UPDATE: This article includes information and quotes from First Citizens' call with analysts, as well as additional commentary from analyst notes.
The sluggish loan returns of Silicon Valley Bank in confluence with costly deposits are weighing on First Citizens BancShares' balance sheet, leading the bank to lower its full-year net interest income guidance in its third-quarter earnings.
The Raleigh, North Carolina-based bank said Thursday that slow loan growth and increasing expenses led to a nearly 15% year-on-year drop in its bottom line. The asset-sensitive bank also
The bank reeled in $639 million of net income during the third quarter, and net interest margin — a profitability metric to assess loan yield versus deposit cost — of 3.33%, down from 3.52% the previous year. First Citizens said those metrics haven't yet hit their bottom and will probably keep sliding until the second half of 2025.
Chairman and CEO Frank Holding Jr. said in a prepared statement that the bank's loan growth "remained resilient" in its legacy general and commercial bank segments but was
"We posted another quarter of strong financial results, largely in line with our expectations," Holding said.
Third-quarter net interest income of $1.8 billion fell within the bank's prior projections, representing a decline of $194 million from a year ago. But total loans, total deposits and noninterest expenses all missed First Citizens' guidance from the previous quarter. The bank cut its net interest income guidance for 2024, expecting $7.08 billion to $7.18 billion, down from $7.2 billion to $7.3 billion.
First Citizens saw earnings per share of $43.42 in the third quarter, below consensus analyst estimates of $45.45, per S&P. Its stock price tumbled Thursday, falling 9.2% to $1,890.35.
The bumpy quarter comes about a year and a half after its acquisition of the failed Silicon Valley Bank in 2023. Since buying the Santa Clara, California-based bank's assets, First Citizens has more than doubled in size, hitting $221 billion assets in the third quarter, and seen its stock price rocket.
But the deal hasn't delivered slam dunk results yet. The bank has had to increase investments in risk management to handle the rapid growth, which has pushed up expenses, though Holding said
Now, the North Carolina stalwart is
The problem, though, is that the sector continues to trudge through a "significant downturn," Marc Cadieux said. Cadieux, a three-decade SVB veteran who was tapped to lead SVB's commercial banking business under the First Citizens umbrella, said in a July interview that the industry is facing its largest slump since the dot-com boom. Borrowing is based on investments, and investment activity has been muted, Cadieux said.
SVB commercial loans for the quarter declined by $2.1 billion, down 5% from a year ago and 20% from the second quarter. But the bank sees the stall in private equity and VC investments as a temporary blip. Chief Financial Officer Craig Nix said on the Thursday call that he doesn't see problems "structurally" with the business, and Holding said he was confident in the prospects of SVB's deposits and loans.
"The stability of the SVB deposit franchise continues to demonstrate the competitive advantage we maintain in the innovation economy," he said.
Holding and Nix pointed to a tick up in average loan balances (as opposed to period-end loan balances) for the quarter and a pipeline of $8 billion as indicators of confidence in the business. Nix said First Citizens is cautious on the absolute level of growth in the sector but is anticipating more business going forward.
"We do expect a modest increase in the investment activity in the fourth quarter as the Fed's monetary easing cycle has the potential to kick-start a market recovery, which could drive loans higher in the segment," Nix said.
Piper Sandler analyst Stephen Scouten wrote in a Thursday morning note that the decline in loans "may take some shine off of the story for the near term." The analyst maintained a neutral rating on the company.
While First Citizens hopes to see the Federal Reserve's forecasted rate cuts catalyze borrowing demand, the moves will also shift the other side of the balance sheet. Nix said he thinks deposit costs peaked in the third quarter and will begin to come down if the Fed cuts interest rates as expected.
First Citizens is also preparing for net interest margin to compress as loans bring in less revenue.
"While we realize that our asset sensitivity causes headwinds to net interest income and net interest margin in down cycles, it has allowed us to pull forward earnings in the higher-for-longer rate environment," Nix said. "In general, we believe that being asset-sensitive provides greater optionality in multiple interest rate environments and allows for greater flexibility on our balance sheet."
First Citizens landed the No. 1 spot on
As the bank pulls various levers to manage interest income, it is simultaneously working to ratchet its common equity tier 1 capital ratio down to 10.5% by the end of 2025 from 13.24% — roughly where it has hovered since the SVB transaction.
To get there, First Citizens has bought $969 million in stock as part of a previously announced $3.5 billion repurchase plan. The bank also raised its dividend to $1.95 a share in the fourth quarter, up from $1.64 a share.
