First Citizens BancShares, Inc. (FCNCA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Second Quarter 2026 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, Head of Investor Relations. You may begin.

Good morning, and welcome to First Citizens Second Quarter 2016 Earnings Call. Joining me on the call are 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 call presentation, which you can find on our Investor Relations website. Before we begin, please note that our comments will include forward-looking statements, which are subject to risks 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 3 of the presentation. 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 guarantee the accuracy of earnings transcripts provided by third parties. With that, I'll now turn it over to Frank.

Thank you, Deanna. And good morning, and welcome, everyone. Thank you for joining us today. I'll begin with a summary of our second quarter performance before turning it over to Craig Nix to review our financial results and our 2026 outlook in more detail. We delivered strong second quarter performance characterized by sequential top line growth that exceeded our guidance and consensus estimates. These results reflect the continued successful execution of a strategy built to drive long-term, sustainable shareholder value and the strength of our diversified franchise. This morning, we reported adjusted net income of $691 million and adjusted earnings per share of $57.09 driving an adjusted ROE of 12.94% and an adjusted ROA of 1.18%. These results reflect robust sequential growth and significant year-over-year expansion. Both key metrics increased by more than 20% compared to the prior quarter. This strong profitability was powered by top line net revenue expansion, disciplined expense and balance sheet management and resilient credit quality. On the balance sheet, we delivered 1.6% sequential loan growth with increases in both period end and average loans. This momentum was anchored by our global fund banking business, fueled by strong production and heightened capital call line utilization. Additionally, we achieved broad-based growth within our tech and health care banking and middle-market banking verticals. We delivered a 1.5% sequential increase in period-end deposits and a 2.8% expansion in average deposits. These results validate the structural resilience of our operating model and the effectiveness of our targeted deposit gathering initiatives within a highly competitive industrial environment -- industry environment, excuse me. Beyond core balance sheet growth, client engagement in our tech and health care and Global Fund Banking businesses drove solid increases in both period end and average off-balance sheet client funds. Simultaneously, we continued to execute on capital efficiency, returning an additional $600 million to shareholders through share repurchases. Backed by a strong liquidity position, we prepaid another $2.5 billion of the FDIC purchase money note during the quarter, followed by an additional $1 billion in July. This brings our total cumulative prepayments to $8.5 billion. To wrap up my comments, credit performance remains strong, exceeding our expectations. These durable credit trends, combined with disciplined expense management, and healthy client activity demonstrated this quarter, position us well to drive positive operating leverage and long-term shareholder value moving forward. I would like now to turn it over to Craig to take us through our second quarter financial results and our outlook for the remainder of the year. Craig?

Thanks, Frank, and good morning, everyone. I'll begin with a review of our financial performance for the quarter, followed by an update on our balance sheet, credit and capital trends and outlook. . I will anchor my comments to Page 8 of the presentation, Pages 9 through 26 provide details underlying our second quarter results. As Frank mentioned, we are pleased that in the second quarter adjusted earnings were up by over 20% sequentially, exceeding internal and consensus expectations. Slightly over half of the increase was generated by higher pre-provision net revenue, supported by resilient net interest income, fee-based noninterest income expansion and disciplined expense management. The remainder was driven by net benefit for credit losses underscoring strong credit performance. In line with our guidance, net interest income increased by $35 million over the linked quarter driven by favorable earning asset volumes and yields, higher purchase accounting accretion, reduced borrowings as well as a higher day count. These positive factors successfully offset higher funding costs and interest-bearing deposit balances. On a margin basis, headline NIM improved by 1 basis point due to the same factors, while our core NIM remained unchanged. Adjusted noninterest income rose by $66 million sequentially, exceeding our guidance. While $50 million of the growth was in other noninterest income, driven by asset monetization and portfolio revaluation, we did see increases across our fee-generating businesses. Favorable public and private market valuation adjustments and realized gains generated a $27 million gain within our equity warrant portfolio which has grown since the SVB acquisition and serves as a structural driver of long-term upside via lending and financing relationships. Additionally, we successfully realized a $17 million gain through the opportunistic sale of a tax credit investment. Independent of other noninterest income growth Momentum continued in our core fee categories, demonstrating strong execution by our commercial and general banking teams. Client investment fees benefited from a rising transaction volumes within tech and health care and improved margins from a higher-yielding product mix. In Wealth Management, driven by deliberate ongoing investments in team capacity and service breadth Second quarter fee income increased by 12% year-over-year. This expansion deepens client wallet share and establishes a highly predictable recurring revenue stream. Deposit and lending-related fees also posted steady sequential gains, reinforcing the stability of our core banking operations. Adjusted noninterest expense increased by $16 million sequentially, landing at the favorable end of our guidance range and reflecting a disciplined balance between strategic reinvestment and cost management. The sequential increase was primarily driven by a $15 million targeted increase in marketing expense to maintain and attract new deposit balances in the direct bank. Simultaneously, we advanced our long-term digital transformation through higher third-party processing fees and equipment expenses dedicated to data center modernization and enhanced client-facing capabilities. The uptick in other noninterest expense was driven by increased charitable contributions after a seasonally low first quarter. These increases were partially mitigated by a decline in personnel costs due to lower incentive compensation and seasonal declines as employees reach annual benefit limits, partially offset by the impact of merit increases 1 additional payroll day and higher health insurance claims. Ultimately, top line revenue -- net revenue expansion outpaced a modest increase in expenses during the quarter delivering positive operating leverage and reinforcing our commitment to strategic cost management. Period-end loans grew by $2.3 billion or 1.6% sequentially and driven by global fund banking, production and robust growth in the tech and health care and middle market banking businesses. Global Fund Banking grew by $2.6 billion, thanks to favorable financing costs, catch-up investments due to prior tariff pauses and a healthy rebound in secondary market valuation, accelerating exit activity. The pipeline remains highly robust with strong line utilization. Middle Market Banking achieved $205 million in growth supported by solid production and utilization rates. Tech & Healthcare delivered strong momentum with a 3.7% sequential increase anchored by strong performance in the fintech and sponsor segments. In the General Bank, production numbers remained strong. However, loans were relatively flat as paydowns and payoffs outpaced new loan production. We are focused on new prospecting opportunities as well as new referral opportunities to drive lending and overall relationship growth. Period-end total deposits increased by $2.6 billion or 1.5% sequentially, driven by the direct bank, which added $2.8 billion during the quarter. These highly insured granular retail deposits continued to strengthen our liquidity profile and significantly reduce large institutional concentration. The Commercial Bank segment declined by $1.5 billion stemming from anticipated early quarter corporate outflows. This reflects the historically lumpy nature of commercial fund flows and remains well within our modeled expectations and we remain encouraged by the performance of these underlying businesses. The General Bank experienced a modest decline, but we expect a medium-term recovery. We are actively focused on driving core deposit growth by enhancing our deposit strategy, broadening digital outreach, strengthening client engagement and refining our attention and relationship-based pricing strategies. We continue to supplement organic growth with strategic use of broker deposits, bolstering liquidity to prepay the FDIC note. We actively monitor pricing and tenor to ensure a resilient cost-effective funding mix. Period-end average period end and average total client funds in the SVB commercial business rose by $1.1 billion and $6.1 billion, respectively. Off balance sheet growth was driven by tech and health care and Global Fund Banking, reflecting strong cash and new money inflows from public entities. Our credit profile remains strong, driven by resilient asset quality trends. The net charge-off ratio improved by 1 basis point sequentially to 29 basis points outperforming our guidance. Our performance was driven by accelerated resolutions in the general office portfolio and reduced investor-dependent losses. While the current operating environment has been impacted by geopolitical factors, the broader economy has remained resilient. This backdrop, combined with continued improvement in criticized and classified asset levels and a migration to higher credit quality portfolios has resulted in lower net charge-offs and a reduction in our allowance for loan losses. Nonaccrual loans held steady quarter-over-quarter at 96 basis points of total loans. The slightly elevated level reflects timing and resolving a few large loans originally slated for the second quarter. We expect nonaccrual loans to decline throughout the second half of 2026. As of July 21, we had repurchased over 20% of our common shares outstanding for a total of $6.3 billion, roughly 84% of our total authorization. Share repurchases were $600 million during the quarter our CET1 ratio was 10.77 at quarter end. As we approach our CET1 target range of 10% to 10.5%, we are proactively moderating the pace of share repurchases. We anticipate repurchases of approximately $600 million in the third quarter and $300 million in the fourth quarter as the capital distribution strategy pivots from deploying excess capital towards sustainable capital maintenance. Our capital position remains comfortably above regulatory requirements. This provides us with meaningful optionality to support client needs, fund strategic growth initiatives and deliver consistent long-term results to our shareholders. Turning to Page 28. I I'll conclude with our outlook for the remainder of 2026. We are projecting third quarter loan balances in the range of $152 million to $155 billion driven by growth in the Commercial Bank and General Bank segments. We reiterate our full year guidance of $153 million to $157 billion, underpinned by sustained client activity and the upcoming BMO branch acquisition. In the Commercial Bank, we expect loan growth to be anchored in the commercial finance industry verticals in the seasonably robust factoring business. Global Fund Banking is supported by a healthy $11 billion pipeline, though we anticipate balance growth will moderate following record production and high utilization in the first half of the year. In the General Bank, growth is expected to accelerate in the second half of the year, fueled by the business and commercial portfolios within the branch network. We also anticipate that the BMO branch acquisition expected to be completed in the third quarter, will add approximately $700 million to the loan portfolio. We project third quarter deposits between $179 million and $182 billion driven by our BMO branch acquisition, adding approximately $5.3 billion in deposits. We expect this to be bolstered by growth in the direct bank and branch network where our digital marketing strategies and pricing enhancements continue to help us capture share. We expect this growth will more than offset normal outflows in tech and health care banking as our clients deploy cash in the operations or off-balance sheet investment alternatives. We have made significant headway on the FDIC purchase money note prepaying $8.5 billion through July. We remain committed to a steady paydown pace of $500 million to $1 billion per month and will also leverage other positive liquidity events to accelerate the paydown, reinforcing balance sheet optimization. Driven by recent wholesale funding activities and the anticipated positive liquidity event created by the BMO branch acquisition, we expect an acceleration in the pace of pay down in the third quarter totaling between $6 billion to $8 billion. We reaffirm our full year guidance of $181 million to $186 billion, accounting for the BMO branch acquisition and targeted deposit growth. On net interest income, we are maintaining our midpoint while marginally narrowing our full year range to $6.6 billion to $6.75 billion. We are guiding to a range of $1.63 billion to $1.71 billion in the third quarter. Our guidance factors in 0 to 125 basis points rate hike potentially moving the Fed funds rate to 4% by year-end. Headline and ex accretion, net interest income troughed in the first quarter due to interest rate shifts and changes in accretion levels. We expect continued strength in earning asset growth, we'll successfully mitigate modest increases in funding costs as we work to grow deposits across all channels and prepaid the FDIC note. While we remain asset sensitive, the anticipated timing of the rate hikes means the bulk of the net interest margin benefits will be realized in 2027 rather than late 2026 as we expect deposits to reprice more quickly than variable rate loans, which often take up to a quarter to reprice. We expect third quarter net charge-offs in the 30 to 40 basis points range we are actively managing the commercial general office and innovation portfolios where we expect charge-offs to continue in the medium term. Reflecting our 2026 performance through the first half of the year, we are moving our full year net charge-off guidance to 30 to 35 basis points. We are not observing any systemic trends signaling credit quality deterioration across the broader portfolio and believe we are well reserved. We remain encouraged by our credit results year-to-date and are optimistic the good performance will continue. We expect noninterest income between $520 million and $560 million in the third quarter. Overall, we continue to see strength in many of our business lines such as rail, carton merchant, client investment fees and wealth. For the full year, we are raising our guidance to $2.14 billion to $2.22 billion, driven in part by client investment fees benefiting from off-balance sheet volume growth and favorable asset yields and a flat to increasing rate environment. In the commercial bank, more broadly, we expect continued strength in international fees and seasonal volume lifts and factoring commissions. We also expect continued momentum in wealth via regional talent acquisition and deeper connectivity with general and commercial bank relationship managers. We anticipate sustained stability in deposit fees and we remain encouraged by the performance of our lending-related businesses as we continue to benefit from strong loan growth and capital markets activity. Finally, we expect high asset utilization and strong lease rate repricing in our rail business through year-end 2026. We project third quarter expenses to remain relatively stable in the $1.33 billion to $1.37 billion range and full year in the $5.34 billion to $5.41 billion range, both improvements from our previous guidance. For the third quarter, we expect expansion in various categories given the expected completion of the BMO branch acquisition as well as work on our SVB brand transition. We will continue to utilize a direct bank to support deposit growth in the third quarter but do expect marginally lower marketing expenses as the team has improved efficiency around client acquisition and retention. The shift in full year expenses reflects our ability to continue to find efficiencies in how we operate, which is helping offset the year-over-year impact of the BMO branch acquisition, merit-based increases, direct bank marketing costs and IT spend as we continue to invest in solutions that simplify our processes and improve our customer experience. We expect that our adjusted efficiency ratio will be in the low 60% range in 2026 as strong revenue performance is partially offset by funding pressures and continued investments in our franchise. To wrap up on expenses, we are highly encouraged by our current trajectory and the discipline we are seeing across the organization, which reflects deliberate actions to streamline our cost of doing business. Our strategic focus on operating efficiency and expense management is successfully bending the cost curve as evidenced by our second quarter performance. We recognize that our efficiency ratio is higher than our ultimate baseline, and we are fully committed to driving this metric down into our mid-50s target range over time. We will continue to focus on cost efficiencies and revenue enhancements to optimize operating leverage and maximize long-term shareholder value. For both the second quarter and full year '26, we expect our tax rate to be in the range of 24.5% to 25.5% and which is exclusive of any discrete items. This concludes our prepared remarks. I will now turn it over to the operator to open the line for questions.

[Operator Instructions] Our first question comes from the line of Casey Haire with Autonomous Research.

Yes. Great. I wanted to touch, Craig, on the NIM came in a little bit stronger than I think what you guys were talking about last quarter. Just some updated thoughts on what the outlook is and maybe where spot deposit costs are versus that [ 273 ] IBD level in the second quarter?

Okay. Thank you. For the third quarter, and this is anchored to 1 rate hike in October. So for the third quarter, we're expecting both baseline and ex accretion net interest income to be flat with the second quarter. We expect both baseline and ex accretion NIM to also be flat with the second quarter. In terms of the fourth quarter exit -- we're expecting headline net interest income to be up low single digits percentage points and net and ex accretion to be up low to mid-single-digit basis points -- percentage points. We expect headline NIM and ex accretion NIM to be flat with the second quarter. So that's the trajectory through the second half of the year. In terms of spot rates, or on total deposits, compared to our 2.07% cost of deposits in the quarter, our spot rate was 1.99%.

Okay. Very good. And then on the capital front, so if I layer in that the $900 million that you expect in the back half of the year on buyback, and then the BMO branch deal that CET1 ended the year at around 10%. So just look at thinking about buyback appetite in 2027. Would you -- I mean, you guys would be at your floor, but would you lean into that Basel III proposal? Just trying to get a feel for what buyback would be in next year.

Okay. First of all, and I'll let Arch expand on this. We expect that our CET1 ratio will be towards the higher end of our target range of 10% to 10.5% at the end of this year. and that assumes the $900 million of repurchases in the second half. Arch, why don't you touch a little bit on the Basel III and our plans there.

Sure, Casey. To echo Craig's point, at least on the exit for Q4 this year, we do expect to kind of be at the midpoint of our target range as we exit the year as we normalize the share repurchase pace, as Craig had mentioned in his prepared remarks. As we're thinking about the Basel refresh in the final rule becoming effective, we've clearly done a lot of work in the back end here to prepare for it. We are not getting too many ducks in a row here until we have that final rule fully in front of us to really start implementing how that might influence the forward capital plan and capital strategy for us internally. But I think as we think about that, we'll certainly have more to share as we think about 2027 in pace as really -- that rule really kind of firms up and becomes a reality.

Our next question comes from the line of Chris McGratty with KBW.

Craig, just following up on the NII and the margin conversation, which is helpful. How would those numbers change if you don't get a hike if rates stay flat? I guess [indiscernible] the fourth quarter...

If rates stay flat. Looking at the third quarter, we would still project flat net interest income, headline and accretion. We would also anticipate that our NIM headline and ex accretion have sort of flattened out as well. So we might bump up or down a couple of basis points, but we would expect those to be fairly stable as well. So not much impact on '26. Moving into '27 with a flat environment. And I'm talking -- or moving into the fourth -- second half of the year, fourth quarter, we would expect low single-digit growth in both core and ex accretion NIM and our margins to remain fairly consistent with where they are now. So not much change.

No, no big change. Okay. And then I guess, broader competitive -- a lot of your peers have talked about just the broader competitive dynamic for fundraising in deposits. Your spot rates would suggest that your whole blind there, but any incremental color on the funding outlook?

Yes. I think we observed that competition is very fierce for deposits, putting a lot of pressure. And frankly, a lot of banks are putting out deposits that are really unprofitable. So the pressure is intent. And I think that's really -- if you think about our asset sensitivity, we would expect to have much more improvement in margin and net interest income. And I think the funding costs are sort of blending sort of blunting that muting sort of our position to neutral to where it is now. Elliot, any more comments on deposit competition, funding costs, et cetera?

No, I think that's right. And I think we're very pleased with what [indiscernible] direct bank in the second quarter. And I think that being said, I mean, rates are kind of marginal cost and that channel north of 4%. So I do think not just in direct bank but others, we're seeing good competition out there that's pushing rates a little bit higher. So really, [indiscernible] your comments there.

Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank.

Just on the FAC note, just wanted to get an updated sense of where you think the remainder proceeds come from. I know you're down to $27 billion with the 1 in pay in July Craig, you mentioned the $6 billion to $8 billion paydown using the BMO branch acquisition in 3Q. Just kind of curious, is the remaining after that so 4Q 1 until it's paid off, just the $500 million -- or $1 billion, sorry, a month like you said. Just want to get some updates.

No, the $1.5 billion to $3 billion a quarter is sort of a natural run rate. But beyond that, we would repay -- to date, we've paid through excess liquidity on our balance sheet. We'd expect to continue to prepay from that. We have good capacity at the Federal Home Loan Bank, so we might draw on that. We are planning on doing some more long-term debt issuance. So that would be a source and then broker deposits, if needed. Arch, anything you'd like to add to that?

Only thing I'd like or there is just continued execution through the deposit channels. Obviously, branch and commercial, we're still looking at growth there over the long run. But to Craig's point, echo in there. We do have a diverse menu of funding opportunities ahead of us, I think, to really kind of measure the purchase money not down over time ahead of that 2028 maturity.

Yes. And just with respect to our projection of $6 billion to $8 billion in prepayments for the third quarter, that will come from a combination of that normal $1.5 billion to $3 billion run rate plus the net liquidity provided from the BMO branch acquisition.

Great. And just as a follow-up, just given all those moving parts, when we think about your asset sensitivity, obviously, it's an outlier versus peers, the DSE note has been a big part of it. And Greg, you mentioned that the bulk of rate hikes that they occur, the NIM will benefit next year. Just wondering, if you were to replace the note, obviously, there are different factors that you kind of mentioned, how would that impact your rate asset activity?

6 I lost you on the last part of that question, how would it impact, what...

Your asset sensitivity [indiscernible].

Okay. Thank you. I got you.