First Citizens BancShares Inc (Delaware)

NASDAQ:FCNCA

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Fourth Quarter and Year End 2022 Earnings Conference Call. At this time, all participants are in 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.

[Deanna Hart, SVP, IR]

Thank you. Good morning, everyone, and thank you for joining us for First Citizens Bank’s fourth quarter earnings call. It is my pleasure to introduce our Chairman and Chief Executive Officer, Frank Holding, as well as our Chief Financial Officer, Craig Nix, who will provide an update on our financial results and outlook.

We are also pleased to have several other members of our leadership team in attendance with us today who will be available to participate in the question-and-answer portion of the call, if needed. During the call, we will be referencing our investor presentation, which you can find on our Web site. An agenda for today’s presentation is on Page 2 of these materials. Following the completion of our presentation, we’ll happily take questions.

As a reminder, our comments will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. We assume no obligation to update such statements. These risks are outlined for you on Page 3 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 found in Section 5 of the presentation. 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 turn it over to Frank.

[Frank Holding, Chairman and CEO]

Thank you, Deanna, and good morning to everyone. We appreciate all of you joining us today. And I'll make some comments about the year and then update you on our 2023 strategic priorities. And then I'll turn it over to Craig Nix to highlight our financial results for the fourth quarter and the outlook for 2023.

Starting on Page 5, 2022 was a great year for First Citizens. In addition to the completion of our merger, we delivered solid financial results marked by strong top line growth, low credit losses and well controlled expenses. We were pleased with the performance of our lines of business, achieving robust loan growth in both the general and commercial banks.

And despite a challenging year for deposits driven by unprecedented quantitative tightening, we experienced modest growth in non-interest checking accounts and only a slight decline in deposits during the year. Our merger integration is substantially complete. And we're now focused on creating positive operating leverage by growing revenues and optimizing our operations. We remain on track to achieve our $250 million cost savings goal.

During the third quarter, we announced a share repurchase plan to optimize our capital levels, and we completed the plan early in the fourth quarter, repurchasing 1.5 million Class A common shares. This plan allowed us to return excess capital to our shareholders while exceeding our CET 1 target, and is expected to be approximately 10% accretive to earnings per share in 2023. Our capital position remains strong relative to our risk profile. And we believe that we will have the ability to resume share buybacks in the second half of this year.

From a profitability standpoint, we finished right in line with our guidance and are pleased with our financial results for the fourth quarter and full year. Strong loan growth and rising interest rates drove a 20% increase in net interest income over the prior year. This strong margin growth combined with solid non-interest income growth and well controlled expenses drove a year-over-year 45.5% increase in pre-provision net revenue.

Earning asset yields increased by 68 basis points. And we were able to manage rising deposit costs despite a challenging and competitive environment. The pace of rate hikes did begin to put pressure on margin as we entered the fourth quarter. During my tenure at First Citizens, we've been through several tightening cycles and we've always grown and prospered through them.

Looking at non-interest income, our fee income producing lines of business provided continued support to our net revenue led by growth in rental income on operating lease assets, as our rail portfolio saw increased utilization and positive momentum from higher lease rates. We also saw growth in areas such as wealth and card despite a challenging market environment for wealth.

You'll remember that we announced the elimination of certain NSF and OD charges that took place in the second half of 2022 reducing deposit service charge income. But we've had strong growth in commercial service charges to help offset some of this NSF, OD impact. Despite inflationary headwinds, we maintain prudent expense discipline which resulted in positive operating leverage for the full year, as well as an improvement in our efficiency ratio, which we expect to maintain in the low to mid 50s on an annualized basis moving forward.

We're pleased with the growth in loans we saw in 2022 with total loans increasing by $5.6 billion, or 8.5% over year end 2021. We saw growth in the general bank and within the commercial bank and industry verticals and business capital. While we experienced an increase in non-accrual loans in the fourth quarter, net charge-offs remained well below historic norms. Overall, credit quality remains strong and we are not seeing broad based signs of stress in our loan portfolio.

Now turning to Page 6, I'll quickly highlight a few of our strategic priorities moving forward. Investing in our core businesses to achieve profitable organic growth. We're pleased with the momentum in many of our core lines of business, including our branch network, wealth, business capital, the industry verticals and middle market banking. And we're going to continue to add revenue producers and enhance our capabilities in these areas to remain competitive and expand market share.

Optimize capital and focus on core deposit growth. A key foundation to our strategy is our focus on full long-term banking relationships, which in addition to making loans includes the deposit relationship. Our goal is to fund earning assets with low cost stable deposits, and this remains a significant component of our go-to-market strategy.

In terms of capital allocation, our number one priority is focus on our customers. But to the extent we have excess capital after funding internal growth, our strategy is to redeploy it into share repurchases at attractive prices.

A focus on talent acquisition and retention. We're going to continue to be proactive in adding talent to support our continued growth. In addition to our focus on talent and our associates, we will remain focused on our customers to make sure we're aligning our products and services across all segments in ways that meet their financial needs.

As we move into 2023, we will continue to work on distributing the capabilities we have as a firm across our lines of business more broadly, which will help create additional revenue synergies as clients have access to a wider variety of products.

Capitalize on the benefits of shifting from merger integration to operating as a combined company to boost our operating leverage. While we are in line to achieve our cost savings goals, we're going to continue to focus on further optimization and efficiency as we believe there is an opportunity to build upon the efficiency we have recognized to date. And we will continue to assess processes and capitalize on revenue synergies and opportunities.

Manage risk effectively. We're committed to strong risk management and regulatory compliance. In 2023, we will continue to build out and execute on our new regulatory capabilities to ensure we meet the requirements of the large financial institutions framework. We have made great progress on our readiness to comply with heightened regulatory standards, and we worked hard to develop the capabilities and planning needed to ultimately satisfy the regulatory standards. In the coming year, we will be intently focused on executing upon these plans.

To conclude, while we acknowledge certain concerns in the broader economy, we enter 2023 with solid capital and liquidity positions, and are well positioned to continue to build customer relationships and grow our balance sheet profitably. We will remain focused on our client-focused model and committed to delivering solid results regardless of the market conditions. I want to thank our associates across the company for working so hard to make us successful in our transformation to a large financial institution and at the same time supporting our shareholders, customers and communities.

And with that, I'll turn it over to Craig Nix.

[Craig Nix, CFO]

Thank you, Frank, and good morning, everyone. Turning to Page 8 of the deck, fourth quarter GAAP net income to common stockholders was $243 million, or $16.67 per common share. Our fourth quarter GAAP results were impacted by the strategic decision to exit $1.2 billion of bank-owned life insurance policies, resulting in a tax charge of $55 million. Favorable market conditions prompted us to exit this long-term liquid asset. And as we receive proceeds from this surrender, it allows us to invest in high quality liquid assets at higher yields resulting in minimum capital and liquidity accretion.

On an adjusted basis, net income to common stockholders was $306 million, or $20.94 per common share, yielding an annualized ROE of 13.89% and an ROA of 1.15%. EPS was in line with the guidance we provided on our third quarter call. Comparable EPS, ROE and ROTC shown on this page for 2021 periods offer First Citizens BancShares on a standalone basis. ROA, PPNR ROA, NIM and the net charge-off and efficiency ratios are presented as if the company were combined during the 2021 historical periods. I'll dive a little deeper into these components in a moment as we look at the underlying trends that produced our results.

On pages 9, 10 and 11, we provide two condensed income statements and commentary. The table at the top of the page represents our reported GAAP results. And the table at the bottom supplements those results showing net income adjusted for notable items. Commentary for quarter-to-date GAAP results is included on Page 9 and for adjusted results on Page 10. Page 11 discusses year-to-date results with GAAP commentary at the top part of the highlight section and adjusted at the bottom. All income statements are presented as if FCB and CIT were merged during the 2021 historical periods presented. The section in the middle of the page summarizes the impact of notable items to derive the adjusted results from the reported results.

The most significant notable items in the fourth quarter included the reclassification of 135 million in depreciation and maintenance expense on operating lease equipment for non-interest expense and non-interest income, the $55 million tax charge I just mentioned related to the BOLI surrender, and $29 million in merger-related expenses.

Focusing now on Page 10, adjusted net income available to common shareholders was 306 million for the fourth quarter, down from 326 million in the third quarter, and from 291 million in the fourth quarter of the prior year. The decrease during the linked quarter was due to an increase in provision for credit losses and slightly lower pre-provision net revenue.

The provision build was primarily due to an increase in reserves on loans individually evaluated for impairment, slightly higher net charge-offs, net loan growth and continued deterioration in the economic outlook, all partially offset by change in portfolio net. The increase over the comparable quarter a year ago was due to $171 million or 51.7% increase in PPNR, only partially offset by a $157 million increase in provision expense.

Page 12 provides detail with respect to notable items for the relevant quarterly and year-to-date periods. During the fourth quarter, these adjustments had a net impact of adding $4.27 to GAAP EPS. Turning to Page 13, net interest income totaled $802 million for the quarter, up over the linked quarter by $7 million.

As we anticipated in our fourth quarter guidance, rising deposit costs and an increase in interest-bearing deposit balances caused net interest income growth to decelerate. Our cumulative deposit beta increased from 6% to 14% during the quarter, in line with our expectations.

Interest income increased by $134 million over the linked quarter due to loan growth and a higher yield on earning assets. Interest expense increased $127 million due to higher funding costs and interest-bearing deposit balances. An analysis of the comparable quarter and year-to-date periods is provided at the bottom of the slide for your reference.

Turning to Page 14, net interest margin was 3.36% in the fourth quarter, a 4 basis points decline from the third and increased by 80 basis points from the fourth quarter a year ago. Before I discuss the key components of the net decline in margin from the linked quarter, it is important to note that with the pace of the share repurchase program that began in early August, we more fully felt the impact of the reduced earning assets in our margin this quarter, which was essentially tied to the foregone cash, which would have continued to increase in yield given the Fed rate hike this past quarter. This had a 4 basis points negative impact on the margin during the fourth quarter.

While the yield on earning assets continued to benefit from repricing, which occurred during the quarter, deposit repricing caught up amidst the competition for deposits. Combined with deposits going slightly more than was on the quarter, it had a slight negative drag on margin. Additionally, a reduction in non-interest-bearing deposits during the quarter also contributed to this slight decline. Moving forward, we believe the strength of our balance sheet will enable us to weather these interest rate headwinds favorably, as we expect to continue to benefit from increasing asset yields, while deposit costs are expected to level off in the back half of 2023.

Turning to Page 15, the line graph on the left hand side of the page indicate we continue to be asset sensitive, albeit slightly less than prior quarters due to reduced cash balances. We have and will continue to take a measured approach to interest and market rate risk management to position our balance sheet to benefit from higher interest rates while at the same time providing some downside protection against lower interest rates.

We estimate that a 100 basis points shock in rates would increase net interest income by 3.4%. And a 100 basis points ramp will increase it by 1.5% over the next 12 months, unchanged from the prior quarter. The main drivers of our asset sensitivity are our variable rate loan portfolio, which represents 45% of total loans, our cash position and expected modest deposit betas driven by our strong core deposit base.

Turning to Page 16, we provide some additional information on our actual and expected deposit betas. In terms of our deposit base, 56% of our deposits exhibit lower betas and 44% exhibit moderate to higher betas. The 56% of deposits shown on the slide that exhibit lower betas are non-interest income bearing deposits and branch network checking with interest and savings accounts. Branch network, money market accounts and CDs representative of about 26% of total deposit exhibit moderate betas. And finally, Direct Bank money market, savings and time deposits representative of approximately 18% of total deposits exhibit higher betas.

Our cumulative beta through the fourth quarter was 14%, which was in line with our projection last quarter. We expect cumulative beta to increase to 22% by the end of the first quarter as deposits continue to catch up from recent rate increases. Over the interest rate hiking cycle, we forecast our cumulative beta will be approximately 25%. However, as Frank mentioned earlier, we are in unprecedented times with respect to Fed tightening. Our through the cycle deposit beta will ultimately be dependent on whether we continue to grow our loan portfolio as expected, whether the current rate forecast come to fruition and the impact of the competitive environment for deposits.

Turning to Page 17, we show GAAP non-interest income for the past five linked quarters and for the comparable year-over-year periods. Non-interest income as adjusted is shown in the blue bars for the same periods. I will focus my comments on adjusted non-interest income. Adjusted non-interest income increased by $2 million from the linked quarter to $290 million. While the total change was not significant, we did see a $9 million improvement in rental income on operating lease assets net, and that's net of maintenance and depreciation, driven by higher gross revenue from continued strong utilization and higher lease rates, as well as lower depreciation and maintenance expenses.

Maintenance expense on operating leases can be more idiosyncratic, with this quarter more favorable. However, we do expect it to move higher in the coming quarters. Our fee generating lines of business also had another great quarter. And we saw increases in service charges on deposit accounts, higher factoring and insurance commissions, increased cardholder income and higher fee income and other service charges. These changes were partially offset by a decline in other non-interest income spread across several smaller line items. Non-interest income was up 26 million over the prior year quarter with the largest driver being improved adjusted rental income on operating lease equipment for similar reasons I just discussed for the linked quarter.

Turning to Page 18, we show GAAP non-interest expense for the past five linked quarters and for the comparable year-over-year periods. Non-interest expense as adjusted is shown in the blue bars for the same periods. And I'll focus my comments on adjusting. The primary drivers of the $13 million increase over the linked quarter included a $6 million increase in marketing costs due to efforts in the Direct Bank to maintain and attract new deposit balances.

Net occupancy expense increased by $3 million, primarily due to increased repairs that were episodic in nature and utilities costs primarily attributable to inflation. Personnel costs were up by $2 million. The adjusted efficiency ratio of 54.08% remains in our target range of low to mid 50s. While we will continue to make expense management a priority for 2023 and beyond, we feel that our continued recognition of cost save is helping maintain expense growth in the low single digits than otherwise would be in the 5% to 6% range given inflation headwinds.

Page 19 outlines our adjusted non-interest income and expense composition, which remained relatively stable compared to the prior quarter aside from changes to rental income on operating leases and other income explained just a moment ago. Page 20 shows balance sheet highlights and key ratios. I won't spend time covering these as I've cover the significant component with subsequent pages of the debt.

Turning to Page 21, we had another good quarter of loan growth with loans increasing by $1 billion over the linked quarter, or by 5.6% on an annualized basis, as our team continued to deliver for our customers and we benefit from reduced prepayments due to the higher interest rate environment. Loan growth for the quarter was primarily driven by the branch network, which grew by $1 billion, or 14.7% on an annualized basis.

Within the branch network, growth was concentrated in business and commercial loans. Mortgage loans grew by $355 million, or 15.4% on an annualized basis. The growth was primarily due to slowing prepayment rates, but production was up in our ARM loans, which we kept on the balance sheet. We continue to see our mortgage pipelines naturally flow given the right environment.

And during the fourth quarter, approximately 90% of our funded mortgage loan volume was for purchases compared to an approximate 50/50 purchase versus refinance split in the fourth quarter of last year. Total loans in the commercial bank declined by $523 million during the quarter, driven primarily by lower factoring balances which declined $448 million due to expected seasonal decline following the third quarter high mark. This decline was partially offset by $193 million in growth and business capital loans.

On a year-over-year basis, loans increased by 5.6 billion, or about 8.5% primarily due to increases in the branch network, which grew by 3.5 billion and mortgage channel grew by 1.6 million; and in the commercial bank, industry verticals grew by 1 billion led by strong growth in healthcare and TMT, business capital was up 632 billion over '21 and all of these increases were offset by $742 million decline in real estate finance loans.

As we look back on both the quarterly and full year results, I would like to recognize our sales teams for the hard work and excellent execution following the merger, as well as for the resulting strong performance that these efforts have spread across our many lines of business.

Page 22 shows our loan composition by type and segment for reference. Turning to Page 23, deposits increased by 1.9 billion, or 8.4% on an annualized basis from the linked quarter. The main driver of the growth was a $3.5 billion increase in interest-bearing deposits due to increases in time deposits and savings accounts partially offset by a decrease in money market deposits. A large portion of this growth is delivered through our Direct Bank.

As you'll remember from our previous call, we have worked diligently to leverage this channel to increase balances to help fund our loan growth. We do anticipate continued deposit growth in the Direct Bank in 2023 to help support loan growth. While this channel is higher costs compared to the traditional branch network, it will enable us to reduce more expensive FHLB borrowings than we have added in the past few quarters.

Our cost of deposits increased by 43 basis points during the quarter to 78 basis points, in line with our guidance. The increase is representative of the impact from the Fed rate hike and our need to raise rates to stay competitive with our peers. But our cost of funding has quickly caught up with our yield on earning assets. Our cumulative deposit data was well controlled at 14% despite the Fed funds rate increasing by 425 basis points since the end of 2021.

While we expect continued increases in deposit costs in the first quarter, we expect them to moderate then flatten in mid '23 as the Fed reduces its pace of increases and begins to lower rates. For your efforts, we have included our deposit composition by type and segment on Page 24. Turning to Page 25, our balance sheet continues to be funded predominantly by deposits, representing over 93% of our funding base.

As I mentioned last quarter, the FHLB borrowings we initiated had quarterly call features and you'll note we decreased those borrowings by approximately 1.6 billion this quarter, which is reflective of the deposit growth I just spoke to a moment ago. We believe the non-deposit concentration metrics will continue to flatten as our deposit balances continue to increase in the first quarter.

Continuing to Page 26, you'll see that credit quality continues to be strong even though we did see a small uptick in that charge-off and an increase in non-accrual loans during the quarter. The 14 basis points net charge-off ratio remains well below historic levels and beat our guidance. Provision for credit losses increased by $19 million due to a higher provision build and a $6 million increase in net charge-offs.

Moving to the bottom of the page, the non-accrual loan ratio increased 2.89% this quarter from 0.65% last quarter, but remains below the fourth quarter of 2019 pre-pandemic level of 0.97%. The increase in non-accruals was driven primarily by our non-owner occupied commercial real estate portfolio and more specifically related to general office exposure in the commercial bank segment.

You may remember, we discussed potential concerns in this portfolio last quarter and some of these changes have now pushed through to the portfolio. We have been closely monitoring this portfolio since the start of the pandemic and are continuing to see market disruption due to hybrid work models which impact vacancy and leasing rates. We have also seen an uptick in charge-offs and credit quality metrics in our small ticket leasing portfolio within business capital as borrowers continue to face inflationary pressures and supply chain disruption.

We are also monitoring this portfolio closely and have modified our credit risk appetite for new originations during the recent months. While we do not believe these two portfolios are necessarily predictive of trends in the broader portfolio, we are actively monitoring them to ensure any potential trends are identified early. Our allowance ratio increased by 4 basis points to 1.3% during the fourth quarter.

Moving on to Page 27, we provide a roll forward of the ACL from the linked quarter. For our CECL modeling, we start with the Moody's baseline scenario and then wait to both the upside and downside scenarios depending on market conditions. This quarter, baseline estimates reflected a continued slowdown in the economy, the elevated interest rate environment and meaningful reduction in real estate values, all of which impacted our allowance levels.

As we have now begun to see our baseline forecast more closely aligned to the downside scenario, we adjusted our scenario weighting this quarter given that our baseline reserves now incorporate more recessionary risks. Our current weighting is 30% to the upside, 30% to the baseline and 40% to the downside, reflecting a 10% shift between the downside weighting and the baseline weighting from the previous quarter.

The ACL increased by $40 million over the third quarter, now totaling $922 million, or 1.3% of total loans. We did have a net reserve build in the fourth quarter and are operating our company with the expectation for a mild recession in 2023. Our reserve build for the quarter was due to the net growth in loans, an increase in specific reserves on individually evaluated loans, as well as a slightly more negative macroeconomic outlook than in the prior quarter. These negative impacts were partially offset by a decline related to a mix shift during the quarter to portfolios with lower reserve rates. The ACL provided 9.3 years coverage of fourth quarter net charge-off on a portfolio with a weighted average life of approximately 3.5 years.

Turning to Page 28, our capital position remains strong with all ratios above or in the upper end of our target ranges. At the end of the fourth quarter, our CET 1 ratio was 10.08% and our total risk-based capital ratio was 13.18%. The 29 basis points decline in our CET ratio was primarily the result of our share repurchase activity, which concluded in October. Net income growth continued to outpace loan-driven risk weighted asset growth and a decrease in CET 1 helped to optimize our capital ratios closer to our target ranges, whereas before our share repurchase plan, we were well above them.

As Frank mentioned in his comments, we plan to pursue another share repurchase plan in the second half of 2023. I feel confident in our ability to execute on this plan while remaining within our target capital ranges. During the fourth quarter, tangible book value per share increased modestly due to strong earnings performance, which more than offset the impact of AOCI in the share repurchase plan.

Turning to Page 29, we summarize our BOLI surrender strategy as well as with its financial benefits. Much of our investment activity during the fourth quarter was a result of this decision. And while this resulted in a $55 million tax charge in the fourth quarter, we anticipate the payback on the strategy to be approximately two years.

This is in line with our long-term view of the business and emphasis on driving tangible book value growth. We were able to pre-invest the additional liquidity and high yielding investments which should help to meaningfully increase our investment portfolio yield in the first quarter of 2023. The impacts from this surrender are reflected in our financial outlook that I will share next.

Turning to Page 31, I will conclude by discussing our financial outlook for the first quarter and full year 2023. The first column is our fourth quarter 2022 results. The numbers for non-interest income expense are adjusted for notable items. Column two provides our guidance for the first quarter of 2023 and column three for the full year. There are a lot of variables that can impact this projection, and this guidance continues to assume recessionary impacts are mild.

Okay. For loans, during the fourth quarter, loans grew an annualized rate of 5.6%, down from the high double digit percentage growth rate in the second and third quarters. We expect flat to low single digit percentage annualized loan growth in the first quarter, as the absolute rate environment puts downward pressure on customers' lending appetite and given seasonal patterns typically witnessed during this period.

For the full year, we believe the mid single digit percentage growth in the fourth quarter is more indicative of where it will be for the full year 2023. While the absolute rate environment and economic uncertainty is tempering our clients' appetite to borrow in some segments, we still have strong pipelines in many of our core areas, and coupled with low rates of prepayment, this will lead us to mid single digit loan growth in 2023.

We think loan growth will be driven by continued momentum in business and commercial lending in the branch network. Our middle market business due to continued additions to our sales force, continued expansion of our wealth business through adding bankers and expanded presence outside of the Carolinas market and further growth both in our industry verticals and business capital segments.

Offsetting this growth, we do expect to see continued declines in real estate finance, as the client appetite to borrow is diminished in the current rate environment and we remain selective on the terms to extend new credit. We do acknowledge that uncertainty around the external environment, especially regarding economic risk and the pace of continued interest rate hikes, could cause actual growth rates to deviate from our expectations.

Moving on to deposits, during the fourth quarter, we actively took steps to curb some of the higher price deposit attrition we experienced in the second and third quarters and successfully grew balance in the fourth quarter at an annualized rate of over 8% led by the Direct Bank. Our expectation for the first quarter is high single digit annualized percentage growth based upon momentum in our Direct Bank and the seasonality in both our branch network and homeowners association banking business.

Our expectation is that this heightened growth in the first quarter will enable us to pay down some of the outstanding FHLB advances we currently have on the balance sheet. On the full year, we expect mid single digits percentage growth with non-interest-bearing growth also in mid single digits. While the high interest rate environment is a headwind here, we believe the client acquisition and our relationship-based approach that emphasizes no loan alone [ph] will help drive our deposit growth in 2023.

From an interest rate perspective, our outlook assumes that rates follow the implied forward curve. We forecast two interest rate hikes in the first quarter of 2023 and one in the second, with the Fed funds rate peaking at a range of 5% to 5.25%. In the back half of the year, we forecast two 25 basis points reductions in the Fed funds rate ending the year at a range of 4.5% to 4.75%. The expected timing of the cut leads to a reduction in the inversion of the yield curve in the back half of '23 which helps moderate some of the pressure on net interest margin.

Now on the net interest income, for the first quarter, we expect flat to a slightly negative annualized percentage decline compared to the fourth quarter primarily on reduced day count. We expect net interest margin to be stable relative to the fourth quarter. On a full year basis, we expect net interest margin to be stable to modestly increasing and year-over-year net interest income growth to be in the mid teens percentage growth range largely on the heels of improvement that we achieved in 2022.

Our forecast includes some lagged pricing impact on deposits and we project our cumulative deposit beta will increase from 14% to 22% in the first quarter. However, our variable loan portfolio will help temper the impact of increased deposit costs. And throughout 2023, we expect to benefit from the large favorable gap between new production yields and existing book yields on fixed rate loans and investments. This continued repricing of fixed rate loans and investments will help us achieve moderate margin expansion starting in the second quarter and in the back half of 2023. However, it's important to point out that most of the benefits of margin expansion are behind us.

The net interest income outlook remains uncertain and changes to our interest rate assumptions could have meaningful impacts to deposit product and pricing decisions as well as customer behavior and competitive dynamics. While we don't expect meaningful disintermediation of our non-interest-bearing account, it’s something we will continue to monitor.

From a credit loss perspective, we are not seeing broad concerning trends in our portfolio with the stress related to a few smaller portfolios that I mentioned earlier. We are actively monitoring these portfolios and have taken proactive steps to limit our exposure. We do expect net charge-offs to continue to uptick in the next quarter in the range of 15 to 25 basis points and begin to return to more historical levels. For the full year 2023, we expect net charge-offs in the 20 to 30 basis points range. We continue to expect strong credit performance in our general bank segment and in many areas of our commercial segment and again have not seen signs of deterioration broadly.

On the non-interest income compared to the fourth quarter, we expect flat to low single digits annualized percentage decline, primarily due to the reduction in BOLI income and seasonal factoring declines being partially offset by continued growth in our wealth and payments lines of business. In terms of full 2023 guidance, we expect flat to low single digit percentage growth. While we project mid to high single digit growth in net operating lease income for the full year, we do expect a slight quarterly decline in the first quarter based upon the lower maintenance expense in the fourth quarter of '22.

We expect continued momentum in our wealth and payments businesses as a result of organic growth which we believe will be offset by the year-over-year impact of lower service charges, the reduction in BOLI income and a decline in factory commissions resulting from slower consumer demand. After the full year impact of NSF, OD changes and the BOLI reduction, we will project closer to mid single digit percentage growth in non-interest income.

Moving to non-interest expense, we expect mid single digit annualized growth in the first quarter. We expect a slight increase in our efficiency ratio during the quarter primarily due to seasonal employee benefit increases. Looking forward, we expect to continue to feel the pressures of inflation especially as it relates to wages, professional services, and contract costs. Despite this, we feel confident in our ability to maintain our efficiency ratio in the low to mid 50s in the coming quarters, as we remove an estimated $50 million out of our cost base helping to neutralize natural non-interest expense growth. We expect the remaining cost base to be stacked towards the back end of 2023 and will have a more pronounced impact on 2024.

All said, we expect mid single digits percentage growth in adjusted non-interest expense in 2023. The expense growth will be led by inflationary factors in salaries and wages, the increasing depreciation impact from the closeout of many strategic and optimization projects, higher marketing costs for the Direct Bank, the impact of the industry-wide increase in FDIC assessment rates and higher marketing costs in the Direct Bank, all partially being offset by the cost saves.

Without the change in FDIC expense and the impact of the Direct Bank increase in marketing expense, we expect expense growth to be at the low single digit percentage range in 2023. And finally, on the income taxes, we expect our corporate tax rate to be in the range of 24.5% to 25% for the first quarter and the full year '23, which is a slight increase over previous guidance due to the surrender of the BOLI policies.

In closing, we are pleased with our fourth quarter and full year results in 2022. As Frank mentioned in his comments, we remain confident in our ability to grow profitably and deliver on our commitments. We are positioned to perform well in a broad range of economic scenarios given our capital and liquidity positions, our talented associates, focused on our customers, our diverse business mix, and strong risk management culture.

With that, I will turn it over to the operator for instructions for the Q&A portion of the call.

[Operator]

[Operator Instructions]. Our first question today comes from Brady Gailey from KBW. Your line is open.

[Brady Gailey, KBW]

Thank you. Good morning, guys.

[Frank Holding, Chairman and CEO]

Good morning.

[Brady Gailey, KBW]

So I wanted to start with the increase in the non-performing loans. Can you just give us a little more color? Was that just one or two loans, or was that a lot of loans? Was that legacy First Citizens or legacy CIT? And can you tell us what the total size of your office CRE loan portfolio is at the end of the year?

[Craig Nix, CFO]

It was concentrated in large loans. I'm going to let Marisa give a little color on all that. Marisa, are you on the line?

[Marisa Harney, Chief Credit Officer]

I am. Good morning. The increase in non-accruals was specifically a handful -- less than a handful of names, so a couple of large names; commercial bank, legacy CIT real estate portfolio, Class B office to drill it down as close as I can. The overall office portfolio in our non-owner occupied or investor commercial real estate is about 2.5 billion, 2.6 billion. It's equally split between the commercial bank and the general bank. The general bank is not seeing any deterioration in that office portfolio. It's a very granular portfolio, much more community based. And the few larger loans that are in the general bank typically have a very strong investment grade credit tenant. So the office portfolio in commercial is about 1.3 billion. It's centered in repositioned bridge. That means it's relatively short tenured. And it is in Class B office. It's broad based in terms of geographies. And obviously as things move into non-accrual, the credit and special assets team evaluate those four impairments. And we feel comfortable that we've done our job in terms of determining where we need specific reserves. But it is, obviously as Craig mentioned, a portfolio that we're watching closely. We are not in that business originating new office.

[Brady Gailey, KBW]

Okay. All right, that's very helpful. And just to be clear, the 2.5 billion to 2.6 billion, that's the total office CRE than the commercial bank and the general bank?

[Marisa Harney, Chief Credit Officer]

That's correct. And as I said, the 1.3 is the commercial bank portfolio that has the Class B office that we've been referring to.

[Brady Gailey, KBW]

Okay. All right. And then just a question on guidance. I know last quarter, you guys gave some specific EPS guidance for the next quarter and the next year, specifically I know 2023 was guided to $95 to $100 a share. That was not in the slide deck this time. Is that still the expectation for '23 earnings to be 95 to 100 per share? Or is it hard to tell just given the uncertainty of what the provision line could be this year?

[Craig Nix, CFO]

Brady, I would say that range is still relevant that we would guide towards the lower end of that range.

[Brady Gailey, KBW]

Okay. And then finally for me, is there any scenario where the share buyback could begin before the back half of this year? You guys are making good money. You clearly have excess capital. Like is there any scenario that the buybacks have come earlier than the back half of '23?

[Craig Nix, CFO]

Brady, not really. Our capital planning process is ongoing, but really comes to a head in the first quarter. So we will align the share repurchase with that capital plan and our capital actions and our submission to our regulators of that plan. So it's really that timing dictates the ultimate timing of the share repurchase plan. So we do not anticipate starting that prior to the second half of the year.

[Brady Gailey, KBW]

Okay. All right, great. Thanks for the color, guys.

[Frank Holding, Chairman and CEO]

Thank you.

[Operator]

We now turn to Stephen Scouten from Piper Sandler. Your line is open.

[Stephen Scouten, Piper Sandler]

Thanks, everyone. Maybe just following up on that share repurchase question and kind of the procedural structure of that, had there been any changes to who you would need to request from a regulatory perspective that repurchase authorization from your request last year? Would you foresee any incremental difficulty given the size changes and maybe any regulatory changes?

[Frank Holding, Chairman and CEO]

Stephen, we're not expecting any changes in the approval or the process that we'll go through. And we're also assessing it the same way that we did last year, so no changes at all in any of that.

[Stephen Scouten, Piper Sandler]

Okay. And when will be your first CCAR submission?

[Tom Eklund, Treasurer]

Stephen, this is Tom Eklund. We believe our -- so we will be subject to the capital plan rule starting in 2024. And we believe our first CCAR submission being a Category 4 bank will be in 2026, unless we are asked to participate sooner than that. It's obviously at the discretion of the regulatory bodies.

[Stephen Scouten, Piper Sandler]

Okay, got it. That's helpful. Thank you. And then I guess, as I'm thinking about your net interest margin guidance, a little surprised but encouraged to hear you think you can move that potentially higher, especially in the second quarter. It sounds like, Craig, from your comments that maybe that's due to your back book of loans, repricing faster than the back book of deposits? Is that kind of the main phenomenon that would lead that higher?

[Craig Nix, CFO]

That is absolutely correct. But I would say modestly higher.

[Stephen Scouten, Piper Sandler]

Okay, great. And then can you give us an idea of what you're seeing from a spread perspective today in terms of maybe new loan yields and incremental deposit costs and how that compares to your current margin?

[Craig Nix, CFO]

Right now, if you just look at new loan yields that are coming on, our new loans are coming on the books between 5.5% and 6%. The marginal cost of our deposits when you consider the various deposits that we have out there, we’re savings money markets in the 350 range. So spreads 254 [ph], so spreads are around 200 basis points. Tom, do you have anything you'd like to add to that?

[Tom Eklund, Treasurer]

No. I think that's accurate. Obviously, rates shift as the market shifts and we pay close attention to both Fed hikes and also sort of how the curve behaves, I suppose.

[Craig Nix, CFO]

But in that dynamic, the inversion of the yield curve remains a challenge.

[Tom Eklund, Treasurer]

Absolutely.

[Stephen Scouten, Piper Sandler]

Yes, definitely. Okay. And maybe just one last thing for me is just on the non-interest-bearing deposit growth. I know you said you think you could grow that mid single digits as well. Anything to note there in particular in terms of customer acquisition plans or otherwise that would lead to that, because I think that's industry-wide where we've been seeing the most pressure especially this quarter, is that maybe negative mix shift away from the non-interest-bearing deposits?

[Craig Nix, CFO]

Yes. I think if you look at just mix of deposits, we are forecasting non-interest-bearing to remain consistent as a percentage of total deposits. And I would just anchor back to our go-to-market strategy, the no loan alone strategy always has emphasized growing non-interest-bearing deposits and we've been able to do that through various rate cycles. We will acknowledge that quantitative tightening and potential disintermediation can be headwinds there. But we feel like a 5% growth goal there is achievable and reasonable.

[Stephen Scouten, Piper Sandler]

Okay, great. Well, thank you all for all the color. I appreciate it.

[Tom Eklund, Treasurer]

Thank you.

[Operator]

[Operator Instructions]. We now turn to Brian Foran from Autonomous. Your line is open.

[Brian Foran, Autonomous]

Hi. Just going back to the 95 to 100 of EPS and maybe focusing more on the low end of the range, I should be able to do the math. But I mean, is that just because of the nudges on the fee expense and tax rate or is that also because of more uncertainty or higher potential provisions that you're contemplating?

[Craig Nix, CFO]

Brian, look, just comparing the previous guidance that we gave in the third quarter to the current guidance, we have increased our deposit growth from low to mid single digits to mid single digits growth. We have changed our non-interest income from low single digit growth to flat to low single digit growth. We have increased our non-interest expense guidance from low to mid single to mid single digit growth. So with all that, when you total that up and run it through the model, it just puts us at the lower -- it leaves us within that range of 95 to 100 that puts us on the lower end, and it obviously does not incorporate share repurchases in the second half of the year. So I’ll say all that is a lot of moving parts.

[Brian Foran, Autonomous]

That's very helpful. And then the Fed cuts you're incorporating, do those really affect NII at all or do they happen like in December of '23 in the model, and so they're not really -- I guess do the Fed -- the 50 basis points of Fed cuts have been impacted the third and fourth quarter NII?

[Elliot Howard, Manager Mergers and Acquisitions]

This is Elliot Howard. I would say one of the cuts kind of back in the third quarter, so that has a marginal impact. But the last one is certainly at the very end of the year, so very minimal impact on '23 for that one.

[Brian Foran, Autonomous]

Okay. That is it for me. Thank you.

[Frank Holding, Chairman and CEO]

Thank you.

[Operator]

Our next question comes from Christopher Marinac from Janney Montgomery Scott. Your line is open.

[Christopher Marinac, Janney Montgomery Scott]

Thanks. Good morning. I wanted to ask about the deposit beta and kind of the roadmap to 25%. How much of that also spills over into kind of some business account activity beyond what you're doing with the CIT Bank?

[Frank Holding, Chairman and CEO]

Sorry, were you referring to business -- commercial business or commercial account activity there? I didn't quite catch the question.

[Christopher Marinac, Janney Montgomery Scott]

Yes, it was business account activity as well as just the kind of interplay between deposit raising within your online channel, as discussed earlier versus kind of business opportunities within some of your core business accounts?

[Frank Holding, Chairman and CEO]

Yes. The majority of the beta, as Craig covered sort of the beta categories, where we see the highest beta is obviously in the direct channel. It's a lower fixed cost channel, but higher variables, higher interest expense there. So that is really sort of the main driver for the overall beta for us.

[Craig Nix, CFO]

Yes, that represents 18% of our deposit beta. If you look at the branch network, we did have a mix of lower beta and moderate beta, that's 71% of deposits. So those two channels are around 90%. So the branch network really smooth that beta out, lowers it in total.

[Tom Eklund, Treasurer]

Yes. I'd say overall, we're experiencing beta similar to historical experience out of the branch network. It's really sort of the online and those deposit gathering channels that are driving the beta up.

[Christopher Marinac, Janney Montgomery Scott]

So that 18%, Craig, would that stay constant or would that change over time?

[Craig Nix, CFO]

You’re talking about 92% of the --

[Tom Eklund, Treasurer]

I think 18% of the deposit beta?

[Craig Nix, CFO]

18%. Yes, I think it’s -- but not significantly. If you look at sort of where we're projecting things to shake out, I think that the Direct Bank might increase marginally, maybe by a percentage point or two, but we anticipate that the branch network is going to be close to that 70% level going forward.

[Christopher Marinac, Janney Montgomery Scott]

Got it. That's helpful. Thank you for that clarification. And then just on the CET 1 ratio over time, what would be the lower bound that you're comfortable with? And is that at all changing from what you may have thought a few quarters ago?

[Craig Nix, CFO]

Our low end of CET 1 is 9% and that's consistent with prior quarter, and we don't anticipate a change there.

[Christopher Marinac, Janney Montgomery Scott]

Okay, very well. Thank you for all the background this morning. It’s very helpful.

[Frank Holding, Chairman and CEO]

Thank you.

[Operator]

We have a follow-up question from Brian Foran at Autonomous. Your line is open.

[Brian Foran, Autonomous]

Hi. Just two quick ones or I guess maybe one has a couple of parts, but on capital just following up on that. So absent the buyback, what you would accrete kind of 30 to 40 bps of CET 1 a quarter, does that sound about right?

[Craig Nix, CFO]

You're close. Yes, that's very close.

[Brian Foran, Autonomous]

And then you said the low end is 9. Is it 9 to 10 is the full through the cycle range, or what's the range of capital? Just remind me what the capital target is?

[Craig Nix, CFO]

9 to 10 is the range for CET 1.

[Brian Foran, Autonomous]

Okay. And then I just want to come back to the front book, back book new loan pricing. So you're saying it's 5.5 to 6 for new production. And was the message that's good, because the existing portfolio yields 5 or was the message that's less good, because it's 200 basis points above the marginal cost of funds, or I just didn't know which to lean on in terms of the takeaway?

[Elliot Howard, Manager Mergers and Acquisitions]

Brian, this is Elliot Howard. I think we would view it as positive. We look at 5.5% to 6% pricing. Specifically in the branch network, we're a lot more into fixed. Current yield on that portfolio is a little less than 4%. So we've got a pretty favorable gap when we look at that. Some of the fixed repricing will kind of be a win that are back in the second half of 2023.

[Brian Foran, Autonomous]

So that's just for the fixed rate piece of the loan portfolio?

[Elliot Howard, Manager Mergers and Acquisitions]

That's right. And that's where the pricing differential -- I mean variable pretty much prices to [indiscernible] moves up and down with the variable rate index.

[Brian Foran, Autonomous]

And just remind me the fixed rate piece is half of the book or a little bit more than half the book?

[Craig Nix, CFO]

It’s 55% fixed, 45% variable.

[Brian Foran, Autonomous]

Okay, so relative to like a lot of other banks. I guess every bank has this dynamic, but it's a bigger piece of your loan book. And so just in terms of the puts and takes into next year, it has a little bit more of a tailwind for you, because you got a little bit less of the immediate Fed funds benefit in '22 than a typical regional bank. But next year, you get a little bit more of the trailing front book, back book kind of ratcheting up than the average bank would?

[Craig Nix, CFO]

Well said.

[Brian Foran, Autonomous]

Yes, I realized that wasn't even a question. I was just like making a statement. Okay. Thank you. That's helpful because I was thinking you are comparing it to the entire loan book and the marginal cost. So that's helpful. That clears it up. Thank you very much.

[Frank Holding, Chairman and CEO]

Thank you, Brian.

[Operator]

I’m not showing any further questions at this time. I'd like to turn the call back over to our host for closing remarks.

[Deanna Hart, SVP, IR]

Thank you. And thank you everyone for participating in our call today. We appreciate your ongoing interest in our company. And if you have any further questions or need additional information, please feel free to reach out to the Investor Relations team. I hope everyone has a great rest of your day.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.