First Citizens BancShares, Inc. (NASDAQ:FCNCA) Q1 2024 Earnings Call Transcript

First Citizens BancShares, Inc. (NASDAQ:FCNCA) Q1 2024 Earnings Call Transcript April 25, 2024

First Citizens BancShares, Inc. beats earnings expectations. Reported EPS is $52.92, expectations were $44.27. First Citizens BancShares, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by and welcome to the First Citizens Bancshares First Quarter 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 section. [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 : Good morning. Welcome to First Citizens’ First Quarter Earnings Call. Joining me on the call today are Chairman and Chief Executive Officer, Frank Holding, and Chief Financial Officer, Craig Nix. They will provide first quarter 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. 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’ll now turn it over to Frank.

Frank Holding: Thank you, Deanna. Good morning, everyone. Let’s start on Page 6. Over the last 12 months, we’ve successfully focused on our SVB integration efforts, regulatory readiness, strategic priorities, and financial performance. During the first quarter, we delivered earnings per share of $52.92, adjusting for notable items on Page 51. Return metrics were strong, reflecting a peer-leading net interest margin, an adjusted efficiency ratio of 50%, and lower net charge-offs. These results exceeded our expectations, with earnings increasing approximately 14% over the sequential quarter. We’re pleased that all our segments, including SVB commercial, grew loans during the quarter, and our liquidity and capital positions strengthened due to core deposits and earnings growth.

We successfully submitted our capital plan to the Federal Reserve on April 5. The process included a full stress test, including the acquired SVB portfolios. The submission of this plan was an important milestone in our regulatory journey, and I’d like to thank all our associates for their hard work in submitting a quality plan. Turning to Page 7, it’s been a year since Silicon Valley Bank became part of First Citizens, which has introduced a lot of change, but most of all, opportunity. I want to thank our associates for their hard work over the past year, stabilizing the business and taking care of our clients. I also want to thank our clients for their confidence in us as we remain committed to them and the innovation economy. The SVB team continues to deliver exceptional service to our clients, and this is demonstrated by the fact that 80% of the VC firms on the Forbes Midas list are served by our company and our ability to onboard over 1,000 new clients in the first year of our acquisition.

SVB also has more experience serving the innovation economy than any other financial services provider, thanks to our dedicated teams of sector experts. Their essential insights come from over 40 years of dedicated focus on innovators and investors, an average leadership tenure of over 20 years with SVB, and the deepest and most experienced bench of over 1,500 innovation bankers and relationship advisors. Our team is well positioned to fight some of the continued economic headwinds facing the innovation economy. Last year, VC fundraising hit its lowest level since 2017. The drawback in fundraising we witnessed in 2023 continued into the first quarter, even though there remains plenty of dry powder to invest. Despite the current environment, we are encouraged by the number of exit-ready companies poised to exit once the IPO market fully reopens.

In fact, there is a record backlog of companies ready to exit given current market conditions. There is fundamental demand from investors, but only at the right price and for companies with good stories. We are beginning to see activity improve and the signs that IPO activity may pick up this year. On Page 8, we show that the SVB franchise has been stabilizing in terms of loans and client funds since the second quarter of last year, reflecting continued support of our innovation clients. Moving to Page 9, our integration efforts helped us retain clients, stabilize deposit balances, and develop strategic priorities for the combined organizations. We continue to make meaningful progress on integration and remain committed to achieving our post-merger potential.

While we have always focused on compliance with regulatory requirements, our growth has moved us to a significantly increased level of regulatory oversight, and we are investing and being proactive in enhancing our regulatory readiness. While there is more work to be done, we have made meaningful progress in maturing and refining our processes to support the change in our size and complexity. A few of these accomplishments include: first, implementing expanded risk management capabilities based on feedback from third-party gap assessments. Second, creating a dedicated regulatory remediation oversight team to manage and enhance regulatory response, as well as provide oversight, monitoring, and reporting of remediation efforts. Third, enhancing our dedicated regulatory affairs team to manage heightened regulatory activity and relationships with new examiners.

And fourth, completing our first-time large financial institution regulatory filings on time. In addition, with our strong risk management culture, we will continue to invest in our capabilities here and we’re confident that over time, we will effectively transform our program in accordance with new and changing regulatory requirements. Now let’s look at Page 10. We continue to invest in our wealth business, one of our primary key income drivers. We believe there are significant opportunities and we’ve achieved remarkable organic growth here since 2013. In the third quarter, we announced the alignment of SVB Private and First Citizens Wealth under one leadership team to improve coordination and enhance services available to clients. Wealth is beginning to see the benefit of our bringing our capabilities together under one umbrella, creating a premier private banking and wealth business.

Most recently, we rebranded all of our wealth services to First Citizens Wealth. The combined First Citizens Wealth organization can help any client, business, or institution regardless of size or complexity. We remain focused on maintaining deep client relationships providing a boutique experience with big bank capabilities. Moving forward, we believe our combined product set dedicated and experienced wealth professionals and client centric engaged model will continue to accelerate the growth of our wealth franchise. And finally, turning to Page 11, we’re happy to be recognized and honored as a Top 20 Financial Institution on Forbes list of America’s best banks and by other organizations and publications listed on the page. This recognition reflects our solid track record taking care of our clients and our customers.

To conclude, the positive momentum we started in 2023 continues despite the uncertainty in the current environment and the hard work ahead of us, we continue to protect and grow customer relationships, stabilize the SVB franchise, grow core deposits and loans, and strengthen our balance sheet. Given our position of strength and dedicated associates, I’m excited about the opportunities ahead of us. With that, Craig, I’ll turn it over to you.

Craig Nix: Thank you, Frank. I appreciate everyone joining us today. I’m going to anchor my comments to the key themes outlined in the takeaways on Page 14. Pages 15 through Page 35 provide more detail supporting our first quarter results. As Frank mentioned, our return metrics were strong and above our expectations. ROE and ROA adjusted for notable items were 15.01% and 1.46% respectively. Compared to the fourth quarter, these metrics benefited from a 13% increase in net income driven by lower net charge-offs and higher non-interest income, partially offset by lower accretion income and higher deposit costs. While net interest income declined from the link quarter by 5%, it was above our expectations. The decline was related to lower accretion income and higher deposit costs.

These impacts were somewhat mitigated by securities and loan portfolio repricing to higher rates during the quarter. NIM contracted by 19 basis points to 3.67%, mostly due to the same factors affecting the decline in net interest income. Ex-accretion then declined by 12 basis points to 3.35%. Adjusted non-interest income increased by 5% over the fourth quarter. A majority of the increase consisted of higher net rental income on rail operating lease equipment. Net rental income was aided by strong utilization rates that surpassed 99%, the highest level since the second quarter of 2015, also positive repricing trends as well as lower maintenance costs. As you will recall, we pulled forward maintenance qualification activity during the fourth quarter, which positioned us to handle the uptick in customer volume this quarter while front loading some of the expenses.

Maintenance costs also benefited from unanticipated delays in getting rail cars to maintenance facilities. As a result, we modeled higher maintenance costs for the remainder of the year as service levels returned to normal. Non-interest income also benefited from an increase in the fair value of customer derivative positions due to higher interest rates. These increases were partially offset by lower capital markets income related to seasonality as well as increased competition as regional banks continue to return to normal activity following last year’s pullback. Stripping out some of the seasonality and focusing on a year-over-year comparison, capital markets income was up roughly $5 million from syndicated deals. Adjusted non-interest expense slightly beat our expectations, increasing sequentially by less than 2%.

Expense growth was concentrated in salaries and benefits as seasonal adjustments associated with our 401k, higher payroll taxes, and annual merit adjustments took effect. First quarter expenses also reflected higher FDIC insurance expense. Effectively managing expenses remains a top priority for us given headwinds to net interest income. We are on track to achieve the low end of our 25% to 30% synergies target for SVB by the end of this year. Focusing on credit, net charge-offs declined by $74 million from the sequential quarter to $103 million. This represents a net charge-off ratio of 0.31% below our previous guidance of 50 basis points to 60 basis points. Losses were largely in the same portfolios as previous quarters, although at a lower rate.

The largest decline was in the innovation portfolio where net charge-offs were down $30 million sequentially led by a $19 million drop in the investor-dependent portfolio. The remainder was spread between equipment finance, general office, and other loan portfolios. At quarter end, the allowance plus purchase discount on the investor-dependent portfolio was 8.2%, covering first quarter annualized net charge-offs 2.9 times and the last four quarters 1.9 times. Consistent with prior quarters, net charge-offs within the commercial bank were concentrated in the general office and small ticket equipment leasing portfolios. As a reminder, while our total general office portfolio was $2.8 billion at the end of the quarter, the portfolio where we have seen stress and charge-offs is in Class B repositioned bridge loans within the commercial bank, which totaled $1 billion at quarter end.

Portfolio net charge-offs were down sequentially but we continue to monitor the risks here. The allowance on this portfolio was 11.1%, covering first quarter annualized net charge-offs 1.6 times and the last four quarter net charge-offs 1.4 times. Overall, the allowance decreased 3 basis points sequentially to 1.28% due to improvements in macroeconomic forecasts, a mixed shift to higher credit quality segments and lower specific reserves, all partially offset by increased volume and mild credit quality deterioration. While the allowance did decline this quarter, we feel good about our overall reserve coverage on the portfolios where we continue to see stress. Our credit team continually monitors our loan portfolios by reviewing delinquency trends and grading migration by industry and or geography to identify areas of potential stress.

And at this time, we are not aware of other significant pockets of deterioration. Moving to the balance sheet, loans grew by more than $2 billion over the length quarter and annualized growth rate of 6.2%. The general and commercial segments grew loans by $900 million and $794 million respectively, and the SVB commercial segment was up by $335 million. General bank growth was concentrated in small business and commercial loans generated in our branch network. In the commercial bank, growth is driven by strong production in our industry verticals, particularly in TMT, healthcare, and energy. Growth in our TMT vertical continues to be driven by strong demand for new data centers, while our energy vertical is benefiting from the energy transition, which is driving activity in financing renewable energy projects.

Finally, the increase in SVB commercial loans related to global fund banking growth. And despite increased competition in this space, we continue to win business. To that end, our team closed more than $5 billion in deals in the first quarter. While we are excited by the positive trends in global fund banking, we recognize that the macroeconomic environment still presents headwinds. In the first quarter, VC investment came in lower than expected amid macroeconomic uncertainty and geopolitical tensions. While VC dry powder remains elevated despite ongoing fundraising sluggishness, we expected to take time to gradually deploy those investments. However, we remain well positioned to ramp up both loans and deposits quickly when the macroeconomic environment improves, given we have the largest fund finance team in the market.

Within the SVB commercial segment, growth in global fund banking was partially offset by expected declines in our technology and healthcare banking business as paydowns outpaced new funding due to continued headwinds in the private investment landscape. While we’ve seen some encouraging activity in the IPO market, we do not expect an immediate reset given continued fundraising and valuation mismatches. We are well positioned to capture business as the pendulum swings back. Technology and healthcare banking team has a focused approach and our track record and expertise in the innovation economy will continue to help us win deals. We are encouraged by our progress in growing the new SVB commercial brand, winning new clients, and bringing those back who left.

Turning to the right-hand side of the balance sheet, deposits grew at an annualized rate of 10.4% or about $3.8 billion in the first quarter due to strong core deposit growth in the general and direct banks. In the general bank, we continue to focus on growing customer deposits and we’re pleased to see these grew by $2.4 billion due to our continued emphasis on expanding relationships with current customers and attracting new accounts. Direct bank deposits increased by over $2 billion despite a decrease in marketing expense during the quarter. While the direct bank channel is higher cost and now accounts for 27% of our deposit base is an additional lever we use to remain resilient through a turbulent environment and is a strong source of insured consumer deposits funding our earnings base.

Growth in this channel enabled us to continue to redeem some of our smaller subordinated debt issuances this quarter given our excess capital and liquidity position. These increases were partially offset by expected declines in the SVB commercial segment. Deposits were down $716 million from the link quarter driven by continued client cash burn and muted fundraising activity. Moving to capital, our CET1 ratio increased by 8 basis points sequentially, ending the quarter at 13.44%. Our shared loss agreement added approximately 107 basis points to the ratio down from approximately 120 basis points last quarter. We continue to use capital to support organic growth and acknowledge that we are operating with elevated capital levels. In addition to supporting organic growth, share repurchases are part of our capital distribution strategy.

We accept share repurchases as part of our capital plan that was approved by our board during the first quarter and was submitted to our regulators earlier this month. While we have not yet received feedback from our regulators on the plan, we remain confident that a share repurchase plan will be an option for us in the second half of this year. While we don’t have an approved share repurchase plan at this time, I will share some general information about how we intend to manage capital moving forward. We manage our capital ratios excluding any benefit from the loss share agreement, which we refer to internally as adjusted CET1. All planned activities and capital levels are assessed in this context as the RWA benefit continues to run off at a rate of $1 billion to $2 billion per quarter and is expected to be mostly gone by the end of 2025.

In addition to supporting organic growth and paying dividends, we intend to supplement that capital use with methodical share repurchase over time to get our adjusted CET1 ratio down to the 10.5% range by the end of 2025, which is the level it was following the acquisition of SVB. We do not intend to immediately manage capital down to this level. Instead, we intend to do it methodically and continually assess capital needs based on balance sheet growth expectations, earnings trajectories, and the economic and regulatory environments over the next couple of years. We will reassess our capital management priorities on a regular basis, including annual updates to our capital plan. Those are on Page 35, discussing our second quarter and 2024 full year outlook.

In summary, for the full year, we move our net interest income forecast up on the higher first quarter starting point and a reduction from 3 to 6 rate cuts to zero to 3 rate cuts. We also move our credit loss guidance down on the lower first quarter starting point. We have not materially changed our non-interest income and expense guidance. On loans, we anticipate low single digit percentage growth in the second quarter driven by growth in the general bank, commercial bank, and SVB commercial. We anticipate SVB commercial will benefit from continued growth in the global fund banking business where we continue to see success due to continued client outreach. This growth, however, will continue to be pressured by hedge wins in the private equity and venture capital markets.

We also anticipate a modest decline in technology and healthcare banking business as lower levels of funding and line draws result in loan portfolio contraction. Looking at the innovation economy more broadly, we found that over time there is a correlation between public market valuations and VC investment volumes. There have been some positive economic signals suggesting that capital deployment may rebound in 2024 driven by an improved IPO outlook. We therefore expect a modest increase in VC investment compared to 2023. Meanwhile, we anticipate growth in the commercial bank and our industry verticals and increased activities in no market banking following seasonal declines in the first quarter. Looking at the full year, we continue to expect loans to end in the $139 billion to $143 billion range or mid-single digit percentage growth which is essentially unchanged from our previous guidance.

We anticipate this growth to be concentrated across all three banking segments for the reasons previously discussed. We expect deposits to be flat, slightly up in the second quarter as growth in the general bank is offset by a decline in SVB commercials. Within the general bank, we anticipate growth in the branch network as we benefit from our focus on increasing our customer base by building deposits through proactive sales, associate outreach, centralized marketing campaigns, and increased community connectivity. This growth will be slightly offset by seasonal declines that we expect in April due to tax payments. With respect to SVB deposits, we expect the venture capital environment to remain challenging, particularly in the first half of 2024.

Looking forward, we expect client funds, cash burn, and losses to continue to normalize over time with gradual improvement expected in the second half of the year. In addition, we expect to improve our capture rate of private market fundraising a large percentage of which flows into on-balance sheet deposit products. Bringing this all together, we expect SVB deposits to be relatively flat in the first half of the year before growing in the second half. While we continue to raise deposits in our direct bank in the first quarter, we anticipate these deposits will remain fairly stable in 2024 given the excess liquidity on our balance sheet and continued strong growth in other channels including the branch network. This obviously could change if we have unexpected deposit outflows occur elsewhere.

For the full year, we anticipate mid-single-digit percentage growth primarily related to growth in the general bank previously discussed and low to mid-single-digit percentage growth in SVB commercial deposits. Our interest rate forecast follows the implied forward curve which includes three rate cuts in 2024 with the effective Fed Funds rate declining from 5.50% to 4.75% by the end of the year. It is our belief that we will see closer to one or no rate cuts given the continued strength of the labor market and the lumpiness we’ve seen in the economy fueling speculation that inflation remains untamed. Therefore, for our net interest income guidance, we provide a range with the top end assuming no rate cut and the low end assuming full rate cut.

It is important to note that these projections do not include the impact of planned share repurchase activity in the back half of 2024 as we await final sizing and approval as part of our capital planning process. For the second quarter, we expect headline net interest income to be down in the low to mid-single digit percentage points range. The decline will be driven by the impact of lower accretion, higher deposit costs, and lower loan yields, assuming one rate cut, only partially offset by higher investment security yields. With no rate cut, we expect headline net interest income to be fairly stable, with or just slightly down compared to the first quarter. For the full year, we expect headline net interest income in the range of $7.1 billion to $7.3 billion.

In either case, we project accretion income just under $500 million for the year, which is a decline from $725 million in the last three quarters of 2023, as loan discounts on the shorter portfolios will have fully been recognized. We previously guided to a range of $6.9 billion to $7.1 billion. The upward revision reflects the higher-for-longer rate environment and shifting the guidance range between zero and three cuts for the remainder of 2024. On credit losses, we are reducing our net charge-off guidance, as we now anticipate it will remain in the 35 basis points to 50 basis points range for both the second quarter and full year 2024. We are benefiting from decreased innovation economy stress, and while losses in this portfolio can still be lumpy, we believe the continued market optimism fueled by the revival of public markets for PE and VC-backed companies, with two large tech IPOs already out the door in 2024, is an encouraging sign for venture exit activity.

Accordingly, we expect some of the pressure in the investor-dependent portfolios to be to soften in the back half of this year. It is worth noting that hold sizes on some of our portfolios are large in the commercial and SVB commercial segments, and just as we had a favorable experience this quarter with less large charge-offs in the innovation portfolio, one or two unexpected larger charge-offs can result in blips in our net charge-off ratio. Therefore, while the decline in net charge-offs during the first quarter was positive, we think it’s too early to call an inflection point on credit calling one quarter of improvement. However, we believe that credit costs remain manageable and are appropriately incorporated into our guidance. Moving to adjusted non-interest income, we expect the second quarter to be down as net rental income on rail operating leases decreases due to expected maintenance costs that were deferred in the first quarter, as I previously mentioned.

While we anticipate some normalization to historically high utilization levels during 2024, our outlook for rail remains positive, and we expect a continuation of healthy fundamental trends 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 also expect client investment fees to decrease due to anticipated lower rates, to the extent we do not receive three rate cuts in 2024, we could see some upside to our forecast here. Nonetheless, we continue to experience growth in wealth management fees and card income, reflecting the strong consumer acquisition and growth trend from our branch network. We expect full-year adjusted non-interest income to be in the $1.8 billion to $1.9 billion range, which is in line with our previous guidance.

As Frank mentioned in his comments, we are excited for the continued build-out and momentum in our wealth platform, and look forward to realizing the synergy of this combination. Moving to expenses, we expect a modest increase from the first quarter due to increased marketing as well as professional and third-party servicing fees as we ramp up project spend related to a few regulatory items such as ISO payments and Dodd-Frank. Furthermore, as mentioned last quarter, a continued focus for us is to build out the product capabilities that will keep us the premier partner in the innovation economy, continuing to enhance our offerings in cash management, FX, and payments. Additionally, we will continue the modernization of our platforms in consumer, equipment finance, and factoring to ensure we are well-equipped to scale in the future.

As we fine-tune our regulatory capabilities, we will also continue to make strategic hires that will help reinforce the skills of the great teams we already have assembled. All of this will be partially offset by continued acquisition synergies, which I spoke to earlier. While we expect to achieve the lower 25% band of our cost-saves goal by the end of 2024, these savings will be offset by continued capability build-out for heightened regulatory expectations as well as costs related to the strategic priorities I just mentioned. Our adjusted efficiency ratio is expected to be in the low 50% range in 2024, up slightly from 49% for the full year of 2023. Looking at the full year, we anticipate adjusted non-interest expense to be up low to mid-single-digit percentage points, which equates to a range of $4.6 billion to $4.7 billion, unchanged from our previous guidance.

For both the second quarter and full-year 2024, we expect our tax rates to be in the range of 27% to 28%, which is exclusive of any discrete items. In closing, we remain steadfast in our long-term approach, focused on our clients and customers, and committed to maintaining a strong risk management environment. I believe we have tremendous opportunity ahead of us, as demonstrated by the successful first quarter, and that we are well-positioned for the future thanks to our solid financial conditions. I will now turn it over to the operator for instructions for the question-and-answer portion of the call.

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Q&A Session

Operator: Thank you, Craig. [Operator Instructions]. The first question comes from Chris McGratty with KBW. Your line is open.

Chris McGratty: Great. Good morning.

Craig Nix: Good morning.

Chris McGratty: Craig, maybe with the view that – good morning. How are you doing? The market’s obviously suggesting higher for longer. Can you talk about what you’re doing with the cash levels and the security purchases as you’ve got likely a few more quarters? How do we think about the normalization process? Has anything changed since last quarter? Thanks.

Craig Nix: I would say that right now we’re a little — and intentionally a little heavy on cash than the optimal level. We’re around 15%. We’d like to see that normalized to 10% to 15% over time. We’re sitting a little slightly light on investments but you’ve seen us deploy cash into the investment portfolio over the last three quarters, and we would expect to continue to do that, maybe to the tune of $3 billion to $4 billion more before the end of the year. We’re very close to optimization, high on cash, but again, a little bit of that intentional given our purchase money note, the FDIC. Tom, do you have anything to add or amplify there?

Tom Eklund : No. I think you hit it. I mean, if you look at the last three quarters, we’ve grown in that $4-ish billion range, and I think you can expect that to continue in the short term. And to Craig’s point, as cash comes down, we’ll eventually normalize and sort of slowdown that investment portfolio growth.

Chris McGratty: Okay, great. And then as my follow-up, the improvement in credit, totally understand not wanting to declare victory yet, but given the marks that you have on the acquired portfolios and how stable credit was, how do we think about the reserve level? I mean, you released about $10 million in the quarter. How do we think, in light of that charge-off guidance, where reserves are turning? Thanks.

Craig Nix : Are you referring to the overall reserve coverage, Chris? Okay, I’m going to answer. I’ll answer both ways then. In terms of just overall coverage, we feel really good about where our reserves are. We covered quarter-to-date net charge-offs 4 times this quarter, about 2.5 times last quarter. We covered, the allowance that it sits now covers 2023 charge-offs almost 2.9 times and non-accrual loans 1.6 times. On non-accrual loans, what gives us comfort here, too, with respect to reserves is that we have analyzed over 70% of those loans for impairment on the individual basis, and our reserve ratio sits at around 30% on those. In terms of our stress portfolios, which I alluded to, overall, we have covered first quarter net charge-offs 2.8 times and last quarter 1.8 times, and that portfolio represents about 8% of loans, but 61% of charge-offs.

We’re feeling like we’re prudently and conservatively reserved, both for the specific loan portfolios exhibiting stress and on the overall ACL.

Operator: Thank you. The next question comes from Brian Foran from Autonomous. Your line is open.

Brian Foran : Hi, good morning. Just on the NII outlook this quarter versus what you gave last, is it just the move to zero to three rate cuts that moved the range up, or was it, I guess, is it just the move in rate cuts, and if it’s not just the move in rate cuts, what else got better in that?

Craig Nix : It is the shift in the rate cut.

Brian Foran : Okay. And on the capital commentary, and I apologize because at least my line cut slightly as you were talking, A, I just want to clarify the go-to capital ratio, did you say 10, and then B, I was trying to compare what you said now versus last time. Was the spirit just kind of reiterating what you’ve said before, or was there any more caution implied with the methodically comment and the ex-FDIC as the core ratio you’re managing?

Craig Nix : No, I think we’re just reinforcing what we’ve said previously for share repurposes, and I would point out that over this two-year period, we would intend to manage the CET1 down to the 10.5% range.

Brian Foran : Okay. And is 9 to 10 still kind of a longer-term target, or given the shift in the world, is kind of 10.5 now more kind of the beyond 2025 landing point?

Craig Nix : Well, the 9 to 10 was our previous target. We have proposed a new target range that we’re not going to disclose today in our capital plan, but I can tell you that you shouldn’t expect it to significantly change from the previous. I want to give our regulators time to give us feedback on our capital plan that we just submitted a couple weeks ago. But I would not, you should not expect a significant change in that.

Brian Foran : Not expect a significant change from 9 to 10 long-term, or…?

Craig Nix : That’s correct.

Brian Foran : Okay, great. The last one, just very quickly, I’m looking at Page 44 in your deck. I definitely hear and appreciate all the commentary on the SVB credit. A lot of the decline in provision dollars really came from the commercial legacy CIT book. Can you just kind of give us the next round of color? I know there’s a couple of comments on the slide as well, but what drove the provision expense on legacy CIT down so much?

Craig Nix : Well, they had, I mean, their charge-off ratio has declined the same as the other portfolios. Really, the biggest move in 80% of the variance in our charge-off were in the investor-dependent portfolio, and there were four major factors there. We had no real large dollar charge-offs during the quarter. We had the fact that charge-offs on smaller loans were down, and the number of charge-offs were also down, and we had a good recovery quarter. Most of the drop in, at least, the net charge-off guidance and, consequently, the provision really related to that investor-dependent portfolio.

Operator: Thank you. The next question comes from Steven Alexopoulos with JP Morgan. Your line is open.

Steven Alexopoulos: Hey, good morning, everybody.

Craig Nix : Good morning.

Steven Alexopoulos: I don’t know if Mark’s on the line, but I want to start on the SVB side. The 1Q VC investment was very weak, and I thought tied to that we would see deposits decline at SVB, and also, I thought capital calls might come down a bit. Could you give some color on how you’re able to maintain stable balances, just given this not great backdrop?

Craig Nix : Well, I’ll let Mark amplify, but I think it’s — Mark, are you on the line? I can’t hear you?

A – Unidentified Speaker: I am here. Go ahead and start, Craig.

Craig Nix : Yes, I was just going to set the backdrop, Mark, and let you amplify, but we were encouraged in the first quarter, new money coming into SVB. It increased over the first quarter, and while cash burn and losses to competitors remained fairly consistent, new cash flows did come in. They went disproportionately off-balance sheet, but this was the first quarter since the acquisition where the cash position remained neutral, first time it had not been negative since we merged last year, and Mark, I would let you give some color around that, how we’re doing that, but again, we’re pretty encouraged by what we’re seeing there.

A – Unidentified Speaker: Yes, so Steve, good morning. It’s Mark, and we’ll follow on. I think that was a great overview, and I think ultimately, to your point, the — what sounds like better-than-expected deposits in the quarter compared to what you would have expected is a function, I think, of our continued momentum in the marketplace, the continued success we’re having both in winning new business and bringing back clients as well, and as you see, that’s really helping, and I think bodes well for the future if we can keep it up.

Steven Alexopoulos: Got it. That’s good color. For follow-up, there’s a lot of excitement at your stock about the potential for you guys to buybacks stock, but I’m curious, given that tangible book value growth is a key performance metric for you guys, how price-sensitive are you as it relates to buybacks moving forward? Is there a certain valuation where you’re unlikely to buybacks stock, or are you pretty much committed to get down to that 10.5% range?

Craig Nix : We don’t buy it back blindly, so we do approach it similar to an approach on an open-market acquisition, although there are differences, obvious differences there with respect to risk, so we don’t just blindly buy. Right now, we do see the stock at an attractive price, so we would anticipate repurchasing at that price. I’m not going to share at what levels we would trigger where we wouldn’t, but we do consider that in our internal model, and it is our goal to manage down to that 10.5% range over the next two years on CET1. Tom, you want to say anything else about that?

Tom Eklund : No. I mean, obviously, from a buyback to capital perspective, the cheaper the stock, the more sense it makes, but no, I mean, to Craig’s point, we look at it similar to open-market transactions, making sure we can get payback periods and everything to line up for.

Operator: Thank you. The next question comes from Stephen Scouten with Piper Sandler. Your line is open.

Stephen Scouten : Yes, thanks a lot, and just to follow-up kind of around that, I just want to make sure I’m thinking about this excess capital correctly, so if I think about the 107 basis points you’re adjusting for the loss here, we’re talking about like 1237 [ph], I guess, on CET1, so about 190 basis points of excess today. Is that right?

Craig Nix : That’s correct.

Stephen Scouten : Perfect. Thank you, Craig, and then going back to SVB, I mean, it really does, I think you used the word stability in the presentation a couple times. It feels like you guys have really stabilized kind of that brand and that footprint. Is it now time for you guys to go even more on the offensive or how do you think about the longer-term push in those segments today?

Craig Nix : Mark, why don’t you take that one?

A – Unidentified Speaker : Yes, so I think the environment is the challenge here. As noted earlier in our discussion, our target markets remain challenged. We expect those challenges to continue through 2024, allowing we have some optimism around IPOs coming back and potentially deposits picking up in the second half as we’ve talked about, and so the trick, right, is as long as venture investment remains diminished, there is you can only step on it to such a degree. Similarly, on the lending side and on tech healthcare banking in particular, we need to be, continue to be careful and choosy and manage the loans we have diligently by virtue of the heightened asset quality concerns that you get from a market downturn like this where the investors aren’t investing as much.

And so with all of that for context, and I think following on my earlier answer to Steve, we are going to continue to focus on doing what we do, executing as best we can, and I think trying to accelerate, I think, would be the kind of thing you might see when we have more confidence that our target markets are coming back and we see that pickup in venture investment, and until then, I think we’re going to continue to compete effectively but carefully at the same time. I’ll stop there.

Operator: Thank you. The next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is open.

Christopher Marinac : Thanks. Good morning. I wanted to ask about originating loans kind of in the legacy for citizens footprint from the perspective of possibly having lower charge-offs there, and therefore the guide on charge-offs could even be better down the road. I mean, Craig, is that a plausible scenario that you may originate less in some of the CIT and SVB areas and more at the old for citizens and that drives different charge-off outcomes?

Craig Nix : No, I don’t think that’s the case. I’ll let Elliot talk about our loan forecast across the business segment.

Elliot Howard : Yes, we really see good growth really across the segments. I think, for the general bank, really the branch network driving it, and we’ve continued to have good growth there. I mean, I think it’s a testament to kind of the good market strategy, the tenure of our sales teams, so we’ve seen that up, meaningfully this quarter, and I mean, you’re right, that book has really kind of sub 15 basis points type charge-offs, so we see that continue to be a benefit. TMT as well, I think we called out some of our industry-leading verticals, TMT, energy, healthcare, so we see growth there. And then with SVB, I think more collaborating on that, as we look at, GFB, the capital call business that has really no charge-off history, we see continued growth there for the rest of the year as kind of some of the recent originations that we have pulled through.

I don’t necessarily see us pulling back on any of those segments, but to the extent that we keep having good growth in the general bank, that’s certainly helpful to the charge-off ratio.

Christopher Marinac : Got it. Thanks for that clarification. I appreciate it. And any other criticized trends for the general bank, outside of what was called out in the slides this morning?

Craig Nix : No.

Christopher Marinac : Would you see a criticized kind of rise slightly from here, or what would be the outlook if there is any?

Craig Nix : Are you speaking to the general bank?

Christopher Marinac : Correct. I’m just looking beyond, what you called out on SVB and some of the other areas.

Craig Nix : We don’t see any rise there. We anticipate it’ll be fairly stable.

Christopher Marinac : Great. Thank you for taking my questions.

Craig Nix : Yes. Thank you.

Operator: Thank you. The next question is from Zach Westerlind with UBS. Your line is open.

Zach Westerlind : Hi. My question is just around the trajectory of loan yields. I saw that it picked down quarter-over-quarter. Is that just a function of lower accretion income, or is there another driver there? And any color you could provide on the trajectory going forward would be great. Thank you.

Craig Nix : Yes. It was a decline due to accretion declining in the quarter. We were down about $40 million on a sequential basis in accretion income, so that had an impact. As far as trajectory, it really depends on the rate cut scenarios. If we look at just no cut, we would look at the sort of the headline yields remaining fairly stable with the first quarter, and ex-accretion actually bumping around where it was at the end of the first quarter. With three cuts, we would start to see some decline in the yield to the low sevens in the second quarter and to the high 670 or the mid-670s at the end of the fourth quarter. We would certainly start to feel that impact going forward if we had three rate cuts. And what our projection, the way we projected this, we have one rate cut in the second quarter, one rate cut in the third, and one in the fourth.

So obviously timing of those rate cuts can impact that as well. Accretion income added 45 basis points to the margin last year, and we expect that to be down 24 this year. A fairly substantial reduction in accretion income.

Zach Westerlind : Understood. Thanks for taking my question.

Craig Nix : Yes. Thank you.

Operator: Thank you. We have a follow-up question from Brian Foran with Autonomous. Your line is open.

Brian Foran : Just two quick ones. Can you remind us where you want to get the loan-to-deposit ratio or range over time or on a normalized basis?

Craig Nix : Yes. On a more normalized basis, we see that loan-to-deposit ratio getting back to the mid-80s.

Brian Foran : Perfect. And then as we start thinking about ’25 and maybe putting the rate cuts in ’25 as opposed to ’24, if the Fed is cutting a few times in ’25, would kind of the sensitivities be similar to we’re seeing now? Like if you took three rate cuts out of the guide and it moved up 200 million, if we put those rate cuts into ’25, is the sensitivity kind of similar? Or is it different for any reason as the balance sheet moves around?

Craig Nix : It would be similar. It would just push the trough out further. But yes, similar trends. We would expect similar trends as it’s sitting.

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

Deanna Hart : Great. Thank you. And thank you, everyone, for joining our earnings 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 you have a great rest of your day.

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