First Citizens BancShares, Inc. (NASDAQ:FCNCA) Q4 2023 Earnings Call Transcript
First Citizens BancShares, Inc. (NASDAQ:FCNCA) Q4 2023 Earnings Call Transcript January 26, 2024
First Citizens BancShares, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens Bancshares Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce the host of this conference call, Ms. Deanna Hart, Senior Vice President of Investor Relations. You may begin.
Deanna Hart: Good morning, everyone. Welcome to our fourth quarter earnings call. Our Chairman and Chief Executive Officer, Frank Holding; and Chief Financial Officer, Craig Nix, will provide fourth quarter business and financial updates today. During the call, we will reference our investor presentation, which you can find on our website. 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 you on Page 3. We will also reference non-GAAP financial measures. Reconciliations of these measures against the most directly comparable GAAP measures can be found in Section 5 of the presentation. Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of earnings transcripts provided by third parties. I will now turn it over to Frank.
Frank Holding : Thank you, Deanna, and good morning, everyone. I'm going to focus my comments today on our fourth quarter accomplishments and our 2024 strategic priorities before turning it over to Craig to cover our fourth quarter financial results and outlook for 2024. Let's start on Page 5. The fourth quarter capped off another exciting and successful year at First Citizens. We kicked off the year, 1 year into our successful merger with CIT and rang out the year combined with SVB, all as we celebrated our 125th year anniversary. I'm really proud of what we accomplished in 2023 and believe we have tremendous opportunity ahead of us. There is an undeniable sense of momentum at First Citizens and our ambition is to serve our clients in ways never imagined 125 years ago.
And we're well positioned for the future, thanks to continued focus on our clients and customers and our solid financial results. We delivered another quarter of solid financial results, driven by a strong net interest margin and adjusted efficiency ratio of 48%. We're pleased that both our general and commercial bank segments grew loans by double-digit percentage points in 2023. Due to strong deposit growth during the year, we improved our liquidity position significantly and ended the year with a strong capital position marked by a CET1 ratio of 13.36%. We recently announced 2 major additions to our team, which will help us to continue to successfully navigate the ever-changing landscape for large financial institutions. First, David Leitch was appointed to the Board of Directors in January.
David is a distinguished leader, executive and attorney and he brings extensive experience and valuable insight to our Board. He retired from Bank of America in 2022, where he served as Vice Chair from 2021, 2022, and its Global General Counsel from 2016 to 2021, and we're excited to have David join the Board. Second, we announced that Greg Smith will join our executive leadership team as the bank's Chief Information and Operations Officer. Greg joins our team from TD Bank Financial Group in Toronto, Canada, where he served as Head of Transformation and Corporate Operations. In this leadership role, he set the vision and built key capabilities to drive end-to-end transformational change. He was also responsible for managing corporate projects and technology platforms.
In the CIOO role at First Citizens, he will be responsible for the strategic enablement of technology, operations, cyber and data functions across the enterprise. Greg's extensive background and depth of experience will make him well suited to take on these important responsibilities, and we're excited to have him on board. Moving to Page 6. We remain intently focused on our core strategies, and I'll highlight a few of them for 2024. First, we remain focused on our clients and customers. Our combinations with CIT and SVB introduced us to new strategic markets that allow us to deliver expanded products and solutions across our diversified lines of business. We continue to support SVB's innovation economy clients and are focused on capturing synergies with the commercial businesses we acquired from CIT.
In the general bank, we have enhanced our deposit campaigns to continue to grow quality core deposits. As we noted last quarter, we continue to expand our wealth business across our geographic footprint and our expanding advisory and self-service options for our clients in that space. Developing our associates and adding talent to support growth remain important priorities. Our integration efforts are centered on ensuring that we retain our culture which emphasizes a relationship-based approach to banking, a client-centric customer -- client and customer-centric service delivery model, a long-term focus and strong risk management. Operational efficiency is very important to us. In addition to disciplined expense management, we are managing our balance sheet to optimize our liquidity and capital positions to support continued profitable growth.
Core deposit growth will be a major priority as we continue to increase deposits as a percentage of our total funding mix. We also continue to make regulatory readiness, a top strategic priority. We have made meaningful progress on our efforts thus far, but acknowledge we need to continue to refine and mature our processes to support the change in the company's size and complexity. We will be intently focused on these efforts in 2024. Now let's look at Page 7. We continue to make good progress on SVB's integration. Our efforts there have been extremely important, helping us retain clients, stabilize deposit balances and develop strategic priorities for the combined organization. As we discussed on the last call, we developed an integration road map, and we expect the majority of those efforts to be completed in 2024.
Our goal remains to support the acquired lines of business, maintain their unique capabilities, all while improving efficiency and risk management, positioning us for future growth. We acknowledge the headwinds in the innovation economy as well as the increased competition in the space. However, we remain encouraged by the strength and value the SVB franchise brings to its client base and its unwavering commitment to providing a relationship-focused service that is unmatched in the innovation ecosystem. To conclude, I am very pleased with our performance in 2023 and excited about growth opportunities as we enter 2024. Despite industry adversity in 2023, we were able to protect and grow customer relationships, stabilize deposits at SVB, grow core deposits and loans in our general and commercial bank segments and build upon our strong capital and liquidity positions.
I'd like to thank all of our associates for making 2023 a successful and positioning the bank for a successful future. With that, I'll turn it over to Craig Nix. Craig?
Craig Nix : Thank you, Frank, and thank you all of you for joining us today. I'm going to anchor my comments regarding our fourth quarter financial results to the takeaways outlined on Page 9. Pages 10 through 29 provide more detail supporting the results for your reference. Our return metrics remain solid and in line with our expectations. ROE and ROA adjusted for notable items from 13.53% and 1.28%, respectively. Compared to the third quarter, these metrics were impacted by an expected 3.9% sequential decline in net interest income driven by a reduction in accretion income and higher deposit costs. These impacts were partially offset by higher loan and investment portfolio yields, which benefited from maturity and replacement of lower-yielding assets during the quarter.
These higher yields offset by higher deposit costs drove net interest income ex accretion to be essentially flat to the sequential quarter. NIM contracted by 21 basis points during the quarter to 3.86% driven primarily by the same factors affecting the decline in net interest income I just discussed. Ex accretion, NIM declined by 5 basis points to 3.46%. Adjusted noninterest income was down modestly by 3% sequentially and majority of the decrease related to a decline in the fair value of customer derivative positions as a result of lower interest rates. Additionally, as we previously guided, our rental business experienced a decline in net rental income due to higher maintenance expenses. As a reminder, given strong utilization rates and positive repricing trends, we made the strategic decision to pull forward regulatory requalification programs in order to increase the number of available cars for leasing in 2024.
These updates position us well to continue to provide our customers with the equipment they need. While we expect some normalization to historically high utilization levels in 2024, we believe that our well-diversified fleet positions us well for the future. A bright spot in the quarter was an increase in capital market fees as our capital markets business had its highest figure on record as we were able to take advantage of market dislocation as many banks pull back. Adjusted noninterest expense was largely in line with expectations, increasing sequentially by less than 1%. We experienced expense growth during the quarter in consulting and project costs related to strategic investments we had delayed earlier in the year. As we noted on the third quarter call, consulting and project costs were lower in the second and third quarters as we assessed and reprioritized areas of focus heading into 2024.
In addition, fourth quarter expenses reflected our expanded CRA commitment as part of our integration efforts to assist communities in Northern California and Eastern Massachusetts. These increases were almost completely offset by lower FDIC insurance and personnel expenses. We remain very cognizant of the importance of expense discipline as we head into 2024, given headwinds to net interest income facing us and many in the industry. Credit continues to normalize and traced with our expectations for the quarter with net charge-offs coming in at the lower end of our guidance range of 50 to 60 basis points. Net charge-offs were $177 million during the quarter, representing a ratio of 0.53% of average loans, basically flat compared to the third quarter.
Losses were largely in the same portfolio where we experienced charge-offs in previous quarters. Within the commercial bank, net charge-offs were concentrated in the general office and small ticket equipment leasing portfolios. We also experienced an idiosyncratic loss in the energy portfolio this quarter that we believe is not indicative of broader terms in the portfolio. While we continue to see stress in our general office portfolio in the commercial bank due to continued inflationary pressure, elevated interest rates and market dislocation, we have limited exposure which totaled $1.2 billion or roughly 1% of loans at the end of the fourth quarter. As a reminder, this portfolio is concentrated in Class B repositioned bridge loans and is where we have seen deterioration in past dues, criticized assets and charge-offs.
General office CRE continues to be carefully monitored, and we are carrying an ACL on these loans of 9.37% compared to 4.77% on the overall general office portfolio. Net charge-offs in the SVB segment remained elevated due to continued stress in the investor dependent portfolio, but did decline sequentially by $35 million. At quarter end, this portfolio totaled $4.3 billion or approximately 3% of total loans with the highest risk category, early-stage companies totaling $1.4 billion or just over 1% of total loans. The allowance for credit losses increased sequentially by 5 basis points to 1.31% due to some adverse credit migration in our commercial portfolio and higher specific reserves on loans individually reviewed. Under the current macroeconomic backdrop, we continually look for indicators of portfolio stress by reviewing delinquency trends and grading migration by industry and/or geography to identify areas of concern.
While credit quality remains within our risk appetite, we anticipate elevated net charge-offs in the innovation, general office and equipment finance portfolios this year. We have taken proactive steps to help limit losses, and we feel that we are properly balancing our growth and underwriting strategy, emphasizing opportunities to build upon our expertise and provide an appropriate risk-adjusted return. Now moving to the balance sheet. Loans were up $100 million over the third quarter. The General and Commercial Bank segment grew loans by $1.3 billion and $716 million respectively, while the SVB segment experienced a decline of just under $2 billion. In the General Bank, growth was concentrated in small business and commercial loans in our branch network as we continue to grow our customer base and deepen relationships.
We are focused on executing our strategy of growing our customer base and supporting existing clients where we have a relationship and a proven history. We believe this relationship banking approach will continue to serve us well. In the Commercial Bank, Growth was driven by strong production in our industry verticals and middle market banking. Within the industry verticals, growth was concentrated in TMT, health care and energy. Growth in our TMT vertical continues to be driven by strong demand for new data centers. Our energy vertical is benefiting from the power infrastructure and renewable energy markets. As for middle market, the team continued its expansion strategy in 2023, adding bankers in Boston, New York, Santa Monica, Atlanta and Dallas, contributing to increased loan production during the year.
The reduction in SVB segment loans was driven primarily by a decline in global fund banking, but to a smaller extent we saw a reduction in our technology and health care banking business. Despite a slowdown in private equity and venture capital markets, we are encouraged by strengthening loan pipeline in Global Fund Banking, which expanded by approximately 40% [indiscernible] quarter as the team continues to support our existing clients as well as add new relationships. Global Fund Banking closed on $4.8 billion in new deals in the fourth quarter, a 129% increase over the third quarter. While utilization room is depressed due to the macroeconomic environment, we have the largest finance team in the market and total approved exposure on the loan book has stabilized and has started to ramp up as the team continues to execute.
We remain the primary banking partner for the vast majority of our GFB clients, which positions us well to ramp up both loans and deposits quickly when the macroeconomic environment improves. The decline in technology and health care banking was driven by paydowns outpacing new fundings as the private market investment landscape continues to face headwinds resulting in a difficult exit environment, lower fundraising numbers and fewer deals. Deposits were down a modest 0.3% sequentially driven by a $1.5 billion decline in the SVB segment due to continued client cash burn and muted fundraising activity. Importantly though, investment inflows increased from the third quarter, while outflows from burn declined, which helped us beat our third quarter forecast of an approximate $5 billion decline.
The branch network declined by $492 million due to expected seasonal outflows. These declines were partially offset by a $2 billion increase in direct bank deposits. While the direct bank channel is higher cost and now accounts for 26% of our deposit base, it is an additional lever we continue to use to remain resilient through a turbulent environment and is a strong source of insured consumer deposits supporting our liquidity base. It also enabled us to pay down higher-cost FHLB debt earlier in the year and most recently redeemed some of our smaller subordinated debt issuances given excess capital and liquidity positions. Moving to capital. We continue to maintain a position of strength as our CET1 ratio increased by 11 basis points sequentially and ended the quarter at 13.36%, which remains well above our internal target range of 9% to 10%.
The impact from our loss share agreement continues to provide for higher capital levels and contributed approximately 120 basis points to our CET1 ratio this quarter, down from 140 basis points last quarter. Even without this benefit to our ratios, we remain well above our target capital ranges and anticipate operating at an elevated level in the near term. We are currently in our annual capital planning process which includes reassessment of our goals and targets for consideration of both SVB and future regulatory changes. This process includes a full stress test, including the acquired SVB portfolio. Additionally, we continue to monitor the proposed Basel III rules but remained well positioned for any changes, including the inclusion of AOCI marks.
Our CET1 ratio at the end of the fourth quarter was estimated at 11.8% when these AOCI marks are included and the impact from the loss share agreement is removed. We have confidence in the rate that we are accreting capital and our absolute capital levels relative to our internal targets, our capacity to handle balance sheet growth, our SVB integration efforts and our positioning with respect to the Basel III end game. Therefore, we do anticipate that our 2024 capital plan will include a share repurchase plan, which once approved, will commence in the second half of this year. We also anticipate beginning a programmatic issuance of long-term debt in 2024 to ensure compliance with the proposed long-term debt requirements by the expected phase-in deadlines.
We expect our binding and strain to be risk-weighted assets for long-term debt and estimate our long-term debt shortfall to be approximately $8 billion to $11 billion. While this strategy is partly dictated by regulatory requirements, we anticipate these funding actions along with our deposit growth strategies will support the replacement of some portion of the FDIC purchase money note, which matures in March of 2028. I will close today on Page 31 by discussing our first quarter and full year outlook for 2024. We anticipate that loans will remain flat to modestly increase in the first quarter, driven by low single-digit percentage Commercial Banking segment due to continued strong performance in our industry verticals. We anticipate SVB loan balances to remain flat in the mid-$50 billion range.
As mentioned earlier, the Global Fund Banking business is benefiting from a strong pipeline due to being back in the market for clients during the second half of 2023 following the pause prior and immediately after the acquisition. This growth, however, will continue to be pressured by headwinds in the private equity and venture capital markets. We also anticipate a modest decline in the technology and health care banking business as lower levels of new fundings and line draws coupled with increased loan payoffs result in loan portfolio contraction. Looking at the full year, we expect loans to end in the $139 billion to $143 billion range or mid-single-digit percentage growth. We foresee increased volumes in our Global Fund Banking business as a result of increased outreach beginning in the second quarter of '23 and our increased pipeline.
Additionally, we continue to see strong growth in our general and commercial bank segments. However, we do expect moderation to mid-single-digit percentage growth in these segments in 2023. Turning to deposits. We expect a low single-digit percentage point increase in the first quarter, primarily due to growth in the branch network driven by leveraging new products and initiatives to deepen client relationships that emphasize deposit growth as well as seasonal growth prior to April tax outflows. We are also focused on increasing our customer base by building deposits through proactive sales associate outreach, centralized marketing campaign and increased community connectivity. For the full year, we anticipate low to mid-single-digit percentage growth primarily related to growth in the general bank previously discussed and a mid-single-digit percentage growth in SVB deposits as market activity and the impacts of customer outreach begin to help produce deposit growth in the back half of 2024.
With respect to SVB deposits, we expect the venture capital environment to remain challenging, particularly in the first half of 2024. Since April, we've seen SVB deposits remain largely stable despite continued cash burn exceeding funds sourced from fundraising activities. Encouragingly, we also added over 60 new primary operating business clients between April and November of 2023. We believe our emphasis on client engagement, coupled with better fundraising in the back half of 2024 will help propel modest growth in this segment. We'll continue to raise deposits in our direct bank. However, given the excess liquidity on our balance sheet, this pace will be moderated from the growth we experienced in 2023 with a growth rate of less than 10% anticipated in the channel.
This obviously could change if we have unexpected deposit outflows elsewhere. Our interest rate forecast follows the implied forward curve, which includes 6 rate cuts in 2024, with the effective Fed funds rate declining from 5.5% to 4% by the end of the year. The implied curve currently diverges from the Fed dot plot expectations, which includes 3 rate cuts with effective Fed funds rate declining to 4.75%. It is our belief that we will see closer to 3 or 4 rate cuts given the continued strength in the labor market and the fact that inflation remains stubbornly above the Fed's target rate. Therefore, for our net interest income guidance, we provide a range with the top end assuming 3 rate cuts and the low end assuming 6 rate cuts. For the first quarter, we expect net interest income to be down in mid-single-digit percentage points range with and without accretion.
The decline in headline net interest income will be driven by the impact of lower accretion and higher deposit costs, only partially offset by higher investment yields. For the full year, we expect net interest income in the range of $6.9 billion to $7.1 billion, with the low end assuming fixed rate cuts and the high end, assuming 3 rate cuts. In either case, we project accretion income close to $485 million for the year, which is a decline from $725 million in the last 3 quarters of '23 as loan discounts on some of the shorter portfolios have been fully recognized. Isolated net interest income for the second through fourth quarter period to take into effect the timing of the SVB merger with 6 rate cuts, we expect headline net interest income to be low double digits percentage points and ex accretion by high single-digit percentage point.
With 3 rate cuts, we expect headline to be down high single-digit percentage points and ex accretion down low to mid-single-digit percentage points. We anticipate our full cycle data to be approximately 44%, which is materially in line with our previous estimate of 43%. Moving on to adjusted noninterest income. We expect the first quarter to be relatively in line with the fourth quarter in the $440 million to $460 million range. Looking at the full year and isolating for only the second through fourth quarters, we anticipate being flat as continued growth in net operating lease rental, wealth management and mortgage income are offset by a decline in client investment fees due to anticipated lower -- the anticipated lower interest rate environment.
We expect full year noninterest income to be in the range of $1.8 billion to $1.9 billion. As Frank mentioned in his comments, we are excited for the continued build-out of and momentum in our wealth platform and will look to fully convert the legacy silicon private businesses in 2024. Moving to expenses. We expect a modest increase from the fourth quarter due to seasonal increases in personnel expense from higher benefits and incentives and software costs due to continued build out of product capabilities that will help us be a premier partner in the innovation economy in areas such as cash management, FX and payments as well as continued investment in our wealth capabilities that will help us sell deeper into our new national reach. Furthermore, we will continue the modernization of our platforms in consumer, equipment finance and factoring to ensure we are well equipped to scale in the future.
We also have a few regulatory projects we will be completing this year related to ISO payments and Dodd-Frank. In addition, as Frank alluded to earlier, we were focused on building out our capabilities in the large bank and regulatory spaces which will require some focused builds. As of this -- all of this will be partially offset by continued acquisition synergies. Looking at the full year and isolating for the second through fourth quarters, we anticipate noninterest expense to be flat to up low single digits percentage points which equates to an adjusted noninterest expense target for the year of between $4.6 billion and $4.7 billion. While we expect to achieve the lower 25% band of our cost saves goal by the end of 2024, these savings will be offset by continued capability build out for large bank expectations as well as costs related to the strategic priorities I just mentioned.
Our adjusted efficiency ratio is expected to be in the low 50% range in 2024, up slightly from 49% for full year 2023. On credit, we anticipate net charge-offs to remain in the 50 to 60 basis points range in the first quarter, given continued pressure in the general office real estate, small ticket equipment leasing and innovation portfolios. For the year, we expect net charge-offs in the 45 to 55 basis points range as we expect some of the pressure in the investor dependent portfolio to soften in the back half of the year as well as some of the changes we made in underwriting small ticket leases in 2022 began to favorably impact the net charge-off ratio. For both the first quarter and full year of 2024, we expect our tax rate to be in the 27% to 28% range, which is exclusive of any discrete items.
In closing, we have accomplished a lot in 2023, including the transformational acquisition of SVB, which brought significant scale to our business and new product offerings through our geographically diverse client base. While economic and geopolitical uncertainties remain, we believe the strength of our diversified businesses, our strong capital and liquidity positions and our hard-working and dedicated associates will help us continue to take care of our customers and clients and deliver meaningful returns to our shareholders. As we've proven during previous economic downturns, our business model is resilient and recession-ready in large part due to our disciplined through-the-cycle credit underwriting standards and robust risk management infrastructure.
In 2024, we remain focused on allocating capital where we can drive deeper relationship business with the goal of continuing to deliver top-tier financial returns. I will now turn it over to the operator for instructions for the question-and-answer portion of the call.
See also 10 Best Tech Stocks for the Next 5 Years and 10 Stocks Receiving a Massive Vote of Approval From Wall Street Analysts.
To continue reading the Q&A session, please click here.
