Q3 2024 First Citizens BancShares Inc Earnings Call

October 24, 2024

Okay.

Operator: Ladies and gentlemen, thank you for standing by and welcome to the First Citizens BancShares Inc. Q4 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press *501* on your telephone keypad. If you require operator assistance during the program, please press *** then 0. As a reminder, today's conference is being recorded. I would now like to introduce the host of this conference call, Ms. Deanna Hart, Head of Investor Relations. You may begin.

Speaker Change: Ladies and gentlemen, thank you for standing by our Buckle, Judy first citizens Bancshares third quarter 'twenty 'twenty four earnings conference call at.

Speaker Change: At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session. Each press star one on your telephone keypad. If you require operator assistance during the program. Please press Star then zero.

Speaker Change: A reminder, today's conference is being recorded.

Speaker Change: I'd now like to introduce the hosted this conference call. Mr. Yano head of Investor Relations you may begin.

Deanna Hart: Thank you and good morning. Welcome to First Citizens' Q4 Earnings Call. Joining me on the call today are Chairman and Chief Executive Officer Frank B. Holding Jr. and Chief Financial Officer Craig Nix. They will provide Q4 business and financial updates referencing our earnings call presentation, which you can find on our website. Our comments today 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 3 of the presentation. We will also reference non-GAAP financial measures. Reconciliations of these measures against the most directly comparable GAAP measures can be found in section 5 of the presentation. Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of earnings transcripts provided by third parties.

Deanna Hart: We assume no obligation to update such statements. These risks are outlined on page 3 of the presentation. We will also reference non-GAAP financial measures. Reconciliations of these measures against the most directly comparable GAAP measures can be found in section 5 of the presentation. Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of earnings transcripts provided by third parties. I will now turn it over to Frank.

Deanna Hart: I will now turn it over to Frank.

Frank B. Holding, Jr.: Thank you, Deanna. Good morning, everyone, and welcome to our earnings call. I'll make some brief comments about our Q4 results, and then I'll turn it over to Craig to review our results in more detail before we take your questions. Starting on page 6 of our investor presentation, we delivered another quarter of strong financial results with adjusted earnings per share of $45.87. Our net interest margin was resilient despite declines in Accretion Income, and we remain encouraged by the stability of our deposit base. We saw continued deposit growth, and the General Bank and SVB Commercial balances were up modestly over the prior quarter. We're pleased with the stability of the SVB deposit franchise, demonstrating the competitive advantage we maintain in the innovation economy.

Frank Holding: Thank you, Deanna. Good morning, everyone, and welcome to our earnings call. I'll make some brief comments about our Q4 results, and then I'll turn it over to Craig to review our results in more detail before we take your questions. Starting on page 6 of our investor presentation, we delivered another quarter of strong financial results with adjusted earnings per share of $45.87. Our net interest margin was resilient despite declines in Accretion Income, and we remain encouraged by the stability of our deposit base. We saw continued deposit growth, and the General Bank and SVB Commercial balances were up modestly over the prior quarter. We're pleased with the stability of the SVB deposit franchise, demonstrating the competitive advantage we maintain in the innovation economy.

Frank B. Holding, Jr.: Loans declined during the quarter, predominantly by a reduction in the global fund banking portfolio as repayment levels outpaced new loan origination and draw activity. However, the pipeline remained strong in this business, and average loan outstandings were up over the second quarter. The decline in GFD was partially offset by mid- and upper single-digit annualized percentage growth in the general and commercial banks, respectively. While net charge-offs ticked up modestly over the second quarter, overall credit remains in good shape. Consistent with previous quarters, net charge-offs were mostly concentrated in the general office, investor-dependent, and small-ticket leasing portfolios. We continue to proactively review our portfolios to identify potential issues early on, and prudent credit risk management will remain a priority for us. Our capital and liquidity positions remained strong during the quarter and continue to be a source of strength.

Frank Holding: Loans declined during the quarter, predominantly by a reduction in the global fund banking portfolio as repayment levels outpaced new loan origination and draw activity. However, the pipeline remained strong in this business, and average loan outstandings were up over the second quarter. The decline in GFD was partially offset by mid- and upper single-digit annualized percentage growth in the general and commercial banks, respectively. While net charge-offs ticked up modestly over the second quarter, overall credit remains in good shape. Consistent with previous quarters, net charge-offs were mostly concentrated in the general office, investor-dependent, and small-ticket leasing portfolios. We continue to proactively review our portfolios to identify potential issues early on, and prudent credit risk management will remain a priority for us. Our capital and liquidity positions remained strong during the quarter and continue to be a source of strength.

Frank B. Holding, Jr.: We're pleased with the progress we made under our share repurchase plan, and during Q3, we repurchased over 350,000 shares of Class A common stock for a total price of approximately $700 million. Craig will touch on this in more detail in his comments. In closing, our thoughts are with our associates, clients, and communities that have been affected and continue to be affected by Hurricanes Helene and Milton. Thanks to our dedicated associates, we quickly reopened operations to help our clients and communities in their rebuilding efforts during this difficult time. We're committed to continuing this support moving forward. I'll turn it over to Craig to review the financial results in more detail. Craig?

Frank Holding: We're pleased with the progress we made under our share repurchase plan, and during Q3, we repurchased over 350,000 shares of Class A common stock for a total price of approximately $700 million. Craig will touch on this in more detail in his comments. In closing, our thoughts are with our associates, clients, and communities that have been affected and continue to be affected by Hurricanes Helene and Milton. Thanks to our dedicated associates, we quickly reopened operations to help our clients and communities in their rebuilding efforts during this difficult time. We're committed to continuing this support moving forward. I'll turn it over to Craig to review the financial results in more detail. Craig?

Craig Nix: Thank you, Frank. We appreciate everyone joining us today. I will anchor my comments on the Q4 key takeaways outlined on page 9. Pages 10 through 26 provide more details underlying our results. As Frank mentioned, we initiated our share repurchase program at the beginning of August. As of close of business on 22 October, we repurchased 3.61% of Class A common shares and 3.36% of total common shares outstanding for a total purchase price of $969.4 million. This represents approximately 28% of our board-approved $3.5 billion repurchase. Turning to Q4 financial results, ROE and ROA adjusted for notable items were 11.94% and 1.22%, respectively. Our adjusted PP&R, ROA, and efficiency ratio were 1.88% and 54%, respectively. Headline NIM was 3.53%, and ex-accretion NIM was 3.33%. With respect to these earnings metrics, we remained at or among the top of our large financial institution peer group.

Craig Nix: Aligned with our guidance, headline net interest income was down slightly from Q2 as lower accretion income and higher deposit costs offset increases in interest income on loans, ex-accretion, and investments, while modest net interest income ex-accretion increased over the linked quarter given support from higher average loan balances. While the pace moderated, deposit costs were up predominantly due to growth in money market and savings accounts. We believe the cost of deposits reached its peak in Q3, and we'll see a downward trend moving forward as down rate betas accelerate from the magnitude of rate cuts in September. Headline NIM contracted sequentially by 11 basis points and excluding accretion by 3 basis points. While NIM was down, the impacts from deposit repricing and interest-bearing deposit growth have stabilized, and we continue to benefit from a higher average loan balance.

Craig Nix: Adjusted non-interest income was down modestly sequentially but aligned with our guidance. The decline was primarily driven by changes in the fair value of customer derivative positions brought on by lower interest rates, partially offset by increased capital market fees due to higher loan syndication volume and an increase in rail income on rail operating lease equipment. The profitability of our rail segment remains on track as we added to the number of rail cars in the fleet this quarter, and we continue to experience solid repricing trends and utilization rates. Adjusted non-interest expense came in slightly above our guidance range, increasing sequentially by approximately 5% with the increase concentrated in personnel costs and professional fees. As you will recall, we identified the continued build-out of our risk organization and risk management framework to LFI standards as a strategic priority in 2024.

Speaker Change: What changes in the fair value of customer derivative positions brought on by lower interest rates, partially offset by increased capital market fees due to higher loan syndication volume and an increase in rental income on rail operating lease equipment.

The profitability of our rail segment remains on track as we added to the number of railcars in our fleet this quarter and we continued to experience solid repricing trends and utilization rates.

Speaker Change: Adjusted noninterest expense came in slightly above our guidance range.

Speaker Change: Increasing sequentially by approximately 5% with the increased concentrated in personnel costs and professional fees.

Speaker Change: As you'll recall, we identified the continued build out of our risk organization and risk management framework to <unk> standards as a strategic priority in 2024 during the third quarter. This constituted the most significant component of the increase impacting both personnel costs and professional.

Craig Nix: During Q3, this constituted the most significant component of the increase impacting both personnel costs and professional fees. In addition to the risk management spend, incentive accruals increased related to 2024 performance, and there was an additional working day in the quarter. Finally, but to a lesser extent, lower loan originations and thus lower deferred salaries, and higher insurance expense contributed to the increase in expense during the quarter. While these expenses were expected, they pulled through at a slightly elevated level in Q3 given accelerated hiring and increased project spend. We expect continued spend into 2025 as we further mature the organization and build a platform for sustainable growth in the future.

Speaker Change: Fees.

Speaker Change: In addition to the risk management spin incentive accruals inquiries related to 2020 for performance.

Speaker Change: There was an additional working day in the quarter finally, but to a lesser extent lower loan originations and thus lower deferred salaries and higher insurers insurance expense contributed to the increase in expense during the quarter.

Speaker Change: While these expenses were expected.

Speaker Change: Pull through at a slightly elevated level in the third quarter, given accelerated hiring and increased project spend we expect continued spend into 2025 as we further mature the organization and build a platform for sustainable growth in the future.

Craig Nix: Despite investments in our business and infrastructure, we have continued to execute on cost-savings initiatives, and we are pleased to report that we achieved the low end of our cost-savings goal from the SVB acquisition. Effectively managing expenses is a top priority for us given headwinds to net interest income and necessary spend for regulatory readiness. We will continue to be vigilant on overall expense management as we look to 2025. Moving to credit, our net charge-off ratio during the quarter was 42 basis points, up slightly from the sequential quarter but aligned with our guidance range. As Frank mentioned in his comments, net charge-offs were in the same portfolios discussed previously, and we noted no emerging problems outside of those pressure points. Most of the increase in net charge-offs during the quarter was concentrated in the general office portfolio within the commercial bank.

Speaker Change: Despite investments in our business and infrastructure, we have continued to execute on cost savings initiatives and we are pleased to report that we achieved the low end of our cost savings goal from the STB acquisition.

Speaker Change: Effectively managing expenses is a top priority for us given headwinds to net interest income and necessary spend for regulatory readiness. We will continue to be vigilant on overall expense management as we look to 2025.

Speaker Change: Moving to credit our net charge off ratio during the quarter was 42 basis points up slightly from the sequential quarter, but aligned with our guidance range as Frank mentioned in his comments net charge offs were in the same portfolio as discussed previously and we noted no emerging problems outside of those pressure.

Speaker Change: Please.

Speaker Change: Most of the increase in net charge offs during the quarter were concentrated in the general office portfolio within the commercial bank. We believe losses will remain elevated here due to high vacancy rates continued pressure from interest rates and limited liquidity in the market for refinancing maturing loans at.

Craig Nix: We believe losses will remain elevated here due to high vacancy rates, continued pressure from interest rates, and limited liquidity in the market for refinancing maturing loans. At quarter-end, total loans in this portfolio were $825 million or approximately 0.6% of the total loan portfolio. We saw a modest increase in net charge-offs in the small-ticket leasing portfolio and experienced modest improvement in the investor-dependent portfolio. Continued improvement here will be facilitated by a higher fundraising environment driven by both M&A and IPOs. At this time, an improved appetite for IPOs remains elusive, and we expect continued stress in this portfolio in the near term but remain optimistic that a declining rate environment will help generate more activity in this space. Non-accrual loans increased sequentially driven by one loan that migrated to non-accrual status in the SVB Commercial portfolio and appears to be an idiosyncratic event.

Speaker Change: At quarter end total loans in this portfolio were $825 million or approximately <unk>, 6% of the total loan portfolio.

Craig Nix: Looking at the allowance, the ratio declined by 1 basis point to 1.21%, with the most significant factor related to improvement in credit quality of our commercial loan portfolio partially offset by changes in the macroeconomic forecast, higher specific reserves on individually evaluated loans, and a $20 million reserve recorded related to Hurricane Helene. We feel good about our overall reserve coverage as well as coverage on the portfolios experiencing stress. Moving to the balance sheet, loans decreased by $646 million sequentially, a decline of 0.5%. The decline was driven by a $2.1 billion reduction in SVB Commercial loans, a majority of which was concentrated in period N loans with Global Fund Banking driven by lower loan draws and higher prepayments. Encouragingly, the GFD pipeline remained strong at approximately $8 billion, and average loan balances were up during the quarter.

Craig Nix: These decreases were partially offset by growth in the General and Commercial Bank segments of $897 million and $573 million, respectively. General Bank growth was primarily attributable to business and commercial loans, while growth in the Commercial Bank continued in our industry verticals, including tech, media, and telecom, and healthcare. Turning to the right-hand side of the balance sheet, deposits grew sequentially by 0.3% or $495 million due to growth in the branch network. We were pleased with this growth, given that this has been a key focus area for us in 2024. In SVB Commercial, we saw modest deposit growth of $54 million. The stability of this franchise continues to demonstrate the competitive advantage we maintain in the innovation economy, given our unique products, innovative and adaptive approach, and the deep institutional knowledge of our associates.

Craig Nix: These increases were partially offset by a $165 million decrease in direct bank deposits as we continue to allow expiring time deposits to run off and only partially replace them with savings products. Given recent Fed rate cuts, we are seeing some slowing in competition and pricing pressures across our channels. This, coupled with continued general bank core deposit growth, reduced the need for additional high-cost direct bank deposits in the third quarter. We will continue to utilize this channel as needed to bolster liquidity, but given our excess liquidity position, we slowed growth in this channel during the quarter. Moving to capital, our CET1 capital ratio decreased by 9 basis points, sequentially ending the quarter at 13.24%.

Craig Nix: This was driven by a continued decline in the benefit provided by the Shared Loss Agreement, which added approximately 73 basis points to the ratio this quarter, down 12 basis points from the second quarter. CET1, excluding the benefits of the Shared Loss Agreement, increased 3 basis points from the linked quarter as earnings growth outpaced risk-weighted asset growth as well as the impact of share repurchases. We intend to manage CET1 ex-loss share towards the 10.5 to 11% range by the end of 2025, which is the level it was following the acquisition of SVB. We intend to accomplish this through regular share repurchases in 2024 and 2025 as we continue to assess capital needs, considering loan growth, earnings trajectories, and economic and regulatory environments. I will close on page 28 with our Q4 2024 and full-year outlook.

Craig Nix: On loans, we move our expectations lower given the starting point at the beginning of Q4. While we remain guarded on growth, we do continue to see solid momentum in our pipelines. We anticipate flat to low single-digit annualized percentage growth in Q4, driven by the business and commercial loan portfolios in the General Bank and growth in the SVB Commercial segment. We expect SVB Commercial will benefit from growth in the Global Fund Banking business, but do remain cautious on the absolute level of growth given the softness we experienced in Q3. We do expect a modest increase in investment activity in Q4 as the Fed's monetary easing cycle has potential to kickstart a market recovery, which could drive loans higher in the segment.

Craig Nix: We expect loans to end the year in the $138 to $140 billion range, representing mid-single-digit percentage growth for the full year. We anticipate this growth will be concentrated across the same banking segments and for the same reasons previously discussed. We expect deposits to end the year in the $150 to $153 billion range, representing a low to mid-single-digit percentage growth rate for the full year. There is potential for a modest decline in deposits in Q4 due to lower balances in the SVB Commercial segment driven by cash burn and a few large Global Fund Banking deposits that came in late in Q3 before being distributed in October. Additionally, as previously discussed, we expect a continued decline in the Direct Bank as we are not replacing time deposit maturities.

Craig Nix: We anticipate these reductions to be partially offset by continued growth in the branch network as we benefit from increasing our customer base by building deposits through successful execution of our organic growth and relationship banking strategy. Our interest rate forecast for Q4 covers a range of 0 to 3.25 basis point rate cuts, with the effective Fed funds rate declining from 5% currently to as low as 4.25% by the end of the year. Turning to Q4 headline net interest income, we expect a low to mid-single-digit percentage points decline as lower accretion and slightly lower loan and investment yields are only partially offset by declining deposit costs. Our guidance does include the planned impact of share repurchase activity for the remainder of 2024.

Speaker Change: Successful execution of our organic growth and relationship banking strategy.

Speaker Change: Our interest rate forecast for the fourth quarter covers a range of zero to 325 basis point rate cuts with the effective fed funds rate declining from 5% currently to as low as 4% to 5% by the end of the year.

Speaker Change: Turning to fourth quarter headline net interest income, we expect a low to mid single digits percentage points decline as lower accretion and slightly lower loan and investment yields are only partially offset by declining deposit costs. Our guidance does include the planned impact of share repurchase activity.

Speaker Change: For the remainder of 2024.

Craig Nix: For the full year, we expect headline net interest income to be in the range of $7.1 to 7.2 billion, down slightly from our previous guide of $7.2 to 7.3 billion, reflecting the full impact of the 50 basis points rate cut in September as well as potential additional cuts in the updated forecast occurring in the fourth quarter. In either case, as expected, we project that loan accretion will be down over $200 million for the year as loan discounts on the shorter portfolios continue to be recognized. 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. 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.

Speaker Change: For the full year, we expect headline net interest income to be in the range of seven one to $7 2 billion down slightly from our previous guide of seven two to $7 3 billion.

Speaker Change: Reflecting the full impact of the 50 basis points rate cut in September as well as potential additional cuts in the updated forecast occurring in the fourth quarter in either case as expected we project that loan accretion will be down over $200 million for the year as loan discounts on the shorter portfolios.

Speaker Change: To be recognized.

While we realize that our asset sensitivity causes headwinds through net interest income and net interest margin in down cycles. It has allowed us to pull forward earnings and the higher for longer rate environment. In general we believe that being asset sensitive provides greater optionality in multiple interest rate environments and allows for.

Speaker Change: Greater flexibility on our balance sheet.

Craig Nix: We will continue to employ strategies to appropriately navigate market fluctuations in line with our long-term focus on Tangible Book Value growth. Moving to credit losses, while we remain within our risk appetite, we do anticipate Q4 Net Charge-Offs near or slightly above the level we experienced in the third quarter, driven by the continued stress in the same portfolios we have been discussing this year. Commercial real estate rate cuts could ease some of the pressure on borrowers in the general office sector and, over the long term, help to reduce issues in this portfolio. However, we do believe losses will remain elevated for the remainder of 2024 and into 2025. We also anticipate continued stress in the investor-dependent portfolio in the fourth quarter and into 2025.

Speaker Change: We will continue to employ strategies to appropriately navigate market fluctuations in line with our long term focus on tangible book value growth.

Speaker Change: Moving to credit losses.

Speaker Change: We remain within our risk appetite, we do anticipate fourth quarter net charge offs near or slightly above the level, we experienced in the third quarter driven by the continued stress in the same portfolios we have been discussing this year.

Speaker Change: Commercial real estate rate cuts could ease some of the pressure on borrowers and the general office sector and over the long term help to reduce issues in this portfolio.

Speaker Change: However, we do believe losses will remain elevated for the remainder of 'twenty four and in the 25.

Speaker Change: We also anticipate continued stress in the investor dependent portfolio in the fourth quarter and into 2025.

Craig Nix: In addition to these factors, we are watching a couple of larger credits that could manifest in the losses in Q4, which are considered in the 40 to 50 basis points range for the quarter. We are increasing the lower end of our full-year range slightly from 35 to 37 basis points, with the high end of the range remaining at 40 basis points. Moving to adjusted non-interest income, we expect Q4 to be in line to down low single-digit percentage points from Q3. We expect full-year adjusted non-interest income to be in the range of $1.89 to 1.91 billion, which is slightly higher than our previous guidance.

Speaker Change: In addition to these factors we are watching a couple of larger credits that could manifest in the losses in the fourth quarter.

Speaker Change: Which are considered in the 40% to 50 basis points range for the quarter.

Speaker Change: We are increasing the lower end of our full year range slightly from 35 to 37 basis points with the high end of the range remaining at 40 basis points.

Speaker Change: Moving to adjusted noninterest income, we expect the fourth quarter to be in line to down low single digits percentage points from the third quarter.

Speaker Change: We expect full year adjusted noninterest income to be in the range of $1 89 to $1 $91 billion, which is slightly higher than our previous guidance.

Craig Nix: This is driven by our Rail outlook as we expect a continuation of healthy fundamentals in the near term from a supply-driven recovery, which is generating strong demand for existing rail cars, resulting in a stronger-for-longer scenario. We are also expecting higher wealth management income due to continued organic growth and client acquisition. Moving to adjusted non-interest expense, we expect Q4 to be flat compared to Q3. As discussed, we continue to invest in our risk and technology capabilities and have made strategic hires on these teams, resulting in a higher run rate for salaries and benefits expense. We are additionally seeing higher project-related expenses for strategic technology projects and increased marketing expenses in the Direct Bank as we try to hold onto deposits there. We will seek to partially offset these expenses through additional acquisition synergies, which I spoke to earlier.

Speaker Change: This is driven by our rail outlook as we expect a continuation of healthy fundamentals in the near term from a supply driven recovery, which is generating strong demand for existing railcars, resulting in a stronger for longer scenario.

Speaker Change: We are also expecting higher wealth management income due to continued organic growth and client acquisition.

Speaker Change: Moving to adjusted noninterest expense, we expect the fourth quarter of a flat compared to the third quarter.

Speaker Change: As discussed we continue to invest in our risk and technology capabilities and have made strategic hires on these teams, resulting in a higher run rate for salaries and benefits expense.

Speaker Change: We are additionally, seeing.

Speaker Change: Higher project related expenses for strategic technology projects and increased marketing expenses in the direct direct bank as we try to hold onto deposits. There we will seek to partially offset these expenses through additional acquisition synergies, which I spoke to earlier.

Craig Nix: Our Adjusted Efficiency Ratio is expected to remain in the mid- to upper-50% range in 2024 as the impact of the Fed rate cut cycle puts downward pressure on net interest margin, and we continue to make investments into areas that will help us scale to Category III status when we cross that threshold. Looking at the full year, we anticipate adjusted non-interest expense to be in the range of $4.76 to $4.79 billion, representing mid-single-digit percentage growth for the three comparable quarters we were merged with SVB in 2023. For both the fourth quarter and full-year 2024, we expect our tax rate to be in the range of 27% to 28%, which is exclusive of any discrete items. In summary, we are pleased with our performance this quarter and encouraged by the performance of our business segments in the current economic cycle.

Speaker Change: Our adjusted efficiency ratio is expected to remain in the mid to upper 50% range in 2024 as the impact of the fed rate cut cycle puts downward pressure on net interest margin and we continue to make investments into areas that will help us scale to category three status when we cross that.

Speaker Change: Thresholds.

Speaker Change: Looking at the full year, we anticipate adjusted noninterest expense to be in the range of $4 76 to $4 $79 billion, representing mid single digit percentage growth for the three comparable quarters, where merge with SBB in 2023.

Speaker Change: For both the fourth quarter and full year 2024, we expect our tax rate to be in the range of 27% to 28%, which is exclusive of any discrete items.

Speaker Change: In summary.

Speaker Change: We are pleased with our performance this quarter and encouraged by the performance of our business segments in the current economic cycle. We will continue to focus on growing in a prudent manner appropriately allocating capital and driving long term growth for our shareholders.

Craig Nix: We will continue to focus on growing in a prudent manner, appropriately allocating capital, and driving long-term growth for our shareholders. I will now turn it over to the operator for instructions for the question and answer portion of the call.

Speaker Change: I'll now turn it over to the operator for instructions for the question and answer portion of the call.

Operator: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star and then the one key on your touchscreen telephone. As a courtesy to others on the call, we ask that you limit yourself to one question and one follow-up, and then return to the call queue if you have additional questions. If your question has been answered and you wish to remove yourself from the queue, please press star, then two. We'll pause for one moment to compile our Q&A roster. Our first question comes from Chris McGratty from KBW. Chris, your line is open. Please go ahead.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, if you have a question or comments at this time. Please press Star then the one key on your Touchtone telephone.

Speaker Change: The others on the call we ask that you limit yourself to one question and one follow up and then return to the Coke if you have additional questions.

Speaker Change: It's a question that's been announced and you wish to remove yourself from the queue. Please press Star then two.

Speaker Change: Proposal, one limits compiler Q&A roster.

Speaker Change: Okay.

Speaker Change: Our first question comes from Chris Mcgratty from K B W. Chris Your line is open. Please go ahead.

Frank B. Holding, Jr.: Oh, great. Morning. Craig or Frank, the SVB decline in the quarter, obviously that's a very tough quarter-to-quarter balance to forecast. I'm interested in your thoughts of the next couple of quarters. What would it take? I think you mentioned lower rates, but just maybe what might be at risk here in terms of near-term loan growth before we start seeing that benefit as rates go down? Thanks.

Frank Holding: Oh, great. Morning. Craig or Frank, the SVB decline in the quarter, obviously that's a very tough quarter-to-quarter balance to forecast. I'm interested in your thoughts of the next couple of quarters. What would it take? I think you mentioned lower rates, but just maybe what might be at risk here in terms of near-term loan growth before we start seeing that benefit as rates go down? Thanks.

Chris Mcgratty: Oh, great good morning.

Chris Mcgratty: Craig or frankly, the SBB.

Chris Mcgratty: A decline in the quarter, obviously, that's a very tough quarter to quarter balanced forecast.

Speaker Change: And your thoughts of.

Speaker Change: The next couple of quarters, what would it take do you think you mentioned lower rates, but.

Speaker Change: Maybe what might be at risk here in terms of near term loan growth before we start seeing that benefit as rates go down.

Craig Nix: Versus Craig, I'll ask Marc or Frank to expand on this, but we anticipate as the market recovers that loans and deposits will grow at SVB. We do think that lower rates and the expectation for lower rates could be a catalyst for growth. We don't really see anything in the quarter structural at SVB, that decline. It really was more related to payoffs towards the end of the quarter. Average loan balances were higher than last quarter. So again, nothing really structural there that we're seeing. I would like to give Marc an opportunity to address that as well if he's on the line, but that's kind of how we see it right now. And Marc, Marc, are you there?

Speaker Change: Chris This is Craig I'll, I'll ask mark or Frank to expand on this but we anticipate as the market recovers.

Speaker Change: The loans and deposits will grow in FCB.

Speaker Change: We do think that lower rates and the expectation for lower rates could be a catalyst for growth, we don't really see anything in the quarter structural and STB.

Speaker Change: That decline.

Speaker Change: It really was more related to payoffs towards the end of the quarter average loan balances are higher.

Speaker Change: Then last quarter, so again, nothing really structural there that we're seeing.

Speaker Change: I'd like to give mark an opportunity to address that as well if he's on the line.

Speaker Change: But that's where we that's kind of how we see it.

Speaker Change: Right now and Mark Mark are you there.

Speaker Change: Okay.

Speaker Change: Yeah.

Marc Cadieux: I am here. Thank you, Craig. This is Marc Cadieux. What you see in that capital call lending portfolio, and taking it back to Q2 when it was up by a roughly similar amount, on a period-end balance basis, that portfolio can move around, again, as Q2 and Q3 results indicate. Craig hit what I think is the most important point, and that is the average loan growth, which continued to be positive in the quarter. When it comes to a portfolio like this that can swing around on a period-end basis like we've witnessed, I think the average balances are really a better thing to focus on as it gives a better indication of how that portfolio is trending. Recognizing that, again, borrowing is a function of investment activity. Investment activity continued to be muted in the quarter.

Speaker Change: I am here. Thank you Craig this is mark <unk>.

Speaker Change: And what you see in that capital call lending portfolio.

Speaker Change: Taking it back to the second quarter when it was up by.

Speaker Change: Roughly similar amount on a period end balance basis that portfolio can move around again as second quarter and third quarter results indicate Craig hit that what I think is the most important point and that is the average loan growth, which was continued to be positive in the quarter.

Speaker Change: And when it comes to a portfolio like this that can swing around on that.

Speaker Change: A period end basis like we've witnessed I think the average balances are really a better thing to focus on as it gives us a better indication of how that portfolio is trending recognizing that again borrowing as a function of investment activity investment activity.

Speaker Change: Continue to be muted in the quarter and so until we see.

Marc Cadieux: Until we see a significant pickup in investment activity, we will presumably continue to see more muted activity in that portfolio segment.

Speaker Change: Significant pickup in investment activity, we will presumably continue to see more muted activity in that portfolio segment.

Frank B. Holding, Jr.: That's great. Thank you for that. And then, I guess, Craig, back to the no interest income guide. The range is wide and understandably because of the uncertainty with rates. Can you maybe speak to the different ranges? And then also within the guide, accretion income came down. How do we think about the accretion piece going forward in the next few quarters? Thank you.

Frank Holding: That's great. Thank you for that. And then, I guess, Craig, back to the no interest income guide. The range is wide and understandably because of the uncertainty with rates. Can you maybe speak to the different ranges? And then also within the guide, accretion income came down. How do we think about the accretion piece going forward in the next few quarters? Thank you.

Speaker Change: That's great. Thank you for that.

Speaker Change: And then I.

Chris Mcgratty: I guess Craig back to the net interest income guide you know the range is wide and understandably because of the uncertainty with rates can maybe speak to the different ranges and then also within the guide accretion income came down how do we think about the accretion piece going forward for the next few quarters. Thank you.

Craig Nix: So accretion, we expect the pickup in NIM or the accretion to NIM to continue to dissipate as those shorter-term loans are paid off and we recognize that income. For instance, during Q3, NIM benefited from accretion by 20 basis points. That was down 8 basis points from the prior quarter, with accretion income dropping from $140 million to $101 million. That would continue to decline as we go forward. For instance, we think that Q4 will be somewhere around $90 million. We will have about $1.3 billion remaining at the end of this year, which is roughly half of what we started with, around $2.6 billion. So the accretion number, the contribution from accretion will continue to go down as we move forward. If we look at just trajectory of NIM and net interest income, we're looking at this in a range of possible outcomes.

Speaker Change: So accretion.

Speaker Change: We expect.

Speaker Change: The pickup in NIM or the accretion to NIM to continue to dissipate as the shorter term loans are paid off and we recognize that income.

Speaker Change: For instance, if it during the.

Speaker Change: Third quarter.

Speaker Change: NIM benefited from accretion of about 20 basis points that was down eight basis points from the prior quarter.

Speaker Change: Accretion income dropping from $140 million to $101 million.

Speaker Change: That would continue to decline as we go forward for instance, we think that the fourth quarter will be somewhere around 90.

Speaker Change: We will have about $1 $3 billion remaining.

Speaker Change: At the end of this year, which is roughly half.

Speaker Change: What we started with around $2 6 billion. So the accretion number the contribution from accretion will continue to go down.

Speaker Change: As we move forward if we look at just trajectory of NIM and net interest income. We are we're looking at this in a range of possible outcomes with the high end of the range assuming no further rate cuts in the fourth quarter. So the 50 basis points in September baked in but no firm.

Craig Nix: With the high end of the range, assuming no further rate cuts in Q4, so the 50 basis points in September are baked in, but no further rate cuts in Q4 and 4 next year, that would be the high end of the NIM and net interest income range. For the low end of the range, three additional 25 basis point rate cuts in Q4 2024 and 4 cuts in 2025. I'm going to anchor my comments to net interest income ex-accretion. We just talked about the accretion impact. If I look at Q3 actual compared to expected Q4 2024 exit net interest income, in the low scenario, we would expect mid- to high single-digits percentage decline, and then the higher forecast low mid- to single low- to mid-single digits decline.

Speaker Change: The rate cuts in the fourth quarter and for next year.

Speaker Change: That would be the high end of the NIM and net interest income range and.

Speaker Change: For the low end of the range three additional 25 basis point rate cuts in the fourth quarter only four and four cuts.

Speaker Change: In 2025, and I'm Gonna anchor my comments to net interest income ex accretion, we just talked about the accretion impact.

Speaker Change: If I look at third quarter actual compared to expected fourth quarter 2000 and for exit.

Speaker Change: Net interest income.

Speaker Change: And the low.

Speaker Change: Scenario, we would expect mid to high single digits percentage decline and then the.

Speaker Change: The higher forecast low mid to single low to mid single digits decline on the margin.

Craig Nix: On the margin, in the high scenario, we would expect margin to drop ex-accretion from the 333 to the low 320s in the high and the low 310s in the low. If we fast-forward that trajectory and look at Q4 2025 exit for net interest income, ex-accretion in the high, we would anticipate being up low single-digits percentage points. And in the low, we would anticipate being down low single digits. On NIM, we would expect in the high scenario for the margin to move from the mid 320s to the high 310s, and then the low from the mid 310s to the high 290s. I know that's a lot, but that's where we see our exit Q4 2024 and Q4 2025 net interest income and margin ex-accretion landing, given those rate scenarios.

Speaker Change: And the.

Speaker Change: Hi.

Speaker Change: Scenario, we would expect margin to drop ex accretion from the $3 33 to the low 300, twenty's and the high and the low three turns.

Speaker Change: In the low <unk>.

Speaker Change: If we fast forward that trajectory and look at fourth quarter 25 exit.

Speaker Change: For net interest income ex accretion in the high we would anticipate being up low single digits percentage points and in the low.

Speaker Change: We anticipate.

Speaker Change: <unk> down.

Speaker Change: Low single digits.

Speaker Change: On NIM, we would expect the in the in the high scenario for the for the margin to move from the mid 300 <unk> to the high <unk> and then the low from the mid <unk> to the high two Ninety's I know that's a lot.

Speaker Change: But that's where we see.

Speaker Change: Our exit fourth quarter, 24% and fourth quarter 25, net interest income and margin ex accretion landing given those rates scenario.

Speaker Change: Yeah.

Frank B. Holding, Jr.: That was great. Thank you, Craig. Appreciate all the color.

Frank Holding: That was great. Thank you, Craig. Appreciate all the color.

Speaker Change: That was great. Thanks, Thank you Greg I appreciate all the color.

Chris Mcgratty: Thanks, Chris.

Operator: Chris. The next question comes from Anthony Elian from J.P. Morgan. Anthony, your line is open. Please go ahead.

Speaker Change: The next question comes from Anthony <unk> from Jpmorgan.

Speaker Change: Your line is open. Please go ahead.

Frank B. Holding, Jr.: Hi, everyone. Following up on SVB, you saw deposits stable during the quarter, and you called out the decline in period-end loans. But Marc or Craig, I'm wondering if you can comment on the pace of client additions in that business and how that's trended in Q3.

Frank Holding: Hi, everyone. Following up on SVB, you saw deposits stable during the quarter, and you called out the decline in period-end loans. But Marc or Craig, I'm wondering if you can comment on the pace of client additions in that business and how that's trended in Q3.

Anthony: Hi, everyone. Following up on SBB, you saw deposits stable during the quarter and the decline you called out the decline in period end loans, but Mark I, Craig I'm wondering if you can comment on the pace of client additions in that business and how that's trended in the third quarter.

Speaker Change: Yeah.

Craig Nix: Marc, will you take that one, please?

Speaker Change: Mark will you take that one please.

Marc Cadieux: Yeah, I will start. Yes. So it's Marc Cadieux. And I do not, in the moment, have the new client statistic for the quarter, though we do continue to add new clients. We continue to see clients return to us in Q3, and so continue to feel good directionally, recognizing that our target markets are still experiencing a downturn, and so that remains the headwind there. But we are encouraged by new client acquisition continuing to be positive.

Speaker Change: Yeah.

Speaker Change: I will start yes, so it's Marc Cadieux and I do not in the moment have the new client statistic for the quarter.

Speaker Change: Though we do continue to add new clients, we continue to see clients returned to us in the third quarter and so continue to feel good directionally recognizing that.

Speaker Change: Our target markets are still experiencing a downturn and so that remains the headwind there, but we are encouraged by new client acquisition and continuing to be positive.

Frank B. Holding, Jr.: Thank you. And then for my follow-up on the buyback, so you told about 30% through October, which was an elevated pace compared to the total authorization you have outstanding. Should we continue to expect the pace of the buyback to remain elevated until mid-next year? Thank you.

Frank Holding: Thank you. And then for my follow-up on the buyback, so you told about 30% through October, which was an elevated pace compared to the total authorization you have outstanding. Should we continue to expect the pace of the buyback to remain elevated until mid-next year? Thank you.

Speaker Change: Thank you and then for my follow up on the buyback. So you told about 30% through October which was elevated pace compared to the total authorization you have outstanding.

Speaker Change: We continue to expect the by the pace of the buyback to remain elevated.

Speaker Change: Until mid next year. Thank you.

Marc Cadieux: Yeah, this is Tom Eklund. Yeah, I think through the end of the year, you can assume a similar pace to what you've seen so far, and then sort of slowing down a little bit in next year to get to that $3.5 billion in the Q3 of next year.

Speaker Change: Yeah. This is Tom Heckman, yes, I think through the end of the year you can assume a similar pace to what you've seen so far and then sort of slowing down a little bit in next year to get to that $3 $5 billion in the third quarter of next year.

Frank B. Holding, Jr.: Thank you.

Frank Holding: Thank you.

Speaker Change: Thank you.

Operator: The next question comes from Samuel Varga from UBS. Samuel, your line is open. Please go ahead.

Speaker Change: The next question comes from Samuel Palca from UBS. Your line is open. Please go ahead.

Samuel Varga: Morning. Craig, could you just put a finer point on the floating-rate loan exposures? You know the 60% to 65% in the Q's, I believe, but can you just say what the exact percentage is as a split between what's floating and what's actually variable?

Samuel Palca: Good morning, Craig could you just put a finer point on the floating rate loan exposure.

Speaker Change: 66, 5% next year, but can you just say what the exact.

Samuel Palca: Percentages.

Samuel Palca: As a split between what's what's floating and what is actually variable.

Craig Nix: Yes. In the total loan portfolio, around 64% is variable, 36% fixed.

Speaker Change: Yes, and the total loan portfolio around 64% variable.

Speaker Change: 36% fixed.

Speaker Change: Yeah.

Samuel Varga: Okay. And of the variable, can you share what's effective floating?

Speaker Change: Okay I know, it's a variable cash can you share what the sector floating.

Craig Nix: Could you repeat that? You broke up there.

Speaker Change: Could you repeat that.

Speaker Change: You broke up there.

Samuel Varga: Yeah, sorry. In the variable of the 64%, what part of that is actually effective floating today?

Speaker Change: Sorry.

Speaker Change: And the variable of a 64% what part of that is actually effective floating today.

Speaker Change: Yeah.

Craig Nix: Are you saying type of floating?

Speaker Change: And are you seeing type of floating.

Speaker Change: Yeah.

Samuel Varga: Just effective floating. So today, what's effective floating?

Speaker Change: Effective floating so today at one <unk>.

Speaker Change: The floating.

Craig Nix: Well, the majority of the loans are tied to SOFR, and the spot maturity rate would be around 690 if that's what you're asking.

Speaker Change: Well the majority of the loans are tied to sofa.

Speaker Change: And the end of the spot.

Speaker Change: Maturity rate would be around 690, if that's what you're asking.

Speaker Change: Yeah.

Samuel Varga: Okay. And then in terms of the terminal deposit beta, you noted the 33% expected next quarter. Can you give some color around how high you expect that to go by 3 April 2025?

Speaker Change: Okay, and then in terms of the.

Speaker Change: The terminal deposit beta.

Speaker Change: You noted with 33% as expected next quarter can you give some color around.

Speaker Change: How high do you expect that to go back Mark Youre trying to head.

Craig Nix: So our terminal up betas on loans was 53%, and on deposits was 47%. We're anticipating in the Q4 down betas to be 23% on deposits, 32% on loans. Fast-forwarding to next year, we would think the terminal betas in the down would be very similar to terminal betas up on loans and deposits. Tom, does that square up with what you're anticipating?

Speaker Change: So our terminal update us online on loans was 53% on deposits was 47% we're anticipating in the fourth quarter down betas to be 23% on deposits, 32% of loans and fast forwarding to next year, we would think the terminal betas in the down would be very similar to <unk>.

<unk>.

Speaker Change: On loans and deposits Tom is that yes, we're out with what's your yes.

Marc Cadieux: Yeah. Yeah, I mean, there's obviously a little bit of a lag on the deposit side, so that's why we're expecting it to be a little lower going into the fourth quarter and then catch up during next year.

Speaker Change: The other thing I mean, there's obviously a little bit of a lag on the deposit side, so thats, what LIBOR expecting it to be a little lower going into fourth quarter, and then catch up during next year.

Samuel Varga: Great. Thank you.

Speaker Change: Great. Thank you.

Operator: The next question comes from David Long from Raymond James. David, your line is open. Please go ahead.

Speaker Change: The next question comes from David Long from Raymond James David Your line is open. Please go ahead.

Frank B. Holding, Jr.: Good morning, everyone. Marc, I know you talked a little bit about the loan side of SVB, and just looking more at the deposit side, flat balances quarter to quarter, had a nice improvement in Q2. What changed in the marketplace that drove that to be relatively flat in Q3?

Frank Holding: Good morning, everyone. Marc, I know you talked a little bit about the loan side of SVB, and just looking more at the deposit side, flat balances quarter to quarter, had a nice improvement in Q2. What changed in the marketplace that drove that to be relatively flat in Q3?

David Long: Good morning, everyone I'll, Mark I know you talked a little bit about the loan side of <unk> and just looking more at the deposit side.

David Long: It's quarter to quarter, you know had a nice improvement in the second quarter.

David Long: In the marketplace that that drove that to be relatively flat.

David Long: In the third quarter.

Marc Cadieux: So it really starts with a diminished venture investment activity in the quarter, roughly $38 billion. And so fewer deposits to capture is how that translates. Similarly, as I think we've noted in past calls, many of our clients have multiple bank accounts today, and so some portion of that opportunity gets captured by others as a function of that. And then cash burn continues to be a factor, which ticked up a little bit in Q3 relative to Q2. And so those are, in effect, the headwinds from a deposit gathering. And by virtue of that, what I think the flat deposits are up modestly, I think it was $54 million in the quarter, reflects, I think, that continued progress bringing back existing or bringing back former clients, attracting new ones, and continuing to reduce the number of clients that attrite.

David Long: So it really starts with a diminished.

David Long: Venture investment activity in the quarter, roughly 38 billion and so.

David Long: Fewer deposits to capture is.

David Long: How that translates.

David Long: Similarly, as I think we've noted in past calls.

David Long: Many of our clients have multiple bank accounts today, and so some portion of that opportunity gets captured by others as a function of that.

David Long: And then cash burn continues to be a factor.

Which ticked up a little bit in the third quarter relative to the second and so those are in effect that the headwinds from a deposit gathering and by virtue of that what I think the flat deposits are up modestly I think it was $54 million in the quarter.

David Long: It reflects I think that continued progress.

David Long: Bringing back <unk>.

David Long: Existing or bringing back former clients attracting new ones.

David Long: And continuing to reduce the number of clients.

Marc Cadieux: And so generally speaking, maybe stick the landing on this. I think of the continued stability in deposits, given all of these headwinds, as great evidence that we're continuing to execute well and remain positioned for a better environment when investment inevitably picks back up.

David Long: And so generally speaking.

David Long: Maybe stick the landing on this I think of the continued stability in deposits given all of these headwinds as great evidence that were continuing to execute well and remain positioned for a better environment when investment inevitably picks back up.

Frank B. Holding, Jr.: Great. Thanks for the color. Appreciate it.

Frank Holding: Great. Thanks for the color. Appreciate it.

Speaker Change: Great. Thanks for the color I appreciate it.

David Long: Okay.

Operator: The next question comes from Ryan Nash from Goldman Sachs. Ryan, your line is open. Please go ahead.

Speaker Change: The next question comes from Ryan Nash from Goldman Sachs. Brian. Your line is open. Please go ahead.

Ryan Nash: Hey, good morning, everyone.

Speaker Change: Hey, good morning, everyone.

Frank B. Holding, Jr.: Morning.

Frank Holding: Morning.

Ryan Nash: Good morning, maybe a follow up on some of the net interest income questions that were asked so when you think about the two scenarios that you outlined when would you expect net interest income and net interest margin to bottom and begin growing again, and then I guess related to that last quarter, you talked about further actions you've taken to reduce asset sensitivity.

Ryan Nash: Maybe a follow-up on some of the net interest income questions that were asked. So when you think about the two scenarios that you outlined, when would you expect net interest income and net interest margin to bottom and begin growing again? And then, I guess, related to that, last quarter, you talked about further actions you've taken to reduce asset sensitivity. Can you maybe just talk about updated thoughts on other actions that you've taken this quarter to reduce sensitivity? Thanks. And I have a follow-up.

Ryan Nash: Maybe just talk about updated thoughts on other actions that you've taken this quarter to reduce sensitivity, thanks, and I have a follow up.

Craig Nix: I will cover the trough question and let Tom cover the Asset Sensitivity question. Obviously, these troughs depend heavily on both timing and magnitude of rate cuts. Timing can be very important on that, and also on balance sheet growth. But all things being equal, if we look at net interest income, ex-accretion, we're looking second half of 2025 regardless of the rate scenario. Net interest margin ex-accretion, we're also looking at second half of 2025 regardless of scenario. Pushing that out is directly tied into our Asset Sensitivity. Obviously, rate cuts have a negative impact and pressure our net interest income and margin. Subject to revision going forward, but we would say second half of 2025 is the trough. I'll let Tom hit the Asset Sensitivity question.

Speaker Change: I'll cover the trough question and let Tom cover the asset sensitivity question in terms of it and obviously these troughs depend heavily on both timing and magnitude of rate cuts timing can be very important on that and also on balance sheet grows so just.

Speaker Change: But all things being equal.

Speaker Change: If we look at net interest income ex accretion.

Speaker Change: We're looking second half.

Speaker Change: Of 25, regardless of the rate scenario and net interest margin ex accretion. We're also looking at second half of 'twenty five regardless of the scenario in that pushing that out is directly tied into our asset sensitivity. So obviously.

Speaker Change: <unk> cuts have a negative impact and pressure our net interest income and margin.

Speaker Change: Subject to revision going forward, but we would say second half of 'twenty five as the trough.

Speaker Change: And I'll, let Tom hit the asset sensitivity question, yes on the.

Marc Cadieux: Yeah, on the asset sensitivity side, as you're aware, we have that 3.5% Purchase Money Note on the liability side, which is fixed rate. It's about 20% of our total funding. So we got a little bit of a kink in our asset sensitivity that they're right around that point. So during Q3, with rates falling down, we moderated some of our actions to mitigate asset sensitivity to instead sort of set aside liquidity to get ready to repay the Purchase Money Note. As rates have recovered now early in Q4, we've gone back to invest a little more, look at some swap options there, but it just hasn't been economic to put on receive fixed at the same rate we're paying fixed on the liability side.

Speaker Change: Asset sensitivity side.

Speaker Change: You are aware, we have that three 5% purchase money note on the liability side, which is fixed rate, it's about 20% of our total funding.

Speaker Change: We got a little bit of a tank and our asset sensitivity that they're right around that point during the third quarter with rates falling down we moderated some of our actions to mitigate asset sensitivity to instead of sort of a set asides liquidity to get ready to repay that purchase money now.

Speaker Change: Send recovered now early in the fourth quarter, we've gone back to invest a little more looked at some swap options there, but it just hasn't been economic to put on.

Speaker Change: Received fixed at the same rate, we're paying fixed on the liability side.

Frank B. Holding, Jr.: Gotcha. Maybe come back to the Global Fund Banking where you talked about the end of period being down, but to focus on the average where it was flat. I think you flagged lower draw activity, which is intuitive, and higher repayments. And obviously, capital call has been an area that a lot of banks have been investing in. Can you maybe just expand on the comments about higher repayments? Are you seeing competition picking up, and loans are being refinanced away? And I know one quarter doesn't make a trend, but how are you just thinking broader about growth in this portfolio over the medium term?

Frank Holding: Gotcha. Maybe come back to the Global Fund Banking where you talked about the end of period being down, but to focus on the average where it was flat. I think you flagged lower draw activity, which is intuitive, and higher repayments. And obviously, capital call has been an area that a lot of banks have been investing in. Can you maybe just expand on the comments about higher repayments? Are you seeing competition picking up, and loans are being refinanced away? And I know one quarter doesn't make a trend, but how are you just thinking broader about growth in this portfolio over the medium term?

Speaker Change: Got you.

Speaker Change: Coming back to the the global fund banking, where you talked about at the end of period being down but to focus on the average where it was flat I think you flagged lower door activity, which is intuitive and higher repayments and obviously capital call. It's been an area that a lot of banks have been investing in can you maybe just expand on the comments about higher repayments.

Speaker Change: Are you seeing competition picking up the loans are being refinanced away and I know one quarter doesn't make a trend, but how are you just thinking broader about growth in this portfolio over the over the medium term.

Craig Nix: Marc, can you take that one, please?

Speaker Change: Mark can you take that one please or its market excuse me, it's mark again.

Marc Cadieux: Sure. It's Marc. Excuse me. It's Marc again. Yes. So it's Marc. And so a couple of things, maybe to go back to the period end. Again, up by roughly a similar amount on a period-end basis in the second quarter before coming down. And to just give a little bit of context on this capital call lending, these tend to be short-term loans. In effect, they're revolving lines of credit, and they borrow when they make an investment, generally speaking, and repay when the capital calls from their limited partner investors show up. And in a higher-rate environment that we've been in, on average, borrowers tend to keep those advances out for a shorter duration. And so the combination of that factor, coupled with, again, the more muted investment activity, is, I think, what conspires there to cause those swings quarter to quarter on a period-end basis.

Speaker Change: Yes.

Speaker Change: So it's mark and so a couple of things maybe just to go back to the period and again up by roughly a similar amount on a period end basis in the second quarter.

Speaker Change: Before coming down to <unk>.

Speaker Change: Give a little bit of context on this capital call lending.

Speaker Change: These are tend to be short term loans that affect their revolving lines of credit.

Speaker Change: And they borrow when they make an investment generally speaking and repay when the capital calls from their limited partner investment investors show up.

Speaker Change: And at a higher rate environment that we've been in.

Speaker Change: On average our borrowers.

Speaker Change: Borrowers tend to keep those advances out for a shorter duration.

Speaker Change: And so the combination of of that factor coupled with again, the more muted investment activity.

Speaker Change: Yeah, I think what conspires there to cause those.

Speaker Change: Swings quarter to quarter on a period end basis again, the important point to note here is the average balance growth, which has continued to trend positive and getting to I think the heart of your question our competitiveness in the marketplace and what we're seeing from others.

Marc Cadieux: Again, the important point to note here is the average balance growth, which has continued to trend positive. Getting to, I think, the heart of your question, our competitiveness in the marketplace and what we're seeing from others, you are right. Capital call lending, subscription lending continues to be an attractive category. We have seen in recent years new entrants, and we continue to feel very confident about our position in the market. We believe we have the longest-lived fund banking practice anywhere. We've been at it an awfully long time and a very long-established and experienced team, and that team continues to win new business, notwithstanding the competitive environment. As I think Craig signalled earlier, we're encouraged by the pipeline we see there. Without going into the future, we remain optimistic when fundraising or, I'm sorry, when investment eventually picks back up. I hope that was responsive.

Speaker Change: You are right capital call lending subscription lending continues to be a attractive category we.

Speaker Change: We have seen in recent years, new entrants and we continue to feel very confident about our position in the market. We believe we have the longest lived fund banking practice anywhere.

Speaker Change: We've been out in an awfully long time.

Speaker Change: And a very long established and experienced team and that team continues to win new business notwithstanding the competitive environment.

Speaker Change: As I think Craig signal earlier, we're encouraged by the pipeline, we see there and.

Speaker Change: Without going into the future we remain optimistic.

Speaker Change: And fundraising or I'm, sorry, when investment eventually picks back up.

That was responsive.

Ryan Nash: Yeah, no, it wasn't. If I could squeeze in one last one. Just on the SVB deposits, I know you said that there was some paydown early in the quarter, and then there's some cash burn. But if you think about it, Alts and advisors have been talking about a ramp-in-deal activity. You talked about lower rates being a catalyst. Do you see deposit flows picking up in this market as we exit the year and move into 2025, hopefully in a more conducive environment? Thank you.

Speaker Change: Yeah, no it was and if I could squeeze in one last one just on the SVP deposits. I know you said that there was some pay down early in the quarter and then theres some cash burn, but if you think about it you know Alton advisers have been talking about a ramp in deal activity you talked about lower rates being a catalyst like do you see deposit flows picking up in this market as we eggs.

Speaker Change: The year and move into 2025, hopefully in a more conducive environment. Thank you.

Marc Cadieux: So recognizing we're not providing preliminary guidance on 2025 at this point, there continues to be a substantial amount of "dry powder," capital that's been committed to venture capital general partners that has yet to be invested. I think the stat for Q3 is something like $328 billion or something like that. So a lot of money on the sidelines waiting to be invested. We've just seen the first 50 basis point rate cut with the expectation of potentially more. And that, we believe, as I think Craig said in his opening remarks, we hope will begin to unstick this market, right? That things will continue to thaw, given that we're now nine, 10 quarters into what has been a very significant downturn in the innovation economy space.

Speaker Change: So recognizing we're not providing preliminary guidance.

Speaker Change: On 25 at this point there continues to be a substantial amount of dry powder quote unquote capital Thats been committed to venture capital General partners that has yet to be invested I think the stat for the third quarter is something like $328 billion or something like that.

Speaker Change: So a lot of money on the sidelines waiting to be invested.

Speaker Change: We've just seen the first 50 basis point rate cut with.

Speaker Change: With the expectation of potentially more.

Speaker Change: And that we believe that I think Greg said in his opening remarks, we hope will begin to.

Speaker Change: Unstick this market right that things will continue to thought given that we're now 910 quarters into what has been a very significant downturn in the innovation economy space and so while I can't predict the future and nobody knows exactly when that investment activity will pick back up I think again we.

Marc Cadieux: And so while I can't predict the future and nobody knows exactly when that investment activity will pick back up, I think, again, we remain well-positioned for that inevitability when it occurs.

Speaker Change: We remain.

Speaker Change: Well positioned for that inevitability when it occurs.

Speaker Change: Yeah.

Ryan Nash: Got it. Thanks for all the color.

Speaker Change: Got it thanks for all the color.

Samuel Varga: You bet.

Speaker Change: You bet.

Operator: The next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is open. Please go ahead.

Speaker Change: The next question comes from Christopher <unk> from Janney Montgomery Scott Christopher Your line is open. Please go ahead.

Christopher Marinac: Hey, thanks. Craig, if you have less balance sheet growth, that should have CET1 higher next year. I'm just curious how that could impact the buyback, just thinking beyond what you've already authorized.

Christopher: Hey, Thanks, Craig if you have less balance sheet growth that should have CET worn higher next year I was just curious how that could impact of buyback just thinking beyond what you've already authorized.

Craig Nix: Yeah, we certainly plan to utilize the entire $3.5 billion in approved buyback. We will be resubmitting our capital plan early next year, in Q1. And if that's the case, if earnings continue to outstrip risk-weighted asset growth, we would contemplate tagging on another repurchase plan in the back half of 2025. So you're exactly right. If we do have a smaller balance sheet, certainly would support us continuing with our share repurchase plan. And right now, we certainly contemplate not necessarily a smaller balance sheet, but despite that, having the capacity to do a further plan in the second half of next year.

Speaker Change: Yeah, we.

Speaker Change: Certainly plan to utilize the entire $3 $5 billion in approved buyback.

Speaker Change: We will be re.

Speaker Change: Submitting our capital plan early in the early next year first quarter in the first quarter.

Speaker Change: And if that's the case of earnings continue to outstrip.

Speaker Change: Risk weighted asset growth, we would contemplate.

Speaker Change: Tagging on another repurchase plan in the back half of 2025.

Speaker Change: So you're exactly right if asset growth.

Do have a smaller balance sheet certainly we support.

Speaker Change: Continuing with our share repurchase plan and right now we certainly contemplate.

Speaker Change: Not necessarily a smaller balance sheet, but despite that.

Speaker Change: Having the capacity to do a further plan in the second half of next year.

Christopher Marinac: Great. Thank you for that. And just to follow up on liquidity, is there any excess liquidity that you're carrying today that could be redeployed as some of the capital rules at the Fed are better understood in a few more quarters?

Speaker Change: Great. Thank you for that and just a follow up on liquidity is there any excess liquidity that you're carrying today that could be redeployed as the number of the capital rules that the fed are better understood and a few more quarters.

Marc Cadieux: Yeah, I think as we look at liquidity, obviously, we're not subject to LCR, but run our internal stress tests and everything like that just in line with what you see at other large financial institutions. We got, give or take, $7 to 10 billion, depending on how you count it, in excess liquidity right now that we're carrying on the balance sheet that we could, in theory, redeploy, whether we use that to pay down debt or invest in other earning assets. But numbers keep shifting because it's obviously highly dependent on deposit mix, unfunded commitments, and things like that. But we do have a little bit. We continue to manage liquidity conservatively, and we'll look to take advantage in the future.

Yeah, I think as we look at liquidity, obviously, we're not subject to LCR, but around our internal stress test and everything like that just in line with what you see at other large financial institutions.

Speaker Change: We got you know give or take $710 billion, depending on how you count it in your excess liquidity right now that we're carrying on the balance sheet that we could in theory, redeploy where do we use that to pay down debt or invest in other earning assets, but it's the <unk>.

Speaker Change: Number it keeps shifting because it's obviously highly dependent on deposit mix you know unfunded commitments.

Speaker Change: It's like that.

Speaker Change: We do have a little bit we continued to manage liquidity conservatively.

Speaker Change: Yep.

Speaker Change: Well look to take advantage of in the future.

Christopher Marinac: Got it. Thank you, Tom. I appreciate it.

Speaker Change: Got it thank you Tom I appreciate it.

Operator: I'm not showing any further questions at this time, so I'd like to turn the call back over to our host, Deanna Hart, for any closing remarks.

Speaker Change: I'm not showing any further questions at this time, so I'd like to turn the call back over to our host for any closing remarks.

Craig Nix: Thank you so much, and thanks, everyone, for joining the call today. 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 our investor relations team. We hope everyone has a great rest of your day.

Speaker Change: Thank you so much and thanks, everyone for joining the call today. 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 our Investor Relations team. We hope everyone has a great rest of your day.

Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.

Speaker Change: Ladies and gentlemen. This concludes today's conference call. You may now disconnect have a wonderful day.

Speaker Change: Okay.

Q3 2024 First Citizens BancShares Inc Earnings Call

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