Prepared remarks
Good morning, and welcome to First Citizens' fourth quarter earnings call. Joining me on the call today are our Chairman and Chief Executive Officer, Frank Holding; and our Chief Financial Officer, Craig Nix. They will provide fourth 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 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.
Thank you, Deanna. Good morning, everyone, and welcome to our call. I will share some brief insights on our fourth quarter results and our strategic priorities for 2025 before handing it over to Craig for a more detailed performance review and outlook discussion. Starting on Page 6, we achieved another strong quarter with adjusted earnings per share of $45.10, surpassing our expectations due to higher core PPNR. We are pleased with the performance across all operating segments, as each achieved growth in loans and deposits during the quarter. I want to emphasize, as Craig will elaborate, that SVB had an excellent quarter with modest improvements in VC investment activity. Fourth quarter loans increased compared to both the third quarter and the same period last year, despite the overall subdued investment pace throughout the year. Deposits also rose, with total client funds showing solid growth for both the fourth quarter and the full year.
As we approach two years since our merger with SVB, we are satisfied with the franchise's stability and particularly the competitive edge we hold in the innovation economy and fund banking. Our capital and liquidity remained robust during the quarter, enabling balance sheet growth while we continued to optimize our capital position through share repurchases. In the fourth quarter, we repurchased an additional 3.5% of our Class A common stock, bringing total repurchases under the plan to 6.44%. In early January, we announced Matt Snow's appointment to our Board of Directors. Matt is an accomplished leader with over 30 years of financial services experience and most recently served as Chairman of the Governing Board of Forvis Mazars, a top 10 U.S. accounting firm. We are excited to welcome him to our team, as he will provide invaluable insights to help us navigate the large financial institution landscape.
Lastly, in light of the recent wildfires and hurricanes, our thoughts are with our associates, clients, and communities affected across the West Coast and Southeast. Following the tragic loss of life and significant property damage, we are committed to supporting those impacted and assure them of our continued support in the future. Moving to Page 7, I want to emphasize our strategic areas of focus this year. Over the past few years, we've significantly scaled our organization, expanded our footprint and client base, and enhanced our products and services. This transformation has not altered our dedication to our clients, associates, and communities that helped establish the foundation we enjoy today. We remain committed to our long-term approach, our relationship-focused commitment to clients and customers, and strong risk management, all reflected in our 2025 strategic priorities. I'll now briefly discuss these.
First, regarding our customers and clients, CIT and SVB have introduced us to new strategic markets and expanded products and services, allowing us to assist them in achieving their goals throughout their personal, business, and entrepreneurial journeys. In 2025, we will continue to enhance these capabilities across our organization to provide seamless relationship management. Second, developing our associates and adding talent to support growth are crucial priorities. Our ability to attract, retain, and nurture talent is essential for our success. Third, operational efficiency remains vital. The significant growth of our company in the past three years has introduced more technical and operational complexity. To prepare for long-term growth, we will simplify our operations and streamline our technology platforms. Fourth, we will focus on balance sheet management by optimizing our liquidity and capital positions to sustain profitable growth.
We will concentrate on a funding mix that favors core deposits to support asset growth in our business lines, and we will continue our share repurchase plan aimed at capital optimization. Finally, prudent risk management will guide all our strategic initiatives, and we will keep investing in our capabilities as we approach Category 3 regulatory status. In conclusion, I am pleased with our 2024 financial performance, which exceeded expectations, and I am excited about the opportunities that lie ahead in 2025. I am confident in our position to deliver long-term sustainable value for our clients, communities, and shareholders. I will now hand it over to Craig for a detailed review of our financial results.
Thank you, Frank. I appreciate everyone for joining us today. I will focus my comments on the key takeaways from the fourth quarter, which are detailed on Page 9, while Pages 10 through 27 offer more insights into our results. Our fourth quarter return metrics and efficiency continue to show favorable comparisons to our peers, with a return on equity and return on assets adjusted for notable items of 11.51% and 1.14%, respectively, and an adjusted efficiency ratio of 57%. The headline net interest margin was 3.32%, and the net interest margin excluding accretion stood at 3.16%. Consistent with our guidance, headline net interest income decreased from the third quarter as the effects of lower yields on loans and overnight investments, alongside reduced accretion income, outweighed the benefits from higher investment securities income and lower deposit costs. The headline net interest margin fell sequentially by 21 basis points, while it decreased by 17 basis points when excluding accretion.
This decline was mainly due to the adverse effects of Federal Reserve rate cuts in the last four months of the year on our earning asset yield, which was only partially mitigated by lower funding costs. Adjusted noninterest income rose by 9% sequentially, surpassing our top line guidance. We continue to see solid performance in the rail business, achieving 13 consecutive quarters of positive repricing trends and strong utilization rates. Our commercial segments also performed well, driven by increased deal flow, resulting in higher international and lending-related syndication fees. Additionally, we experienced positive impacts from fair value changes in customer derivatives and other nonmarketable investments due to shifts in the rate environment. Adjusted noninterest expenses slightly exceeded our guidance, rising sequentially by 3.1% due to higher personnel, amortization, and other expenses.
Increased personnel costs were partly due to net staff additions as we expand our technology and risk teams to support strategic initiatives and scalability for future growth. The rise was also influenced by higher incentive compensation linked to a robust year for the bank. Equipment expenses increased due to several technology projects coming online, leading to greater amortization and software licensing costs. As Frank mentioned regarding our strategic priorities, we are investing in our infrastructure to support growth and scalability, which has increased our operating expenses in recent quarters. Other expenses also rose during the quarter, driven by various items, with significant contributors being elevated state-related non-income taxes due to our rising asset size and charitable donations for hurricane relief efforts, along with other smaller increases in operational expenses. While these costs were anticipated, they came in at a slightly elevated level in the fourth quarter due to accelerated hiring and increased project spending.
We will continue to invest to effectively scale and support both organic and strategic growth opportunities. Regarding credit, nonaccrual loans decreased sequentially. Although net charge-offs rose slightly by 4 basis points over the third quarter, they fell within our expectations. Consistent with previous quarters, net charge-offs were primarily concentrated in the general office, investor-dependent, and small ticket leasing portfolios. However, we noted higher losses in our commercial finance business linked to some unique losses within our industry verticals. We are committed to proactively reviewing our portfolios for additional stress and maintaining vigilance on credit will remain a priority. We believe our credit losses are manageable, with no emerging issues in other portfolios aside from those previously discussed. The allowance ratio dipped by 1 basis point to 1.2%. We are comfortable with our reserve coverage and the coverage on the stress portfolios.
On the balance sheet, we saw broad loan growth across our operating segments, ending the quarter with an increase of $1.5 billion or 1.1% sequentially. General Bank loans rose by $676 million, reflecting strong performance in business and commercial loans, while Commercial Bank loans grew by $508 million, largely concentrated in our industry verticals. SVB Commercial loans increased by $342 million, driven by Global Fund Banking as draws and new fundings outpaced paydowns. Our team remains well placed to serve new and existing clients, booking over $5 billion in new business during the fourth quarter. Although the Tech and Healthcare business decreased sequentially, it aligned with our expectations due to the challenging macro environment impacting originations. Looking at the right side of the balance sheet, deposits grew by $3.7 billion or 2.4% sequentially, exceeding our guidance due to strong performance across our operating segments.
The direct bank was the main contributor to this increase, growing by $1.6 billion. We were cautious in lowering our rates during the quarter to ensure stability and attract new clients in light of the strategic shift regarding one of our SVB Commercial deposit products. This high-yielding deposit product will transition to an off-balance sheet product in the first quarter, expected to reduce total on-balance sheet deposits in this channel by $2.5 billion. While this will lead to a decrease in SVB Commercial deposits, it will boost off-balance sheet client funds and is expected to have a limited impact on the total client fund balances in the segment. This is part of our ongoing effort to optimize our balance sheet to improve liquidity and reduce total deposit interest expense. In the General Bank, we observed an increase of $893 million as we continue to foster strong client relationships and grow deposits organically.
We anticipate further deposit growth in the General Bank thanks to our client-focused approach and strong relationship banking model. As previously mentioned by Frank, SVB saw a strong quarter with deposit growth, achieving actual and average growth of $692 million and $1.2 billion sequentially, respectively. Furthermore, total client funds, which encompass off-balance sheet accounts, increased over the third quarter, with period-end and average balances rising by $5.3 billion and $3.9 billion, respectively. Our Tech and Healthcare team was the key driver of this client fund growth, benefiting from increased venture capital investment and improved market valuations leading to higher inflows from both existing and new clients. On capital, Frank highlighted our progress with our share repurchase plan. As of January 22, we repurchased 6.44% of Class A common shares or 6% of total common shares outstanding for a total of $1.8 billion, representing just over 50% of our Board approved $3.5 billion repurchase plan.
The common equity tier 1 capital ratio decreased by 25 basis points sequentially, finishing the quarter at 12.99%. This change was driven by the impact of share repurchases and a consistent decline in the benefits from the loss share agreement, which contributed approximately 66 basis points to the ratio this quarter, down 7 basis points from the third quarter. The CET1 ratio excluding these benefits fell by 18 basis points sequentially, as risk-weighted asset growth and share repurchases outpaced earnings growth. We aim to manage the CET1 ex loss share towards the 10.5% to 11% range by the end of 2025, similar to levels following the acquisition of SVB. We plan to achieve this through regular share repurchases as we assess capital requirements in light of loan growth and economic and regulatory conditions. I will conclude with our outlook for the first quarter and full year 2025. We anticipate loans will reach around $140 billion to $142 billion in the first quarter, driven mainly by growth in the Commercial Banking segment, particularly from our industry verticals.
We expect SVB Commercial to benefit from growth in Global Fund Banking due to a strong pipeline, but we remain cautious about the overall growth levels. For the full year, we project loans to be in the range of $144 billion to $147 billion, with expected growth in both SVB Commercial and Commercial Bank industry verticals. We foresee growth in SVB Commercial to be more pronounced in the second half of the year as the Federal Reserve's loosening monetary policy takes hold and we benefit from increased venture capital investment and better capital markets activity. In the General Bank, we project continued mid-single-digit percentage growth in business and commercial loans within the branch network. We also plan to shift some of our residential and consumer production off-balance sheet to enhance liquidity and generate additional noninterest income. Our deposit predictions for the first quarter are in the $154 billion to $157 billion range as we prioritize deposit gathering within the General Bank.
Additionally, we anticipate growth in our HOA business due to our strong national market share position amidst ongoing industry consolidation. While we expect growth in the General Bank, it may be offset by a decrease in SVB Commercial deposits as we transition the high-yielding deposit product mentioned earlier to an off-balance sheet format in the first quarter. For the full year, we forecast deposits to be in the $162 billion to $167 billion range, primarily driven by the General and direct banks, where the General Bank will continue to leverage our branch network to enhance client relationships through new products and initiatives. We will remain focused on expanding our customer base by building deposits via proactive outreach, marketing campaigns, and increased community engagement, while also utilizing the direct bank to foster growth and secure core deposits. Despite being a higher-cost product, we plan to benefit from declining interest rates as we pursue our balance sheet optimization efforts.
Our interest rate forecast indicates potential cuts ranging from 0 to 4.25 basis points, with the effective Federal funds rate expected to decrease from between 4.25% to 4.50% to as low as 3.25% to 3.50% by year-end. While our baseline forecast follows the implied forward curve with two rate cuts, we acknowledge that falling inflation might lead to further cuts, though persistent inflation metrics and the Fed's recent hawkish stance suggest these cuts may not materialize. Consequently, we find it prudent to present a range of expectations for the year. For the first quarter, we expect headline net interest income to remain relatively stable compared to the fourth quarter as lower deposit costs are offset by lower accretion and interest on earning assets. Our guidance includes the anticipated impact of share repurchase activity for 2025 in line with our current plan. For the full year, we project headline net interest income to be in the range of $6.6 billion to $7 billion, factoring in the effects of the 50 basis points rate cuts from the fourth quarter and any potential additional cuts in 2025.
We also foresee that loan accretion will drop by over $200 million for the year. In terms of credit losses, we expect first quarter net charge-offs to align closely with fourth quarter figures. While we anticipate continued stress in the investor-dependent and office portfolios, we believe equipment finance is normalizing, with signs of improvement trending toward long-term expectations. In commercial real estate, rate cuts may alleviate some pressures on borrowers in the general office sector, helping to reduce stress over the long term. Nonetheless, we expect losses to remain elevated in 2025, even as market disruptions may ease with companies reinstating office attendance requirements. Notably, we witnessed a $31 billion uptick in venture capital investment in the fourth quarter compared to the third, but we remain cautious regarding the overall outlook due to some large deals inflating these totals.
When excluding those major transactions, the fourth quarter's total aligns with the 2024 average. Improved conditions may arise from a healthier fundraising environment driven by mergers and acquisitions and initial public offerings. Regarding the net charge-off ratio, we anticipate a couple of larger deals contributing to first quarter losses, possibly leading to a net charge-off ratio in the range of 40 to 50 basis points. However, for the full year, we expect the net charge-off ratio to align with long-term targets in the 35 to 45 basis points range. We will refine these estimates as the year advances, but currently, we do not see any significant issues. For adjusted non-interest income, we expect a sequential decrease in the first quarter to a range of $475 million to $500 million, mainly due to the strong performance in the fourth quarter exceeding our expectations. We observed strong net operating lease income, partly due to lower maintenance expenses, which tend to fluctuate from quarter to quarter.
Typical seasonal declines are expected in the first quarter for areas such as card, merchant, factoring, mortgage, and capital market fees. For the full year, we project adjusted non-interest income to rise slightly to the $1.95 billion to $2.05 billion range, driven by our rail outlook, which includes a balanced railcar portfolio, and our strategic exploration ladder, which should continue supporting positive repricing into 2025. Moving to adjusted non-interest expense, we anticipate the first quarter to be flat to modestly higher compared to the fourth quarter, partly due to seasonal benefit increases, offset by lower other non-interest expense categories that were elevated at year-end. We continue to invest in our technology and risk capabilities and aim to better optimize our platforms. Consequently, we are incurring higher third-party processing fees and expect increased equipment expenses due to amortization as projects are set into operation.
Our investments in technology and risk are intended to align us with category three expectations and establish a foundation for scalable growth in the future. Additionally, we anticipate rising marketing expenses in the direct bank as we strive to retain and grow deposits in this segment. For the full year, we foresee adjusted non-interest expense increasing to the $5.05 billion to $5.2 billion range, factoring in the equipment costs, third-party processing fees, and marketing expenditures from the prior investments. Prioritizing disciplined expense management while making strategic investments remains crucial, especially as we face headwinds to net interest income from lower rates. We plan continued spending into 2025 as we further enhance our risk management framework, modernize technology, and consolidate our platforms to improve the client experience and foster collaboration across our business units.
Our adjusted efficiency ratio is projected to remain in the upper 50% range in 2025, driven by the downward pressure from the Fed's rate cutting cycle on net interest margin and our ongoing investments to scale up to category three status. Our long-term goal is to achieve an efficiency ratio in the mid-50s. Finally, we are reducing our estimated effective tax rate by approximately 1% to a range of 25% to 26% for both the first quarter and full year 2025, excluding any discrete items. The lower fourth quarter 2024 and estimated 2025 tax rates are primarily due to a reduced apportionment rate than initially estimated on the assets acquired from SVB, realized upon filing our first combined state tax returns. To summarize, in 2024, we delivered leading returns to our shareholders, maintained robust capital and liquidity positions, and enhanced our capabilities as a large financial institution. As we move into 2025, I am optimistic about the opportunities ahead to generate lasting value for our shareholders. I will now turn it over to the operator for the question-and-answer session.
Questions and answers
Thank you. Our first question comes from Bernard von-Gizycki from Deutsche Bank. Bernard, your line is open. Please go ahead.
Hi guys, good morning. Just on the 2025 outlook, the range of the $6.6 billion to $7 billion for net interest income. Could you just walk us through the assumptions on the low and then the high end of the range? Just anything you can provide there?
Sure. So our baseline forecast is anchored to two rate cuts. But the range contemplates anywhere between zero and four. And obviously the exact absolute value, or number for net interest income and for margin will be dependent upon the magnitude and timing of those rate cuts. But if I just want to talk about just a trajectory for the first quarter '25, compared to the fourth. We expect headline and ex accretion net interest income to be anywhere from up to down 1% sequentially. So a lot of movement. Fairly stable for the exit in the fourth quarter of '25, anchoring to two rate cuts. We expect headline net interest income to be up low single-digits ex accretion, net interest income to be up low to mid-single-digits. And we expect headline NIM in the low 3.20s ex accretion NIM in the low 3.10s. So that range that you referenced does contemplate between zero and four. The numbers that I just mentioned really, we're pegging towards the two rate cuts in the last half of the year.
Okay. Great. Thanks for that color. And just my one follow-up, I think on last quarter's call. Craig, I think you noted there could be some additional acquisition related synergies from SVB. Just wondering what that could entail and if there are any cost or revenue synergies assumed in the '25 guide?
They're not material or significant. We've achieved the cost synergies estimate that we laid out at the beginning of the acquisition. So don't anticipate any material impact from further expense synergies on SVB in the guidance.
Okay. Great. Thanks for taking my questions.
Thank you.
The next question comes from Anthony Elian from JPMorgan. Anthony, your line is open. Please go ahead.
Hi everyone. I was wondering if you could provide more color on the total client fund growth you saw in SVB in the fourth quarter. I know a good portion of the $75 billion in venture capital investment you had on Slide 22 came from large late stage deals that Craig, you highlighted. But I think early stage was flat sequentially. I'm just curious how much of those larger deals contributed to the total client fund growth you saw in 4Q. And if you think the growth in total client funds can persist, even with a higher for longer rate outlook?
Marc, would you like to take that question?
Happy to take that question. Yes. So as already noted on the call, the roughly $75 billion invested in the fourth quarter did have a chunk of very large deals in it. Roughly a third of that total were three very large financings. And then, I want to say billion-dollar plus rounds were almost half of the total. So as Craig mentioned earlier, for the part of the fundraising, or the investment rather that we tend to capture, more of is in that sub $1 billion range. And so with that for context, with venture investment of the sub $1 billion roughly flat quarter-over-quarter. We are pleased with the growth. I think it signals that we're continuing to execute well. We also saw less lower level of cash burn in the quarter relative to Q3, which also helped a bit. And so going into '25, I think our expectations, as Craig already mentioned. We are cautious about growth expectations for SVB, given the continued mixed environment for investment, IPOs, et cetera. Interest rates weighing on all of it, perhaps at least until the second half of the year. And so I'll end by saying that our expectations for TCF growth is captured in the forward guidance Craig mentioned earlier.
Great. Thank you, Marc. And then my follow-up maybe for Frank. I want to get your latest thoughts on M&A, just given First Citizens' has been historically acquisitive, right. You're getting close to the category three threshold and the regulatory backdrop with the new administration will likely be more favorable for all banks? Thank you.
Thank you. We are not projecting any material M&A activity in 2025, but we are an opportunistic crowd. So, but we are not making any projections in that area.
Crystal clear. Thanks. Thank you.
The next question comes from Chris McGratty from KBW. Chris, your line is open. Please go ahead.
Oh great, thanks. Frank or Craig, if you look at the guide and I guess take rates out of it for a moment, where do you think the biggest upside potential is to the guide and also the biggest downside risk?
Well, upside would be rates higher for longer - if we're on the zero end of that range. That's - the biggest one, given that net interest income is over 80% of net revenues. So that certainly would be an upside. Upside could be if our net charge-offs fall to the lower end of the range, which would imply less provisioning next year. Downside risk could be if the economy slows, negatively impacting both loan and deposit growth. That could certainly be on the downside. Those are the major ones. Those are the major ones that come to mind Tom or Elliot, anything else that comes to your mind on upside or downside.
I think you hit the big ones, Craig.
Yes. Craig mentioned earlier.
Yes, thank you for that. And then, in terms of category three readiness, Craig, I mean within the guide for expenses this year, do you think this gets you most of the way there, or do you think 2026 is again the kind of a little bit of an overinvest year?
I think it does. I think the expenses associated with category three readiness are reflected in our run rate for expenses.
Next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is open. Please go ahead.
Thanks. Good morning, Craig, I want to go back to the buyback comments you made in the impact of the loss share agreement. Is that loss share agreement going to work itself to zero this year, or is that going to take longer into '26?
The spread between our capital ratios with and without loss share is going to shrink to around 10 basis points and it was 66 basis points this quarter. So yes, it's working out to a zero impact on capital throughout the remainder of the year.
Great. And is the buyback a goal for 2025, or would the reduction closer to 11% or less take longer than this year, do you think?
Assuming that managing to the 10.5% to 11% range, we contemplate that we actually institute another share repurchase plan in the second half of this year. The current one would be completed over the next two to three quarters. So we're in the midst of our capital plan now and depending on projected earnings trajectories and the results of the stress testing, we would contemplate another plan in the second half of the year. Tom, you want to talk about any, did I miss anything there-like purchases?
No, I think you hit it. I mean earnings accretion will still be strong and outpaced RWA growth, and we'll continue to work our capital ratios down is really the plan over the coming quarters.
Great. Thank you for that background. And just a quick one on credit. Beyond the information you gave us about the SVB criticized, any other general trends on criticized and classified for the general bank?
No, nothing material. Again, I think credit is well contained. Andy, would you like to elaborate on any of that, or is that pretty much where you see it?
No, I agree. I think no discernible trends. Obviously, seen a slight uptick, but nothing of concern.
Great. Thank you all very much. Appreciate the information.
Next question is from Nick Holowko from UBS. Nick, your line is open. Please go ahead.
Hi, good morning. Just coming back to the expense outlook for the year. As you're thinking about the investments you're making on the regulatory readiness front, and sounds like it's those expenses are built into the run rate at this point. But would potential changes to the regulatory backdrop change how you're thinking about those investments over the next couple of years?
We recognize that prioritization of regulatory policy initiatives could change, but we are remaining steadfast in our goal to meet regulatory expectations for category three. So we do not see significant changes regulatory, at least in the near term and certainly, where we would be focused going into 2025, 2026.
Got it. And then you noted your goal for operating with an adjusted efficiency ratio in the mid-50s versus the upper 50% range for 2025. And you laid out the strategic priorities for the year, including a focus on improving operational efficiency and optimizing the balance sheet. So as you think about the progress that you're making on those fronts, do you have a view on how you're thinking about the sustainable RothC power of the bank over the medium term?
I mean I think in the short term, we've obviously quadrupled in size over the last three years. So with that comes significant investment in both technology, and our risk management capabilities. Our goal with operational efficiency is to, over time, improve our processes and simplify our processes so that we are better able to meet regulatory expectations and also improve our customer experience. So that's not something that will happen in the short term. Obviously, rates have a lot to do with us operating right now in that upper 50s range. So rate help would certainly be a case. But our goal through operational efficiency would be over the long-term to operate in the mid-50s.
I'm not showing any further questions at this time. So I'd like to turn the call back over to our host, Ms. Deanna Hart for any closing remarks.
Thank you, and thanks, 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 the Investor Relations team through our website. We hope you have a great rest of your day.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.