First Citizens BancShares, Inc. (FCNCA) Earnings

Management highlights

Overall Financial Performance - Reported adjusted net income of $691 million and adjusted EPS of $57.09, with adjusted ROE/ROA of 1.18%. Both adjusted net income and key profitability metrics increased more than 20% sequentially, exceeding internal guidance and consensus analyst estimates. - Net revenue growth outpaced modest expense increases, delivering positive operating leverage for the quarter. Balance Sheet and Capital Activity - Period-end loans grew 1.6% sequentially ($2.3 billion total), with broad-based growth across core commercial verticals. Period-end deposits grew 1.5% sequentially ($2.6 billion total), driven entirely by direct bank retail deposit gains. - Prepaid $2.5 billion of the FDIC purchase money note in Q2 2026, followed by an additional $1 billion in July, bringing cumulative prepayments to $8.5 billion total. - Returned $600 million to shareholders via share repurchases in the quarter. Total repurchases to date reach $6.3 billion (~84% of total repurchase authorization). - CET1 ratio was 10.77% at quarter end, comfortably above regulatory requirements. Revenue Drivers - Net interest income (NII) increased $35 million sequentially, with headline net interest margin (NIM) improving 1 basis point and core NIM remaining flat. Positive factors (higher earning asset volumes, yields, purchase accounting accretion, reduced borrowings) offset higher funding costs. - Adjusted non-interest income rose $66 million sequentially, exceeding guidance. Gains came from $27 million in equity warrant portfolio valuation gains, a $17 million gain from opportunistic tax credit investment sale, and core fee growth across wealth management, client investment fees, and deposit/lending fees. - Wealth management fee income grew 12% year-over-year, driven by targeted investments in team capacity and service breadth, building a predictable recurring revenue stream. Cost Management - Adjusted non-interest expense increased $16 million sequentially, landing at the favorable end of guidance. Increases were driven by higher marketing spending for direct bank deposit acquisition, digital transformation investments for data center modernization, and higher seasonal charitable contributions, partially offset by lower personnel costs from reduced incentive compensation. Credit Quality - Credit performance remained strong, exceeding management expectations. The net charge-off ratio improved 1 basis point sequentially to 29 basis points, driven by a net benefit for credit losses from strong credit trends.

Guidance

- Loan Growth: Full year 2026 total loans are projected to reach $152-$155 billion, with the four-year target range maintained at $153-$157 billion, including the impact of the upcoming BMO branch acquisition expected to close in Q3 2026 which will add ~$700 million to the loan portfolio. Global fund banking growth is expected to moderate after record production in H1 2026, while general bank growth will accelerate in H2 2026. - Deposits: Q3 2026 total deposits are guided to $179-$182 billion, with the BMO acquisition adding ~$5.3 billion in deposits. The four-year full year deposit guidance range of $181-$186 billion is maintained, including the BMO acquisition impact. - FDIC Purchase Money Note: Management maintains a target steady paydown pace of $500 million-$1 billion per month, with accelerated paydown of $6-$8 billion expected in Q3 2026, bringing cumulative prepayments to $14.5-$16.5 billion through the end of Q3. - Net Interest Income: Full year 2026 NII guidance is narrowed to $6.6-$6.75 billion (midpoint maintained from prior guidance). Q3 2026 NII is guided to $1.63-$1.71 billion. The guidance assumes a 0-125 basis point Fed funds rate hike by year-end, with most NIM benefits from the hike to be realized in 2027 rather than 2026 due to faster deposit repricing relative to variable rate loans. NIM is expected to remain flat sequentially in H2 2026 regardless of whether the rate hike occurs. - Credit: Full year 2026 net charge-off guidance is revised downward to 30-35 basis points (from prior guidance), with Q3 2026 guided to 30-40 basis points. Charge-offs are expected to continue in the commercial general office and innovation portfolios over the medium term. - Non-interest Income: Q3 2026 non-interest income is guided to $520-$560 million. Full year 2026 guidance is raised to $2.14-$2.22 billion, driven by growth in off-balance sheet volumes and higher asset yields in client investment fees, and sustained momentum in wealth management. - Expenses: Q3 2026 adjusted non-interest expense is guided to $1.33-$1.37 billion, with full year 2026 guidance improved to $5.34-$5.41 billion. The 2026 adjusted efficiency ratio is expected to be in the low 60% range, with a long-term target of the mid-50% range. The 2026 effective tax rate is expected to be 24.5%-25.5%, excluding discrete items. - Share Repurchases: Q3 2026 repurchases are expected to be ~$600 million, with Q4 2026 repurchases expected to be ~$300 million, as the company moderates repurchase pace as it approaches its 10-10.5% CET1 target range, pivoting from deploying excess capital to sustainable capital maintenance.

Segment performance

1. Global Fund Banking: Period-end loans grew $2.6 billion sequentially, driving the majority of the quarter's total loan growth, with a robust $11 billion pipeline and strong capital call line utilization. This segment contributed ~100% of the quarter's net loan growth overall. 2. Tech and Healthcare Banking: Period-end loans grew 3.7% sequentially, with the strongest growth since 2023, particularly in the FinTech and sponsor segments. This segment drove off-balance sheet client fund inflows and growth in client investment fees, contributing to core fee income expansion. 3. Middle Market Banking: Period-end loans grew $205 million sequentially, supported by solid production and utilization rates, with ongoing integration of legacy SVB products driving steady performance. 4. General Bank: Loans were relatively flat sequentially as paydowns outpaced new production, resulting in zero net contribution to quarter loan growth. 5. Direct Bank (Deposit Segment): Added $2.8 billion in period-end deposits sequentially, accounting for all net deposit growth in the quarter. These granular, highly insured retail deposits strengthened the company's liquidity profile. 6. Commercial Bank (Deposit Segment): Period-end deposits declined $1.5 billion sequentially due to expected early-quarter corporate outflows, a trend within management's modeled expectations.

Risks & headwinds

- Intense competition for deposits continues to push marginal funding costs higher, particularly in the direct bank channel where marginal costs are above 4%. - Expected net charge-offs continue for the commercial general office and innovation portfolios over the medium term. - Uncertainty around the final Basel III rule makes it difficult to finalize 2027 capital and share repurchase plans, as capital requirements may change. - Sustained higher funding costs put upward pressure on expenses, which could pressure the efficiency ratio and operating leverage.

Analyst Q&A

• Q: NIM came in stronger than expected last quarter; what is the updated NIM/NII outlook, and what are current spot deposit costs versus Q2 levels? /

  A: Management expects baseline NII and NIM to stay flat sequentially in Q3 2026, assuming a single October rate hike. Headline NII is projected to grow low single-digit percentage points in Q4, with NIM remaining flat versus Q2. Current spot total deposit cost is 1.99%, down from 2.07% in Q2.

• Q: If rates stay flat instead of rising, how would NII and NIM guidance change? What is the latest update on deposit competition and funding? /

  A: If rates stay flat, NII and NIM would still be stable with very little change to 2026 guidance, with low single-digit NII growth still expected in Q4. Management notes that competition for deposits remains strong, pushing marginal rates higher across the industry, especially in the direct bank channel where marginal costs exceed 4%, but the direct bank still delivered strong deposit gains in Q2.

• Q: What funding sources will be used to continue paying down the remaining FDIC purchase money note, and how will paying off the note impact the company's asset sensitivity? /

  A: After the $6-$8 billion Q3 prepayment, the natural run rate of paydown will remain $1.5-$3 billion per quarter. Funding sources include excess balance sheet liquidity, FHLB borrowing capacity, long-term debt issuance, and broker deposits if needed. The existing fixed-rate FDIC note increases the company's asset sensitivity; replacing it with variable-rate deposits or wholesale funding will give management more flexibility to manage balance sheet sensitivity going forward.

• Q: Global fund banking and other core lending segments had very strong growth this quarter; how sustainable is this growth, and how are loan spreads trending? /

  A: Management expects capital call line utilization to moderate but still projects continued balance growth for global fund banking, which has a very healthy pipeline. Tech and healthcare banking saw its highest growth since 2023 with strong industry fundamentals, and middle market growth continues as legacy SVB products are integrated. Spreads have tightened in a competitive environment, but the pace of spread tightening is starting to moderate.