Prepared remarks
Thank you. Good morning, and welcome to First Citizens Second Quarter Earnings Call. Joining me on the call today are our Chairman and Chief Executive Officer, Frank Holding; and Chief Financial Officer, Craig Nix. They will provide second 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 be referencing 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. Welcome to our quarterly earnings call, and thank you for joining us this morning. I will start by providing brief comments on our second quarter results before turning it over to Craig Nix, to review our performance in more detail. Starting on Page 5, our key earnings metrics were solid, marked by net interest income growth, net charge-offs at their lowest level since the second quarter of 2024 and adjusted noninterest expense at the low end of our guidance range. We reported adjusted earnings per share of $44.78 or an adjusted ROE of 11.00% and an ROA of 1.07%. We maintained strong capital and liquidity positions, supporting balance sheet growth and allowing us to return another $613 million to our shareholders through share repurchases during the second quarter. Upon the successful completion of our annual capital planning activities, this week, our Board approved a new $4 billion share repurchase plan to commence upon completion of the current plan.
Craig will address additional details regarding the new plan in his comments on the quarter. But first, I'd like to take a moment to highlight progress on our 2025 strategic priorities and the positive results we are seeing in our business segments. During the quarter, we continued consolidating platforms and relationship teams to ensure a seamless client experience, and we're beginning to see positive momentum from these activities. We're also seeing tangible benefits from the way our teams are working together, resulting in new business and deepening existing relationships. Whether it's a middle market company needing capital markets expertise, a high net worth client looking for integrated advice or a multinational company navigating complex treasury needs, we're not just delivering solutions. We're listening to our clients' needs and helping them succeed. We were recently excited to announce the appointment of Diane Morais to our Board of Directors.
Diane is a distinguished leader and executive with more than 30 years financial services’ experience and most recently served as President of Consumer and Commercial Banking at Ally Bank. Over the course of her distinguished career, Diane has become known as a results-oriented executive with a customer-centric vision, which aligns nicely with the relationship-based long-term focus at First Citizens. Her knowledge and experience complement our Board, and we're excited to have her on our team. Looking at Page 6. Our strategic priorities are unchanged from the prior quarter and are outlined for you on this slide. We continue to demonstrate the strength of our diversified lines of business and remain dedicated to our client-first focus. I like our positioning to capitalize on growth opportunities while continuing to optimize our balance sheet and enhance our processes and systems to maximize efficiency and productivity.
As always, we remain vigilant on the macro and geopolitical landscape, which remains somewhat uncertain due to tariff policy and negotiations, interest rates and regulatory change. While we recognize some elements of the landscape could represent tailwinds while others contribute to headwinds, we are pleased that our capital and liquidity positions allow us to operate from a position of strength. To close, I'm very optimistic about our future as we remain committed to our customers and clients, investing for the long term and delivering sustained shareholder value. With that, Craig, please take us through the financial results for the quarter and forward-looking guidance for the remainder of the year.
Thank you, Frank. I appreciate everyone joining us today. I will base my comments on the key takeaways from the second quarter highlighted on Page 8. Pages 9 through 26 offer additional details supporting our results for your reference. Our second quarter return metrics were strong. Adjusted net income reached $607 million, surpassing expectations due to better-than-anticipated net interest income growth, lower credit costs, and expenses at the lower end of our guidance. Consequently, tangible book value per share rose by 10.4% year-over-year and 2.7% sequentially, despite share repurchases of $2.9 billion over the past year and $613 million in the second quarter. The unrealized loss on our available-for-sale portfolio improved by 27.1% sequentially. If rates drop as projected, we expect further benefits to our tangible book value growth from AOCI reduction. Following three quarters of declines, headline net interest income increased by 2% sequentially, landing in the upper half of our guidance range.
Net interest income excluding accretion also grew sequentially by 2.6%, following three quarters of declines, due to a higher day count and an increased average earning asset base. Headline net interest margin stood at 3.26%, matching the previous quarter, while the net interest margin excluding accretion rose by 2 basis points sequentially, thanks to our continued management of deposit costs even as the earning asset yield remained stable. We were pleased with the expansion of the net interest margin excluding accretion, but any further monetary easing anticipated in late 2025 and into 2026 may extend our trough. Adjusted noninterest income exceeded our guidance by $34 million or 7.2%, mainly driven by favorable changes in customer derivative positions and other non-marketable investments, in addition to a write-down in the first quarter that did not affect the current quarter. Adjusted rental income in our rail business grew by $5 million sequentially due to increased rental income and reduced maintenance costs.
The fundamental performance in the rail business remains robust, with utilization at 96.9%, achieving our 15th consecutive quarter of positive repricing trends. Given these trends, we foresee strong growth potential through 2025 and beyond, assuming no drastic shifts in the macroeconomic landscape. Notably, with only about 30% of our portfolio maturing in 2025 and 2026, we have some protection against short-term disruptions. Adjusted noninterest expense came in at the lower end of our guidance, with a sequential increase of less than 1%, influenced by seasonal items from the first quarter related to incentive payments and payroll tax resets. Adjusted for these seasonal impacts, the sequential increase was driven mainly by salary and wage increases due to merit raises, alongside higher professional fees and net occupancy expenses, somewhat offset by a decline in equipment costs. However, we anticipate this trend to reverse in the latter half of 2025 as additional risk and technology projects are implemented.
I will elaborate further in our outlook, but we expect quarterly expenses to remain between $1.28 billion and $1.32 billion in the third and fourth quarters. Now shifting to the balance sheet, loans experienced a modest decline of $89 million or 0.1% sequentially, with slight growth in Global Fund Banking in the SVB Commercial segment and in the General and Commercial Bank segments, countered by a decline in the tech and healthcare portfolio within the SVB Commercial segment, which saw approximately a $300 million drop. On a positive note, loan commitments remained flat compared to the first quarter, reversing recent trends as new loan originations were the highest in the last year, indicating our ongoing commitment to the innovation economy. Global Fund Banking saw over $100 million growth despite lower utilization, as we continue to record new loan originations. The pipeline remains strong, standing at $9.5 billion at the quarter's end.
While we exercise caution regarding overall asset growth levels in this sector, we detect early signs that activity could pick up in the second half of the year, which may enhance line utilization as venture capital and private equity funds are deployed. General Bank loans rose by $140 million, primarily due to increased originations and higher line utilization from our wealth business, although this was partially countered by declines in our business and commercial portfolios as competition for new business remains fierce. Despite the decline's unfavorable nature, we maintain a steadfast loan pricing strategy and will not alter our credit standards in response to competitive and rate pressures. We believe macroeconomic uncertainty is causing diminished demand, contributing to the competitive landscape. Our pricing discipline is reflected in our loan yield, which improved by one basis point to 6.25% from the previous quarter, notwithstanding the effects of the declining yield curve.
Specifically, within the General Bank, the loan yield increased by five basis points. Growth in the Commercial Bank was centered in real estate and equipment finance, somewhat offset by declines within our industry verticals attributed to loan maturities and higher prepayments, with growth in real estate finance mainly due to slower paydowns. Moving to the right side of the balance sheet, deposits rose by $610 million or 0.4% sequentially, driven by growth in both the Direct Bank and SVB Commercial, with the Direct Bank being the largest contributor to the increase at $941 million as we maintain solid elasticity in these deposits despite falling rates. We are also pleased to see our noninterest-bearing deposit mix remain flat from the previous quarter, despite the growth in the Direct Bank channel. Since the year-end, demand deposits have grown by $2.2 billion, marking an annualized growth rate of 11.6%, with growth concentrated in SVB Commercial and the General Bank.
In SVB Commercial, end-of-period growth was $778 million due to increased deposit inflow in the latter half of the quarter. We have observed growth in tech and healthcare banking through new client acquisitions, despite challenges in the overall fundraising landscape. Average deposit balances and total client funds decreased compared to the sequential quarter because of larger outflows in April and May, though we saw encouraging TCF inflows in June. These increases were partially mitigated by declines of $810 million and $95 million in the General Bank and Commercial Bank, respectively. The General Bank decline was due to lower branch network balances and decreased net growth from seasonal outflows. We have initiated new deposit growth strategies to pinpoint both immediate and long-term opportunities to accelerate growth through deeper relationships, empowering more local decision-making, and enhancing digital capabilities.
Regarding credit, net charge-offs decreased by eight basis points sequentially and fell below our guidance range, as several anticipated larger deals were delayed this quarter while we work through client resolutions. Consistent with previous quarters, net charge-offs were primarily concentrated in general office, investor-dependent, and equipment finance portfolios. There were some significant charge-offs in the broader SVB innovation portfolio and our commercial finance business, mostly previously reserved. As we mentioned in earlier calls, net charge-offs can vary from quarter to quarter due to the size of some larger credits, but we are currently not identifying trends signaling broader credit quality issues and feel we are well reserved. The allowance ratio decreased by one basis point to 1.18%. We remain confident in our overall reserve coverage and the coverage of stressed portfolios.
Our strong risk management framework, rigorous underwriting standards, and diversified portfolio continue to protect us against losses. Turning to capital, Frank noted our ongoing progress on the 2024 share repurchase plan. By the close of business on July 22, we had repurchased 10.96% of Class A common shares or 10.2% of total common shares for $2.9 billion. This accounts for around 63% of our Board-approved $3.5 billion repurchase plan for 2024. In July 2025, the Board approved an additional plan for repurchasing up to $4 billion in Class A common shares through the end of 2026. We expect to complete the 2024 plan in the third quarter and immediately start repurchasing shares under the $4 billion plan. Last year, repurchases ranged from approximately $600 million to $900 million per quarter. We anticipate repurchases through the end of 2025 and into 2026 will trend toward the higher end of that range as we manage CET1 toward our target levels.
The pace may slow as CET1 approaches our target range, assuming earnings and RWA growth align with our estimates. Share repurchases will remain a key component of our capital management strategy, facilitating the return of capital to shareholders and promoting capital efficiency. Although we expect CET1 to stay above our target range of 10.5% to 11% in 2025, considering our growth projections and our starting capital ratios, we believe the new repurchase plan will allow us to gradually manage CET1 to that level over time while we continually evaluate our growth outlook, economic uncertainty, potential regulatory changes, and overall capital deployment strategies. With the termination of the FDIC shared loss agreement early in the second quarter, our reported regulatory capital ratios are lower. It is important to remember that although the SLA helped our capital ratio, we have always managed capital without relying on it since it was a temporary boost.
Thus, the termination does not alter our capital management approach. The CET1 ratio for the second quarter was 12.12%, down seven basis points from the first quarter adjusted CET1 ratio, as the effects of share repurchases slightly exceeded earnings and the modest loan downturn mentioned before. I will finish on Page 28 with our outlook for the third quarter and full year of 2025. We continue to observe the macroeconomic environment but recognize that the fluid nature of changes makes it challenging to delineate the potential impacts on the broader economy and our business lines. Consequently, we have not significantly altered our guidance, though we persist in monitoring the environment's influence on our performance. Should we determine that these impacts will significantly affect our earnings or growth outlook, we will adjust our guidance in future quarters. For the balance sheet, we expect loans to fall between $141 billion and $144 billion in the third quarter, driven mainly by growth in the general and commercial banks and SVB commercial.
In the General Bank, we anticipate that recent trends will abate, leading to growth in business and commercial loans in the branch network as we progress through the latter part of 2025. We previously noted increased competition in this arena, with competitors lowering spreads, while overall demand remains soft. We are adapting our strategies to ensure competitiveness and expect higher balances in the upcoming quarters. We believe Commercial Bank growth will stem from our industry verticals as we expect the idiosyncratic paydowns seen in the second quarter to decelerate, with strong origination levels continuing. In the SVB commercial space, we expect growth from Global Fund Banking, aided by its robust pipeline, although we remain cautious regarding absolute growth levels due to lower utilization in recent quarters amid current market conditions. For the full year, we are slightly reducing our guidance range, projecting loans between $143 billion and $146 billion, remaining cautiously optimistic regarding absolute loan levels due to lower growth in the first half of the year.
We anticipate growth driven by the factors mentioned above, but there’s potential for pick-up in the fourth quarter should the Fed's monetary easing have an effect and we witness increased venture capital investment and capital markets activity. We foresee deposits in the range of $159 billion to $162 billion in the third quarter, largely due to growth in the direct bank as we continue to utilize this channel to boost insured core deposits. Although the direct bank is a higher-cost avenue, we expect to benefit from declining interest rates, giving us strategic agility to optimize our deposit funding. We have successfully lowered direct bank costs in the past two quarters while maintaining total balances. However, we expect this growth to be offset by a decline in SVB Commercial due to ongoing cash burn and subdued public and private investment activity affecting absolute growth. Moreover, we anticipate significant outflows in Global Fund Banking based on known client activities, which could contribute to muted balance growth.
We are also focused on strategies to lower funding and liquidity costs in this channel by optimizing our fund mix, influencing absolute deposit growth levels. Finally, while we welcome recent successful IPOs, we advise against linking these successes to a broader industry change. For the full year, we are adjusting our deposit guidance lower to between $161 billion and $166 billion because of the lower starting point in the second quarter and our loan growth expectation shifts. We believe full-year growth will hinge on similar factors, acknowledging a wide range of potential outcomes for deposit levels, significantly impacted by overall earning asset growth. Our interest rate forecast ranges from 0 to 225 basis points in rate cuts in the second half of 2025, with the effective Fed funds rate expected to decline from the current 4.25% to 4.5% to as low as 3.75% to 4% by the year's end. Our baseline forecast contains one projected rate cut; however, broader economic slowdowns may prompt further cuts, though persistent inflation metrics and possible macroeconomic policy consequences mean these cuts are not guaranteed.
Hence, it’s prudent to provide a range of anticipations for the year. We expect third quarter headline net interest income to remain relatively stable compared to the second quarter. Our guidance accounts for the planned effect of share repurchase activity for 2025 under the current and incremental repurchase plans beginning upon completion. For the full year, we are tightening our headline net interest income guidance to a range of $6.68 billion to $6.88 billion, down from $6.55 billion to $6.95 billion, reflecting the revised interest rate curve and the lower baseline beginning from the second quarter. We anticipate that loan accretion will decline by over $200 million compared to 2024. Regarding credit losses, we project third quarter net charge-offs between 35 and 45 basis points, slightly down from the previous range but above our second-quarter results. Although second-quarter net charge-offs were unexpectedly low, we experienced delays in anticipated larger charge-offs.
In commercial real estate, while rate cuts might relieve some pressures on borrowers in the office sector, we foresee elevated losses in the latter half of the year, even as market disruptions may lessen with companies reinstating attendance policies. Continuous stress is expected in the investor-dependent portfolio throughout 2025. Overall, venture capital investment has decreased compared to the prior quarter, but excluding deals over $1 billion, which fall outside our serviceable market, activity levels remained stable. While rate cuts would be advantageous for this business, and there have been notable IPOs, we deem it premature to declare a bottom in the cycle, given that the inducement for buyers to pursue acquisitions and for public investors to favor IPOs remains unclear, compounded by persistent macroeconomic uncertainties. Maintaining our guidance for the full year, we uphold the range of 35 to 45 basis points despite the lower starting point because we anticipate some fluctuations in losses due to large deals affecting the ratio, which can easily shift from one quarter to another.
It’s crucial to note that our net charge-off guidance does not incorporate estimates for long-term tariff impacts, given ongoing expectations and difficulties in assessing the complete effects on our asset quality. While higher tariffs might induce economic stress through inflation or slower growth, we believe the credit risk remains manageable. We will continually evaluate the potential portfolio impact, recognizing its diversity as an asset in this environment. For adjusted noninterest income, we expect to fall within the $480 million to $510 million range for the third quarter, aligning with our typical quarter. Overall, we still see strength in many of our core business lines, such as rail, merchant card, and wealth. With two quarters behind us, we have narrowed our full-year adjusted noninterest income range to between $1.97 billion and $2.05 billion. Year-over-year growth continues to be supported by our rail outlook, driven by a balanced railcar portfolio and a strategic expiration ladder.
We also foresee continued solid growth in wealth and international fees due to new client acquisition and increased fund flows. However, I want to caution that the shifting rate environment may cause fluctuations in our client derivative positions from quarter to quarter, potentially introducing some variability in our noninterest income results. Regarding adjusted noninterest expense, we expect a modest increase in the third quarter compared to the second as we push large projects forward and continue investing in our risk and technology capabilities to meet Category 3 standards, simplifying and optimizing our platforms for efficient scaling in the future. For the full year, we have tightened our adjusted noninterest expense range to $5.1 billion to $5.2 billion. Practicing disciplined expense management while making timely investments in technology, risk management, and our staff is a top priority, considering the headwinds against net interest income.
We expect our adjusted efficiency ratio to remain in the upper 50% range in 2025 because of the downward pressure on net interest margin from the Fed's rate cycle and the continued investment in areas necessary for our transition to Category 3 status. Our long-term goal continues to be operating in the mid-50% range. Finally, we expect our tax rate for both the third quarter and the full year of 2025 to fall between 25% and 26%, excluding any discrete items. In conclusion, our second quarter results underscore the strength and resilience of our diversified business model. Through our long-term focus, ongoing investments, and robust risk management, we are well positioned to continue providing value for our clients, customers, communities, and shareholders. I will now hand it over to the operator for instructions regarding the Q&A session.
Questions and answers
Our first question comes from Casey Haire from Autonomous Research.
So I guess the first question would just be on the loan growth. Obviously, the paydowns are tough to forecast. But if I heard you correctly, I think you said that the SVB pipeline was up...
Just going to have a brief pause here while we adjust this issue. Please stand by.
So just a question on the loan growth outlook. If I heard you correctly, I think you said SVB pipelines are $9.5 billion and yet you have loans running either flat or up modestly in the third quarter. Just a little more color on what's driving that, what seems to be a conservative outlook.
Yes. On the $9.5 billion, that's true related to Global Fund Banking. So that pipeline is actually up from what we saw in the first quarter. So we're very optimistic on the development there. Yes, I think utilization has pulled in slightly. And so I think we're being a little bit conservative on kind of what that growth might portend into, but the underlying really fundamentals are really strong in that business. I think elsewhere, we saw some elevated prepayments kind of idiosyncratic in nature in industry verticals. But we feel really good on where we're positioned in tech, media, telecom, energy and healthcare.
Okay, great. Can we get some updated thoughts on the FDIC purchase money note? I know the Fed cuts keep getting pushed out, but the forward curve does show a 100 basis points increase by the end of next year. How do you envision this playing out, and how much FHLB capacity do you plan to use to retire this funding source?
Okay. I'll take that one, and we'll let Tom amplify here. But declining interest rates, especially to the extent that the forward curve is implying would precipitate some paydown of the note in 2026. We don't really anticipate any of that in 2025. So once that arbitrage is alleviated, it would precipitate a paydown. And in terms of just order of preference, we would certainly like to first use excess liquidity generated by preferably core deposit growth as the first source of repayment. Then we would move down to broker deposits and then we'd move to FHLB advances and then finally, long-term debt. But we feel really good about our positioning there, our liquidity and ability with contingent funding sources to pay that note off. Tom, would you like to add anything to that?
No, I would say to sort of amplify that, since the acquisition of SVB, we paid off just under $10 billion worth of expenses as we took on the purchase money notes. So obviously, we have capacity there. That being said, we'd prefer to use deposits. I think at this point, we've built excess liquidity in sort of the $11 billion range today. To Craig's point, we're still earning a positive arbitrage. We don't really see a purpose to pay the purchase money note down early. But as we look out over time, and rates change, that may change. I think over time, we'd like to keep the passthrough to get that back up to funding sort of 90% to 95% versus the 81% that it is today as a percentage of total funding.
The next question comes from Steven Alexopoulos from TD Cowen. Steven A. Alexopoulos TD Cowen, Research Division I want to first start and follow up on Craig's comments on SVB, maybe hopefully, Marc is on the call. It sounds like you guys are pretty cautious with the outlook for SVB. And when I look at what the equity markets did in 2Q, historically, that's a very positive leading indicator for the SVB business. And when you combine that with what we're seeing with AI more broadly, I was curious, are you seeing an increase in terms of the number of term sheets out in the market? And are your VC clients starting to get a bit more bullish here when it comes to putting all of that dry powder to work?
Marc, do you want to take that one?
Craig, would you like me to take that?
Yes, go ahead, Marc.
Happy to take that. Great to hear from you. Sorry about that. Getting back to your question, Steve, the activity in the second quarter, June was definitely, as noted by Craig, an encouraging uptick, particularly the IPO activity, I think you referenced there. At the same time, I think there is cautious optimism as to whether this is truly the beginning of something, and you see that caution, I think, reflected in our continued guidance and our comments today. The window for IPO certainly seems to be partially open. But at the same time, the bar to go out remains pretty high. It's expensive to be public and capital clearly, as evidenced by venture investment in the second quarter, remains available for good later-stage companies. And so unclear whether this will really be the start of more IPOs, I think it's reasonable to think that we could see as many in the second half as we saw in the first half, but not really expecting a lot there.
And then to your point about term sheets and again, as evidenced by the investment in the second quarter, there is activity in putting that dry powder to work. But most of that activity is very much skewed towards later-stage deals. And as mentioned earlier, the mega $1 billion-plus financings that generally aren't really our target. At the same time, on the earlier stage end of the spectrum, the pace remains muted as it has for going on 3 years now. And so again, I think there is hope, if you will, among the venture community and certainly ourselves that spring is springing and we're going to see a gradual improvement from here. But there, again, are so many mixed signals, so much economic uncertainty hanging over everything that we remain on balance cautious, though somewhat encouraged.
Got it. That's great insight, Marc. To follow up with you, Craig, it seems like the deposit growth you're projecting includes an expectation for SVB deposits to decrease, which reflects a cautious approach and aligns with the outflow you mentioned. Can you provide some specifics on what you anticipate for SVB deposits? What is included in your deposit forecast for the remainder of this year?
Okay. I'm going to let Elliot address that one.
Yes, Steve, I mean. Yes, Steve, I think on kind of the SVB guide for deposits, I really kind of want to reiterate what Marc said. I think we're cautiously optimistic. As we kind of landed in the second quarter, just looking at some larger deals funded on the GFB side, we do expect some outflows. And so I think that is reflected in some of that deposit guidance. I'd say otherwise, I mean, client acquisition has been good. We've actually seen an uptick over the past few quarters. So generally, pretty flattish for the rest of the year with a little bit of growth, but I would color that as cautiously optimistic.
Next question comes from Chris McGratty from KBW.
A lot of talk about deregulation in the markets. I'm interested what that means for your company over the near to medium term. And Craig, I think you've talked in the past about building the cost to be Cat 2 compliant. But is that mid-single-digit still kind of expense growth about what you're thinking?
I missed the last part of the question, Chris. Can you mind repeating that?
Sure. The mid-single-digit expense outlook that you've talked about as you get ready from Cat 2?
Yes. You can anticipate year-over-year expenses to increase in the mid- to high single-digit percentage range. We are maintaining that level of guidance. The additional expenses we've incurred over the past year are primarily related to enhancing our risk management and technology capabilities in line with being a Category 3 firm. We expect our expenses will not remain flat like they did in the first and second quarters; instead, they will likely rise in that mid- to high single-digit range as we prepare for Category 3.
Okay. And then there was obviously a large deal in your market overnight. Any thoughts on deposit opportunities? I know it's early, but any strategic thoughts you might have?
Well, I would just say, Chris, we do well picking our spots with deposits. We've exhibited over time that we can grow deposits on a consistent basis. So I don't really see that transaction as necessarily hindering our ability to do that. Although just generally, with the M&A market, we're encouraged that there's an uptick in activity there. But we feel really good about our deposit growth prospects based on our ability to grow deposits on a sustained basis regardless of competition.
The next question comes from Bernard Von Gizycki from Deutsche Bank.
NIM, could you just talk to what the exit rate for the margin could be in 4Q if rates on the short end remain unchanged versus if we get 2 rate cuts by the end of the year or the one assumed in your baseline forecast?
Sure. You're asking about the net interest margin? Based on a possibility of up to two rate cuts in 2025, if we see two cuts, we expect one in September and one in December. The exit margin for the fourth quarter would likely decrease from 3.26% in the second quarter to the mid-3.10s to high 3.20s for the overall net interest margin, and for the net interest margin excluding accretion, it would range from the mid-3.10s to mid-3s to high 3.10s. We started with mid-3.10s in the second quarter, so excluding accretion, the net interest margin would be between mid-3s and mid-3.10s, heading towards 0 to 10.
Okay. I want to follow up on competitive pressures. During the quarter, many regional banks have observed increased competitive pressure in deposit pricing due to the current rate cycle and the prospect of rate cuts. Your deposit betas are rising while your costs are decreasing. You mentioned implementing new strategies for deposit growth, targeting short- and near-term opportunities. On the loan side, you also indicated that competitive pressures are increasing. Could you discuss some of the challenges you're experiencing in both the deposit and loan areas?
Yes, this is Tom. On the deposit side, as mentioned, we've been able to increase our beta. This indicates our strong competitive position in our markets, and we will continue to manage our interest expenses as best as we can. On the credit side, we've noticed a slight increase across the board. Last year, we were among the few banks actively lending more, and we see more participants in the market today. However, we believe we are well positioned. As Elliot mentioned earlier, we experienced some unexpected large payoffs in certain sectors, but overall, we feel good about our activity and outlook.
Next question comes from Nick Holowko from UBS.
Maybe one other question on competitive pressures. So it seems like there's been a pickup in new applications for bank charters over the past couple of months, including some that seem to be aimed at serving some of the same ecosystem that SVB has traditionally served. So do you have any thoughts on the developments that we're seeing there? And of course, I know it's very early days, but are there any risks that you could foresee on the talent front given some of the higher profile technology aims tied to some of these announcements?
Marc, do you have any thoughts on that as it impacts SVB competition?
Sure. I would be happy to take that. So starting just competition more broadly and as we talked about in past calls, the SVB business continues to have lots of competition, both bank, nonbank, fintech, etc., across the segments of our business. And so one more competitor is, in a lot of ways, nothing really new. In this particular instance, thinking about banks at the application stage will take a while to become additional competition for us is the first thing. And then thinking specifically about maybe the Charter you've got in mind, I would just say here that SVB has offered traditional banking services to Web3 companies for many years through our national fintech practice and think we are very well positioned to expand those offerings over time to serve our clients' digital asset needs. And so I think we and everybody else focused on the innovation economy, focused on crypto and changing regulations there, I think, is similarly enthusiastic about the opportunity there. And so I think, yes, like we've always had, we'll continue to have competition, and we will continue to, I think, in the face of that, execute on our own game. And I think by extension, as comments already offered, we feel pretty good about our positioning and our ability to capture our fair share.
Very helpful. As a follow-up, you mentioned the traditional banking services you've integrated into the Web3 ecosystem, and a lot of the momentum is linked to the broader crypto environment. Aside from traditional banking services, do you have any other goals for that space over the next couple of years?
I'll start on that. Others may... Great. I would just say this is a fluid dialogue, and so I'm going to refrain from talking about specific services that we may elect to offer in the future. But again, we would just end on the very well positioned hundreds of clients in the space. And so as we determine what makes the most sense and where we can best differentiate ourselves from other offerings, that's where I think you should expect to see us over time. I'll pass it to you, Craig.
I think you said it well, Marc.
The next question comes from Chris Marinac from Janney Montgomery Scott.
Craig, I want to ask about the Direct Bank and would the proportion of those deposits grow over time relative to the whole balance sheet?
Yes, they have certainly grown since we acquired CIT, and I expect that growth to continue. However, we prefer to grow deposits in lower-cost channels, although we are comfortable with the spreads of those deposits compared to our investment portfolio loans. Looking ahead, we anticipate double-digit percentage growth in that channel leading into 2026.
Okay. Great. And then just a quick follow-up on the Railcar business. Do you see that business stable from here? Or is there still opportunities to grow it further?
Yes. Great question, Chris. I mean I think we're very encouraged, where we are. I mean I think the utilization having stayed up, we're still close to 97%. We've had 15 quarters of repricing, which Craig mentioned. So I think from really kind of a revenue expansion side, we do see further opportunity there and that runway to continue. And then last, I mean, I think from an expansion standpoint, we continue to invest in that business each year. I'd say kind of generally $300 million to $500 million in added assets. So there is, I think, further runway from a revenue standpoint. But obviously, we'll kind of keep in tune with kind of the economy and kind of everything going there.
Our next question today comes from Manuel Navas from D.A. Davidson.
Can you update where you feel the NIM, NII trough could be next year and kind of what are the assumptions around it?
Yes. It clearly depends on whether there are zero, one, or two rate cuts in 2025. If there are no rate cuts, we have likely reached the lowest point except for the net interest margin headline, which would be in the first quarter of 2026. If there is one or two cuts, it would just push all the lowest points, whether looking at net interest income headline or excluding accretion, to the first quarter of 2026.
I appreciate that. What do you factor in regarding debt issuance to meet TLAC in your NII planning?
We have fairly modest expectations regarding what our long-term debt requirements will be since we have not yet seen a final rule. However, we are focused on our share repurchase plan and are working to optimize our capital structure over time. This may involve the potential issuance of new financial instruments to improve the efficiency between our CET1 and total capital ratios.
Also subject...
So it's decreased since the last time? It has dropped slightly in the projections from what we were considering, which was around $10 billion in issuance. I know you completed some earlier this year or a couple of years ago.
Yes. That assumes the LTD rule would come into play in its current form, which the 6% to RWA was our binding constraint in that. Obviously, pending a final rule, it's hard to estimate what our final issuance would have to be to meet those requirements.
I appreciate that. Can I ask one more question? The deposit betas have been really impressive. You have targets in your presentation. Are you planning to keep raising them? It seems like you're already at the cycle levels, and you've had a lot of success in the Direct Bank. What is the potential for the deposit betas?
The most challenging aspect of answering that question depends on the direction of rate forecasts. As I mentioned earlier, we have been actively managing interest expenses, especially since there haven't been any recent rate cuts. If this situation continues for a few more quarters, we will keep working on increasing that beta. If the Fed begins to cut rates again, I would anticipate a similar pattern to what we’ve observed in the past, where we lag initially before gradually catching up. Therefore, the key factor is when the cut cycle halts, but we aim to maximize the potential upside as much as possible.
But I think you're making a good point that the betas are approaching terminal betas that we saw in the up-rate environment. So that's a good observation.
I'm not showing any further questions at this time. I'd like to turn the call back over to our host, Ms. Deanna Hart for any closing remarks.
Great. Thank you, everyone, for joining our earnings call today. We appreciate your ongoing interest in our company. And if you have any further questions or need additional information, please feel free to reach out to the Investor Relations team. 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.