First Citizens BancShares, Inc. (FCNCA) Q3 2022 Earnings Call Transcript

First Citizens BancShares, Inc. (FCNCA)

Q3 2022 Earnings Conference Call

October 27, 2022 8:30 AM ET

Company Participants

Deanna Hart – Senior Vice President-Investor Relations

Frank Holding – Chairman and Chief Executive Officer

Craig Nix – Chief Financial Officer

Tom Eklund – Treasurer

Marisa Harney – Chief Credit Officer

Conference Call Participants

Brady Gailey – KBW

Stephen Scouten – Piper Sandler

Brian Foran – Autonomous

Christopher Marinac – Janney



Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded.

I’d now like to introduce the host of today’s conference call, Ms. Deanna Hart, Senior Vice President of Investor Relations. Please go ahead.

Deanna Hart

Thank you. Good morning, everyone, and thank you for joining us for First Citizens Bank’s third quarter 2022 earnings call. It is my pleasure to introduce our Chairman and Chief Executive Officer, Frank Holding, as well as our Chief Financial Officer, Craig Nix, who will provide an update on our third quarter 2022 performance and share our outlook for the fourth quarter and fiscal year 2023.

We are pleased to have several other members of our leadership team in attendance with us today, who will be available to participate in the question-and-answer portion of the call if needed. During the call, we will be referencing our investor presentation, which you can find on our Investor Relations website. An agenda for today’s presentation is on Page 2 of these materials. Following the completion of the presentation, we’ll be happy to take questions.

As a reminder, our comments 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 such statements. These risks are outlined for your review on Page 3 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. Finally, First 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 will turn it over to Frank.

Frank Holding

Thank you, Deanna, and good morning, everyone. We appreciate all of you joining us today. We hope this call will be informative and give you a sense of the success we enjoyed through the third quarter and the path we’re on moving forward. We announced another quarter of solid financial results this morning, and I’m confident about both our trajectory moving forward and our ability to continue delivering long-term shareholder value. While we face some economic headwinds and the potential for a recession, we’ve not seen meaningful signs of stress in our credit portfolio to date.

We are encouraged by the resiliency of our clients in the face of elevated inflation and rising interest rates. During the quarter, loan growth momentum continued and was broad across our lines of business. The strong quality loan growth we experienced this quarter in tandem with the positive asset re-pricing we have experienced in the rising rate environment helped produce another quarter of strong net interest income growth and positive operating leverage.

Starting on Page 5, I’ll highlight the 10 takeaways for the quarter and Craig will take a deeper look at our third quarter results and prospects moving forward in the next sessions of this presentation. First, we are pleased to announce that we have repurchased 99.4% of the 1.5 million shares of Class A common stock authorized by our Board for repurchase as of the market close yesterday.

The 1.5 million shares represents approximately 10% of the Class A common shares or 9.4% of the total common shares outstanding prior to the repurchase. This repurchase program allowed us to return excess capital to our shareholders and set the foundation to deliver even stronger returns in the coming quarters, given a more optimal capital level.

The second one, we continue to focus on merger optimization efforts and remain confident that we will achieve our cost savings goal of $250 million. We estimate that we will come in slightly below our merger cost estimate of $445 million.

Number three, pre-provision net revenue continued to be a bright spot, growing by 21.3% over the second quarter indicative of significant margin expansion, solid fee income growth generation and good expense management.

Fourth, net interest margin expanded by 36 basis points during the quarter due to higher interest rates and strong loan growth, only partially offset by higher funding cost and borrowings.

Five, expense management continues to be a focus, and we achieved an efficiency ratio during the quarter of 53%. We’re especially pleased with our efficiency ratio given the inflationary headwinds, which are impacting the industry and market as a whole.

Six, for the second consecutive quarter, we’ve had a provision build related to deterioration in CECL macroeconomic forecast in addition to maintenance reserves to cover loan growth and net charge-offs.

Seven, despite a larger provision expense compared to last quarter, credit quality remains excellent. The net charge-off ratio during the quarter remained below non-stressed historical averages and decreased compared to the linked quarter.

Further, our non-accrual ratio declined during the quarter. We remain pleased with our loan portfolio performance and as covered in detail on last quarter’s call, our portfolios are underwritten to endure times of economic stress. With that said, we continue to monitor the potential impacts of higher rates, inflation, a possible recession and geopolitical instability on our loan portfolio.

Eight, loans grew at an annualized rate of 12% during the quarter, marking another strong quarter. Loan growth was broad in both commercial and the general business bank – General Bank business segments and was an output of the long-term business development efforts from our lenders and our continued emphasis on adding staff in areas that can support quality growth.

Nine, while we continue to see a decline in total deposits, we were pleased that the rate of decline was lower than in the prior quarter. As expected, we experienced further attrition in higher-cost acquired money market deposits. The decline was partially offset by growth in our direct bank as we look to remain competitive in the online space.

Ten, as a result of strong loan growth and reduced deposits, we did add $3.9 billion in wholesale borrowings during the quarter. Despite the change in our funding mix, we feel good about our current and pro forma liquidity position.

Turning to Page 6. We provide more detail on our share repurchase plan progress to date. We were able to repurchase shares faster than anticipated, allowing us to quickly rightsize our capital closer to the target operating range. We estimate that the repurchases will be accretive to 2023 EPS by approximately 10%. Further, while there is initial dilution to TBV in the third quarter of $15.75 we estimate this will be earned back in less than three years.

For now, we are pausing our repurchase plan as we monitor loan growth and the macroeconomic environment moving forward. We plan to submit our capital plan in the second quarter of 2023. After consideration of that plan, it will be our intent to return any excess capital over our internal targets to shareholders in the form of share repurchases beginning in the second half of next year.

With that, I’ll turn it over to Craig to expand on our third quarter financial results and share our financial outlook moving forward. Craig?

Craig Nix

Thank you, Frank, and good morning, everyone. Turning to Page 8. I am happy to report GAAP net income of $315 million or $19.25 per common share, yielding an annualized ROE of 12.49% and an ROA of 1.16%. On an adjusted basis, net income was $338 million or $20.77 per common share, yielding an annualized ROE of 13.47% and an ROA of 1.24%.

Comparable EPS, ROE and ROTCE shown on this page for prior periods, our First Citizens BancShares on a stand-alone basis. ROA, PPNR ROA and NIM and the net charge-off ratio are presented as if the companies were combined during the historical periods. I’ll dive a little deeper into these components in a moment as we look at the underlying trends that produce our results.

Continuing on to Page 9, we provide two condensed income statement, the one at 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 FCB and CIT reemerge during the historical periods.

The section in the middle of the page summarizes the impact of notable items to derive the adjusted results from the reported results. The most significant notable items were $139 million and depreciation and maintenance expense on operating leases as well as $33 million in merger-related expenses.

Page 11 provides a detailed listing of the notable items affecting the quarter along with their impact on net income and diluted earnings per share. I will now focus on the adjusted results at the bottom of the page. Pre-provision net revenue increased by $89 million or 21.3% over the linked quarter and by $224 million or 79.4% over the comparable quarter a year ago.

The increase for both periods was driven by positive operating leverage as net revenues grew at a faster pace than expenses. Net income available to common shareholders was $326 million for the quarter, up from $270 million in the second quarter and $262 million in the third quarter of the prior year....

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