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spk01: Ladies and gentlemen, thank you for standing by. Welcome to the First Citizens Bankshare's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star followed by one on your telephone keypad. If you require operator assistance during the program, please press star followed by zero. As a reminder, today's conference is being recorded. I would now like to introduce the host of this conference call, Mr. Anna Hart. Head of Investor Relations, you may begin.
spk00: Good morning, and welcome to First Citizen's second quarter earnings call. Joining me on the call today are our Chairman and Chief Executive Officer, Frank Holding, and Chief Financial Officer, Craig Nix. They will provide second quarter business and financial updates, referencing our earnings presentation, which you can find on our website. Our comments will include forward-looking statements, which are subject to risk and uncertainties that may cause actual results to differ materially from expectations. We assume no obligation to update such statements. These risks are outlined on page three. We will also reference non-GAAP financial measures. Reconciliations of these measures against the most directly comparable GAAP measures can be found in section five of the presentation. Finally, for 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.
spk03: Thank you, Deanna. Good morning, everyone, and welcome to our earnings call. Starting on page six, and this is the second quarter snapshot slide, we delivered another quarter of solid financial results, including peer-leading return on assets, net interest margin, adjusted efficiency ratio, loan growth, CET1 ratio, and loan portfolio yield. Our board has approved a share repurchase plan allowing us to repurchase shares in an aggregate amount up to $3.5 billion, and Craig will speak to those details later. And I'd like to point out that we were recently included in the Fortune 500 list for the first time. Continuing on to page seven, I'll take a look at, well, I'll take a moment to focus on our business segment performance as well as their outlooks moving forward. Starting with the general bank, we saw positive loan trends as growth remained particularly resilient in business and commercial loans within our branch network. We also experienced strong growth in our SBA, SBB private and wealth channels, importantly We have not made any significant changes in our risk appetite or client selection to chase growth as we feel our expertise and deep client relationships position us well to continue to grow prudently. Deposit growth in our branch network during the first half of the year exceeded our expectations. Looking forward, we see new production and client acquisition contributing to further balance sheet growth. We also see growth coming from deepening our relationships with existing customers, including SBB acquired customers. On the downside, we recognize that reductions in interest rates will cause margin compression. However, we're building strategies to mitigate the expected negative impact, including a focus on the mix of our deposits by targeting operating accounts, growing quality loans, and improving non-interest income from all sources. Our commercial bank segment continued to deliver strong loan growth driven by several of our specialized industry verticals, primarily in project financing for energy and data centers. CRE volume remains challenged driven by the higher for longer interest rate environment Deal volume is expected to remain muted during the second half of the year. While portfolio stress is expected to remain above historic levels in equipment finance, we expect loss rates to decline in the second half of the year and into 2025. From a production standpoint, we expect this segment to continue to benefit first from liquidity concerns bringing the market rates on a greater number of transactions into our target range, and second, from a focus on originating larger, higher quality transactions. Funding for the commercial bank is aided by our nationwide online direct bank with more than 700,000 core deposit accounts. We plan to continue to use the direct bank as a lever to grow core deposits in the current environment where pricing pressure and competition remain high. Turning to SVB commercial, we achieved quarter-over-quarter loan growth driven by high-quality loans in our global fund banking or capital call lending business. The uptick in loans reflects both the increased level of investment activity driving up utilization and Global Fund Banking's continued success in winning the fund banking business of active VC and PC investors. Encouragingly, we also witnessed a quarter-over-quarter increase in SDB commercial total client funds for the first time since the fourth quarter of 2021. SDB commercial deposits increased for the first time since the first quarter of 2022. These increases were driven by slight improvement in the macroeconomic environment and client acquisition. As we look ahead, it's too early to call an innovation economy turnaround despite increasing deal counts and encouraging investment trends. We are encouraged that the rebound will be significant as high levels of DC dry powder remain a strong catalyst for future growth. We expect that the positive trends that we saw in the second quarter could continue to result in gradual improvement in the second half of this year, but remain guarded about the absolute levels of deposit growth given the continued headwinds in the environment. Our SBB team remains the bank of choice for the innovation economy. Moving on to page eight, our strategic priorities have not changed. Given our growth over the past few years, we have been focused on maturing our risk management framework and overall regulatory environment. We have made significant enhancements, not only to meet category four large financial institution requirements, but to develop those capabilities in ways that are scalable through category three expectations. To conclude, we're continuing to see positive momentum in our businesses. While we recognize uncertainty remains in the current macroeconomic environment, we are committed to deepening customer relationships, prudently growing core deposits and loans, and allocating capital. We remain in a position of strength, and I'm excited about the opportunities ahead of us in 2024 and beyond. Craig, I'll turn it over to you.
spk05: Thank you, Frank, and all of you joining us today. My comments will be anchored to the key takeaways found on page 10. Pages 11 through 28 provide more detail underlying our second quarter results. I will start with the $3.5 billion share repurchase plan that Frank just mentioned. Using capital to support organic growth remains our top priority, but strong earnings have led to an excess capital position. Share repurchases provide an opportunity for us to return capital to our shareholders and to more efficient capital levels over time. We manage capital ratios excluding any benefit from the shared loss agreement and all planned capital activities are assessed in this context. We intend to supplement organic capital use with methodical share repurchases with the ultimate goal of managing our adjusted CET1 ratio down to the 10.5% range by the end of 2025. This repurchase plan puts us on that path. Moving forward, We will assess capital management strategies based on balance sheet growth expectations, earnings trajectories, and economic and regulatory environments. This will be reflected in our next capital plan, which will be completed in the first quarter of 2025. To the extent that capital accretion from earnings continues to outpace organic growth, we expect share repurchases to continue beyond this plan. Turning to second quarter results, all of our return metrics exceeded our expectations. ROE and ROA adjusted for notable items were 14.05% and 1.39% respectively. Headline net interest income increased slightly over the week quarter as higher interest income was partially offset by lower accretion and higher deposit costs. While modest, the increase in headline net interest income followed three quarters sequential decline for interest expense on deposits was increasing at a faster pace than interest income. During the second quarter, while interest expense on deposits increased, the pace slowed. Given the likelihood of Fed rate cuts, we continued to mitigate a portion of our asset sensitivity profile by moving an additional $5 billion of cash into short-duration securities in the investment portfolio. Headline NIM, contracted modestly by three basis points and 3.64%. Executions, NIM increased by one basis point to 3.36%, signaling that deposit pressures, while still present, continued to stabilize and were more than offset by the benefit of strong loan origination. Before the second quarter, NIM executions had declined in the previous three quarters. Adjusted non-interest income was slightly better than expected due to higher client investment fees aided by an increase in average balances in SBV commercial off-balance sheet client funds, offsetting the expected decrease in net mill income on rail-operated lease equipment. Rental income was negatively impacted by a return to more normalized maintenance expenses in line with expectations we laid out last quarter. Adjusted non-interest expense came in at the lower end of our guidance range, increasing sequentially by approximately 1%. Expense growth was concentrated in equipment expenses related to accelerated depreciation on assets that will no longer be used following the SBD's acquisition and favorable variances in prior periods related to reimbursement from third parties. Second quarter expenses also reflected higher marketing expense as we increased focus on retaining clients in the direct bank channel to help offset expected maturity in their time deposits and in record deposits. We continue to execute on cost savings from the acquisitions and maintain vigilance on overall expense management. We are now close to achieving the lower end of our cost savings estimate and anticipate achieving it by the end of the year. Credit continues to stabilize during the quarter. Net charge-offs at 132 million, or 0.38%, were on the low end of our guidance range and non-performing loans remained relatively stable. While losses increased modestly over the link quarters, they were largely in the same portfolios as previous quarters, and we noted no emerging problems outside of those pressure points. Encouragingly, while we saw continued stress in the small ticket leasing portfolio and the investor-dependent portfolios, we saw modest improvement in our general office portfolio. While this is a good sign given the continued focus on CRE, particularly CRE office, we do not believe this is indicative of any shift in current stress within that portfolio and really more of a function of loan resolution timing. We continue to be well-reserved with an allowance of 11.84% on the commercial bank office portfolio, covering second quarter debt charge-offs two times. Overall, the allowance ratio decreased six basis points to 1.22%, with the most significant factor related to a mixed shift from recent growth in the Global Fund banking portfolio which carries a low reserve percentage. The decrease was also driven by lower specific reserves on individually evaluated loans, reasonably consistent credit quality trends, and positive changes in macroeconomic forecasts. All these factors were partially offset by an increase in loan volume. While the allowance did decline this quarter, we feel good about our overall reserve coverage as well as coverage on the portfolios experiencing stress. Moving to the balance sheet, loans grew about $4 billion over the link quarter, an annualized growth rate of 11.8%. Growth was led by a $2.1 billion increase in FCB commercial, driven by the Global Fund Banking capital call lending business. These increases were partially offset by expected decline in technology and healthcare banking, giving continued payoff and increased competition. General banks and commercial bank segments also grew loans by $1.5 billion and $386 million, respectively. While the broader industry continues to experience tepid loan growth, we continue to see broad-based expansion across our business segment, as Frank mentioned earlier. Turning to the right-hand side of the balance sheet, deposits grew at an annualized rate of 4% for about $1.5 billion, due to strong core deposit growth in the SCB Commercial and in the General Bank. In SCB Commercial, we saw deposits grow by $1.9 million. A $329 million increase in the General Bank was driven by our continued emphasis on expanding relationships with current customers and attracting new ones. These increases were partially offset by expected declines in broker deposits and the direct bank deposits of $527 and $145 million, respectively. The decline in the direct banks is due to a $1.9 billion decrease in time deposits, partially offset by a $1.8 billion increase in savings accounts. Given pricing on CDs and the expectation that rates will decline in the second half of 2024, we made the strategic decision to let these roll off and will continue to grow core deposits to offset this decline. Moving to capital, our CDT-1 ratio declined by 11 basis points sequentially, ending the quarter at 13.33%. This was driven by a continued decline in the benefit provided by the shared loss agreement, which added approximately 85 basis points to the ratio this quarter, down 22 basis points from the first quarter. The CDT-1 ratio excluding the benefits of the shared loss agreement increased 11 basis points from the lean quarter as earnings growth again outpaced organic growth. I will close on page 28 with our third quarter 2024 and four-year outlook. On loads, we move our expectations higher, giving the starting point at the beginning of the third quarter and solid momentum in our pipelines. a high single-digit annualized percentage growth in the third quarter, driven broadly across our business segments. We anticipate SBB Commercial will benefit from growth in the global fund banking business, where we see success and client outreach. While the second quarter benefited from increased activity in commercial real estate funds, M&A, and debt activity, the market continues to be challenged and remains somewhat unpredictable. While we do expect to see a modest increase in VC investment compared to 2023, we believe our growth will continue to be pressured by headwinds in the private equity and venture capital markets. We also expect continued growth in our business and commercial loan portfolios within the general bank. In the commercial bank, we anticipate our specialty verticals will be key contributors to continued loan growth. We also continue to expand our middle market banking business and expect to see positive momentum from these strategic moves. Looking at the full year, we expect loans to end in the $143 to $146 billion range or mid to high single digits percentage growth on a year-over-year basis. We anticipate this growth to be concentrated across all three banking segments for the reasons previously discussed. We expect deposits to be up slightly in the $152 to $154 billion range in the third quarter due to growth in the general bank. We expect relatively flat balances in SBB commercial due to continued cash burn in the still-used fundraising environment. We anticipate growth in the branch network as we benefit from increasing our customer base by building deposits through successful execution of our organic growth and relationship banking strategy. For the full year, we anticipate deposits in the $153 to $155 billion range primarily related to growth in the general bank previously discussed, flat to modestly increasing balances in SVB commercial, supplemented by growth in the direct bank if needed. We anticipate the direct bank remaining flat to modestly higher through the end of the year as expiring time deposits are offset by money market and savings growth. This is in line with our strategy of reducing higher-cost CDs. In the direct bank, we have the option to bring down rates quicker should the Fed cut cycle be more aggressive than anticipated while providing a strong source of insured consumer deposits in our funding base. The current implied forward curve indicates a 98% probability of two rate cuts in the second half of this year. rate forecast covers a range of one to three rate cuts, with the effective Fed funds rate declining from $5.50 currently to a range of $4.75 to $5.25 by the end of the year. These projections do include the impact of planned share repurchase activity in the back half of 2024. For the third quarter, if we get one rate cut, we expect headline net interest income to be relatively flat with the second quarter, given that our forecast calls for the cut in September. We expect a lower accretion, slightly higher deposit cost, and a slightly lower loan yield will be offset by higher investment security yields. For the full year, we expect headline net interest income in the range of 7.2 to 7.3 billion up from our previous guide of $7.1 to $7.3 billion, reflecting the higher for longer rate environment, as well as potential rate cuts in the updated forecast occurring later in 2024. In either case, we continue to project loan accretion of just over $500 million for the year, over a $200 million decline for 2023, as loan discounts on the shorter portfolios will have been fully recognized. On credit losses, while we have experienced positive trends in recent quarters, we do anticipate continued elevated net charge-offs in the investor-dependent, general office, and equipment finance portfolios. We anticipate third quarter net charge-offs in the 35 to 45 basis points range, but are lowering the four-year range to 35 to 40 basis points, given lower losses during the first half of the year. We do caution that many of our portfolios in the commercial bank and FCB commercial have large hold sizes, and one or two of these ones curating unexpectedly should influence this range. In commercial real estate, higher for longer rates continue to have an effect on value, being felt most heavily in the general office sector where market liquidity support refinancing remains scarce. We expect these market dynamics will continue to elevate losses within this portfolio for the remainder of 2024. We're seeing some green shoots in the investor-dependent portfolio, and we believe that continued market optimism and a greater consensus on valuation is an encouraging sign that should help reduce some pressure. Still, given the uncertainty in the innovation economy, we do expect continued stress throughout 2024. Moving to adjusted non-interest income, we expect the third quarter to be materially in line to down low single digits from the lean quarter. We expect full year adjusted non-interest income to be in the range of 1.85 to 1.9 billion, which is slightly higher than our previous guidance. This is driven by our rate all outlook, as we expect a continuation of healthy fundamental trends in the near term from a supply-driven recovery, which is generating strong demand for existing rail cars resulting in a stronger for longer scenario. We are also expecting higher fee income on service charges resulting from higher lending-related fees as loan volumes continue to be strong. Moving to expenses, we expect a modest increase from the second quarter due to marketing expenses to help replace time deposit runoff in the direct banks as well as professional fees and temporary manpower as we ramp up project spend related to a few regulatory items. Furthermore, as Frank mentioned earlier, we continue to focus on building out our risk and technology capabilities and continue to make some strategic hires on these themes, resulting in higher salaries and benefit expenses. All of this will be partially offset by continued acquisition synergy, which I spoke to earlier. We expect to achieve the lower 25% band of our cost-based goal by the end of 2024. These savings will be offset by continued capabilities held out for regulatory capabilities as well as cost-related duties. The strategic priority is to maximize growth in our core lines of business and optimize our systems and processes. Our adjusted efficiency ratio is expected to remain in the low 50% range in 2024. Longer term, especially if we enter a set rate cycle, we expect it to gravitate towards the mid-50s as our net interest margin compresses and we continue to make investments in new areas that will help us scale efficiently in the future and be ready for category three status when we cross that threshold. Looking at the full year, we anticipate adjusted non-interest expense to be in the range of 4.65 $4.7 billion in line with our previous guidance. For both the third quarter and full year 2024, we expect our tax rate to be in the range of 27% to 28%, which is exclusive of any discrete items. In summary, we are very pleased with our performance this quarter and will begin our share repurchase plan shortly. As Frank's comments earlier indicate, we will continue to grow in a prudent manner allocate capital in alignment with our long-term focus and strong risk management framework. I will now turn it over to the operators for instructions for the Q&A portion of the call.
spk01: Thank you. Ladies and gentlemen, if you have a question or comment at this time, please press star followed by one on your telephone keypad now. As a courtesy to others on the call, we ask that you limit 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 you wish to remove yourself from the queue, please press star followed by two. We'll pause for one moment to compile our Q&A roster. Our first question comes from Steven Alexopoulos from J.P. Morgan. Steven, please go ahead. Your line is open.
spk06: Hi. Good morning, everyone. Morning. I want to start on the stock buyback. And I heard you that you want to get to the 10.5% CET1 target by the end of 2025. By our math, $3.5 billion through 2025 would leave you above 10.5%. Just curious, by your math, is $3.5 billion of buybacks through the end of 2025 get you to 10.5% CET1? Steve, this plan puts us on a path.
spk05: in the 10.5% range by the end of 2025. And we anticipate the plan will be executed over the next four to five quarters. And we will be updating our capital plan in the first half of next year. So you're right in the ratios would be elevated, all things being equal right now. But to the extent that earnings accretion continues to outpace organic growth, we do contemplate another share repurchase plan in the back half of 2025. So yes, if we stop here, they would be there, but we are giving ourselves room for organic growth. We will assess our capital plan, and if we are, again, accreting earnings faster than organic growth, we would contemplate another plan to guide us down to that 10.5% range by the end of 2025.
spk06: Got it. And just given the valuation of the stock here, how do you think about front loading the buybacks? Do you think it will be pretty even? I know the incentive system is tangible book value growth based. What are your thoughts on that?
spk05: Well, we would obviously plan to front load, especially if we anticipate stock price to continue to increase over time as our tangible book value increases. So our plan is methodical. but does have a heavier emphasis on the last half of 24. So it's really not a straight line, but it is expected to occur over the next four to five quarters.
spk06: Okay. And then for my follow-up question, I'm curious. So the NII outlook, we know there's Positives and negatives, right? Growth and loan growth is helping NII. You have purchase accounting accretion, and now we have rate cuts in the forecast. But if I look, so you're 1.8 billion NII for 2Q24, basically implying the same for 3Q and 4Q. And, Craig, if I look at consensus for 2025, it basically has the 1.8 billion sort of being the run rate for the next, let's call it, six quarters or so. I'm just curious, given the strategies you're looking at, you're talking about maybe mitigating some of the asset sensitivity, given all the puts and takes, do you see that as reasonable, that NII sort of trends just flattish over the next several quarters? I'm just curious, actually, how you see this playing out. Thank you.
spk05: If we're looking at the exit margin in the fourth quarter, with zero rate cuts, we would be, and this is net excretion, we would be up low to mid-single digits with zero rate cuts. With one, we would be up low single digits. And with three, we would be up low single digits. Fast forward to 25, exit with zero cuts, we would be up mid-high single digits. With one cut and four next year, we would be up low single digits. And then if we have three this year and four next year, we would be down low to mid-single digits in terms of net interest income.
spk06: Got it. So just so I understand, so if we get to follow the forward curve, which is two this year and four next year, where does that leave NII?
spk05: It leaves NII down one mid-single digits from the fourth quarter 24 exit to the fourth quarter 25 exit. And that's next to Creason. Yep, got it. With Creason, it would be down mid-single digits. Thanks for taking my question. Yep.
spk06: Yep. Got it. Thank you. Thank you.
spk01: The next question comes from Christopher Marinak from Channing Montgomery School. Christopher, your line is open. Please go ahead.
spk07: Thanks. Just wanted to talk about the capital levels and kind of what the lower bound may be as the buyback gets executed and would you revisit that as next year unfolds?
spk05: What we would anticipate if we just executed this plan, see T1 ratio in the mid-11 ex-law share, Uh, but we would intend to, if that's the case and our capital plan holds, we would intend to execute another plan and manage those ratios down to the 10 and a half percent level at the end of 25.
spk07: Great. And the timing for now, for today's authorization is to do this in the next 12 months, Craig, or would it be really 18?
spk05: Well, we're looking at four to five quarters in our pro formas. Tom, do you want to comment on that?
spk08: Yeah. No, and Craig mentioned we're slightly foreclosures in the plan, but still trying to space it out over sort of the next four to five quarters and wrap it up and really get on that large bank capital planning cycle and sort of reassess again first half of next year and then hopefully come back with a new plan.
spk07: Great. Thank you for that. And just a quick follow up on the venture capital space. And do you see any improvement there as you look through the next few quarters?
spk05: Mark Cadger, did you hear that question?
spk04: Sure. Happy to take that. This is Mark Cadger. And as we've alluded to, it remains a bit mixed in terms of the outlook for venture investment. We saw a nice uptick this quarter. It's $55.6 billion, which was initially encouraging. You peel that number apart, there were two very big ones, big investments in there. That net of those makes for a quarter that looks a lot like 23 and the first quarter of 24. And so there's certainly a lot of optimism out there, have not yet seen it translate. And it's really unclear if we'll see that over the next couple of quarters at this time.
spk07: Great. Thank you for that background. I appreciate it.
spk02: Question comes from Casey Herr from Jefferies.
spk01: Casey, your line is open. Please go ahead.
spk09: Great. Thanks. Good morning, everyone. I wanted to touch on the loan-to-deposit ratio. It did tick up here a little bit in the quarter on some pretty nice loan growth. I know you guys have a a long-term goal to drive that lower. If SVB returned to form from the 165% level currently, obviously that would go a long way. Just wondering, can you comment on how the SVB depositors are behaving, your ability to drive that loan-to-deposit ratio back to what was a very deposit-rich vertical and help you achieve these targets?
spk05: Yeah, I'll start, let Tom maybe answer by here. We started the acquisition around 99% loan deposit. It did stick up from 90 to 92, so we're making really good progress, getting it to our sort of mid-80s target range, and we feel confident that over the next three and a half years, as we work down this purchase money note from the FDIC, that we can achieve that range. Tom, do you have anything?
spk08: The only thing I'd add on sort of the SUV side, I mean, we're obviously encouraged. We saw the positive growth during the quarter. You know, that being said, we're looking holistically at the client relationship there, making sure we put them in the right products, use the off-balance sheet products when they're better suited for the client. So we're not, you know, binarily focused on the positive growth there and also looking to, Craig mentioned earlier,
spk05: general bank to drive drop a portion of that deposit growth needed as well keep in mind given that svv deposits can be sort of transitory especially in this environment the direct bank is a level we can pull as well got it thank you and and then just my follow-up um on the uh you guys mentioned that you uh you you've moved uh five billion into the uh
spk09: bond portfolio to sort of dampen the asset sensitivity profile. Is there anything more that you can do on that front to mitigate the impact from Fed cuts?
spk05: Our asset sensitivity, we embarked on this four quarters ago. Our asset sensitivity is around 20% and a 200 basis point rate shop.
spk00: We've gotten that down to around 14% with these actions.
spk05: That's about two-thirds of the path to where we'd like to be, which is somewhere in the 10% to 12% range. So we're very close to that as we sit here today. And that 10% to 12% range is where we were pre-SEV. We're making good progress there. And as you know, we're TBD focused. So what happens there is rates go down 200 basis points. shot to net interest income. However, on the AOCI side, it was more than compensated with increased value of the investment portfolio to TVV, where our balance sheet position would be neutral. Tom, is there anything else you'd like to add to that?
spk08: The only thing I'd add is, tactically, we did add some hedges during the quarter as well. We put on $2.5 billion for the cash flow hedging on the variable rate loan book and moving some of that pricing out over the next 12 weeks.
spk05: Is that how you bring this to $4 billion? Yeah, total. And they're interest rate hedges, cash flow and fair value interest rate hedges?
spk02: Yeah. As a reminder, if you'd like to ask a question on today's call, please press star followed by one on your telephone keypad now. As we have no further questions, I'll hand the call back to Deanna Hart for any concluding remarks.
spk00: Thank you, everyone, for joining us today, and we hope you have a great day. Thanks.
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