First Citizens BancShares Inc (Delaware)
NASDAQ:FCNCA
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First Citizens BancShares Inc (Delaware)
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Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded.
I would now like to introduce the host of this conference call, Ms. Deanna Hart, Senior Vice President of Investor Relations. You may begin.
Good morning, everyone, and thank you for joining us today to review First Citizens BancShares first quarter 2022 financial results.
It is my pleasure to introduce our Chairman and Chief Executive Officer, Frank Holding, as well as our Chief Financial Officer, Craig Nix. During the call, they will be referencing our investor presentation which you can find on our website. We are also pleased to have several other members of our leadership team in attendance with us today who are available to participate in the question-and-answer portion of our call, if needed. Following the completion of our formal presentation materials, we’ll be happy to take any questions you may have.
As you are aware, we closed the merger with CIT Group on January 3, 2022, and first quarter results are for the combined company. Given the magnitude of this merger on our legacy results, we have included combined numbers for the historical periods for comparison purposes. There are footnotes within the presentation to indicate when historical numbers are combined or on a First Citizens standalone basis.
As a reminder, our comments during today’s presentation will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. We assume no obligation to update these statements. These risks are outlined for you on page 3 of the presentation. We will also reference non-GAAP financial measures in the presentation. Reconciliations of these measures against the most directly comparable GAAP measures are available in the appendix.
Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties.
With that, I’ll hand it over to Frank.
Thank you, Deanna, and good morning, everyone. We appreciate all of you joining us today.
We are pleased to announce solid first quarter results this morning. We continue to remain focused on ensuring a timely and successful integration with CIT and made good progress during the quarter, and we’re very excited about our prospects moving forward.
As Craig will touch on when he covers our financial outlook, we expect net interest margin to continue to expand. Our customers, by and large, are in good shape, so we feel good about the prospects for loan growth. And we expect continued momentum in our fee income generating lines of business as well as further progress on our cost save target.
Turning to page 5 of the investor presentation. We continue to remain focused on ensuring a timely and successful merger integration for our customers and associates. Leveraging our dedicated integration management office comprised of execution-oriented leaders with multiple acquisitions, conversions and integrations under their belts, we are working hard to ensure the value of the deal is realized for employees, customers and shareholders. And I’m pleased to say, we are exactly where we expected to be at this point in time.
All of us are focused on ensuring our teams are coordinated and meeting our integration time line. As we’ve said before and are experiencing as we integrate, integration risk can be better managed in this merger because of the structure of CIT. Instead of converting a large bank over a long weekend, which is typically the case, CIT is a diverse group -- or it has a diverse and unique business units and groups that will include some conversions, like One West, which is slated for mid-July, but will also include lifting and shifting or replatforming other lines of businesses, like factoring, commercial finance and rail, which will be managed individually and sequenced in a way that manages the integration cleanly over the next few months.
Turning to page 6. I want to thank all of our associates for their dedication, hard work and sacrifice to ensure that we are making progress on our integration milestones. We are pleased with our progress on our cost saves target of $250 million and expect that $200 million will be in the run rate by the end of this year.
As Craig will soon cover, during the first quarter, we achieved positive operating leverage as net revenue grew at a faster pace than expenses, leading to strong core earnings and pre-provision net revenue growth. We will continue to focus on redeploying excess liquidity into loans and investments at higher rates to boost net interest income and margin. We look forward to making progress -- further progress on merger integration and producing strong results in the second quarter.
Before I turn it over to Craig, I’d like to say that despite some of the uncertainty out there, given geopolitical and macroeconomic issues, we remain very excited and optimistic about our growth prospects. We are already shifting from integration focus to execution in many areas throughout the bank, and we’re working hard to capture the synergistic value from the CIT merger on the revenue and expense side, and that’s already bearing fruit. We are well-positioned to perform well given -- we are well-positioned to perform well, given our long-term focus, our focus on relationships, our risk appetite and the diversity of our business segments and our enhanced earnings profile, as we are now merged with CIT.
Now, Craig will provide a closer look at our financial quarter results. And then, we’ll open the line for questions. Craig?
Thank you, Frank, and good morning, everyone.
Starting on page 8. As you may expect, our first quarter results have some noise in them due to purchase accounting and merger-related items. While I will cover the noise in my comments today, I do not want to detract from what Frank just described as solid first quarter results. So, I’m going to begin with several positives, highlighting the quarter.
Core deposit growth was strong with noninterest-bearing deposits growing by $1.2 billion since year-end an annualized growth rate of 20%. The loan portfolio grew due to strong growth in the branch network and in residential mortgages. In addition to organic loan growth, we continued to redeploy excess cash into investment securities at attractive entry points. Net interest margin expanded by 17 basis points over the linked-quarter, overcoming a decline in SBA-PPP income. Only 6 basis points of the expansion in margin was attributable to purchase accounting.
We continued to generate positive momentum in the rail, card, merchant and wealth, fee income producing lines of business. Noninterest expense was well-controlled. And as Frank mentioned, we are confident that we will achieve our cost savings target.
Net revenues grew at a faster pace than expenses, resulting in positive operating leverage during the quarter relative to the linked and comparable quarters in the prior year. As a result, pre-provision net revenue increased by 8% over the linked quarter and by 18% over the comparable quarter a year ago.
Credit quality remained strong with a net charge-off ratio of 9 basis points. We ended the quarter strong from a capital and liquidity standpoint, supporting the resumption of share repurchases during the second half of the year. And finally, as Frank covered in his comments, merger integration is going well and is on track.
Turning to page 9, I will touch on the financial highlights for the quarter. Please note that we are providing our GAAP results as well as supplemental reporting on an adjusted basis to account for the after-tax basis of notable items such as gains and expenses associated with mergers, gains and losses on sale and debt extinguishment and other nonrecurring noncore items.
With that, I am happy to report GAAP net income of $264 million or $16.70 per share, yielding an annualized ROE of 11.18% and an ROA of 1%. On an adjusted basis, net income was $299 million or $18.95 per share, yielding an annualized ROE of 12.68% and an ROA of 1.12%. Comparable EPS, ROE and ROA shown on this page for prior periods are for First Citizens BancShares on a standalone basis. NIM and the net charge-off ratio are presented as if the companies were consolidated during the historical periods. I’ll dive a little deeper into these components in a moment as we look at underlying trends that produced our results.
Turning to page 10, we provide two income statements, the one at the top representing our reported GAAP results and the one at the bottom supplementing those results showing net income adjusted for notable items. Both income statements are presented as if FCB and CIT were merged during the historical periods presented. The section in the middle of the page summarizes the impact of notable items to drive the adjusted results from the reported results. The most significant notable items were the estimated $431 million bargain purchase gain, $513 million day 2 CECL provision and $135 million in merger-related expenses associated with the CIT merger.
Page 11 provides a detailed listing of the notable items affecting the quarter along with their impact on net income and diluted earnings per share.
Now, I will focus on the adjusted results at the bottom of page 10. Pre-provision net revenue increased by $26 million or 8% over the linked-quarter and by $54 million or 18% over the comparable quarter a year ago. The increases for both periods were driven by positive operating leverage. Net income available to common shareholders is $299 million, up from $291 million in the fourth quarter and down from $323 million in the first quarter of the prior year. The increase in net income during the linked-quarter was due to an increase in pre-provision net revenue, lower preferred dividend, partially offset by a decline in the benefit for credit losses. The decline compared to the same quarter a year ago was due to the decline in the benefit for credit losses, only partially being offset by an increase in pre-provision net revenue.
As I mentioned, page 11 provides detail on notable items, most of the significant ones relate to our merger with CIT. I will call out here that on an adjusted basis, we will report rental income on operating leases net of depreciation and maintenance, which will reduce GAAP reported noninterest income and also reduced GAAP reported noninterest expense by the same amount. The net effect of these adjustments is neutral to pre-provision net revenue, pretax income and net income.
In summary, noninterest income was adjusted downward by $570 million, mostly due to the estimated bargain purchase gain. To get to core noninterest expense, noninterest expense was adjusted downward by $238 million. After removing the day 2 CECL impact, pretax income was adjusted up by $181 million and these adjustments added $1.90 to reported or GAAP EPS.
Now, starting with page 12, I’ll touch on the major trends impacting our operating results. Unless noted otherwise, the financial trends on the upcoming pages are consolidated as if the merger with CIT took place during the historical period presented.
Net interest income totaled $649 million for the quarter, representing a $30 million or 5% increase compared to the linked-quarter. The drivers of the increase were a $54 million decrease in interest expense, offset by a $24 million decline in interest income. The decline in interest expense was driven by reductions in interest expense on borrowings of $40 million and on deposit of $14 million. Of the $54 million decline in interest expense, $31 million related to purchase accounting, premium amortization with the remaining $23 million attributable to the $3 billion debt redemption in February and lower deposit rates. The cost of deposits declined by 6 basis points during the quarter as higher price time deposits continue to mature. While we expect that interest costs on deposits will begin to increase given Fed rate hikes, we will continue to let higher price time deposits, including brokered CDs, mature, which will help to alleviate some of the pressure of rising rates in the short term.
Interest income was negatively impacted by declines in legacy CIT interest accretion that accounted for $23 million of the decrease and SBA-PPP income contributing to $7 million of the decrease and a lower day count. These factors were partially offset by improved investment yield and earning asset mix as we redeploy excess liquidity into investment securities, organic loan growth and to redeem long-term debt. Interest on investments was up $23 million compared to the linked-quarter due to a 36 basis-point increase in yield and a $1.9 billion increase in average balance. $7 million and 14 basis points of the increase was due to purchase accounting. The remaining positive impacts were due to higher reinvestment rates and lower prepayments on the MBS portfolio.
Excluding the impact of lower accretion, SBA-PPP interest income and day count, interest income was up $32 million due to a higher investment portfolio yields and improved earning asset mix. The loan yields ex accretion and PPP loans was essentially flat with the prior quarter. Net interest income increased by $42 million over the comparable quarter in 2021 and net interest margin increased by 15 basis points. Net interest income increased for similar reasons described for the linked-quarter, with the exception that interest income was negatively impacted by earning asset mix relative to the comparable quarter in 2021.
Turning to page 13, we highlight the drivers of the 17 and 15 basis points margin expansion from the linked and comparable prior year quarters, respectively. Purchase accounting was accretive to both quarters by 6 basis points. Excluding the impact of purchase accounting, net interest margin increased by 11 basis points from the linked quarter and by 9 from the comparable quarter. The increase for the linked quarter was due to the impact of the combination of improved funding and earning asset mix, higher investment yield and lower deposit costs, all outpacing the negative impact of lower SBA-PPP income. Similar themes exist for the comparable quarter increase. However, the decline in deposit rates was more accretive and earning asset mix had a more pronounced negative effect as average loans declined by $3.5 billion.
As we look ahead to the remainder of 2022, while we expect interest expense to increase, we expect that interest income will increase at a faster pace, leading to growth in net interest income over the coming quarters. In addition, we expect the earning asset yields will increase at a faster pace than the cost of funding them, thus leading to continued expansion of net interest margin.
Turning to page 14. The line graph on the left-hand side of the page indicates that we continue to be asset sensitive. While we have been opportunistic in reducing excess liquidity, we continue to operate with liquidity above normal operating ranges. We have and will continue to take a measured approach to interest rate risk and market risk management to position our balance sheet to benefit from higher interest rates while at the same time, providing downside protection, should interest rates fall in the future. We estimate that a 100 basis-point shock in rates would increase net interest income by 6.1% and at a 100 basis-point ramp by 2.5% over the next 12 months. The main drivers of the improvement are our variable rate loan portfolio, which represents 45% of total loans, our cash position and modest deposit betas, driven by our strong core deposit base. We model our blended deposit beta between 20% and 25%, which is aligned with historical experience in a rising rate environment. Currently, deposit betas are well below these expectations.
Moving to page 15. Noninterest income totaled $726 million during the first quarter, which was an increase of $402 million over the linked-quarter and $302 million over the comparable quarter last year. The difference between the $850 million in GAAP noninterest income reported on page 9 and the $726 million shown here is that rental income on operating leases is reported net of depreciation and maintenance expense. On slide 16, noninterest expense has been reduced by the same amount.
The $402 million increase in noninterest income for the linked-quarter was driven primarily by the estimated bargain purchase gain recorded in connection with the CIT merger, higher core noninterest income, the gain on debt extinguishment, partially offset by declines in gains on sale of operating leases and legacy CIT consumer mortgages. The gains on sale will be a less prominent part of our strategy moving forward, given our liquidity and capital position, and the purchase accounting reset on legacy consumer mortgage and rail assets.
Core noninterest income increased $16 million or about 6% over the linked-quarter, primarily due to higher rental income on operating leases, an increase in card and merchant income, partially offset by a decline in factoring commissions due to expected seasonal decline in volume.
Higher net rental income on operating leases was due primarily to lower maintenance cost on rail fleet -- on the rail fleet as less cars came off fleet during the quarter, requiring less transportation and maintenance costs. Core noninterest income increased by $36 million when compared to the first quarter, led by an increase in net rental income on operating leases, higher card and merchant, service charges on deposits and wealth management income, all partially offset by a decline in mortgage income. Higher rental income on operating leases was due to improvement in gross rental income due to higher rail fleet utilization, higher renewal rates on new leases as well as lower depreciation and maintenance costs. Rail fleet utilization increased to 95.5% at the end of the first quarter, up 2.4% from year-end. Mortgage income was negatively impacted by higher interest rates from reduced refinance activity and pressure on gain on sale margins, which have declined after being elevated in the latter half of 2020 and 2021 due to increased mortgage demand and the lower rate environment.
Turning to the remainder of 2022, we expect continued momentum in our rail, merchant and card and wealthy income-producing lines of business. While service charges on deposits will decline as we enact the NSF OD policy changes we announced earlier this year, we anticipate a high single-digit percentage increase in adjusted noninterest income year-over-year. With respect to the lost fee income from NSF OD fees, we are looking for opportunities to offset it by broadening customer relationships through product offerings that will add value for our customers.
Turning to page 16. Noninterest expense totaled $686 million during the first quarter, an increase of $117 million and $116 million over the linked-quarter and the comparable quarter, respectively. The $117 million increase over the linked-quarter was primarily driven by $222 million increase in merger-related expenses resulting from a combination of deal-related change in control, retention and severance payment and legal and consulting costs. Core noninterest expense increased by $20 million, and were partially offset by a $27 million expense reversal related to termination of 2 legacy benefit plans.
The $20 million increase in core noninterest expense over the linked-quarter primarily related to higher personnel costs driven by a combination of factors, including higher performance and revenue-based incentives, seasonally higher FICA and 401(k) expenses and lower deferred loan origination call, all partially offset by lower salaries expense. The lower salary expense was a result of our continued focus on merger cost saves. The $116 million increase over the comparable quarter last year was due to the same reasons stated for the linked-quarter with the exception of the increase in merger-related expenses was also offset by a decline in intangible asset amortization.
Core noninterest expense increased by $24 million due to higher personnel costs, third-party processing fees and marketing costs. The good news here is that our efficiency ratio improved to 61.57% during the quarter as core net revenue growth outpaced expense growth.
Looking forward, we are feeling the pressures of inflation, especially as it relates to wage pressure, professional service and contract costs. We do expect, however, as we are able to remove another $100 million out of our cost base, it will help to neutralize the natural noninterest expense growth that exclusive of merger cost saves will be closer to the mid-single-digit range for this year. We expect a low-single-digit percentage increase in adjusted noninterest expense year-over-year. In terms of our efficiency ratio moving forward, with the expected positive net revenue impact of rate increases and continued efforts on cost savings initiatives, we could see continued improvement during the remainder of the year and into next year. We still feel good about our estimate of $300 million in merger-related expenses for the year, with the absolute level of merger expenses continuing to moderate in the coming quarters, with quarter one being the high watermark with most of the first quarter expense tied to the timing of the merger close.
Page 17 provides balance sheet highlights and key ratios. I will cover the significant components of the balance sheet on subsequent pages. So, I won’t spend time on this page, other than to note that you’ll see that we are maintaining strong, healthy capital levels post merger, which we plan to leverage into organic growth and share repurchases during -- and share repurchases during the second half of the year.
Turning to page 18. Total loans increased $313 million over the linked-quarter or by 1.9% on an annualized basis. If we remove the impact of purchase accounting and SBA-PPP loan decline, total loans increased by $455 million or by 2.8% on an annualized basis. Given the lower seasonal growth we typically experience during the first quarter and the necessary focus on merger integration, we are pleased with these results. The loan growth for the quarter was led by the branch network, which grew at an annualized rate of 6%, led by growth in commercial, business and consumer loans. This growth rate is encouraging as we continue to focus on both, client outreach efforts and adding additional bankers in high-performing markets where we feel there is a compelling organic growth opportunity. Elsewhere, we had growth in mortgage loans for the quarter, even as overall mortgage loan production was down as the decline in prepayment speeds due to higher interest rates enabled production to overcome loan runoff. On the downside, we continue to see learn declines in real estate finance loans, abundant liquidity in the system keeps pressure on pricing, and competitors are willing to refinance loans at lower spreads.
Last, inflation in the rising rate environment are prompting some apprehension to new borrowing in the space. On a year-over-year basis, loans declined by $2.6 billion or 3.8% due to decreases in SBA-PPP and real estate finance loans, excluding SBA-PPP which accounted for $2.6 billion reduction in the net impact of purchase accounting. So, the $2.6 million reduction in PPP and the impact of purchase accounting, the decline was 0.3% or virtually flat as the growth mentioned previously in the branch network was able to neutralize declines in real estate finance loans.
As we look forward, we do feel positive about the prospects for further loan growth. We anticipate a mid-single-digit percentage increase in loans for the full year ‘22. However, we do acknowledge that uncertainty around the external environment, especially with regard to economic and geopolitical risks could cause actual growth rate to deviate from our expectations.
Moving to page 19. We experienced strong deposit growth during the quarter with deposits growing an annualized rate of approximately 4% or about $833 million. The main drivers of the quarter-over-quarter change were a $1.2 billion increase in noninterest-bearing checking accounts, representing almost 20% annualized growth. This was offset by a $388 million decrease in interest-bearing deposits due to $754 million decline in time deposits, partially offset by a net $376 million increase in other interest-bearing accounts. Our cost of deposits declined to 17 basis points during the quarter, down 6 basis points from the linked-quarter and 16 basis points from the first quarter of last year.
Despite the fact that our noninterest-bearing deposit growth continued at record levels in the first quarter, we remain guarded on the outlook for continued absolute deposit rate in 2022 as the interest rate environment continues to evolve and the Fed impacts liquidity in the system by deleveraging balance sheet. As we continue to optimize our funding mix by placing higher cost deposits -- by replacing higher cost deposits with lower cost core checking account, we expect the continued decline in time deposits, offsetting growth in transaction accounts.
Moving to page 20. Our balance sheet continues to be funded predominantly by core deposits, the total deposits representing over 96% of our funding base at the end of the quarter.
Continuing to page 21, credit quality continues to be very strong. While the net charge-off ratio increased from 5 basis points to 9 basis points from the linked-quarter, it remains low, which in combination with improved macroeconomic scenarios, resulted in a negative provision of $49 million during the quarter, after excluding the day 2 CECL provision. The ACL ratio declined from 1.36 at the end of last year to 1.29 at the end of the first quarter.
Turning to page 22. The combined ACL was $890 million at the end of 2021. As we reported in March on the date of the acquisition, we cleared out CIT’s ACL of $712 million and established an estimated reserve for PCD loans of $284 million and an estimated day 2 provision for non-PCD loans of $454 million, which resulted in a $26 million increase in CIT’s year-end ACL. The increase was primarily related to changes in specific reserves on loans individually evaluated for impairment at the acquisition date. This resulted in a day 1 combined ACL of $916 million.
Subsequent to the acquisition date, we released $68 million in reserves, bringing the ACL down to $848 million or 1.29% of total loans. The release was a result of improvement in certain macroeconomic scenarios used in the estimation of the allowance, specifically around real estate values. Additionally, we saw improvement in the specific reserves on certain impaired loans during the quarter. The ACL at quarter-end covered annualized net charge-offs 14.3 times.
Turning to page 23. Our capital position remains strong, with all ratios above or in the upper end of our target ranges. As of the end of the first quarter, our CET1 ratio was 11.36% and our total risk-based capital ratio was 14.48%. After accounting for the merger impact, which was slightly dilutive to our risk-based capital ratio and accretive to our Tier 1 leverage ratio, the growth during the quarter was attributable to strong earnings, partially offset by growth in total risk-weighted assets and dividend payments. The leverage ratio increased further due to the average asset impact from the debt redemption completed on February 24th. Our tangible book value per share grew by 40% to $574.09 during the quarter, driven by the value created from the CIT acquisition.
Turning to page 25, I will conclude by discussing our financial outlook. Let me preface my comments here that this outlook assumes that the U.S. economy continues to perform well by most measures. This includes GDP growth as COVID continues to wane, that Ukraine crisis does not derail the U.S. economy, that monetary policy becomes tighter as the Fed tries to rein in inflation, inflation while currently elevated, doesn’t move up significantly or declines, supply chain and geopolitical issues are resolved, the unemployment rate remains relatively low and income taxes remain at current levels.
On page 25, the first and third columns list our first quarter ‘22 and full fiscal year ‘21 adjusted actuals for the relevant metric or balance sheet line items. The numbers in these columns are adjusted for notable items to arrive at core noninterest income and expense. Column two provides our growth and other assumptions for the second quarter and column 4 for the full fiscal year 2022.
From a loan growth perspective, we expect growth to be in the mid-single-digit percentage range in both Q2 and for the year. While we foresee continued mid- to high-single-digit growth in our branch network, we do continue to feel some pressures in the real estate finance portfolio based upon accelerated prepayments in the competitive landscape. We will continue to proactively add bankers in our wealth, middle market banking and large metro branch network areas to support loan growth. We also anticipate that our cost of funds will afford us opportunities to compete more favorably in the large commercial space on high credit rate opportunities and the continued collaboration of our legacy FCB and CIT lending teams and sending referrals will help increase loan volumes as the cultures become integrated. We are already seeing referral activity pick up as FCB and CIT gain more understanding of each legacy company’s products and capabilities.
On deposits, we do not expect to continue the legacy First Citizens robust levels of growth over the past two years as we seek to optimize funding by replacing higher cost accounts with lower cost core checking accounts. While we had strong growth in the first quarter, we do expect seasonal outflows in our branch network and CAB business and consequently, we expect deposits to be slightly down in the second quarter.
On the year, we expect flat to low-single-digit percentage growth. However, if we continue to see upside in our noninterest-bearing account, we could exceed that guidance. Our expectation is that demand deposit growth will continue at a mid-single-digit percentage growth rate but will be offset by continued optimization of the funding base, highlighting higher-priced CDs and money market accounts run off.
For net charge-offs, we expect a gradual return to pre-pandemic non-stress levels for both First Citizens and CIT. We expect net charge-offs in the range of 10 to 20 basis points in the second quarter and 15 to 25 basis points for the full year. The increase in our net charge-off projection is not due to any apparent stress in our portfolios. Rather, we think the impact of inflation and rising rates may result in our losses returning to more historic levels.
For net interest income, we expect continued growth in the second quarter in the mid-single-digits percentage range compared to Q1 as the impact of expected rate increases on earning asset yields outpace increases in the cost of funding earning assets. On a full year basis, we expect low- to mid-teens percentage growth.
From a core noninterest income perspective, we expect to be down slightly compared to the first quarter as renewal rates on operating leases increase and maintenance costs return to more normal levels. For the year, we expect upper single-digit growth led by net rental income on operating leases as well as continued growth in wealth, merchant and card income. From a core noninterest expense standpoint, we expect the second quarter to be flat to slightly negative compared to the first quarter as the impact of annual merit increases are offset by a decline in seasonal benefits extend the continued recognition of merger cost saves. On the year, we expect noninterest expense percentage growth to be low single digits.
From a cost savings standpoint, we estimate that $100 million in cost saves is in our run rate currently and project $200 million to be in the run rate by the fourth quarter of this year. In 2023, we expect $250 million to be in our run rate by the fourth quarter.
In closing, we are very pleased with our first quarter results and the hard work put in by our associates to make it happen.
With that, I will now turn the call back over to the operator for Q&A.
[Operator Instructions] And your first question will come from Brady Gailey.
So, as we approach the back half of this year, which is when you guys have signaled you’ll reengage in the buyback, how do we think about the size of what that buyback could be? I mean, you guys clearly have a lot of excess capital. And I know historically, when you have been engaged in the buyback, you’ve done it in size, like I think in 2019 and then 2020. Each of those years, you repurchased about 8% of the company. So, any thoughts on how you think about the size of what the buyback could be at the back half of this year and next year?
Brady, this is Frank Holding. I’m going to give some sort of context for this question, and I’m going to let Craig answer it a little more specifically. Given our early success in integration and demonstrating solid safety and soundness metrics with stable systems, we remain confident having a, I’ll describe it as a robust stock repurchase plan in the second half of the year, as we’ve discussed before. Simply, our deep experience in integration is proving out here. And we felt strong capital levels were prudent in a merger of this size, but our early success and the greater line of sight in projections around integration efforts along with strong safety and soundness metrics. But again, we feel that it’s prudent, and we feel very good about having our second half plans for a, I’ll describe it as robust stock repurchase plan is warranted. Craig, do you want to talk about anything, you want to expand on that?
Yes, sure, Frank. And I’ll speak to this in terms of sort of where we sit in our CET1 sort of capital target range. And let’s say that we target the middle of that range, which would put CET1 in around 10%. That would be the target. Excess capital would be approximately at the end of the quarter $1.1 billion. And then, if we take that out to the end of the year, around $1.6 billion. So, that should just give you some indication of the excess capital. I’m not telegraphing the exact amount that we will request for our repurchase plan. But every -- based on the targets we put out there for EPS, every $1 billion repurchase, if we assume stock price is where it was when the market closed, is about 10% accretive to EPS. So, we believe -- and we have not modeled any of that into our forecast, but we believe that is a -- could be a powerful strategy for our EPS accretion moving forward.
And then given what we’ve seen just with the long end of the curve moving up, your bond rates -- your bond reinvestment rates are nicely higher, how are you guys thinking about continuing to deploy this excess liquidity? I mean, do you want to leave some there to run off CIT more expensive funding, or do you start to think about putting that into the bond portfolio more aggressively now that rates are higher? Like, what’s the plan with all the excess liquidity at this point?
I think in a -- I’ll let Tom Eklund speak to this. If I missed anything, Tom, step in here. But I think in a perfect world, if we can just wave a magic wand, we would like to see sort of our earning asset mix with overnight investments from around 4% to 5% investment portfolio in the 19% to 20% range and then loans 74% to 77%. Right now, we are on the high end of that range with overnight investment stuff, we have the excess liquidity. We’re about where we want to be on the investment portfolio, but then that offset of excess liquidity we’d like to see redeployed into the loan portfolio because simply put, with the current yield curve, if we were able to redeploy that excess liquidity, it will be accretive to margin by 10 to 15 basis points. And in terms of the absolute value of net interest income between $95 million and $143 million, which is not built into our current projections. So, I do think we should all keep in mind, we are restricted on how much we can redeploy in the loans, given that we have to have some liquidity reserve for liquidity stress tests and high-quality liquid assets against our deposits, but we do believe we have a great deal of balance sheet capacity here to boost earnings further than our projections in the K. Tom, did I miss anything there?
No, I think you hit the points really well there, Craig. So, no further comments from me.
Great. That’s good color. And then, just one more quick one, if I can. Can you all give us the amount of PPP fees that were in spread income and the amount of accretable yield that was realized in the first quarter?
I can give you the impact of purchase accounting, if you just bear with me. While I’m doing that, if you could help here as well. In the first quarter, if you just aggregate the -- purchase accounting impact on net interest income, it was around $33 million pretax or 14 basis points. So if you strip back -- if you were to strip that out from a margin standpoint, our margin would have been -- was 2.73%, would have been 2.59%. And instead of the actual 17 and 15 basis points that we increased, we would have increased by 9 and 11. So, that just gives you some of the magnitude on the net interest income side.
And on the fee income side, Elliot, I don’t think that there was a tremendous amount of purchase accounting impact.
For the SBA-PPP, we had $9.5 million of income in the first quarter, Brady.
So, you’re talking -- but that was interest income…
Yes. Let me -- Brady, we’ll get back to you on the exact split…
But I’ll just -- just for some perspective in the margin, our headline margin went up 15 basis points for the comparable quarter, 17 basis points for the linked. When you exclude both, purchase accounting and PPP, they would have been up 18 for both periods. So, while there’s a lot of noise in there, what that indicates is that core net interest income is improving nicely. We stripped out for PPP and purchase accounting adjustments.
Yes. And Brady, the fee only portion in Q1 was $6 million.
Purchase accounting -- we spent a lot of time on purchase accounting, and it really does not have a huge impact on results.
Your next question will come from Stephen Scouten with Piper Sandler.
Craig, I wanted to follow up on something you said regarding the share repurchase. I think you said you’re not targeting what you will request. So, is that indicative of the fact that a request hasn’t been yet submitted to regulators? And if that’s correct, do you have any insights on what timing from them would be from approval or kind of what the process looks like to get approval on your repurchase plan?
Yes. We definitely are engaging with our regulators, and so we’re not just sitting on our hands with that. But it does take around a month for approval. So, that process will get -- will be in hand during this quarter, and very soon.
Okay. That’s very helpful. Thank you. And then, I guess, the market today is kind of discounting all the money that banks and including you guys will probably earn some higher rates and careful about a recession and potential credit issues and whatnot. Can you give any color on how the legacy CIT book is looking in your view relative to your recent marks? And then, maybe if you had any changes in qualitative factors around your CECL modeling or how you guys are waiting towards Moody’s economic scenarios or kind of however you’re determining your CECL weightings and so forth?
We’re feeling really good about the CIT portfolio. Credit quality is really strong. Those credits are sort of underwritten to stress scenarios. And CIT did a really good job of resisting market pressure to bend on credit quality and term. So just in general, we’re feeling really good about it.
In terms of the -- just the ACL, if you really -- if you look at where we are currently, we feel really good. And frankly, we feel like our reserve is conservative. And what I did went back and compared where we were at the end of the first quarter to the fourth quarter of ‘19, which is what we would consider pre-pandemic level. And our -- the ACL of the combined company was 1.29% and it was 1.43% back in fourth quarter of ‘19 as the companies would have been combined. The net charge-off ratio now is 9 and at the end of ‘19 it was 28. So, we now have 14% coverage, whereas we had 5% coverage -- 5 times coverage pre-pandemic. Another thing that Marisa Harney focuses on, our Chief Credit Officer, is how much does that allowance cover nonaccruals. We’re covered 1.56 times now versus 1.47 times then. 30-day, 60-day past dues are down. Nonaccrual loans to total loans are down. Criticized loans are flat and classified loans slightly up. But most indicators along that spectrum indicate that we have a conservative and prudent allowance for loan losses. And I don’t see any apparent near-term stress in the portfolio that would change our view on that.
And Marisa, I don’t know if you’re on the line, if you would want to add to that?
Yes. No, everything that Craig said is absolutely true. The legacy CIT portfolios are, frankly, performing at some of their best levels from a credit quality perspective, even in the context of pre-pandemic, which is what I look at. A lot of people talk about, "Oh, it’s improved since 2020." Well, a lot has improved since 2020. But, our indicators are suggesting that we are back to, if not better than our pre-pandemic asset quality levels. And I think some of that is a testament to, as Craig indicated, our very balanced underwriting approach to what has been a very, very competitive loan market, not just in terms of pricing, but in terms of terms as well. So, I reiterate what Craig said. I don’t see anything on the near horizon from a sector perspective or from a specific transactional perspective that gives me concern at this time. We’re obviously watching all the macroeconomic indicators going forward. And as Craig said, we underwrite to stress scenarios. So, all is well.
One thing I would say just to make sure that we disclaim a little bit of it. The ACL on our CECL is highly influenced by the S3 Moody’s severe economic forecast. And a lot of what you saw this quarter where we had the reversal was due to the fact that those macroeconomic factors in terms of unemployment and CRE price index, home price index, all of that improved in the severe scenario while the baseline stayed pretty moderate. With the news today, with the print today, that could change next quarter. So, we might see some pressure. Obviously, we see pressure, not to have negative provision, but we could see pressure to start building reserves back. So, that’s one qualification that I would give to all that. But in terms of the portfolio, we’re feeling really good about the way it’s performing and its credit quality.
Got it. Very helpful. And then, just last thing for me. How are you guys thinking about incremental -- I mean, I know you said you want to keep the liquidity for loan growth. You feel good about where the securities book is today. But at some point as rates begin -- continue to increase, how do you think about the relative spreads that you can obtain in the securities book with theoretically much less risk than in the loan book with geopolitical events and everything else potentially presenting greater risk? How do you think about that dynamic?
Well, our first priority is to lend the money, to lend the liquidity. The investment portfolio is sort of there to put whatever is left over in excess liquidity. And obviously, we want to try to maximize that yield. But at the same time, we want to protect ourselves from hits to TBV and market value as rates rise. And so, with respect to the securities portfolio, you’ll see us generally buying residential government-backed or sponsored in Ginnie Mae mortgage-backed securities with shorter duration. And what we’re trying to do there is reduce the volatility in a rising rate environment. So, either -- we’re either buying securities that have -- they might be back about 30-year mortgages, but those are going to be seasoned or we just buy securities back about 15-year mortgages. So, the duration of our portfolio is probably a bit shorter than peer.
We are in discussions now, and I’ll let Tom hit this as well, give more detail, but we are discussing now about going a little longer with reinvested cash flows but would look for securities with more defined, locked out cash flows, bullet like cash flows. And we believe we could pick up some yield there, to your point and have more predictable cash flows. But we’re likely to consider doing that as we move further into this rate cycle increase. We don’t think it makes a lot of sense to go longer right now. I know others are doing that. Given that rates are heading up from here, we just -- we’re at the beginning of the rate cycle. So, that’s sort of the investment strategy, but I’ll let Tom amplify that if he needs to say anything -- if he’d like to say anything else about it.
No. I think Craig hit most of the certain points there. I mean, I think really, we’re looking at the front-end cash flows currently. We believe in sort of buying stable season mortgages that have sort of gone through rate increase and decrease cycles in the past and sort of gotten through that first refi boom. As we move further out and we get some of our currently locked out cash flows rolling down the curve, we’ll look to add additional duration exposure behind it. But currently, we’re focused on that sure thing. And when buying duration, we’re looking more for -- to Craig’s point, defined cash flows there that don’t have as much optionality as maybe new issue 30-year mortgages would happen.
Great. Thanks, guys, for all the color. And congrats on all the progress that’s already been made.
Thank you.
Your next question will come from Christopher Marinac.
I wanted to ask Frank about the regions of the country that are performing well within First Citizens footprint and any of that perhaps are weaker? And then, also any changes you’ve seen in customer behavior the last two months?
This is Frank Holding. We see strong markets really across the country. There are no weak spots that we see. Certainly, some are stronger than others. I guess, generally, the larger metropolitan areas that we serve are probably -- have a more robust growth than some of the more suburban or rural areas, but we don’t see any weakness. We’ve noted no weakness in any particular part of the country.
Great. That’s helpful. And then, Craig, just a quick question about being able to increase loan rates as the Fed has raised in March and then again, expected this quarter.
Loan rates, what I think you’ll see is our loan yield sort of stabilized this quarter. And the rate sheets right now are higher than loans are rolling off. So we’re going to naturally start to see a pickup in our loan yield. And the same thing is true for our investment portfolio yield.
Chris, I’m going to add a little bit to that. You have to realize that outside of the Carolinas, all the markets that we expand into, we basically chose because the metrics there were that they had stronger population growth and greater household income and growth of that household income versus national averages. So, I don’t want to say that the whole U.S. is performing equally, but we didn’t choose those markets equally either.
Thank you, speakers. I’m not showing any further questions at this time. I would like to turn the call back over to our host for any closing remarks.
Thank you, and thank you, everyone, for participating in our call today. We appreciate your interest in our company. And if you have any further questions or need additional information, please feel free to reach out. I hope everyone has a great day.
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Have a wonderful day.