to moderate as the effects of government stimulus subsides and customers, putting our cash to use.

Yeah.

Turning to page 14, our capital position remained strong and ratios are above or within target ranges.

As of the end of the second quarter.

Our CET 1 ratio was 11, 1.4%.

And our total risk based capital ratio was 14, 1.5 per cent.

The majority of the growth in our risk based capital ratios was attributable to strong earnings during the first half of the year, partially offset by growth in total risk weighted assets.

As we noted in prior quarters, our tier 1 leverage ratio continues to be impacted by significant asset growth both from government government stimulus and organic deposit growth.

But at rate remains above internal thresholds and we are comfortable with the current level.

Turning to page 15, I'll close out by providing an update on our merger with CIP.

As Frank mentioned in the opening we continue to be excited about this merger our collective teams remain connected and have positioned us well for legal close and the ultimate integration of the companies.

Since our last call we received approval of our application from the FDIC and are currently awaiting approval from the federal reserve.

We continue to be in communication with the fed and are positive then on approval of our application is forthcoming.

Outstanding information requests with respect to our application. It is also on understanding that there are no concerns that may impact ultimate approval completion of the merger remains subject to fed approval and customary closing conditions, we expect closing to occur during this quarter.

Both companies have worked hard to develop our missile business unit integration plans, which include key system decisions and recommendations.

Once we move past legal close we will review and finalize these integration plans and timelines key system conversions are slated to begin in the first quarter of 2022.

When we announced this when we announced this merger we stated that it was financially compelling and it will create a premier nationwide commercial and consumer bank with enhanced scale to drive growth improve profitability and enhance shareholder value. We believe this remains the case and our collective teams are excited about the opportunities at <unk>.

Lie ahead for the combined company.

Last October we shared with you estimated day, 1 accounting marks on financial projections based on our merger due diligence. Our plan is to book is to provide you an update as soon as practical following legal close on.

I can tell you that both companies are well positioned financially for this merger and the conditions have improved since October, particularly with respect to credit quality.

Specifically, we were pleased with the trends in credit quality. The city is reported this year and the impact they have had on the allowance for credit losses.

Again more to come as soon as practical after legal close with respect to day, 1 accounting marks and financial projections.

This concludes my comments. Thank you all for joining US today I'll now open it up for Q&A.

Ladies and gentlemen, if you have a question or a comment at this time. Please press Star then the number 1 key on your Touchtone telephone.

As a courtesy to others on the call. We ask that you limit yourself to 1 question and 1 follow up.

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Our first.

Question comes from Kevin Fitzsimmons.

Your line is open. Please go ahead.

Hey, guys.

But from D. A Davidson how are you all.

Doing well I hope you are.

Good good.

I appreciate all the detailed updates.

1 area I wanted to drill in a little deeper into was loan growth. So X P. P. P looked like a pretty healthy 7% growth linked quarter as you said Craig and.

And given the outlook for mid single digit just curious if you can drill down a little further in terms of what what.

What is really driving the growth from what the headwinds are we've heard quite a bit about elevated pay downs and pay offs.

And line utilization not quite being there on the C&I side and.

Uh huh.

You all are on a lot of different market. So I'm curious what you're seeing in terms of the south east or some of your other metro market share in throughout the country.

Thanks for the question, Kevin I would say just from a quantitative standpoint, the growth has come in commercial real estate loans and primarily owner occupied we've also seen some growth in residential.

Mortgage loans, we put some products out there for such as home improvement loans on Mrs. Fueled some of that growth.

I think.

That we are very pleased with the 7% annualized growth during the quarter and we really attribute that to.

Those new products number 1 but number 2 we were very proactive during the pandemic and reaching out to our customers and we think this has paid dividends with new opportunities for loans as the economy has improved.

And the headwinds that we could we would.

We anticipate in the future may be.

Related to if there are further outbreaks or things of that nature, but we see.

Opportunities to grow our loans at similar rates as we go forward, assuming the economy continues to open up and expand.

Yeah.

Okay great.

Thank you.

So given what you mentioned about the margin there I think all banks are facing this issue the drag from excess liquidity.

You guys mentioned that you put.

Some of Thats worked from Securities. So I'm just curious.

How how high you would continue taking the securities portfolio, just on on a standalone basis and trying.

Trying to.

Fight off.

Some of that yield pressure from the excess liquidity.

Well I don't really have a bright line in terms of the size of the investment portfolio.

I can tell you that at the end of the first quarter.

We huddled up in we decided we put a goal out there too.

Put close to $1 billion for work there to optimize our yield on earning assets moving out of cash into investments.

We remain.

Diligent.

To add to that portfolio moving forward.

As you know, we're running around 15% of our earning assets in cash right now we're normally at 4%. So there's a there's certainly a cost to that.

And part of the way to mitigate that outside of loan growth is to opportunistically add to the investment portfolio, where it makes sense so that strategy.

We foresee that strategy continuing.

Throughout the remainder of the year.

Okay.

1.1 last 1 I appreciate those comments on the merger so if I'm reading it correctly.

Just between the lines it sounds like the message is there is no.

Big issue.

For or.

Or obstacle that's stopping at this just your Inc. Communication, that's just a matter of letting the process play out and getting it getting legal close correct.

That's correct Kevin.

Okay. Thanks, guys.

Thank you.

Our next question comes from the line of Brady Gailey. Your line is open. Please go ahead.

Hey, Thank you good morning, guys.

Good morning.

Maybe 1 more on loan growth.

Great loan growth this quarter, Yeah, I hear you on the guidance of mid single digits.

What do you think loan growth will look like.

As a combined company with <unk> you know.

A lot of times when you go through a big acquisition.

Loan balances can be somewhat flat or maybe even shrink a little bit.

Before that kind of normalize out and then start to grow from there. So how do you think about the dynamics of organic core loan growth.

<unk> in the mix.

We would we would maintain the mid single digits.

Growth.

Expectation there.

But obviously, stating the obvious here, but it really does depend on to the extent the economy keeps opening up but our expectations with a mid single digit percentage growth combined.

Okay Alright, great.

And then when you think about you know you guys have historically been pretty active buying.

Buying back your stock.

So that's been a little problematic for the CIC deal pending but they're assuming that will close.

What are your thoughts on the buyback from if you look at the stock is trading at about 1.5 times pro forma tangible book value per share, which is pretty attractive relative to your <unk>.

Profitability profile. So how do you think about the buyback from here.

We acknowledge the price is attractive.

I will tell you on our first priority will be integrating <unk>, but as we combine the companies and build capital we definitely plan to Opportunistically.

Resume our share repurchase program.

Okay.

Thank you.

You mentioned, how youre going to be updating and disclosed and kind of where the deal marks shook out.

After legal close I know a lot has changed today versus mid October you know the world.

It seems to be doing better than what we at all.

Were thinking back then so to me it seems like the deal related marks are going to come down.

So I know you can't talk about specifics for maybe just talk about what impact that could have on.

On.

Forward tangible book value on earnings obviously, if the marks go down do you think there'll be a positive to tangible book value per share.

But then is there any real EPS impact maybe from lower.

Accretable yield I mean, just talk about the dynamics that.

Could be.

Consideration there.

Well I will talk qualitatively about that.

Number 1.

Certainly are encouraged by the credit quality trends.

We will.

With bode well for where the credit Mark maybe compared to where it was in October that's as of today things can change between now and closing.

So that movement is generally positive.

From an EPS perspective, I know that we came out with EPS guidance and on.

Tabor of last year, I really don't see much movement there.

Based on what we know as of today, either so I think the the financial dynamics behind this obviously with a lower credit Mark we would come into it with higher capital.

But I think that the.

The financial dynamics are even more compelling than.

And then they were in October so we expect good news there, but we shall see upon legal close for those things shake out.

And then finally for me.

The city has a lot of really expensive holding company debt.

And I know, that's a big opportunity for.

For additional EPS accretion kind of beyond what you guys laid out in October.

You have 2 options you can either just looked at debt mature over time.

Or you can kind of bite the bullet and go.

Take care of that debt upfront.

Any idea, which way youre well, you mean as far as what youre going to do with all debt rather expensive holding company debt with CRT.

Well as you know, we're going to mark that debt to market. So we will get the benefit of current market rates.

I can I can tell you with great certainty that our eye is on that constantly we mark debt debt to market and are doing a cost benefit analysis of that and that decision will be made post legal day 1 close.

Okay, Alright, great. Thanks for all the color guys.

Thank you.

Our next question comes from the line of Christopher Marina Caroline is open. Please go ahead.

Thanks, Good morning, I'll have 2 follow up questions on the commercial loan growth side. Its noticed noticeable that the lines of credit from the FDIC disclosures of expanded particularly at <unk>, but it's also it for citizens side.

What does it take borrowers to kind of draw on those lines do you see signals coming that there'll be more active with that the lines from source of expanded which I see as a positive as well.

This is Jim Brian.

I think the activity on the lines of credit for for citizens are really driven by our focus on C&I activity, we have historically not been a C&I lender.

And we began that journey prior to Covid, but we have been able to continue with that.

And have had picked up some nice opportunities.

I don't see a negative in line advanced so I think it's more active participation in the market and the rebuild of above of activity with our C&I clients.

Okay, Great. That's helpful. Thank you.

And then just a quick back other question on the on the capital levels pro forma cash.

Capital I presume, it's stronger now than it was when you announced the act.

Acquisition in mid October do you have a sense of kind of how low you can't take the capital ratios once the merger is closed.

Well, we came out with and I'll focus on CET, 1 we came out.

Our pro forma in October of around 9.5% that has.

That number will come in higher than that.

I'm not going to talk about the specific number but it will be higher for the reasons, we discussed earlier around credit quality, primarily and good earnings by both companies.

<unk>.

In terms of how low we're willing to take it.

I think I think our operating range for CET, 1 is 9% to 11% and we would leave.

In an environment, where.

Sure.

Where there is economic uncertainty we might operate at higher end of that range and a better business environment, maybe down towards the lower end of that range.

But how low we are willing to take capital obviously as is.

You have to consider regulatory limits, but we believe.

That we will be well within our range on CET, 1 at that time and as we build capital again as we combine the companies I think we will have opportunities to.

<unk> repurchased shares.

Great. Thank you Craig I appreciate that.

Thank you.

And im not showing any further questions at this time I'd like to turn the call back over to our host for any closing remarks.

Great. Thank you and thank you everyone for joining this morning on all as we are appreciative of your ongoing interest in our company do you have any further questions or need additional information please feel free to reach out.

Have a great day.

Ladies and gentlemen.

This concludes today's conference call you may now disconnect have a wonderful day.

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Frank.

Alright.