管理層發言
Thank you for joining us for the First Citizens BancShares Second Quarter 2025 Earnings Conference Call. Today's conference is being recorded. I would now like to introduce Ms. Deanna Hart, Head of Investor Relations, who will lead the call. You may begin.
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 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. 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 to consolidate 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 of 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 focus my comments on the key takeaways from the second quarter outlined on Page 8. Pages 9 through 26 provide more details about our results for your reference. As Frank noted, our return metrics for the second quarter were solid. Adjusted net income reached $607 million, surpassing our expectations, driven by stronger-than-anticipated net interest income growth, lower credit costs, and expenses at the lower end of our guidance range. Consequently, our tangible book value per share rose by 10.4% year-over-year and 2.7% sequentially, even with share repurchases totaling $2.9 billion over the past year and $613 million in the second quarter. The unrealized loss on our AFS portfolio improved by 27.1% sequentially. If interest rates decline as predicted, we expect the AOCI burn down to continue positively impacting our tangible book value per share growth.
After experiencing three consecutive quarters of sequential declines, headline net interest income grew by 2% sequentially, positioning it in the upper half of our guidance range. Net interest income excluding accretion, which had also seen declines in five of the past eight quarters, increased by 2.6% sequentially after three quarters of decline. The growth in both forms of net interest income resulted from an increased day count and a higher average earning asset base. Headline net interest margin stood at 3.26%, consistent with the linked quarter, while the margin excluding accretion was 3.14%, up 2 basis points sequentially as we managed deposit costs downward while maintaining stable earning asset yields. Although we are pleased with the expansion of our margin, further monetary easing anticipated in late 2025 and into 2026 may push our trough further out. Adjusted noninterest income slightly exceeded our guidance, rising by $34 million or 7.2%.
The key factors behind this increase included favorable changes in the fair market value of customer derivative positions and other non-marketable investments, along with the write-down on a held-for-sale asset from the first quarter that did not affect this quarter. Adjusted rental income in our rail business increased by $5 million sequentially, driven by higher rental income and reduced maintenance costs. The fundamentals in the rail business remain strong, with a utilization rate of 96.9% and the 15th consecutive quarter of positive repricing trends. Given these trends, we foresee continued growth potential into 2025 and beyond, assuming macroeconomic changes do not adversely affect performance. With only about 30% of the portfolio set to expire in 2025 and 2026, there is some buffer against near-term disruptions. Adjusted noninterest expense came in at the lower end of our guidance, with a sequential increase of less than 1%.
This modest growth was influenced by seasonal factors in the first quarter related to incentive payments, payroll tax resets, and 401(k) contributions. Adjusted for these seasonal impacts, increases were mainly driven by higher salaries and wages due to merit increases and escalated professional fees and occupancy expenses, partially offset by a decline in equipment expense. We anticipate this trend to reverse in the latter half of 2025 as we activate additional risk and technology projects. I will discuss further in our outlook, but we expect quarterly expenses to remain between $1.28 billion and $1.32 billion for the third and fourth quarters. Regarding the balance sheet, loans saw a modest decline of $89 million or 0.1% sequentially, with slight growth in Global Fund Banking and the general and commercial bank segments, countered by a drop in the tech and healthcare portfolio within SVB Commercial.
Loan outstandings in tech and healthcare banking fell by about $300 million from the linked environment. Positively, loan commitments remained steady from the first quarter, reversing recent trends, and new loan originations hit their highest mark in the last year, showcasing our commitment to the innovation economy. Global Fund Banking grew by over $100 million despite lower utilization rates, continuing to see new loan originations. Our pipeline remains strong, totaling $9.5 billion at the quarter's end. While we remain cautious about overall growth in this sector, early signs suggest that the second half of the year might stimulate additional activity, boosting line utilization as VC and PE capital gets deployed. General Bank loans increased by $140 million, mainly fueled by our wealth business, which reported both increased originations and higher line utilization in the second quarter.
These gains were somewhat offset by drops in our business and commercial portfolios within the branch network due to heightened competition for new business and muted loan originations over the past two quarters. Although the decline was not ideal, we have maintained our loan pricing strategy and are not adjusting our credit standards despite the competitive landscape. We believe that macroeconomic uncertainty is contributing to reduced demand, which is intensifying these competitive pressures. Our pricing discipline is evident in our loan yield, which excluding accretion improved by 1 basis point to 6.25% from the previous quarter, even amidst the challenges posed by the declining yield curve. Specifically within the General Bank, the loan yield rose by 5 basis points from the linked quarter. Growth in the Commercial Bank was mainly in real estate finance and equipment finance, but was partly offset by reductions in our industry verticals due to loan maturities and increased prepayments.
The growth in real estate finance was primarily attributed to slower paydowns. On the deposits front, we saw an increase of $610 million or 0.4% sequentially, with growth in both the Direct Bank and SVB Commercial sectors. The Direct Bank was the primary contributor to this increase, growing by $941 million, as we observed healthy elasticity in these deposits despite falling interest rates. We were also pleased to maintain a stable noninterest-bearing deposit mix from the linked quarter, despite growth in the direct bank channel. Since year-end, demand deposits rose by $2.2 billion, reflecting an annualized growth rate of 11.6%, concentrated in SVB Commercial and the General Bank. In the SVB Commercial segment, we saw an end-of-period increase of $778 million due to heightened deposit flow in the latter half of the quarter. We were encouraged by the growth in tech and healthcare banking, driven by the acquisition of new clients despite ongoing challenges in the overall fundraising landscape.
Average deposit balances and average total client funds were down from the sequential quarter due to larger outflows in April and May. However, we noted an increase in TCF inflows in June. This growth was mitigated by declines of $810 million in the General Bank and $95 million in the Commercial Bank. The drop in the General Bank stemmed from lower balances in the branch network and CAB due to seasonal outflows and limited net growth. Within the General Bank, we have initiated new deposit growth strategies to uncover both near- and long-term opportunities for growth through deepening relationships, encouraging local decision-making, and enhancing digital capabilities. In terms of credit, net charge-offs decreased by 8 basis points sequentially and fell below our guidance range, as several larger deals we anticipated were postponed this quarter while we continued working with our clients.
Consistent with previous quarters, net charge-offs were primarily concentrated in the general office, investor-dependent, and equipment finance portfolios, with a few significant charge-offs in the broader SVB innovation portfolio and our commercial finance business, most of which had previously been reserved for. As mentioned in the past, net charge-offs can be inconsistent quarter-over-quarter due to the size of some larger credits. While we will keep monitoring these portfolios, we are not observing trends indicating widespread credit quality issues and believe we are adequately reserved. The allowance ratio dipped by 1 basis point to 1.18%. We are confident in our overall reserve coverage as well as the protection for the stressed portfolios. Our robust risk management strategies, rigorous underwriting standards, and diversified portfolio help mitigate potential losses. Concerning capital, Frank highlighted our progress on the 2024 share repurchase plan.
As of July 22, we had repurchased 10.96% of Class A common shares, or 10.2% of total common shares outstanding, for $2.9 billion. This amount corresponds to approximately 63% of our Board-approved $3.5 billion repurchase plan for 2024. In July 2025, the Board authorized an additional repurchase plan for 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 then begin share repurchases under the new $4 billion plan. Over the past year, repurchases have varied from roughly $600 million to $900 million per quarter. We anticipate that repurchases through the end of 2025 and into 2026 will be closer to the upper end of this range as we manage CET1 toward our target range. The pace of repurchases may slow when CET1 approaches our target range, assuming earnings and RWA growth meet our projections. Share repurchases will continue to be a tool for capital management, allowing us to return capital to shareholders and enhance capital efficiency over time.
Although we expect CET1 to remain above our target range of 10.5% to 11% in 2025, considering our current growth expectations and starting capital ratios for the year, we believe the new repurchase plan will enable us to gradually reduce CET1 to that level, as we regularly evaluate our growth outlook, economic uncertainty, potential regulatory changes, and overall capital deployment. Following the early termination of the FDIC shared loss agreement in the second quarter, our reported regulatory capital ratios are lower in absolute terms. While the SLA previously bolstered our capital ratio, we managed capital independently of the SLA, recognizing its temporary benefit. Thus, the termination does not modify our approach to capital management or related actions. The CET1 ratio for the second quarter was 12.12%, down 7 basis points from the adjusted CET1 ratio in the first quarter, as the impact of share repurchases slightly exceeded earnings, along with the modest loan decrease discussed earlier.
I will conclude with our outlook for the third quarter and the full year 2025, noting that we continue to assess the macroeconomic environment, but recognize the fluidity of changes makes it challenging to narrow down potential impacts on the overall economy and our business lines. Therefore, no significant adjustments have been made to our guidance, though we are monitoring the situation closely and will reflect any substantial impacts on our earnings or growth prospects in future quarters. Starting with the balance sheet, we expect loans to fall within the range of $141 billion to $144 billion for the third quarter, primarily driven by growth in the general and commercial banks and SVB Commercial. In the General Bank, we expect recent trends to reverse, anticipating growth in business and commercial loans as we navigate through the latter half of 2025. As mentioned earlier, competition in this area has intensified, with competitors reducing spreads amid overall weak demand.
We are actively working on strategies to remain competitive and expect higher balances over the next several quarters. Commercial Bank growth will likely stem from our industry verticals as we foresee the idiosyncratic paydowns seen in the second quarter to slow, while origination levels should remain robust. In SVB Commercial, we anticipate ongoing benefits from growth in Global Fund Banking, thanks to its strong pipeline, though we remain cautious regarding the absolute growth levels, partly due to reduced line utilization in recent quarters. For the full year, we have slightly reduced our guidance range, expecting loans to be between $143 billion and $146 billion as we cautiously assess absolute loan levels, given lower growth in the first half of the year. We believe fourth-quarter growth could accelerate if the Fed's monetary easing takes effect, leading to higher VC investment and capital market activities.
Our expectations for deposits are between $159 billion and $162 billion for the third quarter, primarily fueled by growth in the direct bank as we continue leveraging this channel to increase insured core deposits. While the direct bank is a more expensive avenue, we will benefit from declining interest rates, giving us the agility needed to enhance our deposit funding base. Encouragingly, we have managed to lower costs in the direct bank over the past two quarters without a decrease in total balances. This growth may be offset by a decline in SVB Commercial due to ongoing cash burn and muted public and private investment activities affecting overall growth levels. Additionally, we expect some significant outflows in Global Fund Banking driven by known client activities, which may contribute to limited growth. We are also evaluating strategies to lower funding and liquidity costs within this segment by optimizing our fund mix, which could impact absolute deposit growth levels.
Finally, while we are excited about a few recent successful IPOs, we advise against linking these outcomes to an overall industry shift. For the entire year, we are revising our deposit guidance lower to a range of $161 billion to $166 billion based on the lower starting point in the second quarter and our updated loan growth expectations. We expect full-year growth to be influenced by similar factors previously discussed and recognize a wide range of potential deposit level outcomes driven by overall earning asset growth. Our interest rate forecast projects possible cuts ranging from 0 to 225 basis points in the latter half of 2025, with the effective Fed funds rate anticipated to decrease from 4.25%-4.5% to as low as 3.75%-4% by year-end. While our baseline scenario includes one rate cut, there is a potential for more cuts if a broader economic slowdown occurs. However, we acknowledge that persistent inflationary measures and possible macroeconomic policy effects may delay these cuts, so we see the merit in providing a range of expectations for the year.
For the third quarter, we foresee headline net interest income remaining stable compared to the second quarter. Our guidance accounts for the planned effects of share repurchase activities for 2025 under both our existing and forthcoming repurchase plans. For the full year, we are tightening our revenue guidance for headline net interest income to a range of $6.68 billion to $6.88 billion, down from the previous range of $6.55 billion to $6.95 billion. This revision reflects the updated interest rate curve and starting point from the second quarter. We expect loan accretion to decrease by over $200 million for the year compared to 2024. Regarding credit losses, we anticipate third-quarter net charge-offs to be between 35 to 45 basis points, a slight decrease from the earlier range provided but marginally higher than our second-quarter results. While the second quarter yielded lower-than-anticipated net charge-offs, we did not realize one or two large charge-offs that would have elevated our ratio.
In the commercial real estate sector, although rate cuts may relieve some pressure on borrowers in the general office segment, we expect losses to remain high in the latter half of the year, even as market disruptions may ease with more companies reinstating office attendance. We also foresee persistent stress in the investor-dependent portfolio throughout 2025. Overall, VC investment activity continued to decline compared to the previous quarter; however, excluding deals above $1 billion, which we consider outside our serviceable market, activity levels appeared relatively stable during the quarter. While additional rate cuts would significantly benefit our business and a few large IPOs have emerged, we believe it is premature to declare a bottom in the cycle. The catalysts for buyers to become more aggressive and for public investors to show renewed interest in IPOs are still missing, and ongoing macroeconomic uncertainty continues to affect market activity.
Accordingly, we maintain our net charge-off guidance for the full year at 35 to 45 basis points, even considering the lower starting point. We anticipate some fluctuations in losses within the portfolio without roll-offs of large deals, which can swing the ratio and easily land in one quarter or another. Notably, our net charge-off guidance does not factor in an estimate for the long-term impact of tariffs, given the ongoing changes in expectations and the challenge of assessing the full effect on our asset quality. While higher tariffs could pose economic stress through inflation or stagnant growth, we believe the credit risk is manageable. We will keep evaluating the potential impacts on our portfolio but believe diversification is a strength in this environment. Turning to adjusted noninterest income, we expect to remain in the range of $480 million to $510 million for the third quarter, consistent with our typical quarterly performance.
Overall, we see strength in many core business lines such as rail, merchant card, and wealth. After two completed quarters, we are tightening our full-year adjusted noninterest income range to $1.97 billion to $2.05 billion. Year-over-year growth remains driven by our outlook for rail, which features a balanced railcar portfolio and strategic expiration timings. We anticipate continued robust growth in wealth and international fees, supported by new client acquisitions and increased fund flows. However, it's important to note that fluctuations in client derivative positions due to the changing rate environment can lead to inconsistencies in our noninterest income results across quarters. As for adjusted noninterest expenses, we project a modest increase in the third quarter compared to the second quarter, as we implement large projects and invest in our risk and technology capabilities to ensure readiness and streamline operations for future scaling.
For the full year, we are tightening our adjusted noninterest expense guidance to $5.1 billion to $5.2 billion. Exercising disciplined expense management while strategically investing in technology, risk management, and human resources is essential for us, particularly given the challenges facing net interest income. We expect our adjusted efficiency ratio to remain in the upper 50% range in 2025 while the Fed's rate cut cycle applies downward pressure on net interest margins and as we continue investing in areas that will support us in achieving Category 3 status upon crossing that threshold. Ultimately, our long-term goal is to operate in the mid-50% range. For both the third quarter and the full year 2025, we anticipate our tax rate to range between 25% and 26%, excluding any discrete items. To conclude, our results from the second quarter highlight the strength and resilience of our diversified business model.
Thanks to our long-term vision, ongoing investments in our operations, and strong risk management practices, we are well positioned to continue delivering value to our clients, customers, communities, and shareholders. I will now hand it over to the operator for Q&A instructions.
分析師問答
Our first question comes from Casey Haire from Autonomous Research.
So I guess the first question would be on the loan growth. Obviously, the paydowns are tough to forecast. But if I heard you correctly, I thought you mentioned 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 health care.
Okay, great. Can we get some updated thoughts on the FDIC purchase money note? I know that Fed cuts keep getting pushed out, but the forward curve does indicate a 100 basis point increase by the end of next year. How do you envision this playing out, and how much FHLB capacity do you plan to use for retiring 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 original 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.
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 address that. It's great to hear from you. I apologize for the confusion; I accidentally muted myself. Regarding your question, Steve, the activity in June during the second quarter was indeed an encouraging uptick, especially in terms of IPO activity that you mentioned. At the same time, there is a sense of cautious optimism about whether this is truly the beginning of a trend, which is reflected in our ongoing guidance and comments today. The IPO window seems to be partially open, but the requirements for going public remain quite high. It's costly to maintain a public status, and as shown by second-quarter venture investments, capital is accessible for strong later-stage companies. Therefore, it's uncertain if this will actually lead to a surge in IPOs. While it’s reasonable to expect a similar number in the second half as we saw in the first half, we aren't anticipating a significant increase.
Regarding term sheets and the evidence of investment activity in the second quarter, there is movement in deploying available capital, but it predominantly favors later-stage deals. Furthermore, the large $1 billion-plus financings, which are not our main target, are also noticeable. On the earlier-stage front, activity has remained subdued for nearly three years. Nevertheless, there's hope among the venture community, including ourselves, that conditions may improve gradually. However, with so many mixed signals and economic uncertainties lingering, we maintain a cautious yet somewhat optimistic outlook.
Got it. That's great insight, Marc. To follow up with Craig, it seems that the deposit growth guidance includes an expectation that SVB deposits will decrease, which reflects the caution you've mentioned along with the outflow. Craig, could you provide us with the expected size for SVB deposits? What is included in that 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 expect expenses to grow in the mid- to high single-digit percent range year-over-year. We are maintaining that guidance. The additional expenses we have 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 anticipate that our expenses will increase moving forward, rather than remaining flat as they were in the first and second quarters, aligning with that mid- to upper 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? If there are two rate cuts expected in 2025, we might see one in September and another in December. We anticipate that the exit margin for the fourth quarter could decline from 3.26% in the second quarter to somewhere in the mid-3.10s to high 3.20s for the headline net interest margin, and from the mid-3.10s to mid-3s to high 3.10s when considering net interest margin excluding accretion. We started at mid-3.10s in the second quarter, so the net interest margin excluding accretion would likely range from mid-3s to mid-3.10s, heading towards 0 to 10.
I have a follow-up question regarding competitive pressures. During the quarter, many regional banks have noted increased competition in deposit pricing due to the current rate cycle and the anticipation of rate cuts. Your deposit betas are gradually increasing while your costs are decreasing. You mentioned in the General Bank that you're adopting new strategies for deposit growth that target both short-term and long-term opportunities. Additionally, you pointed out heightened competitive pressures on the loan side as well. Could you elaborate on the pressures you are experiencing in both deposits and loans?
Yes, this is Tom. Regarding deposits, as you mentioned, we've been able to increase our beta, and I believe that reflects what Craig noted earlier. We are confident in our competitive position in the markets we operate in, and we will continue to manage our interest expenses effectively. On the credit side, we've observed a slight increase across the board. Last year, we were one of the few banks expanding our lending, and now we are seeing more participants in the market. However, we remain well positioned. As Elliot mentioned, we experienced a few large payoffs in areas we did not anticipate, but overall, we feel good about our activity and future 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 are 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 much of the current momentum is linked to the broader crypto environment. Beyond traditional banking services, do you have any other goals in mind as you consider that space in 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 trend to continue. While we prefer to grow deposits in lower-cost channels, we are also comfortable with the spreads of those deposits compared to our investment portfolio loans. I anticipate that our deposit outlook reflects double-digit percentage growth in that channel as we approach 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?
It depends on whether there are zero, one, or two rate cuts in 2025. If there are no rate cuts, we have likely already reached the lowest point except for the headline net interest margin, which would be in the first quarter of 2026. If there is one or two cuts, that would push the lowest points for net interest income, both headline and excluding accretion, as well as the headline net interest margin excluding accretion, out to the first quarter of 2026.
I appreciate that. What do you include in your debt issuance to meet TLAC in your NII planning?
We have modest expectations regarding the requirements for us since we haven't seen a final rule yet. However, we are focused on our share repurchase plan, aiming to optimize our capital structure over time. This may involve potentially issuing new instruments to enhance the efficiency of the relationship between the CET1 and total capital ratios.
Also subject...
So it's come down from the last time? It has decreased slightly in the assumptions from what we were considering around $10 billion in issuance. I know some was done earlier in the year or two.
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 very impressive. You have targets in your presentation. Will you continue to push to raise them since it seems you're already at the cycle levels? You've had a lot of success in the Direct Bank. Where do you think the deposit betas can go?
The most challenging aspect of answering that question depends on the direction of rate forecasts. As I mentioned earlier, we have taken steps to manage interest expenses, especially since there haven't been recent rate cuts. If this continues for another few quarters, we will keep working to increase that beta. Should the Fed resume cuts, I anticipate a reaction similar to what we've seen in the past, where there's a bit of a lag initially before we begin to catch up. Ultimately, it's contingent upon when the cut cycle ends, but we're aiming for as much upside 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.