First Citizens BancShares, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Jan 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Q4 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s conference is being recorded. I would now like to introduce host of this conference call, Mr. Tom Heath, Director of Investor Relations. You may begin.

[Tom Heath:]

Thank you, Angie. Good morning and thank you so much for joining us. It is my pleasure to introduce our Chairman and Chief Executive Officer, Frank Holding, as well as our Chief Financial Officer, Craig Nix, who will provide an overview of our results, after which we will be happy to take any questions you may have. We are also pleased to have several other members of the team with us as well, including our Chief Risk Officer, Lorie Rupp; our Chief Credit Officer, Jim Bryan; our Treasurer, Tom Eklund; our Chief Accounting Officer, Robert Hawley; our Head of Analysis and in M&A, Elliot Howard; and lastly, Brian Paull of Risk and Data Analytics.

[Frank Holding:]

Thank you, Tom, and good morning, everybody. We appreciate you joining us. As you’ve seen, despite the challenging environment, we’ve had a very good fourth quarter and a full year 2020. This all translated into record earnings for First Citizens. Performance was broad-based and I’m exceptionally proud of our team for their hard work and the efforts they have made to see our clients and communities through this challenging period. I’ll let Craig Nix, our CFO walk you through our financial performance in more detail. But before I do, I wanted to make a couple of high-level comments. First, it’s very clear to me that the investments we made in recent years in both people and technology have paid off handsomely. Testament to that fact is that in this tough environment, we’ve not skipped a beat. And I believe our significant activity in PPP demonstrates just one example of the power of our people and the underlying franchise. The team is hard at work on round two of PPP now as we plan to continue to help our clients to navigate in these tough times. Second, as you know, we announced a transformational partnership with CIT in this past October, while we spent many months on the front end carefully understanding the opportunity. Since that time we’ve been – we’ve had even more time with the CIT team. As of today, I can tell you that we’re even more excited about this opportunity given the quality of the combined team and our underlying capabilities as a combined entity. On Page 3 of the investment deck, we provide an update of our activities surrounding our plan to merger with CIT. Drawing from both organizations, we’ve established core merger and integration planning teams to promote a coordinated approach to enterprise issues, drive executions and aid key decisions. We’ve filed key regulatory applications in December 2020. We have scheduled a shareholder meeting to approve the merger in February. Subject to regulatory and shareholder approval, we are targeting legal close at the beginning of the second quarter. We formed an integration management office to provide governance structure and facilitate reporting. As we move forward, we will be finalizing organizational and personnel decisions as well as completion of our business unit integration plans. We continue to plan operational conversion in 2022.

[Craig Nix:]

Thank you, Frank, and good morning, everyone. As I’m sure you’re aware, we released our fourth quarter earnings yesterday, along with a press release and investor deck. I will touch on our significant fourth quarter and full year financial highlights in my comments today. As Frank mentioned in his comments, we are very pleased to report a strong fourth quarter as well as full year results. Pages 4 and 5 of the investor deck provided our earnings highlights for the fourth quarter and for the year ended 2020. During the fourth quarter, we earned $133.4 million, an increase of 31% over the fourth quarter of 2019. Earnings translated into a return on average assets of 1.11% and a return on average equity of 14.02%. EPS was up 42.3% reflecting the positive impact of higher earnings in our earlier share repurchases. I will touch on some of the drivers behind our fourth quarter results on the ensuing pages, but the increase in quarter-over-quarter earnings was primarily driven by a 29.3% increase in pre-provision net revenue. Credit quality remained strong with comparable quarter net charge-offs declining from 14 basis points to 7 basis points. For the full year 2020, we are in $477.7 billion. This translated into a return on average assets of 1.07% and a return on average equity of 12.96%. Earnings for the full year were up 4.4%, while EPS was up 15.7%, again, reflecting the positive impact of higher earnings and of share repurchases. Similar to the quarterly results, pre-provision net revenue growth was the primary driver behind improved year-over-year earnings, but the impact was partially blunted by $36.1 million reserve build related to uncertainty around COVID-19. On Page 6, we take a look at net interest income and net interest margin. As we stated at the end of the third quarter, while the expected net interest margin continue to decline, we expected it to decline at a much more modest pace. This is what happened as net interest margin declined by 4 basis points on a linked quarter basis compared to a 41 basis points dropped between the first and second quarter. While the margin did decline during the quarter, net interest income was up by just over $5 million, driven primarily by acceleration of SBA-PPP interest income as loan forgiveness has picked up.

[Operator:]

Your first question comes from the line of Brian Foran with Autonomous.

[Brian Foran:]

Hi, good morning. Maybe one to start, when you announced the CIT deal, you put up an illustrative $70 per share in 2022. I know it’s only been three months or so since then, but I wonder if you could just kind of talk anything that’s going better or worse than you expected relative to those original assumptions, and especially maybe in the context of the deposit growth and the credit quality performance? Is there anything that’s kind of maybe trending a little better than that $70 originally assumed?

[Craig Nix:]

Okay, Craig Nix’s here. We have not updated those pro formas and we’re going to – and we will be doing that here soon. We do acknowledge that the economic outlook in general has improved since we established our original marks and established those pro formas. We are also encouraged with CIT’s fourth quarter results. We did create our marks and assumptions based on the best information we had at the time in the fall of last year. And again, we plan to establish final marks as transaction close, and we’ll consider the facts and circumstances at that time, but right now we’re not ready to provide additional guidance. But we are – I can tell you, we are encouraged our eyes on the ball in integrating CIT. And we don’t think things have gotten any worse.

[Brian Foran:]

And maybe one follow-up or maybe a separate question, really. Probably the most common question I get on your stock is that you have a little bit of an unusual setup. And I hesitate to call it, things that could be shareholder friendly because ultimately stock that goes up and outperforms over time is the ultimate shareholder friendly setup and you guys have certainly delivered on that. So the existing setup has served you well over time. But maybe if I call it like shareholder broadening and things like the Class A, Class B, the level of the dividend, index inclusion, all the things that would go in that bucket, I wonder if you could just share your outlook, what things are under consideration and anything that’s not on the table or not subject to change over time? Just – if you think about the next two or three years, where could that shareholder broadening transition look like then?

[Frank Holding:]

Brian, this is Frank Holding. I think in terms of shareholder broadening, we look forward to having a much broader shareholder base with our friends. We’re combining with our friends at CIT. If you’re asking a question about, are we planning something that would change our share class structure A to B, we have no plans for that. But thank you for your compliment on our total shareholder returns. I believe we have done a reasonable job there and thank you for that recognition. You asked – part of your question also was about dividend. And I would say we have a long history of having a very modest dividend. And while we demonstrate that we move it nominally occasionally, I think we have no intention of changing our path from having a modest dividend.

[Brian Foran:]

Great. Thank you for taking the questions.

[Operator:]

We do have a follow-up question from Brian Foran with Autonomous.

[Brian Foran:]

I figured we’d just make it a fireside chat. I guess one other question I get a lot is on your owner-occupied CRE. I mean, certainly your ability to grow core loans right now is a pretty nice differentiator. I think maybe it’s not always as clear to people, the differences in the owner-occupied CRE both you have and even sometimes I kind of scratch my head on some of the opportunities you might be finding now. I wonder if you could just talk about, as you look at the recent owner-occupied CRE growth over the past three, six, nine months, and help us understand a little bit where that opportunity is coming from and what makes it different than the typical retail or hotel or whatever that might be a little bit COVID concerning right now.

[Craig Nix:]

I’m going to ask Jim Bryan, our Chief Credit Officer to address that question.

[Jim Bryan:]

Thank you, Craig. We have had nice growth this past year in that category. And our focus is on small business medical professional activities. And owner occupied as compared to non-owner occupied obviously is that credit that the business cash flow repays the credit. So it’s supporting the housing of the business that business needs to operate. We continue to see opportunity in that area across all sectors of including our medical and professional activity, small business primarily outside of that restaurant COVID impacted category and a lot of that has to do with consolidation within the industry merger and acquisition that creates opportunity for us. If you want to rephrase the question, where – if I haven’t answered properly, if you want to ask an additional question, I’d be glad to help.

[Brian Foran:]

No, I think that’s helpful. And I guess maybe the follow on, I mean, is it – if I think about that kind of stereotypical medical property, that is the owner-occupied CRE or a piece of it, is it about growth in the market right now? Or is it about gaining market share or new geographies, I mean, where are you finding the incremental growth in that portfolio?

[Frank Holding:]

I think it’s a little bit of both, because we are seeing that growth both in our, what we would consider our legacy footprint of North Carolina, South Carolina, Virginia and also in our other markets as well. So it’s a combination of gaining new clients along with growth within our existing client base where they continue to expand and grow. And so those opportunities are on both sides of the ledger.

[Brian Foran:]

And I don’t know if this is for Craig or Frank, but maybe on capital. I think you put out a 9.5% CET1 at deal close if I remember and I think that might’ve even fully loaded merger costs. So it might even been a little conservative. I guess on the one hand, earnings for both you and CIT are coming in pretty good, maybe that CET1 ratio the marks might improve, so maybe that CET1 ratio comes higher. But you did referenced the Tier 1 leverage being a little depressed right now by PPP, by cash on the balance sheet. As we think about post-deal close, which one do you think will be the limiting factor, number one? And then number two, when you do re-emerge into an excess capital position, how do you think about the relative attractiveness of maybe a buyback versus maybe another deal or other uses of capital? So I guess what’s the limiting factor posts the deal close and then, whenever you get back into an excess position what’s kind of the waterfall of priorities?

[Craig Nix:]

Sure. Very good question. With respect to both CET1 and leverage, we really don’t see either as a limiting factor. We are comfortable operating within those ranges or within that level. It falls in our ranges. So we’re comfortable in operating there. And we do see both rebounding nicely as we start the earning streams as the combined company starts to kick in. So we have no concerns in operating those levels. With respect to acquisitions and repurchases, our first priority in 2021 will be to integrate CIT. So you wouldn’t see certainly anything in that activity, in that right away. But we certainly see our long-term strategy is to be opportunistic with M&A opportunities. And that would include buying back our own stock.

[Brian Foran:]

If I could sneak one last one in, your noninterest bearing deposit, your demand deposit growth this year was pretty phenomenal on the order of 50% year-over-year. And I’m assuming PPP played a part in that, maybe some companies getting cash and not fully using it yet. I wonder if you kind of have any thoughts on the stickiness of those noninterest bearing deposits going forward and once you get fully past PPP, any kind of insights you have into how much of that might stick around or could you actually continue to grow from these levels?

[Frank Holding:]

Yes. Tom Eklund on our treasurer will address that question.

[Tom Eklund:]

Yes. I think you mentioned PPP growth. When we looked at the PPP program, we initially had basically one-for-one, we had $3 billion in checking growth resulting from the PPP program. However, when looking at by the end of the year, using sort of a watermark approach on that those balances were down to about $1 billion, up to $9 billion we grew for the year, about $1 billion came from that PPP program. When looking at it another way, of that $9 billion total deposit growth we did see $2.5 billion of that coming from new clients that was not clients going into 2020. So I think it’s a little bit of both, we’re seeing both existing clients, going back to Craig’s point earlier holding more cash on their balance sheet, which resulted in about $6.5 billion for the growth and then $2.5 billion, which was a very strong year for us, where we were able to capitalize on some opportunities to add new clients as well on top of that.

[Brian Foran:]

That’s great. Thank you for taking all my questions.

[Operator:]

Our final question comes from the line of Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch:]

Great, thanks. And maybe you could just expand a little on one of the points that you raised about the liquidity and how do you see it actually working in terms of the deploying your excess liquidity into CIT’s book. Like what’s the process, how long will it take? I assume that you’ll have to at some point get rid of some of the funding that they’ve got on the assets and can you just talk through like, what that will look like I guess from the second quarter on?

[Tom Eklund:]

Yes, sure. This is Tom Eklund again. I think the way we’re thinking about it is I think we’ve been very clear on sort of from a business perspective. We’re not looking to make any changes there. We’re excited about the opportunities from the direct banks and some of the broader client footprint that CIT brings to the table. However, obviously when looking at the balance sheet, I’m assuming we can accomplish the deal structure as proposed. The waterfall for us really starts with looking at some of those senior debt opportunities. Some of the non-core sort of funding pieces and see what we can do there to replay with, ideally with the low cost deposits. I mean, you mentioned where it’s 10 basis points total deposit cost for the year. So obviously that provides potential synergistic opportunities for us in the future as we’re able to reposition that. The maturity schedule of those mean that, not all that comes in early, it’s something that we’ll be facing over time as we start looking at those that instruments come up for maturity.

[Moshe Orenbuch:]

Thank you.

[Operator:]

I would now like to turn the conference to Mr. Tom Heath for any additional or closing remarks.

[Tom Heath:]

Angie, that’s all. We’re good and thank you very much. Thank you all for joining us.

[Operator:]

Thank you for participating in today’s conference call. You may now disconnect your lines at this time.