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First Citizens BancShares (FCNCA) Q4 2021 Earnings Call Transcript

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First Citizens BancShares (NASDAQ: FCNCA)
Q4 2021 Earnings Call
Jan 26, 2022, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by and welcome to the First Citizens BancShares fourth quarter and year-end 2021 earnings conference call. At this time, all participants are in a 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 -- Senior Vice President, Investor Relations

Thank you, Felis. Good morning, and thank you for joining us today. It is my pleasure to introduce our chairman and chief executive officer, Frank Holding. As well as our chief financial officer, Craig Nix.

He will provide an overview of our fourth quarter and year-end results, and we'll be referencing our investor presentation, which you can find on our investor relations website. We are also pleased to have several other members of our leadership team in attendance today who are available to participate in the Q&A portion of our call if needed. Following the completion of our formal presentation materials, we'll be happy to take any questions you may have. We will mostly be speaking today on First Citizens BancShares' stand-alone financial results, but we'll provide an update on our merger activity with CIT, as well as some CIT stand-alone quarterly, and year-to-date financial highlights, which are included on Pages 22 and 23 of the presentation.

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Our comments during today's presentation 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 your review on Page 2 of the presentation. We will also reference non-GAAP financial measures, reconciliations of these measures against the most directly comparable GAAP measures are available in the appendix.

Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by a third party. With that, I'll hand it over to Frank.

Frank Holding -- Chairman and Chief Executive Officer

Thank you, Deanna, and good morning, everyone. We appreciate all of you joining us today. As you can see on Page 3 of our investor presentation, we're at the dawning of a new and exciting era with the closing of our transformational merger with CIT, creating a top 20 US financial institution with over $110 billion in assets. We believe the merger brings an opportunity to become an even better bank than we've been for the last 124 years.

It marks big and important changes in our long and accomplished history in terms of our structure, size, scope, and capabilities. The goal and combining our two companies is to create long-term value for all our constituents, including shareholders, customers, associates, and communities. And we'll do this through our emphasis on stable leadership, enduring values, and a commitment to helping people and businesses prosper by focusing on their long-term success. We also believe success is grounded in our forever first motto, as outlined on Page 4 of the presentation.

The core of Forever First is the notion that you're going to be here for the long term and that we will always put our customers first. While the way we do banking changes as we bring forward new products, new services, new conveniences, and new ways of engaging our customers. The key principles of financial stability are focused on long-term growth and customer experience are things that will never change. On Page 5 of the presentation, you'll see our statement of purpose, better banking, better tomorrow.

In recent months, we've looked at the statement with fresh eyes updated as we look forward to the merger with CIT. We're Forever First focused on our customers, the statement of purpose focuses on our associates, specifically how we work and the culture we want to promote. Supporting the statement are three pillars, and I'll put that in quotation marks, which helps express the way we deliver better banking and better tomorrow. These are qualities that are essential to who we are and how we work.

The first pillar is long-term thinking. We place a lot of emphasis on building relationships to create long-term value and opportunity for our customers. The second pillar is service excellence. We believe in providing better service to our customers than our competitors and are dedicated to doing it with integrity, transparency, and respect.

The third pillar is powerful results. We want to help create better outcomes for our customers, associates, and communities. As we work to integrate CIT, this statement will guide our teams and ensure we remain focused, all while delivering value to our shareholders. Since the combination of our companies on January 3rd, we've been actively engaging with and ensuring our new associates are properly welcome to the combined company with the goal of binding us all into a unified team.

We're also actively engaging with our customers, reaffirming our commitment to helping them with their financial needs. As far as other integration activities, we anticipate the OneWest Bank conversion will occur during the third quarter, followed by Legacy Mutual of Omaha during the fourth quarter. We are working diligently to finalize our combined strategic priorities and integration timeline, which we will share over the coming months. This morning, we reported fourth quarter net income of $123.3 million, or $12.9 per share, delivering another quarter of strong results to our shareholders.

When compared to the third quarter, we saw increased net income -- I'm sorry, increased net interest income, despite continued growth in deposits and pressure from our excess liquidity. We were able to deploy some of this excess liquidity into our loan and investment portfolios. Despite the decline in the loan portfolio from SBA-PPP loan forgiveness activity. Non-interest income from our core fee income-producing lines of business continued to be a source of strength.

Our credit quality remains solid, resulting in another net provision benefit. All in all, it was another great quarter for First Citizens, and I want to thank all of our associates for their commitment in 2021. As we look forward, I want to mention a change we're making around the middle of the year regarding NSF and OD fees -- and overdraft fees. We will be eliminating our NSF fees and significantly lowering our overdraft fees, from $36 to $10 on consumer accounts.

We believe these changes are necessary to remain competitive in the current marketplace. I will turn it over to Craig for a closer look at our financial results, and then we'll open the line for questions.

Craig Nix -- Chief Financial Officer

Thank you, Frank, and good morning, everyone. Starting on Page 6 of the investor presentation, I will cover our fourth quarter earnings highlights. Earnings for the fourth quarter totaled $123.3 million, down $800,000 from the linked quarter and $14.8 million from the same quarter a year ago. While earnings were down compared to those periods, we are pleased with our core earnings performance, which I will touch on in a moment.

Earnings for the fourth quarter translated into a return on average assets of 0.84% and a return on average equity of 10.96%. Net income per common share was $12.9, compared to $12.17 in the third quarter and $13.59 in the comparable quarter a year ago. For the linked quarter, lower earnings were due to higher non-interest expense and a decline in gain on sale of securities, partially offset by increased net interest income and an increase in a net benefit for credit losses. Lower earnings from the comparable quarter a year ago were due to lower fair value -- market value adjustments on equity securities, the decline and gain on the sale of securities, higher non-interest expense, and lower SBA-PPP income, are all partially offset by higher net interest income ex PPP.

A decline in provision for credit losses and higher core non-interest income. While earnings were down for the length and comparable quarters, we were pleased with ex PPP net interest income growth, as well as core non-interest income from our fee income-producing lines of business. We were also pleased with our comparable fourth quarter results from a pre-provision net revenue growth perspective after removing non-core income and expense items. We continue to experience strong credit quality and reported a net recovery for the quarter.

In addition, macroeconomic factors continue to improve, resulting in a further reserve release providing a $5.1 million net benefit from provision for credit losses during the fourth quarter. For the year is macroeconomic factors have improved, and we have sustained the credit quality, we released $45.8 million in reserves compared to a reserve build of $35.9 million last year related to the uncertainty surrounding COVID-19. On Page 7, we highlight our year-over-year results. Net income totaled $547.5 million for the full year at $55.7 million or an 11.3% increase over 2020.

This translated into a return on average assets of 1% and a return on average equity of 12.84%. The most significant factor contributing to the increase in earnings was a $36.8 million net benefit from provision for credit losses in 2021 compared to the provision expense of $58.4 million last year. The net charge-off ratio for the year declined from eight basis points to three basis points, while the net interest margin declined by 51 basis points. Our efficiency ratio remained flat, primarily due to core net revenue growth, offsetting core non-interest expense growth.

Turning to Pages 8 through 10, I will cover trends in net interest income, and net interest margin. Net interest income increased by 3% versus the prior quarter, primarily driven by higher SBA-PPP income, higher loan, and investment balances, only partially offset by lower loan and investment yields. While an increase in SBA-PPP interest income accounted for most of the dollar increase in net interest income during the quarter, net interest income ex PPP and PCD loans increased by $5.3 million. This increase over the linked quarter was due to loan investment portfolio growth offsetting impacts from the low-interest rate environment and excess liquidity.

We are pleased that loans ex PPP grew at an annualized rate of 5.7% over the third quarter. While the increase in the absolute level of net interest income during the quarter was a bright spot, as expected, net interest margin declined for the linked quarter by three basis points. As discussed in prior quarters, we continue to operate with liquidity above normal operating ranges, which continue to put downward pressure on the net interest margin. On prior calls, we stated that we were monitoring interest rates closely and looking for opportunities to redeploy excess liquidity to grow the absolute level of net interest income.

So in addition to solid organic loan growth during the quarter, we invested $2 billion in short duration US treasuries to increase interest income while adding minimal interest rate risk. We thought the time was right to implement the strategy given that the market had fully priced $0.06 interest rate hikes into the '22 and '23 yield curves, thereby allowing us to pick up a sufficient spread over the Fed [Inaudible] rate as we await the Fed to raise rates. Despite deploying the cash and some earlier in the year, leading to a $3.2 billion increase in our investment portfolio over the last year, our overnight investment balance at the end of the fourth quarter was $9.1 billion, essentially unchanged from the prior quarter. As mentioned in prior quarters, we purposefully maintain a conservative posture with respect to liquidity.

Given that we believe there were opportunities to optimize our balance sheet once our merger with CIT was complete. To that end, we announced Monday that we intend to retain $2.9 billion of senior unsecured debt assumed in connection with our merger with CIT. The debt will be redeemed on February 24, 2022, the $2.9 billion includes four unsecured notes and maturities ranging from 2022 to 2025 and a weighted average coupon rate of 5%. This redemption aligns with our strategy to optimize the balance sheet for the newly combined company as we work to reduce higher debt costs by utilizing excess cash from our deposit growth.

In 2022, net interest income ex PPP is poised to grow through the balance sheet growth. However, we expect net -- headline net interest margin to decline, albeit more moderately than it did in 2021 due to continued excess liquidity at SBA-PPP income becoming less of a contributor moving forward. We will continue to seek opportunities to grow absolute levels of net interest income to offset declines in margin through organic loan growth, opportunistic additions to our investment portfolio, and continuing to optimize the liability side of the balance sheet. Turning to Page 11, I will cover non-interest income, which totaled $114.3 million during the fourth quarter.

Headline non-interest income was down $8.7 million compared to the linked quarter, driven mostly by an expected decline in security gains. Core non-interest income was relatively stable for the length periods. Headline non-interest income declined by $12.5 million when compared to the fourth quarter of 2020. Primary drivers included a $21.2 million reduction in fair market value adjustments.

On equities and securities gains, partially offset by an $8.6 million increase in income from fee-producing lines of business. The most significant factor of the increase was higher wealth income and driven by stronger sales and market value impacts, leading to growth in assets under management. We also saw increases in service charges and income from credit -- from card services. These increases were partially offset by a decline in mortgage income.

Turning to 2022, we expect continued momentum in our wealth and payments-related businesses. We expect to continue to see moderation mortgage income due to the impact of higher mortgage rates and consequently the slowing and refinance activity. As Frank noted earlier, we are making changes to our NSF and overdraft practices, which will reduce service charges, consumer NSF, and overdraft fees constitute approximately 50% of our service charges income statement line item. And we expect this change to result in a 35% to 40% decline in service charge revenue once fully implemented.

In terms of the dollar impact. We estimate a 2022 impact in the $15 million to $20 million range and the full impact going forward to be between $35 million to $#40 million. Given all of these factors, we expect low single-digit percentage growth in core non-interest income in 2022, as wealth and payments businesses continue to grow, providing an offset to lower mortgage and service charges income. Turning to Page 12, I will cover the non-interest expenses.

Non-interest expense increased by $10.4 million over the linked quarter. Most of the increase occurred in other non-interest expenses, with the largest increases in foreclosure and collection expense and consulting costs. The remainder of the increase was spread, among other general and administrative accounts. The efficiency ratio increased slightly during the quarter from 66.09% to 66.31%.

And considering the impact of the current quarter's expenses from merger-related costs, the impact of merger pre-hires, and other episodic expenses, expenses were in line with expectations. We expect that our run rate and I'm talking legacy FCB here will increase by approximately 3% to 5% next year, reflecting wage pressures, salesforce additions, and well in our fastest-growing markets and continued investment in digital transformation. Page 13 provides balance sheet highlights and key ratios, and I will cover the significant components of the balance sheet on subsequent pages. Turning to Page 14, I'll cover loan growth for the linked quarter and year over a year period.

Loans decreased $144 million, or about 1.8%, on an annualized basis this quarter, primarily due to a $593 million net decrease in SBA-PPP loans. As I mentioned earlier, excluding PPP loans, we experienced solid annualized organic growth of 5.7% over the third quarter. The largest growth components were commercial and industrial, and owner-occupied commercial real estate loans. On a year-over-year basis, loans declined by $420 million, or about 1.3%, primarily due to a $1.9 billion decrease in SBA-PPP loans.

Excluding PPP loans, we saw organic growth of $1.5 billion or 4.9%. Overall, we are pleased with organic loan growth this year, and we expect that growth will continue in the mid-single-digit percentage range moving forward. However, the ultimate level of loan growth will be dependent upon continued economic expansion in our markets. Turning pages 15 through 17, I will cover our credit quality trends and our allowance for credit losses.

Credit quality continues to be a source of strength, we reported a total net recovery of one basis point for the quarter. The non-performing assets to total loans and other real estate ratios were 0.50% at quarter-end, down from 4.65% in the prior quarter and the lowest level since the second quarter of 2019. Given these trends and improvements in macroeconomic factors, we released $45.8 million in reserves year to date compared to a reserve build of $35.9 million last year related to uncertainty surrounding the pandemic. Our allowance ratio ex PPP loans declined mostly from the time modestly from 58 basis points in the third quarter to 56 basis points in the fourth of 0.56%, compared to 0.58% in the third quarter.

While credit quality continues to be strong and we have little indication that it won't continue to be moving forward, we do not expect significant reserve releases in 2022 and anticipate building reserves to support loan growth at some point during the year. Pages 18 and 19 all covered deposit trends in our funding mix, we continue to experience strong deposit growth during the fourth quarter. The deposit is growing at an annualized rate of 10.6% since the end of the third quarter. On a year-over-year basis, deposits grew by 18.4%.

Our balance sheet continues to be funded predominantly by core deposits with deposits representing over 96% of our funding base at the end of the quarter. The total cost of deposits declined by one basis point during the quarter to six basis points. The total cost of interest-bearing liabilities also declined by one basis point. Deposits and deposit growth are obviously at record levels.

As we move forward, we will continue to monitor our deposits and the pandemic flow to try to predict future deposit growth and customer behavior. While we acknowledge that the pandemic has contributed to our deposit growth, we are pleased that over two-thirds of our 2021 deposit growth occurred in core checking accounts. Well, we expect that overall deposit growth will moderate in 2022. We expect overall deposit balances to remain elevated and that they will continue to be a source of strength for our balance sheet and margin even as interest rates rise.

Turning to Page 20, our capital position remains strong with our ratios above or within target ranges. As of the end of the fourth quarter, our CET1 ratio was 11.50% and our total risk-based capital ratio was 14.35%. Most of the growth in our risk-based capital ratios was attributable to strong earnings during the year, partially offset by growth and total risk-weighted assets. As we have noted in prior quarters, our leverage ratio has been impacted by significant deposit growth that remained within an acceptable target range as earnings are mostly offsetting the impact of the increase in average assets.

We expect that our merger with CIT will return our leverage ratio to a more normal level. As Deanna stated earlier, we have included CIT income statements and balance sheets on Pages 22 and 23 of the presentation. First, I will provide a year-to-date and some statement highlights. For the year CIT reported a net income of $922.3 million, compared to a loss of $615.3 million in 2020.

For the year CIT recognizes the benefits for provision totaling $327.4 million compared to a provision of $800.3 million in the prior year. The provision relief in 2021 reflected a combination of factors, including a continued low level of net charge-off. A reduction in loan balances, as well as modest improvements in various macroeconomic factors. Note that the net charge-off ratio declined from 1.14% in 2020 to 0.16% in 2021.

Non-accrual loans declined by $109 million, or about 32% during 2021, and ended the year at 1.21% of total loans, down from 1.63% at the end of 2020. Despite reserve releases during the year, the allowance for credit losses at the end of the year was 2.2% above the pre-pandemic post CECL and implementation level of 2.04%. Net interest income held up fairly well during the year, despite lower loan balances declining by $11.4 million as lower interest expense on deposits and borrowing mostly offset a decline in interest income. Non-interest income increased by $84.8 million, or about 6.2%s over the prior year, primarily due to higher gain on the sale of investment securities and higher factoring commissions.

Non-interest expense was down $731.4 million. The largest component of the decline was related to goodwill write-down in 2020, which did not occur in 2021. The remaining clients spread, among other operating expense accounts. Turning to the quarter of net income for the fourth quarter was $216.1 million, up from $175.5 million in the linked quarter.

Net interest income increased by $5.9 million due to higher investment balances and higher yields on earning assets, lower deposit balances and runoff of higher-cost CDs, and broker deposits. These positive impacts more than offset lower loan balances, which declined by 2% from the end of the third quarter. The net -- the benefit from credit provision, increased by $3.6 million due to the same factors cited for the year-to-date change. Net charge-offs were 11 basis points during the fourth quarter.

During the fourth quarter, non-interest income increased by $40.9 million over the linked quarter. The prior quarter included a $13 million charge related to the release of a cumulative transition adjustment related to the liquidation of a foreign subsidiary. The remaining $27.9 million increase was related to higher rental income due to increased rail utilization and upward pricing of leases, higher factoring commissions on seasonally higher volume, higher capital market fees, and higher equipment sale gains, all partially offset by lower gains on the sale of securities. Non-interest and -- non-interest expenses declined by $18 million, primarily related to lower headcount during the quarter.

Turning to the balance sheet, loans declined by $3.3 billion at the end of 2020. Most of the decline is attributable to elevated levels of prepayments on real estate finance loans. The sale of the aviation portfolio and continued sales of consumer mortgage loans. During the fourth quarter, originations increased over the prior quarter, but they were outstripped by commercial loan prepayments and the sale of consumer mortgage loans.

Deposits were down $3.7 billion, mostly due to runoff of higher rates CDs, and CIT continued to optimize its balance sheet. We are pleased with CITs year-to-date and quarterly results and are excited about the combination of our companies. Just as we were when we announced the planned merger in October of 2020, we remain positive about our prospects as we, one, preserve and grow both banks' core businesses. Two, optimize the funding on the combined balance sheet.

And three, enhance operational efficiency by gaining economies of scale. Work is currently underway to produce a financial forecast and plan for the combined company. This involves reassessing our earnings expectations for 2022 and 2023. By gaining a better line of sight into CITs business plans and financial forecasts, validating expected efficiencies, and finalizing our purchase accounting marks.

Given that this work is underway, we will not be sharing pro forma financial information on the combined company today. We estimate that this work will be complete by early March, and we plan to share the results with you as soon as practicable after its completion. This concludes my comment. Thank you all for joining us today.

We appreciate your time. I will now hand the floor back over to the operator to open it up for Q&A.

Questions & Answers:


[Operator instructions] Our first question comes from the line of Kevin Fitzsimmons with D.A. Davidson.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Good morning, everyone.

Craig Nix -- Chief Financial Officer

Good morning, Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

I just want – I appreciate the detail on, putting the excess liquidity to work and the step up with the short-term securities. Craig, I'm just wondering. Beyond that move, what additional moves you might be? And I know we're probably talking just on a First Citizens' stand-alone basis, but what other moves in terms of increasing the securities portfolio you would likely look to do in the coming months? Thanks.

Craig Nix -- Chief Financial Officer

Well, I can't say, did you have the company's balance sheet that combined cash would be around $12 billion? The redemption that we just have to take it to around 9. Overall, that's still suboptimal from overnight investments to earning assets ratio. So we will continue to look for opportunities to redeploy that cash into investments and loans. And we will also look for opportunities in the combined company for funding synergies and specifically targeting higher cost deposits on the liability side to replace with lower-cost core deposits.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK, thank you. One question on just -- this is more looking further out on a combined basis for not getting into the weeds on the numbers, but I'm just thinking more conceptually and timing. I always thought that one of the opportunities was combined. The company is integrated, get performance up to a certain level, and then get more comfortable stepping in and utilizing some of the excess capital and buying back to stock and I'm just frank.

I'm curious what your thought, given that we've had the delay in closing the deal and now you've said when you expect to get the conversions done. Just curious what your timing -- expected timing might be when you would feel comfortable stepping in and doing that?

Craig Nix -- Chief Financial Officer

Well, Kevin, obviously, the first work ahead for us is to integrate the companies and exhibit that we are following through with our integration plan. So as soon as we can after that occurs when we demonstrate that we're integrating as planned and that we've put some years of earnings together and continue to build capital as soon as we can. After that, we would intend to resume stock repurchases. I don't really have a specific timeframe, but as soon as possible.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK. OK, thanks very much. Thank you.

Craig Nix -- Chief Financial Officer

Thank you, Kevin.


Your next question comes from the line Brian Foran with Autonomous Research.

Brian Foran -- Autonomous Research -- Analyst

Hey, good morning. Maybe just to follow up on the March potential communication of financial forecasts pro forma just in terms of nuts and bolts. Is there anything we should watch out for between now and then? Do you file a pro forma balance sheet at any point? Or is it -- if we're kind of waiting for more info on the pro forma company, March is the next milestone?

Craig Nix -- Chief Financial Officer

We will -- we are required to file pro forma information 71 days or 75 days after the effective date of the acquisition. So we do intend to do that and shortly thereafter, we would plan to come back and share those results.

Brian Foran -- Autonomous Research -- Analyst

Great. And recognizing that the quantitative work is underway. I wonder if just qualitatively you could share, it's been 400 days or so, you've had a lot of time to watch CIT, some time to start working on the integration. Are there any items you would highlight for people as better or worse than initial expectations, again, on a qualitative basis, as you step back and look at what's gone bad or what's gone worse?

Craig Nix -- Chief Financial Officer

I would say what's done better is definitely credit losses and credit quality, actually in both companies have gotten better. Obviously, we believe the continued over this period, we've gotten around the uncertainty, some of the uncertainty around the pandemic that was causing some conservatism in terms of some of the adjustments, some of that uncertainty has dissipated. So I would think that would be the major thing I would point out in that other item, probably, I don't think there will be significant fluctuations.

Brian Foran -- Autonomous Research -- Analyst

And then maybe lastly, it was on the NIM commentary, I mean first to clarify, when you talked about some residual pressure, is that including any change in interest rates from the Fed? Or is that where we are today not contemplating potential Fed hikes?

Craig Nix -- Chief Financial Officer

Are you talking about our forward look?

Brian Foran -- Autonomous Research -- Analyst

Yeah, I think if I got it right, when you were talking about the NII guide, you talked about growth driven by earning assets, but with some NIM pressure still. So hopefully I got that right. And then it just clarified that NIM pressured include any raising rate, or is that extra rates?

Craig Nix -- Chief Financial Officer

It includes and if you look -- if you really have to look at it -- if you look at without PPP, we sort of bottom out in the first quarter and then when the Fed starts – when rates start rising and we do have some rate hikes built into the – to our pro forma. We started a turnaround in the second, third, and fourth quarters, and obviously, the more rate increases, the higher the turnaround – the better that turnaround would be. So we do start to see margin improvement, sort of ex PPP sort of third-fourth quarters, as those rate hikes take effect.

Brian Foran -- Autonomous Research -- Analyst

Great, thank you. Thank you.

Craig Nix -- Chief Financial Officer

Thank you.


Your next question comes from the line of Brady Gailey with KBW.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

Hey, thanks, good morning, guys.

Craig Nix -- Chief Financial Officer

Good morning.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

I wanted to start this – I wanted to start on a follow-up on the share buyback. And if you look at legacy FCNCA, you guys have been pretty active in the buyback, like when I look at 2019 and 2020 combined, I think you repurchased about 16% of the companies of a big figure. You mentioned reengaging in the buyback. Will FCNCA be sensitive to the price of the stock when they think about buybacks or the way that you view it, it's just kind of good practice to always invest internally and repurchase shares over time.

I'm just wondering how this stock has been pretty volatile recently. But if stock goes up a lot, should we still expect share buybacks, or do you think that you're really going to be pretty price-sensitive there?

Craig Nix -- Chief Financial Officer

I would say -- I'll give you a nuanced answer here. I would say our general philosophy is to remain active in buybacks. But obviously, price weighs into that and we want to make sure there's a tangible book value payback period that's adequate, that we're actually getting the return on that investment just like we would in any other acquisition. But the general philosophy would be to remain active.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

Okay. And then, I think I remember in the past, you guys guiding to a target common equity Tier 1 ratio of 9% to 11%. I know you're on top of that, today, but that year end. But that's without CIT.

When you think about the buyback, what capital ratio are you focusing on the most and what is the target of that ratio longer-term?

Craig Nix -- Chief Financial Officer

Well, first of all, I'm not going to cheer the pro forma cap ratio as a combined company, but I think someone asked about what has gotten better. Obviously, with the earnings of both companies and the credit quality, both companies improve. Our capital ratios are going to be fairly high coming into this transaction much higher than we projected back in October of 2020. So I would say that our capital ratio -- I'm not going to provide a target, but our capital ratios will be significantly -- we'll have significant excess capital to grow internally or repurchase shares.

So we feel like we'll have a good capacity to do that. We did have target ranges that we operate in and we'll be mindful of those as we engage in that activity.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

But just remind us, Craig. What are your target ranges kind of longer-term capital? It is the target ratio is still common equity Tier 1? Or is it 9% to 11%?

Craig Nix -- Chief Financial Officer

That's correct.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

OK. And then finally for me, just on loan growth, mid-single-digit. I know, its what you guys have been pointing to. That's what you did this quarter.

So, in line, as we think about '22 and '23, do you think the combined company will still be able to grow loans in the mid-single-digit level with CIT involved? Like should that change at all with the new pro forma company?

Craig Nix -- Chief Financial Officer

We would probably aspire to that, but I will tell you, based on where things are right now, that would be a challenge. And we're really right now trying to get a better line of sight into the CITs business unit to determine that. So I would not promise or project mid-single-digit percentage growth at this time for the combined company.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

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

Craig Nix -- Chief Financial Officer

Thank you.


That now ends our Q&A session. I would now like to turn the call back over to our host for any closing remarks.

Deanna Hart -- Senior Vice President, Investor Relations

Thank you, Felis, and thank you, everyone, for joining this morning. As always, we are appreciative of your ongoing interest in our company and if you have any further questions or need additional information, please feel free to reach out. I hope everyone has a great day.


[Operator signoff]

Duration: 43 minutes

Call participants:

Deanna Hart -- Senior Vice President, Investor Relations

Frank Holding -- Chairman and Chief Executive Officer

Craig Nix -- Chief Financial Officer

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Brian Foran -- Autonomous Research -- Analyst

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

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