FCNCA – First Citizens BancShares: Navigating Challenges, Unlocking Growth Potential

First Citizens BancShares (NASDAQ:FCNCA) has recently reported impressive growth in total revenue, doubling its earnings from the previous fiscal year. This outstanding performance can be attributed to its strategic mergers and acquisitions, dedication to affordable homeownership, and small business lending. With management’s optimism and a strong buyback catalyst, the stock has become an attractive investment opportunity. This article will dive into the key factors driving FCNCA’s success, as well as potential headwinds and investment considerations.

Company Highlights

First Citizens BancShares highlighted strong growth in total revenue, reaching $3,999 million, more than double the $1,935 million recorded in FY’21. The significant increase in total revenue can be attributed to a combination of factors, including its recent M&A activity and its dedication to supporting affordable homeownership, and small business lending.

Furthermore, the management remains optimistic that they will continue reaping the benefits of operating synergies, as quoted below.

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. Source: Q4 2022 Earnings Call Transcript

In fact, the adjusted efficiency ratio has already started to improve this year to 56.40%, better than its previous 64.34%. Looking at its growing adjusted earnings per share of $77.24, better than its previous $51.88, makes the stock attractive. However, on a quarterly basis, FCNCA missed analysts’ Q4 estimates due to non-recurring expenses, as quoted below.

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.

Additionally, management continues to reassure investors that they are in shape to weather today’s headwinds with their strong buyback catalyst.

…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. Source: Q4 2022 Earnings Call Transcript

In fact, FCNCA bought back 1.5 million shares this year, increasing the tangible book value per share to $571.82. With the current trading price below its tangible book value, the stock is now an attractive investment.

However, this temporarily lowers its CET 1 ratio of 10.08% compared to its 11.14% pro-forma combined in FY’21 and its Tier 1 leverage ratio of 9.06% from its 9.09% from a year ago.

Liquidity and Funding

Management remains optimistic about their liquidity. In fact, deposits are the primary funding source for the company, as quoted below.

…our balance sheet continues to be funded predominantly by deposits, representing over 93% of our funding base. Source: Q4 2022 Earnings Call Transcript

Despite the mixed views on the company’s outlook shown in the image above, both S&P and Moody’s have assigned investment credit ratings, making the stock attractive.

FCNCA Remains Positive on Driving Margin Expansion

The FY’22 report states that FCNCA’s loan portfolio grew by $5.6 billion, representing an 8.5% increase over the previous year’s end. According to management, while rising interest rates could potentially impact FCNCA’s profitability, it is taking steps to address the situation, such as implementing credit allowances, as quoted below.

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. Source: Q4 2022 Earnings Call Transcript

FCNCA is actively managing today’s headwind to ensure that the company is well-positioned to navigate changes in interest rates.

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. Source: Q4 2022 Earnings Call Transcript

FCNCA’s variable rate loan portfolio makes up 45% of its total loans and a 100-basis points shock in rates is estimated by management to increase its net interest income by 3.4%. This suggests that its loan portfolio and interest rate risk management strategy remain favorable for the company. The bank also expects moderate margin expansion to continue, driven by the continued repricing of fixed-rate loans and investments in 2023.

…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. Source: Q4 2022 Earnings Call Transcript

Management remains optimistic that they will remain competitive and achieve a positive spread, as quoted below.

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. Source: Q4 2022 Earnings Call Transcript

FCNCA’s loan portfolio currently yields 4.41%, which is significantly better than the 10-year Treasury yield of approximately 3.39%. This impressive performance should provide reassurance to investors that today’s market headwinds are well under control.

FCNCA’s 44% Dive: Uncover Hidden Opportunities

Panic selling is apparent after the collapse of Silicon Valley Bank. In fact, FCNCA has already dropped more than 44% from last year’s high. This leaves the company’s price trading below all of its simple moving averages, implying strong bearish momentum. Additionally, looking at its MACD value of -37.35, with a MACD signal value of -10.32, both indicators suggest a bearish trend.

However, BancShares is already approaching its significant support, as shown in the chart above. This implies a potential slowdown in today’s bearish momentum. Further accumulation and a potential bullish MACD crossover at these inflection points will confirm support, bringing favorable rewards for potential investors.

Attractively Valued

Based on the valuation metrics provided by SeekingAlpha, FCNCA has been given a valuation grade of D-. Upon further inspection, it appears that it has a low dividend yield ratio of 0.45%, which is significantly lower than the sector median of 3.48%. This may make it less attractive for investors who are seeking dividend income.

However, if FCNCA were to increase its dividend rate, the stock could become a more attractive investment option. Its payout ratio currently stands at 2.79%, indicating that there is room for an increase. Additionally, the company’s outstanding forward dividend coverage ratio of 35.24x suggests that they have the ability to continue growing their dividend, especially in a more normalized operating environment.

In terms its profitability and efficiency in generating returns for shareholders, FCNCA’s return on common equity of 15.90% is better than its 5-year average of 12.16% and also better than the sector’s median of 11.19%.

Looking at its trailing Non-GAAP P/E ratio of 7.06x, it is undervalued compared to its 5-year average of 26.65x. This undervaluation sentiment continues especially considering its forward P/E of 6.03x. However, assuming a more impacted earnings per share in FY’23 of $63.54 this will translate to 8.01x forward P/E remains undervalued compared to its 5-year average, making the stock still attractive as of this writing.

Conclusive Thoughts

FCNCA has shown strong growth in total revenue, driven by recent M&A activity and its commitment to affordable homeownership and small business lending. Despite some short-term headwinds and non-recurring expenses, the company remains well-positioned to weather market challenges and continues to focus on creating positive operating leverage.

FCNCA’s loan portfolio growth and interest rate risk management strategy, combined with its commitment to margin expansion and competitive loan yields, demonstrate a strong and resilient business model. Although the stock’s dividend yield is currently low, there is potential for growth in dividends given the company’s low payout ratio and strong dividend coverage.

Despite facing short-term challenges, FCNCA shows strong long-term prospects as indicated by insider buying, reflecting its conviction in the company’s potential. Overall, this makes FCNCA an attractive stock.

Thank you for reading and good luck!