Q1 2022 First Citizens BancShares Inc (Delaware) Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the first citizens Bancshares first quarter 2022 earnings conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star on your telephone Star one on your telephone.
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As a reminder, today's conference is being recorded.
I'd now like to introduce the host of this conference call Ms. Diana Hart Senior Vice President of Investor Relations you may begin.
Good morning, everyone and thank you for joining us today to review <unk> first citizens Bancshares first quarter 2022 financial results. It is my pleasure to introduce our chairman and Chief Executive Officer, Frank holding as well as our Chief Financial Officer, Craig next.
During the call they will be referencing our investor presentation, which you can find on our website.
We're also pleased to have several other members of our leadership team in attendance with US today, who are available to participate in a question and answer portion of our call if needed.
Following the completion of our formal presentation materials, we'll be happy to take any questions you may have.
As you are aware, we closed the merger with C. I T grades on January three 2022 and.
And first quarter results are for the combined company given the magnitude of this merger on our legacy for adults. We have included combined numbers for the historical periods for comparison purposes. There are footnotes within the presentation to indicate when historical numbers are combined are on a first citizens stand alone basis.
As a reminder, our comments during today's presentation will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.
We assume no obligation to update these statements.
These risks are outlined for you on page three of the presentation. We will also reference non-GAAP financial measures in the presentation reconciliations of these measures against the most directly comparable GAAP measures are available in the appendix.
Donnelley for citizens is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference. Transcripts provided by third parties with that I'll hand, it over to Frank.
Thank you Danielle and good morning, everyone. We appreciate all of you joining us today.
We're pleased to announce solid first quarter results. This morning, we continue to remain focused on ensuring a timely and successful integration with the I T and made good progress during the quarter.
And we're very excited about our prospects moving forward.
As Craig will touch on when he covers our financial outlook, we expect net interest margin to continue to expand.
Our customers by and large are in good shape. So we feel good about the prospects for loan growth and we expect continued momentum in our fee income generating lines of business as well as further progress on our cost save target.
Turning to page five of the Investor presentation, we continue to remain focused on ensuring a timely and successful merger integration for our customers and associates.
Leveraging our dedicated integration management office comprised of execution oriented leaders with multiple acquisitions conversions and integrations under their belt. We are working hard to ensure that the value of the deal is realized for employees customers.
And shareholders.
And I'm pleased to say, we are exactly where we would be expected to be that at this point in time.
All of US are focused on ensuring our teams are coordinated are meeting our integration timeline as.
As we've said before and are experiencing as we integrate.
Integration risk can be better managed in this merger because of the structure of C. I T. Instead of converting a large bank overall long weekend, which is typically the case.
He has a diverse group.
Oh it has oh.
Diverse and unique business units and groups that will include some conversions like Onewest, which is slated for mid July but will also include lifting and shifting of re platforming other lines of businesses like factoring commercial finance and rail.
Will be managed individually and sequenced in a way that manages the integration cleanly over the next few months.
Turning to page six I want to thank all of our associates for their dedication hard work and sacrifice to ensure that we are making progress on our integration milestones.
We are pleased with our progress on our cost savings target of $250 million and expect that $200 billion will be in the run rate by the end of this year.
As Craig will soon cover <unk>.
During the first quarter, we achieved positive operating leverage.
Net revenue grew at a faster pace than expenses, leading to strong core earnings and pre provision net revenue growth.
We will continue to focus on redeploying excess liquidity into loans and investments with higher rates to boost net interest income and margin.
We look forward to making progress further progress on merger integration and producing strong results in the second quarter.
Before I turn it over to Craig.
Like to say that despite some of the uncertainty out there.
Given geopolitical or macroeconomic issues.
We remain very excited and optimistic about our growth prospects.
Already shifting from integration focus to execution in many areas throughout the bank and we're working hard to capture the synergistic value from the CIP merger on the revenue and expense side and that's already bearing fruit.
We are well positioned to perform well given.
We are well positioned to perform well given our long term focus.
Our focus on relationships, our risk appetite and the diversity of our business segments.
And our enhanced earnings profile as we know as we are now merged with CIP.
Craig will provide a closer look at our financial quarter result.
And then we will open the line for questions Greg. Thank you Frank and good morning, everyone.
<unk> on page eight as you know.
We expect our first quarter result have some noise in them due to purchase accounting and merger related items.
While I will cover the noise in my comments today I do not want to detract from what Frank. This described as a solid first quarter resolved, so I'm going to begin with several positives highlighting the quarter.
Core deposit growth was strong with noninterest bearing deposits growing by one 2 billion since year end and annualized growth rate of 20%.
Loan portfolio grew due to strong growth in the branch network and in residential mortgages.
In addition to organic loan growth, we continue to redeploy excess cash into investment securities at attractive entry points.
Net interest margin expanded by 17 basis points over the linked quarter overcoming a decline in SBA PPP income only six basis points of the expansion in margin was attributable to purchase accounting.
We continue to generate positive momentum in the rail card merchant in wealth fee income producing lines of business.
Non interest expense was well controlled and as Frank mentioned, we are confident that we will achieve our cost savings target.
Net revenues grew at a faster pace than expenses, resulting in positive operating leverage during the quarter relative to the linked and comparable quarters in the prior year as a result pre provision net revenue increased by 8% over the linked quarter and by 18% over the comparable quarter a year ago.
Credit quality remained strong with a net charge off ratio of nine basis points.
We ended the quarter strong from a capital and liquidity standpoint, supporting the resumption of share repurchases during the second half of the year.
Finally, as Frank covered in his comments merger integration is going well and is on track.
Turning to page nine I will touch on the financial highlights for the quarter. Please note that we are providing our GAAP result, as well as supplemental reporting on an adjusted basis to account for the after tax basis.
Notable items, such as gains and expenses associated with mergers.
James and losses on sale and debt extinguishment and other nonrecourse recurring non core items.
With that I'm happy to report GAAP net income of $264 million.
Or $16 70 per share yielding an annualized ROE of 11, one 8% and an <unk> of 1%.
On an adjusted basis net income was $299 million or $18 95 per share.
Yielding an annualized our O E of 12, six 8% and an <unk> of 1.12%.
Comparable EPS ROA and ROE as shown on this page for prior periods are for first citizens Bancshares on a stand alone basis.
NIM and the net charge off ratio are presented as if the companies were consolidated during the historical periods I'll dive a little deeper into these components in a moment as we look at underlying trends that produced our results.
Turning to page 10, we provide two condensed income statements, but one of the top representing our reported GAAP results and the one at the bottom supplementing those results showing net income adjusted for notable items.
Both income statements are presented as if STB in CIP or merged during the historical periods presented the section in the middle of the page summarizes the impact of notable items to derive the adjusted result from the reported results.
The most significant notable item for the estimated $431 million bargain purchase gain $513 million day, two seasonal provision and $135 million and merger related expenses associated with the CIP merger page 11 provides a detailed listing.
Of the notable items affecting the quarter along with the impact on net income and diluted earnings per share.
Now I will focus on the adjusted result at the bottom of page 10, pre provision net revenue increased by $26 million or 8% over the linked quarter and by 54 million or 18% over the comparable quarter a year ago.
The increases for both periods were driven by positive operating leverage.
Net income available to common shareholders was $299 million up from 100 $291 million in the fourth quarter and down from $323 million in the first quarter of the prior year.
The increase in net income during the linked quarter was due to an increase in pre provision net revenue lower preferred dividend, partially offset by a decline in the benefit for credit losses.
The decline compared to the same quarter a year ago was due to a decline in the benefit for credit losses, only partially being offset by an increase in pre provision net revenue.
As I mentioned page 11 provides detail on notable items most of the significant wins relate to our merger with Ti T. I will call out here that on an adjusted basis. We will report rental income on operating leases net of depreciation and maintenance, which will reduce.
Reported noninterest income and also reduce GAAP reported noninterest expense by the same amount the net effect of these adjustments.
As neutral to pre provision net revenue pre tax income and net income.
In summary, noninterest income was adjusted downward by 570 million, mostly due to the estimated bargain purchase gain to get to core noninterest expense noninterest expense was adjusted downward by $238 million.
After removing the date to seasonal impact.
Pretax income was adjusted up by $181 million and these adjustments added $1 92.
Reported or GAAP EPS.
Now starting with page 12, I'll touch on the major trends impacting our operating results unless noted otherwise the financial trends on the upcoming pages are consolidated as if the merger with CIP took place during the historical periods presented.
Net interest income totaled $649 million for the quarter, representing a $30 million, a 5% increase compared to the linked quarter.
The driver of the increase were a $54 million decrease in interest expense offset by a $24 million decline in interest income.
The decline in interest expense was driven by reductions in interest expense on borrowings of $40 million and on deposits of $14 million.
Of the $54 million decline in interest expense of 31 million related to purchased accounting premium amortization with the remaining 23 million attributable to the $3 billion debt redemption in February and lower deposit rates.
The cost of deposits declined by six basis points during the quarter as higher priced time deposits continued to mature.
While we expect the interest cost on deposits will begin to increase given fed rate hikes, we will continue to let higher priced time deposits, including brokered Cds mature, which will help to alleviate some of the pressure of rising rates in the short term.
Interest income was negatively impacted by declines in legacy Ti T interest accretion that accounted for $23 million of the decrease and SBA income SBA PPP income contributing to $7 million of the decrease and a lower day count. These factors were partially offset by.
Improved investment yield and earning asset mix as we redeployed excess liquidity into investment securities organic loan growth and to redeem long term debt.
First on investments was up $23 million compared to the linked quarter due to a 36 basis point increase in yield and a $1 $9 billion increase in average balance of $7 million and 14 basis points of the increase was due to purchase accounting the remaining positive impacts were due to higher reinvestment rates and low.
Sure prepayments on the MBS portfolio.
Excluding the impact of lower accretion SBA PPP interest income and day count interest income was up $32 million due to a higher investment portfolio yields and improved earning asset mix.
Loan yields ex accretion and PPP wise was essentially flat with the prior quarter.
Net interest income increased by $42 million over the comparable quarter in 2021, and net interest margin increased by 15 basis points net interest income increase for similar reasons.
For the linked quarter with the exception that interest income was negatively impacted by earning asset mix relative to the comparable quarter in 2021.
Turning to page 13, we highlight the drivers of the 17 at 15 basis points margin expansion from the linked and comparable prior year quarters, respectively.
Purchase accounting was accretive to both quarters by six basis points, excluding the impact of purchase accounting net interest margin increased by 11 basis points from the linked quarter and by nine from the comparable quarter.
The increase from the linked quarter was due to the impact of the combination of improved funding in earning asset mix higher investment yields and lower deposit costs, all outpacing the negative impact of lower SBA PPP income.
Similar similar themes exist for the comparable quarter increase however, the decline in deposit rates was more accretive and the earning at earning asset mix had a more pronounced negative effect as average loans declined by $3 5 billion.
As we look ahead to the remainder of 2022, while we expect interest expense to increase we expect net interest income will increase at a faster pace leading to growth in net interest income over the coming quarters.
In addition, we expect the earning asset yield will increase at a faster pace than the cost of funding them. Thus leading to continued expansion of net interest margin.
Turning to page 14, the line graph on the left hand side of the page and the case that we continue to be asset sensitive.
While we have been opportunistic in reducing excess liquidity, we continue to operate with liquidity above normal operating ranges, we have and will continue to take a measured approach to interest rate risk and market risk management to position our balance sheet to benefit from higher interest rate while at the same time, providing downside.
I'd protection should interest rates fall in the future.
We estimate that a 100 basis point shock in rates with increased net interest income by six 1% and that a 100 basis point ramp by two 5% over the next 12 months.
The main drivers of the improvement.
Our variable rate loan portfolio, which represents 45% of total loans, our cash position and modest deposit beta is driven by our strong core deposit base.
We model, our blended deposit beta between 20, and 25%, which is aligned with historical experience in a rising rate environment. Currently deposit betas are well below these expectations.
Moving to page 15, noninterest income totaled $726 million during the first quarter, which was an increase of $402 million over the linked quarter and $302 million over the comparable quarter of last year. The difference between the $850 million in GAAP noninterest income reported on page nine and the <unk>.
726 million shown here is that rental income on operating leases is reported net of depreciation and maintenance expenses on slide 16, noninterest expense has been reduced by the same amount.
The $402 million increase in noninterest income for the linked quarter was driven primarily by the estimated bargain purchase gain recorded in connection with the <unk> merger higher core noninterest income.
Jane on debt extinguishment, partially offset by declines in gains on sale of operating leases and legacy.
Consumer mortgages the gains on sale will be a less prominent part of our strategy moving forward, given our liquidity and capital position and the purchase accounting reset on legacy consumer mortgage and rail assets.
Core noninterest income increased $16 million or about 6% over the linked quarter, primarily due to higher rental income on operating leases.
An increase in card and merchant income, partially offset by a decline in factoring commissions due to the expected seasonal decline in volume.
Higher net rental income on operating leases was due primarily to lower maintenance cost on rail fleet on the rail fleet as less cars came off lease during the quarter.
During less transportation and maintenance costs.
Core noninterest income increased by $36 million when compared to the first quarter led by an increase in net rental income on operating leases higher card and merchant service charges on deposits and wealth management income all partially offset by a decline in mortgage income.
Higher rental income on operating leases was due to improvement in gross rental income due to higher rail fleet utilization higher renewal rates on new leases as well as lower depreciation and maintenance costs.
Rail fleet utilization increased to 95, 5% at the end of the first quarter up two 4% from year end.
Mortgage income was negatively impacted by higher interest rates from reduced refinance activity and pressure on gain on sale margins, which have declined after being elevated in the latter half of 2020 in 2021 due to increased mortgage demand and the lower rate environment.
Turning to the remainder of 2022, we expect continued momentum in our wealth merchant card and wealthy income producing lines of business.
While service charges on deposits will decline as we enact the N S. F O D policy changes, we announced earlier this year, we anticipate a high single digit percentage increase and the increase in adjusted noninterest income year over year with respect to the lost fee income from NSF fees were looked.
For opportunity to offset it by broadening customer relationships through product offerings that will add value for our customers.
Turning to page 16, noninterest expense totaled 686 million during the first quarter.
An increase of $117 million and $116 million over the linked quarter in the comparable quarter respect respectively.
The $117 million increase over the linked quarter was primarily driven by $222 million increase in merger related expenses, resulting from a combination of deal related change of control retention and severance payments.
And legal and consulting costs.
Core noninterest expense increased by $20 million.
And were partially offset by $27 million spent with our fuel related to termination of two legacy benefit plan.
The $20 million increase in core noninterest expense over the linked quarter, primarily related to higher personnel costs, driven by a combination of factors, including higher performance and revenue based incentives.
Reasonably higher FICA, and 401, K expenses and lower deferred loan origination Paul all partially offset by lower salaries expense. The lower salary expense was a result of our continued focus on merger cost saves.
The $116 million increase over the comparable quarter.
Last year was due to the same reasons status for the linked quarter with the exception that the increase in merger related expenses was also offset by a decline in intangible.
Asset amortization.
Core noninterest expense increased by $24 million.
Due to higher personnel costs, and third party processing fees and.
In marketing costs. The good news here is that our efficiency ratio.
Improved to $61 five 7% during the quarter as core net revenue growth outpaced expense growth.
Looking forward, we are feeling the pressures of inflation, especially as it relates to wage pressure professional service and contract costs. We do expect however, as we are able to remove another $100 million out of our cost base and will help to neutralize the natural noninterest expense growth then exclusive of merger cost saves will be closer to the mid <unk>.
<unk> digit range for this year.
We expect a low single digit percentage increase in adjusted non interest expense year over year in terms of our efficiency ratio moving forward with the expected positive net revenue impact of rate increases and continued efforts on cost savings initiatives. We should see continued improvement during the remainder of.
Of the year and into next year, we still feel good about our estimate of $300 million in merger related expenses for the year with the absolute level of merger expenses expenses continuing to moderate in the coming quarters with quarter, one being the high watermark with most of the first quarter expense tied to the <unk>.
Timing of the merger close.
Page 17 provides our balance sheet highlights and key ratios.
I'll cover the significant components of the balance sheet on subsequent pages I won't spend time on this page other than to note that you'll see that we are maintaining strong healthy capital levels post merger, which we plan to leverage into organic growth and share repurchases. During this and share repurchases during the second half of the year.
Turning to page 18, total loans increased $313 million over the linked quarter or about one 9% on an annualized basis.
If we remove the impact of purchase accounting and SBA PPP loan decline total loans increased by $455 million or by two 8% on an annualized basis.
Given the lower seasonal growth, we typically experienced during the first quarter and the necessary focus on merger integration. We are pleased with these results for loan growth for the quarter was led by the branch network, which grew at an annualized rate of 6% led by growth in commercial business and consumer loans. This growth rate is encouraging as we continue to focus.
On both client outreach efforts in adding additional bankers in high performing markets, where we feel there is a compelling organic growth opportunity.
Elsewhere, we had growth in mortgage loans for the quarter, even as overall mortgage loan production was down as a decline in prepayment speeds due to higher interest rates enable production to overcome loan run off.
On the downside, we continue to see loan declines in real estate finance loans abundant liquidity in the system keeps pressure on pricing and competitors are willing to refinance loans at lower spreads.
<unk> inflation and the rising raising right rate environment, prompting some apprehension to new borrowings in the space.
On a year over year basis loans declined by $2 6 billion, a three 8% due to decreases in SBA PPP and real estate finance loans, excluding SBA, PPP, which accounted for $2 $6 billion reduction in the net.
And the net impact of purchase accounting, so the $2 six month or reduction in PPP and the impact of purchase accounting the decline was <unk>, 3% of virtually flat as the growth mentioned previously in the branch network was able to neutralize declines in real estate finance lines.
As we look forward, we do feel positive about the prospects for further loan growth, we anticipate a mid single digit percentage increase in lines for the full year 'twenty two.
However, we do acknowledge that uncertainty around the external environment, especially with regard to economic and Geo political risks could cause actual growth rate to deviate.
From our expectations.
Moving to page 19, we experienced strong deposit growth during the quarter with deposits growing at an annualized rate of approximately 4% or about $833 million.
The main drivers of the quarter over quarter change or a $1 $2 billion increase in non interest bearing checking accounts, representing almost 20% annualized growth.
This was offset by $388 million decrease in interest bearing deposits due to a $764 million decline in time deposits, partially offset by a net $376 million increase in other interest bearing accounts.
Our cost of deposits declined to 17 basis points during the quarter down six basis points from the linked quarter and 16 basis points from the first quarter of last year.
Despite the fact that our noninterest bearing deposit growth continues at record levels in the first quarter. We remain guarded we remain guarded on the outlook for continued absolute deposit growth in 2022 as the interest rate environment continues to evolve and the fed impact liquidity in the system by deleveraging its balance sheet.
As we continue to optimize our funding mix by placing higher cost deposits with by replacing higher cost deposits with lower cost core checking accounts. We expect the continued decline in time deposits offsetting growth in transaction accounts.
Moving to page 20, our balance sheet continues to be funded predominantly by core deposits. The total deposits representing over 96% of our funding base at the end of the quarter.
Continuing to page 21 credit quality continues to be very strong.
While the net charge off ratio increased from five basis points to nine basis points from the linked quarter. It remains low which in combination with improved macroeconomic scenarios resulted in a negative provision of $49 million during the quarter. After excluding the day two seats or provision the.
The ACL ratio declined from 136 at the end of last year to 1.29 at the end of the first quarter.
Turning to page 22, the combined ACL was $890 million at the end of 2021 as we reported in March on the date of the acquisition, we cleared out Cit's ACL of $712 million and established an estimated reserve for PCB lines of $284 million and an estimated date too.
Provision for non PCB line of $454 million, which resulted in a $26 million increase in cit's year in AC L. The.
The increase was primarily related to changes in specific reserves on loans individually evaluated for impairment at the acquisition date. This resulted in a day, one combined ACL of $916 million.
Subsequent to the acquisition date, we really $68 million in reserves, bringing H, the ACL down to $848 million or 129% of total loans.
The release was the result of improvement in certain macroeconomic scenarios using the estimation of the allowance specifically around real estate values. Additionally, we saw improvement in the specific reserves on certain payer loans during the quarter.
The ACL at quarter end covered annualized net charge offs 14 three times.
Turning to page 23, our capital position remains strong with all ratios above or in the upper end of our target ranges as of the end of the first quarter. Our CET one ratio was 11, 36% and our total risk based capital ratio was 14 four 8%.
After accounting for the merger impact, which was slightly dilutive to our risk based capital ratios and creative and accretive to our tier one leverage ratio growth during the quarter was attributable to strong earnings partially offset by growth in total risk weighted assets in dividend payments and the leverage ratio increased further.
The average asset impact from the debt redemption completed on February 24th.
Tangible book value per share grew by 40% to $574.09 during the quarter driven by the value created from the <unk> acquisition.
Turning to page 25, I will conclude by discussing our financial outlook.
Let me preface my comments here that this outlook assumes that the U S economy continues to perform well buy boats boats. Most measures. This includes.
GDP growth as Covid continues to weigh.
Ukraine prices does not derail the U S economy.
Monetary policy becomes tighter as the fed tries to rain and inflation.
Relation while currently elevated elevated doesn't move up significantly our declines as supply chain and geopolitical issues are resolved.
Unemployment rate remains relatively low and income taxes remain at current levels on page 25, the first and third columns lift our first quarter 'twenty, two and full fiscal year 'twenty, one adjusted actuals for the relevant metric our balance sheet line items. The numbers in these columns are adjusted for notable.
Items to arrive at core noninterest income and expense.
Column, two provides our growth and other assumptions for the second quarter in column four for the full fiscal year 2022.
From a loan growth perspective, we expect growth to be in the mid single digit percentage range in both Q2 and for the year.
While we foresee continued mid to high single digit growth in our branch network. We do continue to feel some pressures in the real estate finance portfolio based upon accelerated prepayments in the competitive landscape. We will continue to proactively add bankers in our well middle market banking than large metro.
<unk> network areas to support loan growth.
We also anticipate that our cost of funds will afford us the opportunity to compete more favorably in the large commercial space on high credit great opportunities and the continued collaboration of our legacy FCB in CIP lending teams and sending referrals will help increase loan volumes as the cultures become integrated we are already seeing that.
<unk> activity pick up as FCB in CIP gain more understanding of each legacy companies products and capabilities.
On deposits, we do not expect to continue the legacy first citizens robust levels of growth over the past two years as we seek to optimize funding by replacing higher cost accounts with lower cost core checking account.
While we had strong growth in the first quarter, we do expect seasonal outflows in our branch network in cab business and consequently, and consequently, we expect deposit.
To be slightly down in the second quarter.
On the year, we expect flat to low single digit percentage growth. However, if we continue to see upside in our noninterest bearing account, we could exceed that guidance.
Our expectation is that demand deposit growth will continue at a mid single digit percentage growth rate, but will be offset by continued optimization of the funding base validating higher price Cds and money market accounts run off.
For net charge offs, we expect a gradual return to pre pandemic non stress levels for both first citizens first citizens and CIP, we expect net charge offs in the range of 10 to 20 basis points in the second quarter and.
15, 25 basis points for the full year the increase in our net charge off projections not due to any parents stress in our portfolio is.
Rather we think the impacts of inflation and rising rates May result, in our losses, returning to more historic levels.
For net interest income, we expect continued growth in the second quarter in the mid single digits percentage range compared to Q1 as the impact of expected rate increases on on earning asset yields outpaced increases in the cost of funding earning asset.
On a full year basis, we expect low to mid teens percentage growth.
From a core noninterest income perspective, we expect to be down slightly compared to the first quarter as renewal rates on operating leases increase and maintenance costs return to more normal levels.
For the year, we expect upper single digit growth led by net rental income on operating leases as well as continued growth in wealth merchant and card income.
On a core noninterest expense standpoint, we expect the second quarter to be flat to slightly negative compared to the first quarter as the impact of annual merit increases are offset by a decline in seasonal benefits expense and continued recognition of merger cost saves.
On the year, we expect noninterest expense percentage growth to be low single digits.
From a cost savings standpoint, we estimate that a $100 million in cost savings.
Within our run rate currently and project 200 million to be in the run rate by the fourth quarter of this year and 2023, we expect $250 million would be in our run rate in our run rate by the fourth quarter.
In closing we are very pleased with our first quarter results and the hard work put in by our associates to make it happen.
With that I will now turn the call back over to the operator for Q&A.
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Okay.
And your first question will come from Brady Gailey Your line is open.
Hey, Thank you good morning, guys.
Good morning.
So as we approach the back half of this year.
Which is where do you guys have signaled you'll reengage in the buyback how do we think about the size of what that buyback could be you guys clearly have a lot of excess capital.
I know historically when you have been engaged in the buyback do you you've done it in size like a bigger in 2019, and then 2020.
Each of those years, you repurchased about 8% of the company. So any thoughts on how you think about the size of what the buyback could be the back half of this year and next year.
Brady This is Bryan holding I'm going to give some sort of context for this question and I'll, let Craig answer it a little more specifically.
Given our early success in the integration and demonstrating solid safety and soundness metrics were stable systems, we remain confident having a I'll describe it as robust stock repurchase plan in the second half of the year as we've discussed before.
Simply our deep experience in integration is proving out to year end.
We felt strong capital levels were prudent in a merger of this size, but our early success.
Greater line of sight in projections around integration efforts along with.
Strong safety and soundness metrics, but again, we feel that it's prudent and we feel very good about having our second half plans for <unk>.
I'll describe this robust start with planned stock repurchase plan.
<unk> is warranted, Greg you want to talk about anything you can expand a little yes sure Frank.
I'll speak to this in terms of sort of where we sit and our CET one capital target range and let's say that we are.
Target the middle of that range, which would put the CET, one and around 10% that would be the target.
Our excess capital.
Would be approximately at the end of the quarter $1 $1 billion and then if we if we take that out to the end of the year around one $6 billion. So that should just give you some indication of the excess capital I'm not telegraphing the exact amount that we will request.
For our repurchase plan, but every based on our based on the targets we put out there for Etfs every $1 billion repurchase if we assume the stock price is where it was a market close is about is 10% accretive to EPS.
So we believe and we have not modeled any of that into our forecast, but we believe that as a.
It could be powerful.
Strategy.
For our EPS accretion moving forward.
Okay Alright.
Alright.
We continue.
And then given what we've seen just with the long end of the curve.
Moving on from your bond rates are your bond reinvestment rates are nicely higher how are you guys thinking about continuing to deploy this.
This excess liquidity I mean do you want to.
Some there to runoff CIC more expensive funding or.
Do you start to think about putting that into the bond portfolio more aggressively now that rates are high or whats the plan with all the excess liquidity at this point.
I think in a perfect I'll, let Tom Heckman.
Speak to this if I Miss anything Tom step in here, but I think in a perfect world. If we could just wave a magic wand, we would like to see sort of our earning asset mix with overnight investments somewhere around four 5%.
Investment portfolio in the 19% to 20% range, and then loans, 74% to 77%.
Right now we're on the high end of that range with overnight investments. Thus, we have the excess liquidity, we're about where we want to be on the investment portfolio.
But then that offset of excess liquidity, we'd like to see redeployed.
Into the loan portfolio because simply put.
The current yield curve, if we were able to redeploy that excess liquidity it would be accretive to margin by 10 to 15 basis points and in terms of the absolute value of net interest income between $95 million to $143 million, which is not built into our current projections. So.
I do think we shall keep in mind, we are restricted on how much we can redeploy in the loans.
Given that we have to have some liquidity reserve for liquidity stress tests and high quality liquid assets against our deposits, but we do believe we have.
A great deal of balance sheet capacity here to boost earnings further than our projections.
Projections indicate.
Did I Miss anything there no I think I think you hit the points.
Right. So no further comments from me.
Alright, Thats good color and then just one more quick one if I can can you all give us the amount of P. P P fees.
We're in spread income and the amount of Accretable yield that was realized in the first quarter.
I can give you the impact of purchase accounting.
Bear with me.
While I'm doing that you can help here as well.
In the.
In the first quarter.
Aggregate the TP purchase accounting impact on net interest income it was around.
$33 million pre tax of 14 basis points.
If you strip back if you if you were to strip that out.
From a margin standpoint.
Our margin would have been was 273 would have been $2 59, and instead of the actual.
17, and 15 basis points that we increase we would have increased by nine and 11. So that just gives you some of the magnitude.
On the net interest income side and on the fee income side.
Elliot I don't think that there was a tremendous amount of purchase accounting impact.
For the SBA PPP, we had $95 million of income in the first quarter Brady.
So you talked about that was interest income.
But it will get back with you on the split of the food, but I'll just just for some perspective in the margin our headline margin went up 15 basis points for the comparable quarter of 17 basis points for the <unk> when you exclude both <unk>.
Accounting and PPP, there would have been $8 18 for both periods. So while theres a lot of noise in there.
What that indicates is that core net interest income is improving nicely.
You stepped out for PPP and purchase accounting adjustments.
Yes Brady that.
The only portion of that in Q1 was $6 million.
Okay Alright, great.
Routing purchase we spent a lot of time on purchase accounting.
And it's really does not have a huge impact on results.
Alright, great.
Yeah.
Yes.
Thank you. Your next question question.
It will come from Stephen Scouten with Piper Sandler Your line is open.
Hey, good morning, everyone. Thanks for the time.
Morning.
Greg I wanted to follow up on something you said regarding the share repurchase I said I think you said.
We're not targeting what you will request so is that indicative of the fact that our request hasnt been yet submitted to regulators.
If that's correct do you have any insight on what timing from them would be from approval or kind of what the process looks like to get approval on the on your repurchase point.
Yes, we definitely are engaging with our regulators and so we're not just sitting on our hands.
That.
But it does take around about a month for approval so that that process will get it will be in hand during this quarter and very soon.
Okay. That's very helpful. Thank you.
Yes.
And then I guess.
The market today is kind of discounting all the money that banks and including you guys will probably on some higher rates and fearful about a recession and potential credit issues and whatnot.
Can you give any color on how the legacy CIT Burke.
In your view relative to.
To rethink your recent marks and then maybe if you had any changes in qualitative factors around your seats a modeling or.
How you guys are waiting towards Moody's economic scenarios are kind of however, youre determining your Cecil.
Weightings and so forth.
We're feeling really good about the Sip portfolio credit quality is really strong.
Those credits are sort of underwritten.
Cause stress scenarios.
And <unk>.
Did a really good job of.
Resisting market pressure to depend on credit quality and term.
So just in general we're feeling really good about it in terms of the <unk>.
The ACL.
If you really if you look at where we are currently we feel really good and frankly, we feel like our reserve is conservative.
And what I did I went back and compared where we work and.
The first quarter to the fourth floor of 19, which is what we would consider pre pandemic level.
And are the ACL of the combined company.
129, and it was $1 43 back in fourth quarter and 19 at the company's would've been combined the net charge off ratio now is nine and at the end of 19. It was 28. So we now have 14% coverage, whereas we had 5% coverage five times coverage.
Pandemic.
Another thing that Marisa Harney focuses on our chief credit officer is how much does that allowance covered non accruals were covered 156 times now versus 147 times then.
30 day 60 day past dues are down non accrual loans to total loans are down criticized loans are flat and classified loans slightly up but most indicators along that spectrum in the case that we have a conservative and prudent.
Allowance for loan losses, and I don't see any apparent near term stress in the portfolio that would change our view on that.
And the risks I don't know if youre on the line if you would want to add to that.
Yeah, no everything that Craig said is absolutely true.
Legacy portfolios are frankly, performing at some of their best levels from a.
Credit quality perspective, even in the context of pre pandemic, which is what I look at.
A lot of people talk about Oh, it's improved since 2020, while a lot has improved since 2020, but our indicators are suggesting that we are back to if not better than our pre pandemic asset quality levels and I think some of that is a testament to as Craig indicated our.
Our very balanced underwriting approach to what has been a very very competitive loan market not just in terms of pricing, but in terms of terms as well. So I reiterate what Craig said I don't see anything on the near Horizon from a sector perspective or from a specific.
Transactional perspective, it gives me.
Concern at this time.
Obviously watching all the macroeconomic indicators.
Indicators going forward and as Craig said, we underwrite and stress scenarios.
So all is well.
Yes, one thing Thats extremely helpful and encouraging.
But one thing I would say just to make sure that we.
Disclaim a little bit of it.
<unk> is highly influence.
By the S. Three Moody's severe economic forecast and a lot of what you saw this quarter, where we had the reversal was due to the fact that those macro economic factors in terms of unemployment CRE price index home price index all of that improved in the severe scenario of a baseline stay pretty moderate.
With the news today with print today that could change next quarter. So we might see some pressure.
Obviously, we'd see pressure not to have negative provision, but we could see pressure to start building reserves back. So that's one qualification that I would give to all of that but in terms of the portfolio. We're feeling really good about the way it's performing in its credit quality.
Got it very helpful. And then just last thing for me.
How are you guys thinking about incremental I mean, I know you said you want to keep the liquidity for loan growth you feel good about where the securities book is today, but at some point as rates begin continue to increase how do you think about the relative spreads that you can obtain in the securities book.
Theoretically much less risk than in the loan book.
With geopolitical events and everything else potentially presenting greater risk how do you think about that dynamic.
Our first priority is to lend the money to lend the liquidity.
Investment portfolio is sort of there too.
Put whatever is left over and excess liquidity and obviously, we want to try to maximize that yield.
Yield, but at the same time, we want to protect ourselves from hits.
Hits to TBD and market value as rates rise.
And so with respect to the securities portfolio.
<unk> generally buying residential.
Government backed sponsored.
And Ginnie Mae mortgage backed securities with shorter duration and what we're trying to do there is reduce the volatility and.
A rising rate environment, so either we're either buying securities that have they might be back about 30 year mortgages, but those are gonna be season or are we just buy securities backed by a 15 year mortgages the duration of our portfolio is probably a bit shorter than peer.
We are in discussions now and I'll, let Tom.
This is well give more detail, but we are discussing now about going a little longer with reinvested cash flows, but we would look for securities with more defined locked out cash flows bullet like cash flows.
And we believe we could pick up some yield there to your point and have more predictable cash flows that were likely.
To consider doing that as we move further into this rate cycle increase we don't think it makes a lot of SaaS to go longer right. Now I know others are doing that given that rate given that rates are heading up from here. We've just we're at the beginning of the rate cycle.
So that's sort of the investment strategy, but I'll, let Tom amplify that if he needs to say anything if you'd like to say anything else about it no I think Craig it most most of the pertinent points. There I mean, I think really what we're looking at the front end cash flows currently.
Believe in sort of buying stable seasoned mortgages that have sort of gone through rate increase and decrease cycles in the past and sort of gotten through that first.
Refi boom.
As we move further out then we get some of our currently locked out cash flows rolling down the curve will look to add additional duration exposure behind it but currently we're focused on that sure them and when buying duration, we're looking more for to Craig's point.
Defined cash flows there that don't have as much optionality. If may be you know new issue 30 year mortgages went up.
Great. Thanks, guys for all the color and congrats on all the progress that's already been made.
Thank you.
Your next question will come from Christopher <unk>. Your line is open.
Thanks, Good morning wanted to ask Frank about the regions of the country that are performing well within first citizens footprint in any of that perhaps are weaker and then also any changes you've seen in customer behavior. The last two months.
The spring holding.
So we see.
Strong markets really across the country they are not.
Weak spots that we see certainly some are stronger than others.
So I guess.
Generally the larger metropolitan areas that we serve are probably more.
More robust growth in some of the more.
Suburban or rural areas, but we don't see any weakness we've noted no weakness in any particular part of the country.
Great. That's helpful and then Craig just.
A quick question about being able to increase loan rates.
That is raised in March and then again as expected this quarter.
Loan rates.
I think youll see as our loan yield sort of stabilize this quarter.
And the the rate sheets right now are higher than loans rolling off so we're in a naturally start to see it.
A pickup in our loan yield and the same thing is true.
For our investment portfolio yield.
Great. Thank you all for the information this morning.
Okay.
Yes.
Chris I'm going to add a little bit to that.
You have to realize that outside of the Carolinas all the markets that we expanded too.
We basically chose because the metrics there were that they had.
Stronger population grows and greater household income.
And growth of that household income versus national averages. So.
I don't want say that the whole U S is performing equally well.
We didn't choose those markets equally as either.
Thank you speakers I'm not showing any further questions at this time I'd like to turn the call back over to our host for any closing remarks.
Thank you and thank you everyone for participating in our call today. We appreciate your interest in our company and if you have any further questions or need additional information. Please feel free to reach out and hope everyone has a great day.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect have a wonderful day.
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