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spk11: So we're confident with this recently, the combined organization is very well positioned financially and is operating from a position of strength. In addition to significant TBV accretion, our liquidity remains strong, driven by conservative asset liability management and was enhanced by this transaction with the creation of on-balance sheet funding and access to significant contingency funding. Turning to legacy for citizens performance, we delivered another quarter of deposit and loan growth as positive momentum continued across all lines of business. The strong quality loan growth we've experienced this quarter in tandem with the positive asset repricing that we experienced throughout 2022 help generate favorable operating leverage year over year. We, like most companies, face some economic headwinds, including the increasing possibility of recession. However, we have not seen meaningful increases of stress in our credit portfolio. Overall, we remain encouraged by the resiliency of our clients in the face of elevated inflation and rising interest rates, and we look forward to continuing to support them. Turning to page six, we remain focused on the long-term sustainable shareholder value driven by our core strategic priorities, which haven't changed other than the addition of a new strategic priority related to the acquisition of SVB. Long-term benefits can be achieved by harnessing SVB's legacy businesses and leveraging these to attract and retain new clients to our franchise. SVB continues to support its clients day in and day out. In fact, several clients recently announced new deals with SVB that are supporting the growth of their businesses. In addition, SVB's premium wine division currently has all-time high loan outstandings. SVB's Community Development Finance Group closed its largest ever affordable housing facility, and this week is celebrating the grand opening as the lead construction lender of new housing in San Francisco for formerly unhoused military veterans. To successfully integrate SVB, we are focused on the following. The first, running SVB as SVB to maintain the competitive advantage it has in the innovation economy, while at the same time infusing the cost discipline and risk management that has defined First Citizens for 125 years. Secondly, continuing our high-touch approach, demonstrating to legacy SVB clients that we're committed to helping their businesses succeed. Embracing our SVB colleagues to create synergies that enhance our client relationships and further drive the innovation of our products and services. And lastly, continue to articulate our vision with SVB associates to proactively retain key revenue generating employees and the staff to support them. While we are clearly in the early days of the SVB acquisition, We already have begun to integrate our teams and we continue to actively prioritize our efforts to support SVB and its clients. As a combined team, we remain committed to our long-term strategic focus, our relationship client-focused model, delivering solid results while operating with strong liquidity and capital positions, and effectively managing risk within our defined risk appetite. I would like to close my comments by recognizing all our associates at FCB and SVB for coming together over the past month to move us forward as a combined company. We still have work to do, but your hard work provides us the real opportunity to unlock the strategic and financial value of this partnership. And I'll turn it over now to our President, Peter Bristow, to further discuss areas of focus on the SVB acquisition. Peter?
spk13: Thank you, Frank, and good morning, everyone. On page 8, I want to touch on the potential growth opportunities the SVB combination unlocks for First Citizens. With the addition of approximately $100 million in total assets, SVB adds meaningful financial scale to First Citizens. While we did experience some level of deposit outflow since the acquisition date, about half of which was expected on day one, we have begun to see some signs of stabilization. This acquisition built on First Citizen's solid foundation by adding significant scale, geographic diversity, exceptional talent, and most importantly, valuable solutions for clients throughout their financial life cycle. First, the addition of SVB meaningfully advances our presence in the innovation and technology sectors. SVB's historic leadership position in these sectors ensures for citizens is better positioned to serve venture-backed companies and tech startups in our backyard and across the nation. Second, it opens new business opportunities while driving incremental top-line growth. By leveraging the existing offerings of First Citizens and SVB, we can better serve our combined client base. Third, SVB Private has enormous potential to accelerate the growth of our wealth business, adding new digital capabilities, talent, and solutions to our already growing franchise. Fourth, SVB increases our presence in attractive, high-growth markets on the West Coast and in the Northeast. positioning us to capture new clients while diversifying our footprint. Finally, as Frank mentioned, this acquisition is compelling financially, both immediately and in the long term. On page nine, we dive deeper into the entities we acquired, the SVB commercial and private banks. The commercial arm of SVB is the banking leader in the innovation economy. with a powerful network of relationships across entrepreneurs, investors, and influencers. Their focus on technology, life sciences and healthcare, and global fund banking combined with their best-in-class model for delivering to those clients truly sets them apart from the rest of the industry. SVB provides tailored commercial banking solutions to clients at every life stage, from startup and early-stage companies to venture-backed growth companies on up to large corporate entities. These solutions include business banking, treasury services, card, digital banking, FX, liquidity management, and venture debt through the various stages, as well as a comprehensive package of banking products to support venture capital and PE fund clients. SVB Private is an established wealth advisory franchise with private banking solutions tailored to the needs of innovation clients. SVB serves these clients both professionally and personally. SVB's private wealth capabilities include lending solutions to address equity compensation, concentrated stock positions, and non-liquid assets. SVB Private also works with premium wine producers to provide working capital and then your loans. I'm not going to cover page 10 in detail, but we have included it for your reference to provide a snapshot of all the First Citizens Bank business segments along with on and off balance sheet financial data as of March 31st, 2023. Turning to page 11, while we are in the early stages, our integration efforts are underway. Our approach is to seek out the best minds and most experienced people who can develop our go-forward business model. We are formalizing integration plans that we will share in the future. Meanwhile, we are diligently working to address our immediate priorities and goals, which include, first, maintaining our position as a key partner in the innovation economy. We are committed to continuing to help innovators, enterprises, and investors move bold ideas forward. Despite the recent turmoil, we believe there are long-term secular tailwinds supporting the technology and healthcare sectors that will continue to drive future growth. Second, supporting clients and working to regain trust. Our goal is to maintain seamless functionality that SVB clients are accustomed to and have come to expect. We have already met with many key clients to hold initial discussions around the transition and reinforce our commitment to them. We plan to continue that communication and ensure that feedback can be received quickly and effectively addressed. Third, retaining key revenue generating talent and staff to support them. One of the most important priorities has been the retention of key SBB talent. we have provided a budget for meaningful amount of retention to retain this key talent. As Frank mentioned, we have had some attrition since this acquisition date. However, we have been pleased that our succession plans, internal talent pool, and external recruiting resources have allowed us to backfill key positions. On page 12, we show the composition of our loan portfolio at quarter end, including the impact of the SVB acquisition. The transaction provides diversification across our loan portfolio. In this way, Legacy SVB's commercially focused portfolio complements First Citizen's client strategy by bringing on strong private equity and venture capital relationships. Moving to page 13, we provide an overview of the Legacy SVB credit portfolios, and they are divided into risk categories. The acquired portfolio has a low loss history, which aligns well with First Citizens' credit culture and risk management strategy. As you can see, approximately 70% of SVB loans fall into the low credit risk portfolios, including Global Fund Banking and the Private Bank. We will continue to manage these portfolios prudently and effectively while maintaining consistent and strong underwriting standards. The efforts already executed by the legacy SVB team in this area have positioned the bank well from a credit quality standpoint. On page 14, we show our deposit composition at quarter end, including the impact of the SVB acquisition. One of the most immediate benefits is the shift in deposit mix, as 62% of SVB's deposits are non-interest bearing, bringing the consolidated non-interest bearing ratio to 39%. up 11% from what we reported in the fourth quarter. Further, the transaction provides a more geographically diverse deposit base, which we believe will help position us to compete in the current deposit rate environment by growing our core deposit base. We continue to focus on client outreach, and I believe that some of the legacy SVB clients will move business that left back to us as depositors realize their deposits are safe with First Citizens. In the meantime, we've successfully been leveraging our nationwide digital direct bank to quickly add balances through competitive product offerings. I will now turn it over to Craig Nix to discuss the preliminary purchase accounting in our first quarter financial results. Craig.
spk14: Thank you, Peter, and good morning, everyone. Page 17 provides a view of the acquired balance sheet prior and post-purchase accounting impact. After preliminary purchase accounting, we acquired approximately $107 billion in assets comprised of $35 billion in cash and $71 billion in loans. We assumed $56 billion in deposits and $35 billion in borrowings. The FDIC received a value appreciation instrument payable in cash of up to $500 million. On March 28, the fdic exercised its options option and in april we paid the fdic 500 million dollars page 18 shows that the acquisition resulted in significant pdv accretion starting with the standalone for citizens tangible book value of 590 dollars per share estimated day one accretion was 112 percent or an increase of 9.6 billion dollars to $1,250 per share. After the impacts of CDI in Day 2 CECL, estimated accretion was 106%, or an increase of $9.1 billion to $1,214 per share. Assuming fully phased-in acquisition costs, estimated at $650 million, PBV accretion was 100%. Continuing to page 19, pre-tax purchase accounting adjustments for $2.8 billion. The most significant adjustment included a 3.9% credit and liquidity mark on loans. After consideration of other adjustments, including $253 million for commitments to lend and $230 million for CDI, the asset discount of $16.45 billion was reduced to $13.6 billion. After recognizing the $500 million paid to the FDIC, we recognized an after-tax gain of $9.8 billion on the acquisition. Our current estimate for the PCD-ATL gross up is $200 million, and our Day 2 CECL non-PCD provision is $462 million. In addition to day two provision, we recorded $254 million in provision expense for commitments to lend, bringing the after-tax of day two provision expense to $536 million. On page 20, we present the estimated impact of preliminary purchase accounting marks on EPS, NIM, and income statement line items. Please note that the fair value adjustments presented exclude fair value adjustments that will not impact future earnings. The impact of the fair market value adjustments is estimated to be accretive to 2023 EPS by $28.95 and to 2023 NIM by 36 basis points. The day two CECL adjustments for non-PCD loans and reserve for unfunded commitments will have a negative impact on estimated 2023 EPS of $26.97. Page 21 shows that of the $71.3 billion in loans acquired, approximately $2.5 billion were determined to be PCD loans. After recording the ACL on PCD loans totaling $200 million, we estimate $2.6 billion of interest income accretion to be recognized over the remaining lives of the loans. The ACL ratio on the acquired SVB loans is 1%, resulting in a combined ACL of $1.6 billion, or 1.16% of total loans at March 31, 2023. Next, on page 22, it was especially important to us that post-acquisition, we maintain a forecast balance sheet marked by strong liquidity, both on and off balance sheet, manage to a low risk appetite with respect to our investment portfolio, maintain strong credit quality, and provide appropriate ACL coverage. All capital ratios are above our current target operating ranges, the CET1 at 12.53%, When adjusting the CET1 ratios for AOCI unrealized losses on our securities portfolio, it drops to 12.1%. And when further adding unrealized losses on the HTM portfolio, it drops to 11.4%. Both of these pro forma ratios remain above regulatory well-capitalized limits and our internal target ranges. We have strong on and off balance sheet liquidity positions, totaling $51.4 billion in cash and high-quality liquid securities and $79.5 billion in contingent sources. Total liquidity covered uninsured deposits by 198% as of March 31 and by 219% as of April 30. Although net charge-offs increased in the first quarter, credit performance was strong and we remain well-reserved. Now turning to first quarter results, I'm going to anchor my comments to the takeaways on page 24. In the interest of time, I will not cover pages 25 through 41 in detail, but have included them for your reference. We posted another quarter of strong reported and adjusted financial results. Reported net income for the quarter was obviously boosted by the gain on acquisition, but we were pleased with adjusted net income as well. Adjusted year-over-year PPNR increased by 35% and by 21% without the first quarter impact of SVB. Linked quarter net interest income grew and margin expanded by five basis points to 3.41%. Non-interest income held up well, increasing over the linked quarter with and without SVB's contribution. Our efficiency ratio improved on a year-over-year basis but was up slightly from the linked quarter due to higher seasonal personnel costs and the industry-wide increase in FDIC assessment rates. Overall, we feel good about where we are on expenses. Legacy FCB loan and deposit growth was strong during the quarter. Annualized loan and deposit growth was 7.7% and 6.3% respectively. Moving to credit, even though we are seeing an uptick in net charge-offs towards more historic levels, We are pleased with our credit quality and the strength of our clients. Outside of the general office and small ticket equipment leasing, we have not seen new areas of stress in the portfolio. Our non-accrual ratio declined by 26 basis points with the SVD acquisition and five basis points without it. As I mentioned earlier, our capital position remains strong. We are experiencing a burndown of AOCI losses as our securities portfolio matures and rates have come off recent highs. Starting on page 43, I will highlight our financial areas of focus. First, we are focused on maintaining a solid base of core deposits to fund our balance sheet. General bank deposits totaled $86 billion Over 60% of our total deposit base consisting primarily of our branch network and our nationwide direct bank. 80% of these deposits are insured or collateralized, and the average account size is $36,000. The deposits noted below the general bank or in our commercial bank from legacy CIT and represent a much smaller portion of our total funding. Corporate segment deposits consist primarily of broker deposits. SBB deposits of $49.3 billion represented 35% of our deposit base and have an average size of $360,000. 14% of these deposits are insured. Putting it all together, 53% of our deposits were insured at March 31, 2023. Continuing to page 44, we show weekly deposit trends post-acquisitions. On the SVB side, deposits have grown by $2.6 billion, primarily in the direct bank. On the SVB side, after seeing initial outflows of $7 billion and a $5 billion outflow that was expected at the acquisition date related to a sweet repo product coming back online, deposit balances have begun to stabilize. We are monitoring deposit outflows at SVB closely and will continue to use our direct bank to offset future outflows of deposits at SVB. Page 45 shows that as of March 31 and April 30, liquidity covered our uninsured deposits by approximately two times. On pages 46 and 47, we highlight our total CRE exposure which was under 12% of total loans at quarter end. General office loans total $2.8 billion or 2.1% of total loans. Page 47 includes information on the general office portfolio, which is well diversified geographically with limited exposure to some of the hardest hit markets, including San Francisco, Chicago, and New York. As we shared on our last call, Of the $2.8 billion in general office loans, our largest area of concern is in our commercial bank with general office loans totaling $1.3 billion or less than 1% of total loans. This portfolio consists of Class B, reposition, and bridge loans, and it's where we have seen deterioration in past dues, criticized assets, and charge-offs. We are carrying an ACL on these loans of 5.23% versus an ACL on the overall general office portfolio of 2.67%. The general office loans in the commercial bank were originated with strong loan-to-values in the 60% to 65% range. We acknowledge that current market conditions could bring these higher depending on the location and specific properties. As these loans approach maturity, we are working with our clients on an individual basis to assess potential concerns and ensure we are addressing them quickly. So while we expect some additional downward migration in this portfolio, we do believe the issues are manageable. Most of the remaining general office exposure is in the general bank. This portfolio is much more granular in nature with a smaller average loan size, and we have to date not seen deterioration. To close the loop on this, we are not originating new loans in this space and are diversifying to other performing property types. On pages 48 and 49, our investment portfolio strategy is to purchase stable cash flowing securities that act as a source of liquidity and do not take on significant duration risk. This is evidenced by the short duration of our portfolio of approximately 4.2 years and importantly extending to only 4.3 years in an up 100 basis points rate shot. 95% of the portfolio is directly or indirectly guaranteed by the U.S. government. Turning to page 50, we expect to receive 22% of our investment portfolio cash flows over the next seven quarters. Over that same time horizon, we expect a 39% burn down of our investment portfolio-related AOCI losses. On page 51, our interest rate sensitivity increased during the quarter due to the SVB acquisition. The primary drivers were the fixed-rate purchase money note, increasing liability duration, while variable rate loans and cash acquired shortened asset duration. We are prioritizing the management of liquidity risk and are keeping a larger cash balance as a percentage of assets due to the current uncertainty in the banking environment. The main drivers of our asset sensitivity are our variable rate loan portfolio, which represents approximately 65% of total loans, and our cash position of $38 billion, equating to 20% of earning assets as of March 31, 2023. On page 52, we provide information on our actual and expected deposit data. 58% of our deposits exhibit lower betas, and 42% exhibit moderate to higher betas. Our cumulative data through the first quarter was 22%, in line with our projection last quarter. We expect cumulative data to increase to 28% by the end of the second quarter, and deposits continue to catch up from recent rate increases. Over the interest rate hiking cycle, we forecast our cumulative beta will be in the 30 to 35% range. Turning to page 54, I'll conclude with our outlook for the remainder of 2023. While we believe that our projections are achievable and reasonable, As we prepared our outlook, we noted several sources of uncertainty surrounding it. Number one, we are a little over a month into the acquisition of SVB, so we still have a lot to digest there. Number two, we assume any recessionary impacts will be mild. Number three, the impact of policy changes, including the path of the Fed funds rate and the pace of quantitative easing, could impact our projections. And four, the impact of competition and client behavior could drive our deposit betas higher. The first column on the page lists our first quarter of 2023 results. The numbers for non-interest income and expense are adjusted for notable items. Column two provides our guidance for the second quarter of 2023, and column three for the full year. On loans, we expect a low single-digit percentage decline in the second quarter as paydowns in the global fund banking business from slowed market activity are offset by annualized low to mid-single-digit percentage growth in legacy FCB. We expect the same trend to continue through year-end, with the legacy FCB portfolio moderating to approximately $60 billion and legacy FCB achieving mid-single-digit percentage growth. For deposits, we expect a low to mid-single-digit percentage decline in the second quarter. While we are encouraged by the stabilization of SVB deposits since the first week of April, we are projecting an $8 billion decline through the end of the year. With lower absolute levels of funding in the marketplace, we anticipate that SVB clients will continue to experience some level of cash burn. We are expecting this to be offset by $10 billion in growth in our direct bank. With respect to SBB deposits and loans, we have engaged in an expansive calling effort to reach out to over 30,000 clients. While it is early, we have seen initial positive results in the first clients we have contacted. We are cautiously optimistic that we will not see the level of loan or deposit runoff included in our projection, but this will depend on the extent to which clients return or the absolute funding in the marketplace returns. If this happens, We feel there could be upside to our projection. Our interest rate forecast follows the implied forward curve. We forecast that the Fed funds rate has peaked at the 5 to 525% range. From there, we anticipate 325 basis points rate cuts in the back half of the year. The SVB acquisition will be accreted not only to net interest income given the sizable balance sheet, but also to net interest margin. We expect an estimated purchase accounting impact to net interest income of $604 million and an accretive impact to NIM of 36 basis points in 2023. While we are not providing 2024 guidance at this time, we do expect the pace of accretion to moderate in 2024 as detailed previously in the purchase accounting slides. If rate cuts materialize on the back half of the year, we do anticipate net interest income declining from current levels. We anticipate full cycle beta to be 31% up from our previous estimate of 25% due primarily to declines in non-interest bearing deposits as well as volume increases in the more extensive direct bank channel. We expect second quarter annualized net charge-offs to be in the 35 to 45 basis points range. The uptick is primarily related to a $45 million charge-off in the SVB portfolio that was fully reserved for in day one purchase accounting. We view that charge-off as idiosyncratic in nature. Absent that charge-off, we would expect net charge-offs to be in the mid-20s annualized. For the full year 2023, we expect net charge-offs in the 25 to 35 basis points range. On an adjusted basis, we expect $430 to $460 million in non-interest income in the second quarter. We expect legacy SVB to generate close to $130 million to $150 million per quarter. On an apples-to-apples basis of the SBB businesses that were acquired, this was closer to $300 million per quarter in 2022, so we are expecting the run rate to be slightly less than half of that given client attrition, especially in some of the off-balance sheet suite products. With respect to legacy for citizens, we still have momentum in our wealth, merchant card, and rail businesses. While maintenance expenses are expected to increase in rail, utilization is almost 98%, and in the past two quarters, renewal rates have been at or above 130% of the previous quarter's rate. Non-interest expense projections do not include expected acquisition expenses related to SVB, estimated at $650 million, with 50% recognized over the remainder of 2023, and the other half in 2024. We expect non-interest expense in the range of $1.25 to $1.3 billion in the second quarter. The SBD pre-merger annual run rate was approximately $2.6 billion or $650 million per quarter. We anticipate 25% to 30% cost synergies to be in the run rate by the end of 2024, equating to $650 to $780 million. Most of the synergies will be driven by consolidation of redundant or reduplicate back office processes and systems, as we do remain focused on supporting the existing front line of business and their clients. On an FCB standalone basis, we expect expenses to be down low single-digit percentage points compared to the first quarter due to elevated seasonal benefits partially offset by merit increases as well as heightened marketing expenses related to the digital bank. We expect to maintain an efficiency ratio in the mid-50s with upside to the low 50s if rates remain higher for longer. If rates begin to decline as forecasted, we feel comfortable in our ability to maintain it in the mid-50s as decreases in net interest income are offset by recognition of cost synergies. And finally, we expect our corporate tax rate to be in the 26.5% to 27% range. an increase from the previous range of 24.5% to 25%, as our revenue distribution is more heavily weighted to higher tax jurisdictions such as California, and our pre-existing tax benefits are spread amongst a larger pre-tax income base. Page 55 shows our EPS forecast for 2023 and significant EPS accretion from the SVB acquisition. The forecast does not include the impact of acquisition expenses. It assumes that 50 to 60% of the cost synergies are in the run rate by the end of 2023. Starting from the left side of the page, we begin with FCB's estimated standalone 2023 EPS range of $85 to $90 per share. Moving To the gray bar on the right, the impact of the base combination with SVB prior to cost synergies adds $27 to $31 per share, bringing the range for the base combination EPS to $112 to $121 per share. Continuing to the right, cost synergies in 2023 are estimated to add another $9 to $11 to EPS. Note that if we were to assume estimated fully phased-in cost energies in this projection, they would be accreted to EPS by $33 to $39 per share. The next two gray boxes to the right show that purchase counting impacts are accreted to EPS by $31 per share and that amortization of CDI reduces that impact by $2 per share. Actual results could differ materially, particularly with respect to accretion, depending on loan prepayment. The $31 per share assumes loans pay off based on contractual maturities. Thus, we end at an estimated range for EPS between $150 and $161 per share, representing 67% to 89% accretion. With fully phased-in cost synergies, accretion would be between 93% and 122%. Note that the EPS walk includes estimated SBB operating results from the acquisition date through December 31, 2023. And with that, I will turn it back over to Frank for closing comments.
spk12: Wow. I know we've thrown a lot at you today, but
spk11: I'd like to sort of end with some takeaways, call it sort of headlines of all the material that we've thrown at you this morning. First of all, the SBB acquisition was a home run financially in terms of immediate TBD accretion and future EPS accretion. Secondly, our fortress balance sheet enabled us to do the SBB deal, and we intend to maintain it post-acquisition. Also, SBB clients should take great comfort in our safety and stability, and we're hopeful that the recent reduction in runoff and deposit runoff is a sign of their confidence in us. Next, we're committed to SBB's strategic approach to the technology and innovation sector and believe that it represents the opportunity for significant upside for First Citizen shareholders. And finally, Moving forward, we are positioned to perform well in a broad range of economic scenarios given our capital and liquidity positions, talented associates, focus on our clients, and increasingly diverse business mix and our strong risk management culture. And with that, I'll turn it over to the operator for instructions for the question and answer portion of the call.
spk10: ladies and gentlemen if you have a question or comment at this time please press star then the one key on your touch tone telephone as a courtesy to others on the call we ask that you limit your yourself to one question and one follow-up and then return to the call queue if you have additional questions if your question has been answered and wish to remove yourself from the queue please press the pound key we'll pause for one moment to compile our q a roster The first question comes from the line of Steven scouting with Piper Sandler. You may proceed.
spk06: Hey, good morning. Uh, thanks everyone. Appreciate all the color. It's a lot, but it's all really positive. So we appreciate all the detail there. Um, I guess one, one thing maybe I'd be curious about, um, is around the migration of that 8 billion in deposit outflows. You said you expect through year end into the 10 billion in the direct bank. Kind of how we can think about that from a mixed perspective and a cost perspective and how you think about that longer term.
spk14: You're talking about the $8 billion from where we are in May to the end of this year?
spk06: Yeah, I think you said you expect $8 billion to flow out from SIDBI and then replace it with $10 billion from the direct bank, if I heard you correctly.
spk14: That's correct. And really, it's more related to the nature of the SBB business and the cash burn that we continue to expect. Now, if inflows come into the marketplace, we could be being very conservative there. But it's just really a continuation of cash burn throughout the remainder of the year. can provide some of the industrial logic that we went through in developing that specific number. So we didn't just pull that number out of the air. So Elliot, why don't you talk about how we built that projection?
spk03: Yeah, absolutely. So, you know, a few things. As far as call spaces, it really is kind of embedded in our deposit beta slide there. So we factored that in. If you look at kind of our offering rates in direct bank, really that marginal cost is coming in somewhere kind of a 475 type range. The overall Silicon Valley book right now, blending kind of non-interest bearing and interest bearing is around 150. So certainly a delta there that we're replacing kind of what we'd call a conservative $8 billion decline in the Silicon Valley book with kind of the incremental on the direct bank. You know, I'd say, you know, as Craig mentioned, kind of industrial logic. I think, you know, we've seen the stabilization here. I think, you know, when we look at the amount of really kind of new funding capture and absolute levels of that being lower right now in the economy, that's really kind of what's leading us to that $8 billion decline. I think with, you know, positive initial steps that we've seen in client outreach, the stabilization we've seen, we are hopeful that's a conservative number and optimism to the upside there.
spk13: Peter Bristow, let me make a quick comment about it as well. One of the things that could potentially influence that is, again, because of the lack of transactional volume that's going on in the VC and the PE space, that drives balances down in our global fund business. So that's sort of a, you know, and as that cash burn continues, we think that, which we think it will, but that could turn around quickly if there were some sort of change in sort of the tenor and the environment. So that's part of that as well.
spk14: So the punchline here is that we could be being conservative if market dynamics change.
spk06: Absolutely. Yeah, I have no doubt you're probably on the conservative end of that, so I appreciate that. Okay. I guess, you know, obviously this is massively capital accretive as well, CET1, you know, well north of your targeted range. I guess kind of two questions around that. One, where do we stand on potential for a buyback announcement later this year? Has anything changed there? And then, you know, even though your deposits are stabilizing from Silicon Valley, the market's clearly stabilizing. assuming that there's a lot more outflows to come and there's some distressed banks kind of in your footprint, do you think about additional M&A with all your capital or do you kind of digest Silicon Valley and see where you land down the road?
spk14: Well, we always think about M&A, but we do need to digest SEBs. I mentioned your second question first. But we certainly acknowledge that our capital ratios are well above our target ranges right now, and we project them to remain elevated in 23 and 24. One thing that everyone needs to keep in mind is that law share coverage provided about a 2% benefit to all of our risk-based capital ratios. So without law share, we'd be over our target CET1 range, near the top on Tier 1, and towards the bottom of total capital. Now earnings will replenish those and continue them growing well above our target ratios going forward. So, you know, as we've stated previously, it's part of our capital planning process to assess capital, to assess capital actions, including share repurchases, which remain an important part of our toolkit to manage capital. We are currently slated to take a combined capital plan to our board for approval in late July. And this plan will contemplate all of our capital actions after we have considered the external environment, the behavior and capital needs of the SVD portfolio, as well as the dynamics on risk-weighted assets of this law share. So a lot going on there. So at this sitting, given that our combined capital plan is under construction, it's too early to provide timing of an SRP.
spk06: Got it. Got it. Okay. And then the last one for me is just, um, around the 650 million and kind of merger charges you noted and noted investments to try to retain the people from SVP is the cost of attempting to, you know, retain incentivize those employees. Is that kind of contained within that 650 million, or could that be, I guess, incremental and how do you, how do you think about those investments?
spk14: No, that, that is, uh, 60% of that 650 million. is personnel related.
spk06: Okay, perfect. Extremely helpful. Thanks so much for the color and congrats on the deal and the quarter.
spk10: Thank you, Dave. Thank you, Mrs. Gatton. The next question comes from Brady Gailey with KBW. You may now proceed.
spk08: Thank you. Good morning, guys. I wanted to start with One more question on the common equity tier one. I think in the past you guys have talked about internally at First Citizens a 9% to 10% target. It feels like the world has kind of changed over the last quarter. So what's the new range? How should we think about where your target's going to be? Knowing that AOCI could eventually get embedded in common equity tier one, how do you think about that new range?
spk14: Well, we don't have any plans currently to change it. That obviously would be contemplated in the capital plan because as the ratios sat at the end of the first quarter, even including HTM and AOCI losses, unrealized losses in the ratio, we were over the target range by 1% with HTM and AFS losses and by 2% with... uh just afs losses included so at this setting we don't contemplate changing the range uh but obviously those types of things will be considered in our capital plan uh but keep in mind too you know the law share coverage is providing a little bit of boost to these ratios so we're going to take all of that into consideration in developing our plan going forward tom do you have any comments to add on that
spk15: No, I mean, I think it's important to note, I mean, we're building this very similar to how other large banks do it. You know, we go through sort of our internal stress test methodology, look at what potential capital burn could be, and sort of build up from there. So unless we see a material change in risk profile, we don't expect material changes to our overall capital ranges.
spk08: Okay. And then just back to the buybacks. comment. I know it's according to your plan and you've got to go to the board, but what does your gut tell you? Do you think First Citizens will buy back stock in the back half of the year? I know you did about one and a half million shares last year. Do you think that's likely?
spk14: I can't comment on that at this time.
spk08: Okay. All right. So the loan to deposit ratio, historically it's been pretty low at First Citizens. I know with
spk14: silicon valley it's it's up near 100 percent do you work to get that down over time and what what's the kind of longer term target for loan deposit ratio we obviously we don't believe that 100 percent is sustainable long term however in the short term given that we took a purchase money note and have the fdic loc in place we have time to get it back in line A longer term, Frank and I just talked about this this morning, so it's a very relevant question. We'd like to see an eight handle on the loan-to-deposit ratio. So that's sort of where we feel like it should be considering our earning asset, cash, et cetera, on the balance sheet. So having an eight handle on this will be more comfortable over the long term.
spk08: And then finally for me, I know historically – First Citizens has been asset sensitive. Once you layer in Silicon Valley, can you just talk about the sensitivity to interest rates of the new company?
spk14: Yeah, the addition of cash and variable rate loans on the asset side and the purchase money note on the liability side fairly significantly increased. our asset sensitivity. But we are very accepting of the downside risk here because number one, liquidity is our top priority in the current operating environment. And number two, the cost of hedging to mitigate downside risk make cost-effective hedging difficult. So for example, if we tried to swap the purchase money note to floating, it costs us about 150 basis points. So we're comfortable where we sit. We're also comfortable where our margin lands after rate cuts. So as we sit here right now, we're pretty pleased where we are from an interest rate risk standpoint. Okay.
spk08: Thanks for the color. Thanks for the color.
spk10: Thank you, Mr. Gailey. Thank you. The next question comes from the line of Kevin Fitzsimmons with DA Davidson. You may now proceed.
spk04: Hey, good morning, everyone. Good morning. I was just wondering on Brady's, just dovetailing on Brady's question there, if we look at the percentage net interest margin, Craig, any way to kind of best describe, you know, whether you want to talk core, X, purchase accounting, or all in? uh versus the what was about 3.41 margin in this quarter where we're to kind of think about the trajectory of that as it's baked into your guidance on nii yes and are you asking with and without accretion um i mean yeah but if you can give it both but but maybe all in with accretion like how you see that yeah gap margin trending right
spk14: I got you. So if you look at, if you just look at the, and I'm going to, when I talk about purchase accounting, in fact, there's still some residual impact from CIT out there, but it's fairly immaterial to the impact of SVB. So if you look at our margin at the end of the first quarter, we were at 341, and that was 14 basis points with purchase accounting related. So, without it, it would have been 326. we look at the margin. Uh, migrating upward and the 2nd quarter. Uh, the 4% 52 basis points of which is, uh, purchase, accounting, accretion and then given that we have a rate cut starting in July. We have another one in September, one in December. Margin falls to 386 in the third quarter of 23, and then 370 in the fourth quarter. So we see a migration down as rates decline, which would be expected given our asset sensitivity. But still feel like the 380 margin for the year would be very strong.
spk04: Okay. Matt? So you're pegging that off of the 326, Craig, or are you off of the 341?
spk14: I'm pegging it off of the 340.
spk04: Got it. Okay. Very helpful. And then on that topic, like I know what the forward curve says, but I think you kind of alluded to it in your comments. If we do have more of a higher for longer period, environment, given the asset sensitivity you spoke of, then there's likely upsides to that margin projection as well as NII. Is that a fair way to think of it?
spk14: Yes, there is.
spk04: I think for this year, I think that's right.
spk14: I mean, if we don't, if we didn't get rate cuts this year, I think you'd have a seven basis points higher margin. Obviously, it takes time for those impacts to go through. So the impact on 24 will be a little higher and about $6 on the EPF. So next year, higher for longer would be even more significant.
spk04: Okay. One question on deposits. You mentioned the diversity by region, the increased diversity by region. But how do you plan to curb or put guardrails in on the large, lumpy deposits, larger customers? That was a case that was evident at SBB. You know, I know you want a lot of their customers, a lot of their deposits coming in, but how do you prevent that from becoming an issue at the broader persistence?
spk14: Well, I mean, in terms of our large commercial depositors or large depositors, many of them have long-term relationships with us. And when we break this down, some of them for decades. So we stay in touch with them, and they know we're strong and stable, as Frank mentioned. So I don't anticipate that we're going to see an outflow there, even with what's going on in the external environment. We have seen some customers move money into secured suites or interest-bearing accounts for diversification and ease of mind, but it has not been widespread. And we're just staying in front of our customers and have long relationships with them, so we don't really see that as being a big issue for us.
spk04: Okay. One last one, just on the borrowing, you know, the presence of the borrowing, you have the FDIC line. Are the intentions to keep that in place for the foreseeable future, just given the focus on maintaining a liquid and fortress balance sheet?
spk14: we would certainly uh longer term ship like to shift our funding mix to core deposits but that's not going to happen uh rapidly so what we're envisioning is replacing the purchase money note with some level of long-term debt tlac type borrowing and then and then a portion being paid off through increases in core deposits over that five-year period. So it would be, we have a gradual burndown of the purchase money note shifting to other wholesale sources of funding for deposits over time.
spk15: No, I think that's well put. I mean, really focusing on getting that on and on the FDIC process
spk10: line that's there for contingency purposes to support the transaction is obviously something we'll keep in place here in the intermediate future okay thanks very much guys thank you thank you mr fitzsimmons the next question comes from the line of christopher marinek with janie montgomery scott you may now proceed
spk05: Thanks. Good morning, and thank you for all the disclosures today. I wanted to ask about the CIT Bank and the online channel. How has that been evolving, and how do you see that playing out? Is there a different mix that that can contribute and therefore impact the funding base going forward?
spk15: Yeah, I think we mentioned we're obviously going to use that as a growth channel and continue to add core deposits. Obviously, it comes at a higher marginal cost, like Elliot discussed earlier, but some of the benefits there is obviously it's a well-diversified deposit portfolio. Over 90% of it is insured, and it's truly sort of that retail deposit base that we found through these last weeks or I guess it's months now of sort of bank stress have been very stable and sort of a very solid funding source for us. Plan there is to continue to augment growth with that. Before the acquisition, the direct bank made up about 18% to 20% of our total deposits, and we sort of see that coming back to that in an aggregate level for the combined company.
spk14: Yeah, I think, Tom, we're expecting an increase of about 22% from that 18% and then normalized in 24%.
spk15: Yep, that's right.
spk05: Got it. Thank you for that. And then I just want to dig a little bit deeper on the office CRE and all the disclosures there. So the high level of criticized loans in the office, how much of that is your internal rating system than just being an abundance of caution versus expectations that there are defaults out there?
spk14: Andy, can you take that one?
spk02: Sure. It is, you know, we do a deep dive on the portfolio monthly And so it is a combination of, we believe our credit ratings are accurate and timely, as well as individually evaluating each property type.
spk05: Great. And would you envision that the same level of office exposure looking at a year or two would be the same? I know it's not high, but just curious if that would incrementally come down as we roll forward. In terms of criticized levels? Really just the percentage of the book altogether of the total loan composition.
spk02: Oh, sorry. Yeah, we are not originating any new office. So I would imagine in terms of an absolute dollars in office exposure, that would come down.
spk05: Great. And then any other just overall credit trends from the criticized perspective this quarter beyond the office information that you broke out?
spk02: As Craig noted, we did see some migration in our equipment finance small ticket leasing portfolio. And then some migration in the commercial bank but not much.
spk05: Great. Thank you for that clarity. I appreciate the time this morning.
spk10: Thank you. Thank you, Mr. Maronick. The next question comes from the line of Brody Preston with UBS. You may now proceed.
spk07: Hey, good morning, everyone. Good morning. Craig, I just wanted to follow up on the expenses. It sounded like the expense base that you're working off of is, uh, is 2.6 billion for, for legacy SVB and then 25 to 30% cost savings. I think I heard you correctly. You said by the year end, 2024, I guess, could you help us better understand the cadence of the cost savings, you know, where you expect the exit run rate on non-interest expense to be, you know, for the fourth quarter of 23 and then, you know, how much is left for 2024.
spk14: Yeah, we are projecting a range of 650 million to 780 million. So that's 25 to 30% of the baseline coming into the acquisition. And we would expect that of that 650 to 780, that roughly half of it would be in the run rate at the end of 2023. And then 100% of it would be in the run rate by the end of 2024.
spk07: Got it. Okay. And could you help me, could you give us what the loan yields and what the deposit costs were from SIVB when they came over?
spk14: Okay. So loan yield for this year pre-purchase accounting would be 602. So that's the 23 projection. It was 549 in the first quarter. I mean, it was 657 for the first quarter, I'm sorry. And so for the year 666, and then combined with 662, so we're pretty close on yields for citizens and SEB there. Deposit cost, and I'm talking about interest-bearing, the cost of interest-bearing deposits, Let me see if I have this handy. Okay, cost of deposits. I don't have SEB broken out separately, but we were at 124 in the first quarter. And Elliot, I think I recall SEB was like at 106. So very similar to ours. And we have that escalating to 159, or 169 by the fourth quarter for 159 for the year. So SEB was slightly lower cost of deposits. So they were accreted to margins. and slightly higher than us on loan yield and lower than us on Tulsa deposits.
spk07: Got it. And do you happen to have what the mix of SVB's deposits were between non-interest bearing and interest bearing at April 30th? And then with the projected runoff that you have, do you have what the mix of those deposits look like, you know, going forward?
spk14: No, it takes before you know. Hold on one second. I think we have that as of March 31.
spk12: You asked for April 30. We would only talk about March 31. Okay. Okay.
spk03: Brody, this is Elliot Howard. So in kind of our assumptions, you know, at March 31 is roughly 62%. We see that kind of migrating down to kind of the mid to low 50s of noninterest bearing the total.
spk07: All right, great. That's helpful. And then I did want to ask just on the capital ratios, you know, understand that for most of them, you're pretty well above your operating range. But I did notice that on the tier one leverage, if you adjust for the day count, you're kind of right in the middle. And so I did want to ask just as we think about buybacks going forward and understand that you have your capital planning later in July, you know, which ratio should we view as more constraining from a buyback perspective? Should we focus on the CET1 or should it be, you know, all of them? And so, you know, would Tier 1 leverage play a role there as well?
spk14: Well, Tier 1 leverage certainly was the one that was at 9% would be dead, middle of our range, you're right. It's going to migrate up to over 10 and over 11, 23 and 24. So it's going to be at the top of the range by the end of the year and then well over it. In terms of buying, you can strike. I'll let Tom talk a little bit to that.
spk15: What I'll say there, too, is it's important to consider as you look at those ratios, you can see that Tier 1 and total are more constraining than CET1, and that's obviously due to the bargain purchase gain boosting CET1, but no Tier 1 instruments or Tier 2 instruments coming over. As we look at capital planning and looking out into the future, those are obviously things that we will consider, not in the short term with ratios where they are, but as some of these loans roll off a loss share, we would expect to, you know, maybe right-size the slope in those ratios a little more through potential future capital races, if that makes sense, with Tier 1 and subordinated debt.
spk07: Okay, great. I'll just try to rattle off a couple more quickly here. I did want to ask, just when we think about, you know, the size of the balance sheet now, and this is a couple-part question, you know, what you know spend you know I guess what additional expenses you know do you need to kind of have now that you're a larger bank you know I was thinking about it from a regulatory perspective and then you know when you think about some of the things that have been stated by the regulators in the wake of some of the bank failures it feels like some of the tailoring rules might be going away and you know the line in the sand might be getting pushed back to 100 billion in assets and so Have you contemplated, you know, what your needs will be from a total loss absorbing capacity perspective, you know, TLAC? And then, you know, help us think about, you know, where you are in being prepared for LCR.
spk14: Yeah. Tom had just briefly mentioned TLAC and capital stock mix. So we do contemplate if we were subject to those rules that we would expect some mix of preferred sub-debt and senior debt. And right now, that range for us is probably somewhere in the $7 to $10 billion range with a heavy portion of that in senior debt and the smaller portions in preferred stock and sub-debt. But we definitely are monitoring regulatory changes to capital and liquidity, tailoring rules. and areas that impact us, and I think we're gonna have more stringent regulatory oversight obviously here, and we're ready for that, and we'll be prepared for it. I'll let Lori talk a little bit about our investment in risk management, which we think we're well positioned to absorb SVB within our risk management framework.
spk01: Thanks, Greg. What I would say is over the last year, we've built a risk management program as a result of CIT integration to meet regulatory expectations from a large bank perspective. So that's in place today. And we have begun our alignment of the SVB businesses and processes into that risk management program. And we'll expect to fully invest from a technology and a people perspective to ensure our risk management program aligns with our current size and it's scalable for any future growth.
spk15: I was just going to make a comment on the liquidity side. I mean, there's a lot of talk about LCR and liquidity buffers and everything. We believe we're coming in from a position of strength there, obviously, with a lower concentration in investment securities, higher concentration in cash. So we believe we're well prepared from that perspective.
spk07: Yeah, that's a fair point. I'll ask one more and then leave it there. I did just want to ask just You know, on the loans, on managing the balance sheet, you know, a couple of questions here within this. Could you give us a sense for what the loans from SVB that had run off following the acquisition were? And then within your projections, right, for 2023, and I know, Craig, it'll probably be a longer term kind of thing to get back down to an eight handle on the loan to deposit ratio. But, you know, where do you see kind of loan balances you know, kind of going longer term? And are there any portfolios that you've kind of circled as, you know, ones that more likely have runoff capacity going forward through 2024, just given that the deposit environment is likely to remain challenging for a little bit for the industry?
spk14: Yeah, I'll let Elliot talk about our forecast, but I'll make some broad comments. Just in terms of this year, We're expecting from the first quarter of this year for loans to decline by 2%. And that's an 8% decline in SVB and a 3% increase in the FCB portfolio. And within FCB, we think that the growth will be broad-based as it has been in the branch network and the industry verticals. But down from first quarter levels is we expect demand to soften with Fed tightening. if customers become a little more cautious given the potential for a recession so we backed off of the current level growth which is eight percent annualized in the first quarter in terms of scb we are projecting the eight percent decline which would settle loans down about 61 billion uh and the expectation there is public and private markets will remain muted for the remainder of 23 as peter mentioned there could be some upside if that's not the case and we certainly hope so and um That's my comment. Elliot, do you have anything to add to that?
spk03: Yeah, Bertie, I would just echo kind of what Craig said. I think when you look at it, you know, the largest portion of the Silicon Valley book is the global funds banking. And so that's the part that's, you know, we expect to decline a little bit here. And that's really a reflection not of kind of losing market share. It's really of the underlying, you know, just market activity. And so that's, you know, private bank, pretty stable. Same with tech and health care.
spk07: Got it. Thank you very much for taking all the questions, everyone. I appreciate it.
spk10: Thank you, Brody. Thank you, Mr. Preston. I'm not showing any further questions at this time. I'd like to turn the call back over to our host, Deanna Hart, for any closing remarks.
spk09: Thank you, everyone, for participating in our call today. We appreciate your ongoing interest in our company, and if you have any further questions, or need additional information, please feel free to reach out to the investor relations team.
spk10: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.
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