First Citizens Bancshares (FCNCA) Q2 2026 earnings call transcript

I would now like to introduce the host of this conference call, Ms. Diana Hart, Head of Investor Relations. You may begin.

Good morning and welcome to first citizen second quarter 2026 earnings call. Joining me on the call are Chairman and Chief Executive Officer Frank Holding and Chief Financial Officer Craig Nix. They will provide second quarter business and financial updates referencing our earnings call presentation, which you can find on our Investor Relations website. Before we begin, please note that our comments will include forward looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially from expectations.

We assume no obligation to update such statements. These risks are outlined on page three of the presentation. We will also reference non gap financial measures, reconciliations of these measures against the most directly comparable gap measures can be found in section five of the presentation.

Finally, for citizens is not responsible for and does not guarantee the accuracy of earnings transcripts provided by third parties. With that, I'll now turn it over to Frank.

Thank you, Diana. And good morning and welcome everyone. Thank you for joining us today. I'll begin with a summary of our second quarter performance before turning it over to Craig Nix to review our financial results and our 2026 outlook in more detail.

We delivered strong second quarter performance characterized by sequential top line growth that exceeded our guidance and consensus estimates. These results reflect the continued successful execution of a strategy built to drive long term, sustainable shareholder value, and the strength of our diversified franchise.

This morning, we reported adjusted net income of $691 million and adjusted earnings per share of $57.09 driving an adjusted ROE of 12.94% and an adjusted ROE of 1.18%.

These results reflect robust sequential growth and significant year over year expansion. Both key metrics increased by more than 20% compared to the prior quarter. This strong profitability was powered by top line net revenue expansion, disciplined expense and balance sheet management, and resilient credit quality.

On the balance sheet, we delivered 1.6% sequential loan growth with increases in both period end and average loans. This momentum was anchored by our global fund banking business fueled by strong production and heightened capital call line utilization. Additionally, we achieved broad based growth within our tech and healthcare banking and middle market banking verticals. We delivered a 1.5% sequential increase in period end deposits and a 2.8% expansion in average deposits.

These results validate the structural resilience of our operating model and the effectiveness of our targeted deposit gathering initiatives within a highly competitive industrial environment, industry environment, excuse me.

Beyond core balance sheet growth, client engagement in our tech and healthcare and global fund banking businesses drove solid increases in both period end and average off balance sheet client funds.

Simultaneously, we continued to execute on capital efficiency, returning an additional $600 million to shareholders through share repurchases. Backed by a strong liquidity position, we prepaid another $2.5 billion of the FDIC purchase money note during the quarter, followed by an additional $1 billion in July. This brings our total cumulative prepayments to $8.5 billion.

To wrap up my comments, credit performance remains strong, exceeding our expectations. These durable credit trends combined with discipline and expense management and healthy client activity demonstrated this quarter, positioned us well to drive positive operating leverage and long-term shareholder value moving forward.

I would like now to turn it over to Craig to take us through our second quarter financial results and our outlook for the remainder of the year. Craig.

Thanks, Frank and good morning, everyone. I'll begin with a review of our financial performance for the quarter, followed by an update on our balance sheet, credit, capital trends and outlook. I will anchor my comments to page eight of the presentation, pages nine through 26 provide details underlying our second quarter results.

As Frank mentioned, we are pleased in the second quarter adjusted earnings were up by over 20% sequentially, exceeding internal and consensus expectations. Slightly over half of the increase was generated by higher pre-provision net revenue, supported by resilient net interest income, fee-based non-interest income expansion and discipline expense management. The remainder was driven by net benefit for credit losses, underscoring strong credit performance.

In line with our guidance, net interest income increased by $35 million over the linked quarter, driven by favorable earning asset volumes and yields, higher purchase accounting accretion, reduced borrowings, as well as a higher day count. These positive factors successfully offset higher funding costs and interest bearing deposit balances. On a margin basis, headline NIMM improved by one basis point due to the same factors while our core NIMM remained unchanged.

Adjusted non-interest income rose by $66 million sequentially, exceeding our guidance. While $50 million of the growth was in other non-interest income driven by asset monetization and portfolio revaluation, we did see increases across our fee-generating businesses.

Favourable public and private market valuation adjustments and realized gains generated a $27 million gain within our equity warrant portfolio, which has grown since the SVB acquisition and serves as a structural driver of long-term upside via lending and financing relationships. Additionally, we successfully realized a $17 million gain through the opportunistic sale of a tax credit investment.

Independent of other non-interest income growth, momentum continued in our core fee categories, demonstrating strong execution by our commercial and general banking teams. Client investment fees fitted from a rising transaction volumes within tech and healthcare and improved margins from a higher yielding product mix. In wealth management driven by deliberate ongoing investments in team capacity and service breadth, second quarter fee income increased by 12% year over year.

This expansion deepens client wallet share and establishes a highly predictable recurring revenue stream. Deposit and lending related fees also posted steady sequential gains, reinforcing the stability of our core banking operations.

Adjusted non-interest expense increased by $16 million sequentially, landing at the favorable end of our guidance range and reflecting a disciplined balance between strategic reinvestment and cost management.

The sequential increase was primarily driven by a $15 million targeted increase in marketing expense to maintain and attract new deposit balances in the direct bank. Simultaneously, we advanced our long-term digital transformation through higher third-party processing fees and equipment expenses dedicated to data center modernization and enhanced client facing capabilities. The uptick in other non-interest expense was driven by increased charitable contributions after a seasonally low first quarter. These increases were partially mitigated by decline in personnel costs due to lower incentive compensation and seasonal declines as employees reach annual benefit limits partially offset by the impact of merit increases, one additional payroll day and higher health insurance claims.

Ultimately, top line revenue expansion outpaced a modest increase in expenses during the quarter, delivering positive operating leverage and reinforcing our commitment to strategic cost management.

Period in loans grew by $2.3 billion or 1.6% sequentially driven by global fund banking production and robust growth in the tech and healthcare and middle market banking businesses. Global fund banking grew by $2.6 billion thanks to favorable financing costs, catch up investments due to prior tariff pauses and a healthy rebound and secondary market valuation accelerating exit activity.

The pipeline remains highly robust with strong line utilization. Middle market banking achieved $205 million in growth supported by solid production and utilization rates. Tech and healthcare delivered strong momentum with a 3.7% sequential increase anchored by strong performance in the FinTech and sponsor segments.

In the general bank, production numbers remained strong. However, loans were relatively flat as paydowns and payoffs outpaced new loan production. We are focused on new prospecting opportunities as well as new referral opportunities to drive lending and overall relationship growth.

Period in total deposits increased by $2.6 billion or 1.5% sequentially driven by the direct bank which added $2.8 billion during the quarter. These highly insured granular retail deposits continue to strengthen our liquidity profile and significantly reduce Lars institutional concentration.

The commercial bank segment declined by $1.5 billion stemming from anticipated early quarter corporate outflows. This reflects the historically lumpy nature of commercial fund flows and remains well within our modeled expectations. And we remain encouraged by the performance of these underlying businesses.

The general bank experienced a modest decline, but we expect a medium term recovery. We are actively focused on driving core deposit growth by enhancing our deposit strategy, broadening digital outreach, strengthening client engagement and refining our attention and relationship based pricing strategies.

We continue to supplement organic growth with strategic use of broker deposits, bolstering liquidity to prepay the FDIC note. We actively monitor pricing and tenor to ensure a resilient cost-effective funding mix.

Period in and average total client funds in the SBB commercial business rose by $1.1 billion and $6.1 billion respectively. Off-balance sheet growth was driven by tech and healthcare and global fund banking, reflecting strong cash and new money inflows from public entities.

Our credit profile remains strong, driven by resilient asset quality trends. The net charge off ratio improved by one basis point sequentially to 29 basis points outperforming our guidance. Our performance was driven by accelerated resolutions in the general office portfolio and reduced investor dependent losses.

While the current operating environment has been impacted by geopolitical factors, the broader economy has remained resilient. This backdrop combined with continued improvement in criticized and classified asset levels and a migration to higher credit quality portfolios has resulted in lower net charge offs and a reduction in our allowance for loan losses.

Nonacrual loans held steady quarter of a quarter in 96 basis points of total loans. The slightly elevated level reflects timing and resolving a few large loans originally slated for the second quarter. We expect nonacrual loans to decline throughout the second half of 2026.

As of July 21st, we had repurchased over 20% of our common shares outstanding for a total of $6.3 billion, roughly 84% of our total authorization.

Sherry purchases were $600 million during the quarter and our CET1 ratio was 10.77 at quarter end. As we approach our CET1 target range of 10 to 10.5%, we are proactively moderating the pace of Sherry purchases. We anticipate repurchases of approximately $600 million in the third quarter and $300 million in the fourth quarter as the capital distribution strategy pivots from deploying excess capital towards sustainable capital maintenance.

Our capital position remains comfortably above regulatory requirements. This provides us with meaningful optionality to support client needs, fund strategic growth initiatives and deliver consistent long-term results to our shareholders.

Turning to page 28, I'll conclude with our outlook for the remainder of 2026. We are projecting third quarter loan balances in the range of 152 to $155 billion, driven by growth in the commercial bank and general bank segments.

We reiterate our four year guidance of 153 to 157 billion underpinned by sustained client activity and the upcoming VMO branch acquisition.

In the commercial bank, we expect loan growth to be anchored in the commercial finance industry verticals and the seasonably robust factoring business. Global fund banking is supported by a healthy $11 billion pipeline that we anticipate balance growth will moderate following record production and high utilization in the first half of the year. In the general bank, growth is expected to accelerate in the second half of the year fueled by the business and commercial portfolios within the branch network.

We also anticipate that the VMO branch acquisition, expected to be completed in the third quarter, will add approximately $700 million to the loan portfolio.

We project third quarter deposits between $179 and $182 billion, driven by our VMO branch acquisition adding approximately $5.3 billion in deposits.

We expect this to be bolstered by growth in the direct bank and branch network where our digital marketing strategies and pricing enhancements continue to help us capture share.

We expect this growth will more than all set normal outflows in tech and healthcare banking as our clients deploy cash in the operations or off balance sheet investment alternatives.

We have made significant headway on the FDIC purchase money note, pre-paying $8.5 billion through July. We remain committed to a steady pay down pace of $500 million to $1 billion per month and will also leverage other positive liquidity events to accelerate the pay down, reinforcing balance sheet optimization. Driven by recent wholesale funding activities and the anticipated positive liquidity event created by the VMO branch acquisition, we expect an acceleration in the pace of pay down in the third quarter totaling between six to $8 billion.

We reaffirm our four year guidance of $181 to $186 billion accounting for the BMO branch acquisition and targeted deposit growth.

On net interest income, we are maintaining our midpoint while marginally narrowing our four year range to $6.6 to $6.75 billion.

We are guiding to a range of $1.63 to $1.71 billion in the third quarter. Our guidance factors in zero to 125 basis point rate height, potentially moving the Fed funds rate to 4% by year end.

Headline and execretion net interest income trough in the first quarter due to interest rate shifts and changes in accretion levels. We expect continued strength and earning asset growth will successfully mitigate modest increases and funding costs as we work to grow deposits across all channels and prepaid the FDIC note.

While we remain asset sensitive, the anticipated timing of the rate hikes means the bulk of the net interest margin benefits will be realized in 2027 rather than late 2026 as we expect deposits to reprice more quickly than variable rate lines, which often take up to a quarter to reprice.

We expect third quarter net charge offs in the 30 to 40 basis points range. We are actively managing the commercial general office and innovation portfolios, where we expect charge offs to continue in the medium term.

Reflecting our 2026 performance through the first half of the year, we are moving our full year net charge off guidance to 30 to 35 basis points. We are not observing any systemic trends signaling credit quality deterioration across the broader portfolio and believe we are well reserved.

We remain encouraged by our credit results year to date and our optimistic the good performance will continue. We expect non-interest income between 520 and $560 million in the third quarter. Overall, we continue to see strength in many of our business lines, such as rail, carton merchant, client investment fees and well.

For the full year, we are raising our guidance to $2.14 billion to $2.22 billion, driven in part by client investment fees benefiting from off balance sheet volume growth and favorable asset yields and a flat to increasing rate environment. In the commercial bank more broadly, we expect continued strength in international fees and seasonal volume lifts and factoring commissions.

We also expect continued momentum and wealth via regional talent acquisition and deeper connectivity with general and commercial bank relationship managers. We anticipate sustained stability and deposit fees and we remain encouraged by the performance of our lending related businesses as we continue to benefit from strong loan growth and capital markets activity.

Finally, we expect high asset utilization and strong lease rate re-pricing in our rail business through year end, 2026. We project third quarter expenses to remain relatively stable in the $1.33 to $1.37 billion range and four year in the $5.34 to $5.41 billion range, both improvements from our previous guidance. For the third quarter, we expect expansion in various categories, given the expected completion of the BMO branch acquisition, as well as work on our SBB brand transition.

We will continue to utilize the direct bank to support deposit growth in the third quarter, but do expect marginally lower marketing expenses as the team has improved efficiency around client acquisition and retention.

The shift in four year expenses reflects our ability to continue to find efficiencies in how we operate, which is helping offset the year over year impact of the BMO branch acquisition merit based increases, direct bank marketing costs, and IT spend as we continue to invest in solutions that simplify our processes and improve our customer experience.

We expect that our adjusted efficiency ratio will be in the low 60% range in 2026, as strong revenue performance is partially offset by funding pressures and continued investments in our franchise.

To wrap up on expenses, we are highly encouraged by our current trajectory and the discipline we are seeing across the organization, which reflects deliberate actions to streamline our cost of doing business. Our strategic focus on operating efficiency and expense management is successfully bending the cost curve as evidenced by our second quarter performance. We recognize that our efficiency ratio is higher than our ultimate baseline, and we are fully committed to driving this metric down into our mid 50s target range over time.

We will continue to focus on cost efficiencies and revenue enhancements to optimize operating leverage and maximize long-term shareholder value.

For both the second quarter and four year 26, we expect our tax rate to be in the range of 24 and a half to 25 and a half percent, which is exclusive of any discrete items.

This concludes our prepared remarks. I will now turn it over to the operator to open the line for questions.

Okay, thank you for the third quarter. And this is anchored to one rate hike in October. So for the third quarter, we're expecting both baseline and execution.

Net interest income to be flat with the second quarter. We expect both baseline and execution NIMM to also be flat with the second quarter. In terms of the fourth quarter exit, we're expecting headline net interest income to be up low single digits percentage points and net and execution to be up low to mid single digit basis points percentage points.

We expect headline NIMM and execution NIMM to be flat with the second quarter. So that's the trajectory through the second half of the year. In terms of spot rates, how are on total deposits compared to our 2.07% cost of deposits in the quarter, our spot rate was 1.99%.

Okay, first of all, and I'll let Arch expand on this. We expect that our CT1 ratio will be towards the higher end of our target range of 10 to 10 and a half at the end of this year. And that assumes the $900 million of repurchases in the second half.

Arch, why don't you touch a little bit on the AMPS Basel III and our plans there. Sure, Casey, to echo this Craig point, at least on the exit for Q4 this year, we do expect to kind of be at that midpoint of our target range as we exit the year and as we normalize the share repurchase pace, as Craig had mentioned, has prepared remarks.

As we're thinking about the Basel refresh in the final rule becoming effective, we've clearly done a lot of work in the back end here to prepare for it. We are not getting too many ducks in a row here until we have that final rule fully in front of us to really start implementing how that might influence the forward capital plan and capital strategy for us internally.

But I think as we think about that, we'll certainly have more to share as we think about 20, 27 in pace.

That rule really kind of firms up and becomes a reality.

Oh, Craig, morning. Craig, just following up on the NII in the margin conversation, which is helpful. How would those numbers change if you don't get a hike? If it's right, stay flat. I guess they have more than a fourth quarter. If it's right, stay flat. If you're looking at the third quarter, we would still project flat, net interest income, headline and excretion.

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

So not much change.

And then it gives broader competitive, a lot of your peers have talked about just the broader competitive dynamic or fundraising and deposits, your spot rates would suggest that you're holding the line there, but any incremental color on the funding outlook, thanks. Yeah, I think we observe that competition is very fierce for deposits, putting a lot of pressure and frankly, a lot of banks are putting out deposits that are really unprofitable.

So the pressure is intense. And I think that's really, if you think about our asset sensitivity, we would expect to have much more improvement in margin and net interest income. And I think the funding costs are sort of blunting, sort of blunting that muting sort of our position to neutral to where it is now.

Elliot, any more comments on the deposit competition, funding costs, et cetera? No, I think that's right. And I think we're very pleased with what we're able to raise in the direct bank. I mean, rates are kind of marginal costs in that channel more than more percent. So I do think, not just in direct bank, but others we're seeing a good competition out there that's pushing rates a little bit higher. So really proud to echo your comments there.

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

Arch, anything you'd like to add to that? Only thing I'll echo there is just continued execution through the deposit channels. Obviously branch in commercial, we're still looking at growth there over the long run. But the Craig's point echoing there, we do have a diverse menu of funding opportunities ahead of us, I think, to really kind of measure the purchase money note down over time ahead of that 2028 maturity.

Yeah, and just with respect to our projection of six to eight billion in pre-payments for the third quarter, that'll come from a combination of that normal billion and a half to three billion dollar run rate plus the net liquidity provided from the BMO branch acquisition.

Okay, thank you, thank you, I gotcha. This is our chair responder to that one as well. On the note itself, just as a tool or as a line on there, it is a fixed rate note on the balance sheet. So for us, it does accentuate from a mixed perspective, the sensitivity on the balance sheet for us. So as we go into replacement funding, whether those coming through deposit channels or whether those are coming through wholesale funding channels, it permits us more flexibility to manage the sensitivity off the liability side of the balance sheet than we have today.

So I think as we look at gradual replacement of that funding, it'll just provide us more flexibility as we manage the sensitivity position on the balance sheet inherently there.

I think we would expect utilization to moderate, but we would expect even with that, expect balances to grow, a very healthy pipelines right now. I think we've seen good activity. I mean, then tech and healthcare certainly had a great quarter. It was our highest quarter of growth really since 2023. I think there's some very strong fundamentals, just kind of industry-wide there.

In middle market, I think middle market's really kind of a build of that line of business, right? We've put a lot of effort as we're kind of translating some of the legacy SVB products over to that line of business. I think we've seen strong growth and that's really kind of extended to the loan side as well. So, really kind of positive. I think across kind of those three lines of business right now.

Mark, Kajra, I'm not sure if you want to add anything. Elliot, I think you covered it very well. Thank you.

Nothing to add.

I think the competitive environment is strong. I think we've seen spreads come in, even in areas like Global Fund Banking. I would say we've started to see some moderation in some of that spread tightening. So we might have a little bit more to go, but we think kind of the worst is probably behind us. But I think overall in regional banking, I think competitors are out there. I think they're lending.

And so competition is strong out there. But we feel like we're competing very well, even against that backdrop.

Sure. So our clients continue to like that there are interest rates and an ability to get a return these days. But having said that based on the, really focusing on the average numbers, we continue to be pleased with the continued execution, our ability to attract new client balances.

And as I think already referenced, very pleased with this drawing execution through the first half.

No, those are largely behind this model enhancements. Thank you.

Hey, Janet, this is our chair. On the SBB deposits specifically, we do have some of those on balance sheet. We are circling those from a conservative nature to bring and retain those on balance sheet that provide us with the liquidity factors and quality that are preferred to us as we manage the balance sheet and liquidity position. As you can see with the off balance sheet build that we've had, we continue to manage those relationships very dynamically and very well with the growth in that business and those client relationships.

There are certainly questions around how we think about that off balance sheet deposit quality over time as we continue to get our hands around the deposit franchise, but for where we're sitting right now, as we look at the purchase money note path, we are not bringing in any sort of that off balance sheet product as it's positioned today to kind of support how we are looking at the forecast path for the purchase money note.

The spot rate right now in the direct bank is 3.71, the highest offer grade is 4.1.

And the 3.71 compares to the cost of 3.70 during the second quarter, so fairly neutral.

And should we assume that that is gonna be the primary avenue to to pay down alongside the broker or are you, I mean, is that a fair assumption? Well, our assumption is it'll come from excess liquidity, which will be deposit growth and excess loan growth, about a third of that for the remainder of the year. We expect to come from the direct bank.

And then again, FHLBs out there, long-term debt issuance as an option and further broker deposit issuance if needed. But we feel very confident in our ability to prepay the purchase money note.

Is BMO unique or are there others out there that you could do? We have no other current ones in the queue. We're very pleased with the BMO acquisition though.

Yep. You're welcome.

I'd like to turn the call back over to our host Miss Deanna Hart for closing remarks. Thank you. And thank you everyone for joining our call this morning. We appreciate your ongoing interest in our company. And if you have further questions or need additional information, please feel free to reach out to the We have you have a great rest of your day.