First Citizens Bcshs -cl B Stock

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to introduce the host of this conference call, Ms. Deanna Hart, Head of Investor Relations. You may begin.

Good morning, and welcome to First Citizens Second Quarter 2026 Earnings Call. Joining me on the call are 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 Investor Relations website.

Before we begin, please note that our comments 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 guarantee the accuracy of earnings transcripts provided by third parties.

With that, I'll now turn it over to Frank.

Thank you, Deanna, and good morning, and welcome, everyone. Thank you for joining us today. I'll begin with a summary of our second quarter performance before turning it over to Craig Nix to review our financial results and our 2026 outlook in more detail.

We delivered strong second quarter performance, characterized by sequential top line growth that exceeded our guidance and consensus estimates. These results reflect the continued successful execution of a strategy built to drive long-term, sustainable shareholder value and the strength of our diversified franchise.

This morning, we reported adjusted net income of $691 million and adjusted earnings per share of $57.09, driving an adjusted ROE of 12.94% and an adjusted ROA of 1.18%. These results reflect robust sequential growth and significant year-over-year expansion. Both key metrics increased by more than 20% compared to the prior quarter. This strong profitability was powered by top line net revenue expansion, disciplined expense and balance sheet management and resilient credit quality.

On the balance sheet, we delivered 1.6% sequential loan growth with increases in both period end and average loans. This momentum was anchored by our Global Fund Banking business, fueled by strong production and heightened capital call line utilization. Additionally, we achieved broad-based growth within our Tech & Healthcare banking and Middle Market Banking verticals.

We delivered a 1.5% sequential increase in period-end deposits and a 2.8% expansion in average deposits. These results validate the structural resilience of our operating model and the effectiveness of our targeted deposit gathering initiatives within a highly competitive industrial environment -- industry environment, excuse me.

Beyond core balance sheet growth, client engagement in our Tech & Healthcare and Global Fund Banking businesses drove solid increases in both period end and average off-balance sheet client funds. Simultaneously, we continued to execute on capital efficiency, returning an initial $600 million to shareholders through share repurchases. Backed by a strong liquidity position, we prepaid another $2.5 billion of the FDIC purchase money note during the quarter, followed by an additional $1 billion in July. This brings our total cumulative prepayments to $8.5 billion.

To wrap up my comments, credit performance remains strong, exceeding our expectations. These durable credit trends, combined with disciplined expense management and healthy client activity demonstrated this quarter, position us well to drive positive operating leverage and long-term shareholder value moving forward.

I would like now to turn it over to Craig to take us through our second quarter financial results and our outlook for the remainder of the year. Craig?

Thanks, Frank, and good morning, everyone. I'll begin with a review of our financial performance for the quarter, followed by an update on our balance sheet, credit and capital trends and outlook. I will anchor my comments to Page 8 of the presentation. Pages 9 through 26 provide details underlying our second quarter results.

As Frank mentioned, we are pleased that in the second quarter, adjusted earnings were up by over 20% sequentially, exceeding internal and consensus expectations. Slightly over half of the increase was generated by higher pre-provision net revenue, supported by resilient net interest income, fee-based noninterest income expansion and disciplined expense management. The remainder was driven by a net benefit for credit losses, underscoring strong credit performance.

In line with our guidance, net interest income increased by $35 million over the linked quarter, driven by favorable earning asset volumes and yields, higher purchase accounting accretion, reduced borrowings as well as a higher day count. These positive factors successfully offset higher funding costs and interest-bearing deposit balances. On a margin basis, headline NIM improved by 1 basis point due to the same factors, while our core NIM remained unchanged.

Adjusted noninterest income rose by $66 million sequentially, exceeding our guidance. While $50 million of the growth was in other noninterest income, driven by asset monetization and portfolio revaluation, we did see increases across our fee-generating businesses.

Favorable public and private market valuation adjustments and realized gains generated a $27 million gain within our equity warrant portfolio, which has grown since the SVB acquisition and serves as a structural driver of long-term upside via lending and financing relationships. Additionally, we successfully realized a $17 million gain through the opportunistic sale of a tax credit investment.

Independent of other noninterest income growth, momentum continued in our core fee categories, demonstrating strong execution by our commercial and general banking teams. Client investment fees benefited from a rising transaction volumes within Tech & Healthcare and improved margins from a higher-yielding product mix.

In Wealth Management, driven by deliberate ongoing investments in team capacity and service breadth, second quarter fee income increased by 12% year-over-year. This expansion deepens client wallet share and establishes a highly predictable recurring revenue stream. Deposit and lending-related fees also posted steady sequential gains, reinforcing the stability of our core banking operations.

Adjusted noninterest expense increased by $16 million sequentially, landing at the favorable end of our guidance range and reflecting a disciplined balance between strategic reinvestment and cost management. The sequential increase was primarily driven by a $15 million targeted increase in marketing expense to maintain and attract new deposit balances in the direct bank.

Simultaneously, we advanced our long-term digital transformation through higher third-party processing fees and equipment expenses dedicated to data center modernization and enhanced client-facing capabilities. The uptick in other noninterest expense was driven by increased charitable contributions after a seasonally low first quarter.

These increases were partially mitigated by a decline in personnel costs due to lower incentive compensation and seasonal declines as employees reach annual benefit limits, partially offset by the impact of merit increases, one additional payroll day and higher health insurance claims.

Ultimately, top line revenue -- net revenue expansion outpaced a modest increase in expenses during the quarter, delivering positive operating leverage and reinforcing our commitment to strategic cost management.

Period-end loans grew by $2.3 billion or 1.6% sequentially, driven by Global Fund Banking production and robust growth in the Tech & Healthcare and Middle Market Banking businesses. Global Fund Banking grew by $2.6 billion, thanks to favorable financing costs, catch-up investments due to prior tariff pauses and a healthy rebound in secondary market valuation, accelerating exit activity. The pipeline remains highly robust with strong line utilization.

Middle Market Banking achieved $205 million in growth, supported by solid production and utilization rates. Tech & Healthcare delivered strong momentum with a 3.7% sequential increase, anchored by strong performance in the Fintech and sponsor segments.

In the General Bank, production numbers remained strong. However, loans were relatively flat as paydowns and payoffs outpaced new loan production. We are focused on new prospecting opportunities as well as new referral opportunities to drive lending and overall relationship growth. Period-end total deposits increased by $2.6 billion or 1.5% sequentially, driven by the direct bank, which added $2.8 billion during the quarter. These highly insured granular retail deposits continue to strengthen our liquidity profile and significantly reduce large institutional concentration.

The Commercial Bank segment declined by $1.5 billion stemming from anticipated early quarter corporate outflows. This reflects the historically lumpy nature of commercial fund flows and remains well within our modeled expectations, and we remain encouraged by the performance of these underlying businesses.

The General Bank experienced a modest decline, but we expect a medium-term recovery. We are actively focused on driving core deposit growth by enhancing our deposit strategy, broadening digital outreach, strengthening client engagement and refining our retention and relationship-based pricing strategies.

We continue to supplement organic growth with strategic use of broker deposits, bolstering liquidity to prepay the FDIC note. We actively monitor pricing and tenor to ensure a resilient cost-effective funding mix.

Period-end average -- period end and average total client funds in the SVB commercial business rose by $1.1 billion and $6.1 billion, respectively. Off-balance sheet growth was driven by Tech & Healthcare and Global Fund Banking, reflecting strong cash and new money inflows from public entities.

Our credit profile remains strong, driven by resilient asset quality trends. The net charge-off ratio improved by 1 basis point sequentially to 29 basis points, outperforming our guidance. Our performance was driven by accelerated resolutions in the general office portfolio and reduced investor-dependent losses.

While the current operating environment has been impacted by geopolitical factors, the broader economy has remained resilient. This backdrop, combined with continued improvement in criticized and classified asset levels and a migration to higher credit quality portfolios has resulted in lower net charge-offs and a reduction in our allowance for loan losses.

Nonaccrual loans held steady quarter-over-quarter at 96 basis points of total loans. The slightly elevated level reflects timing and resolving a few large loans originally slated for the second quarter. We expect nonaccrual loans to decline throughout the second half of 2026.

As of July 21, we had repurchased over 20% of our common shares outstanding for a total of $6.3 billion, roughly 84% of our total authorization. Share repurchases were $600 million during the quarter, and our CET1 ratio was 10.77% at quarter end. As we approach our CET1 target range of 10% to 10.5%, we are proactively moderating the pace of share repurchases. We anticipate repurchases of approximately $600 million in the third quarter and $300 million in the fourth quarter as the capital distribution strategy pivots from deploying excess capital towards sustainable capital maintenance.

Our capital position remains comfortably above regulatory requirements. This provides us with meaningful optionality to support client needs, fund strategic growth initiatives and deliver consistent long-term results to our shareholders.

Turning to Page 28. I'll conclude with our outlook for the remainder of 2026. We are projecting third quarter loan balances in the range of $152 billion to $155 billion, driven by growth in the Commercial Bank and General Bank segments. We reiterate our full year guidance of $153 billion to $157 billion, underpinned by sustained client activity and the upcoming BMO branch acquisition.

In the Commercial Bank, we expect loan growth to be anchored in the commercial finance industry verticals and the seasonably robust factoring business. Global Fund Banking is supported by a healthy $11 billion pipeline, though we anticipate balance growth will moderate following record production and high utilization in the first half of the year.

In the General Bank, growth is expected to accelerate in the second half of the year, fueled by the business and commercial portfolios within the branch network. We also anticipate that the BMO branch acquisition expected to be completed in the third quarter, will add approximately $700 million to the loan portfolio.

We project third quarter deposits between $179 billion and $182 billion, driven by our BMO branch acquisition, adding approximately $5.3 billion in deposits. We expect this to be bolstered by growth in the Direct Bank and branch network where our digital marketing strategies and pricing enhancements continue to help us capture share. We expect this growth will more than offset normal outflows in Tech & Healthcare banking as our clients deploy cash in operations or off-balance sheet investment alternatives.

We have made significant headway on the FDIC purchase money note prepaying $8.5 billion through July. We remain committed to a steady paydown pace of $500 million to $1 billion per month, and we'll also leverage other positive liquidity events to accelerate the paydown, reinforcing balance sheet optimization. Driven by recent wholesale funding activities and the anticipated positive liquidity event created by the BMO branch acquisition, we expect an acceleration in the pace of paydown in the third quarter totaling between $6 billion to $8 billion.

We reaffirm our full year guidance of $181 billion to $186 billion, accounting for the BMO branch acquisition and targeted deposit growth. On net interest income, we are maintaining our midpoint while marginally narrowing our full year range to $6.6 billion to $6.75 billion. We are guiding to a range of $1.63 billion to $1.71 billion in the third quarter. Our guidance factors in 0 to 1, 25 basis point rate hike, potentially moving the Fed funds rate to 4% by year-end.

Headline and ex-accretion net interest income troughed in the first quarter due to interest rate shifts and changes in accretion levels. We expect continued strength in earning asset growth will successfully mitigate modest increases in funding costs as we work to grow deposits across all channels and prepay the FDIC note.

While we remain asset sensitive, the anticipated timing of the rate hikes means the bulk of the net interest margin benefits will be realized in 2027 rather than late 2026 as we expect deposits to reprice more quickly than variable rate loans, which often take up to a quarter to reprice.

We expect third quarter net charge-offs in the 30 to 40 basis points range. We are actively managing the commercial general office and innovation portfolios where we expect charge-offs to continue in the medium term.

Reflecting our 2026 performance through the first half of the year, we are moving our full year net charge-off guidance to 30 to 35 basis points. We are not observing any systemic trends signaling credit quality deterioration across the broader portfolio and believe we are well reserved.

We remain encouraged by our credit results year-to-date and are optimistic the good performance will continue. We expect noninterest income between $520 million and $560 million in the third quarter. Overall, we continue to see strength in many of our business lines such as rail, card and merchant, client investment fees and wealth. For the full year, we are raising our guidance to $2.14 billion to $2.22 billion, driven in part by client investment fees benefiting from off-balance sheet volume growth and favorable asset yields in a flat to increasing rate environment.

In the Commercial Bank more broadly, we expect continued strength in international fees and seasonal volume lifts in factoring commissions.

We also expect continued momentum in wealth via regional talent acquisition and deeper connectivity with general and commercial bank relationship managers. We anticipate sustained stability in deposit fees, and we remain encouraged by the performance of our lending-related businesses as we continue to benefit from strong loan growth and capital markets activity.

Finally, we expect high asset utilization and strong lease rate repricing in our rail business through year-end 2026. We project third quarter expenses to remain relatively stable in the $1.33 billion to $1.37 billion range and full year in the $5.34 billion to $5.41 billion range, both improvements from our previous guidance.

For the third quarter, we expect expansion in various categories given the expected completion of the BMO branch acquisition as well as work on our SVB brand transition. We will continue to utilize the Direct Bank to support deposit growth in the third quarter, but do expect marginally lower marketing expenses as the team has improved efficiency around client acquisition and retention.

The shift in full year expenses reflects our ability to continue to find efficiencies in how we operate, which is helping offset the year-over-year impact of the BMO branch acquisition, merit-based increases, Direct Bank marketing costs and IT spend as we continue to invest in solutions that simplify our processes and improve our customer experience. We expect that our adjusted efficiency ratio will be in the low 60% range in 2026 as strong revenue performance is partially offset by funding pressures and continued investments in our franchise.

To wrap up on expenses, we are highly encouraged by our current trajectory and the discipline we are seeing across the organization, which reflects deliberate actions to streamline our cost of doing business. Our strategic focus on operating efficiency and expense management is successfully bending the cost curve as evidenced by our second quarter performance.

We recognize that our efficiency ratio is higher than our ultimate baseline, and we are fully committed to driving this metric down into our mid-50s target range over time. We will continue to focus on cost efficiencies and revenue enhancements to optimize operating leverage and maximize long-term shareholder value.

For both the second quarter and full year '26, we expect our tax rate to be in the range of 24.5% to 25.5%, which is exclusive of any discrete items.

This concludes our prepared remarks. I will now turn it over to the operator to open the line for questions.

[Operator Instructions] Our first question comes from the line of Casey Haire with Autonomous Research.

I wanted to touch, Craig, on the NIM came in a little bit stronger than I think what you guys were talking about last quarter. Just some updated thoughts on what the outlook is and maybe where spot deposit costs are versus that 2.73% IBD level in the second quarter.

Okay. Thank you. For the third quarter, and this is anchored to one rate hike in October. So for the third quarter, we're expecting both baseline and ex accretion net interest income to be flat with the second quarter. We expect both baseline and ex-accretion NIM to also be flat with the second quarter.

In terms of the fourth quarter exit, we're expecting headline net interest income to be up low single digits percentage points and net and ex accretion to be up low to mid-single-digit basis points -- percentage points. We expect headline NIM and ex accretion NIM to be flat with the second quarter. So that's the trajectory through the second half of the year.

In terms of spot rates, our -- on total deposits compared to our 2.07% cost of deposits in the quarter, our spot rate was 1.99%.

Okay. Very good. And then on the capital front, so if I layer in that the $900 million that you expect in the back half of the year on buyback and then the BMO branch deal, that put -- that CET1 ends the year at around 10%. So just look at thinking about buyback appetite in 2027, would you -- I mean, you guys would be at your floor, but would you lean into that Basel III proposal? Just trying to get a feel for what buyback would be in next year.

Okay. First of all, and I'll let [ Arch ] expand on this. We expect that our CET1 ratio will be towards the higher end of our target range of 10% to 10.5% at the end of this year, and that assumes the $900 million of repurchases in the second half.

[ Arch ], why don't you touch a little bit on the Basel III and our plans there.

Sure, Casey. To echo Craig's point, at least on the exit for Q4 this year, we do expect to kind of be at that midpoint of our target range as we exit the year and as we normalize the share repurchase pace, as Craig had mentioned in his prepared remarks.

As we're thinking about the Basel refresh and the final rule becoming effective, we've clearly done a lot of work in the back end here to prepare for it. We are not getting too many ducks in a row here until we have that final rule fully in front of us to really start implementing how that might influence the forward capital plan and capital strategy for us internally. But I think as we think about that, we'll certainly have more to share as we think about 2027 and pace as really -- that rule really kind of firms up and becomes a reality.

Our next question comes from the line of Chris McGratty with KBW.

Craig, just following up on the NII and the margin conversation, which is helpful. How would those numbers change if we don't get a hike, if rates stay flat? I guess -- I'm worried about the fourth quarter...

If rates stay flat, looking at the third quarter, we would still project flat net interest income, headline and ex accretion. We would also anticipate that our NIM, headline and ex accretion have sort of flattened out as well. So we might bump up and down a couple of basis points, but we would expect those to be fairly stable as well. So not much impact on '26.

Moving into '27 with a flat environment, and I'm talking -- or moving into the fourth -- second half of the year, fourth quarter, we would expect low single-digit growth in both core and ex accretion NIM and our margins to remain fairly consistent with where they are now. So not much change.

No big change. Okay. And then I guess broader competitive -- a lot of your peers have talked about just a broader competitive dynamic for fundraising in deposits. Your spot rates would suggest that you're holding the line there. But any incremental color on the funding outlook?

Yes. I think we observe that competition is very fierce for deposits, putting a lot of pressure. And frankly, a lot of banks are putting out deposits that are really unprofitable. So the pressure is intense. And I think that's really -- if you think about our asset sensitivity, we would expect to have much more improvement in margin and net interest income. And I think the funding costs are sort of blending -- sort of blunting that muting sort of our position to neutral to where it is now.

Elliot, any more comments on deposit competition, funding costs, et cetera?

No, I think that's right. And I think we're very pleased with what we're able to raise in Direct Bank in the second quarter. And I think that being said, I mean, rates are kind of marginal cost in that channel, north of 4%. So I do think not just in Direct Bank, but others, we're seeing good competition out there that's pushing rates a little bit higher. So really, Craig would echo your comments there.

Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank.

Just on the FDIC note, just wanted to get an updated sense of where you think the remainder proceeds come from. I know you're down to $27 billion with the $1 billion paid in July. Craig, you mentioned the $6 billion to $8 billion paydown using the BMO branch acquisition in 3Q. Just kind of curious, is the remaining after that, so 4Q on until it's paid off, just the $500 million to $1 million -- $1 billion, sorry, a month like you said. Just want to get some updates.

No, the $1.5 billion to $3 billion a quarter is sort of a natural run rate. But beyond that, we would repay -- to date, we've repaid through excess liquidity on our balance sheet. We'd expect to continue to prepay from that. We have good capacity at the Federal Home Loan Bank, so we might draw on that. We are planning on doing some more long-term debt issuance. So that would be a source and then broker deposits if needed. [ Arch ], anything you'd like to add to that?

Only thing I'll echo there is just continued execution through the deposit channels. Obviously, branch and commercial, we're still looking at growth there over the long run. But to Craig's point, echoing there, we do have a diverse menu of funding opportunities ahead of us, I think, to really kind of measure the purchase money note down over time ahead of that 2028 maturity.

Yes. And just with respect to our projection of $6 billion to $8 billion in prepayments for the third quarter, that will come from a combination of that normal $1.5 billion to $3 billion run rate plus the net liquidity provided from the BMO branch acquisition.

Great. And just as a follow-up, just given all those moving parts, when we think about your asset sensitivity, obviously, it's an outlier versus peers. The FDIC note has been a big part of it. And Craig, you mentioned that the bulk of rate hikes, if they occur, the NIM will benefit next year. Just wondering, if you were to replace the note, obviously, there's different factors that you kind of mentioned. How would that impact your rate asset sensitivity?

I lost you on the last part of that question. How would it impact what...

Your asset sensitivity...

Okay. I got you.

This is [ Arch ] responding to that one as well. On the note itself, just as a tool or as a line item there, it is a fixed rate note on the balance sheet. So for us, it does accentuate from a mix perspective, the sensitivity on the balance sheet for us. So as we go into replacement funding, whether those coming through deposit channels or whether those are coming through wholesale funding channels, it permits us more flexibility to manage the sensitivity of the liability side of the balance sheet than we have today. So I think as we look at gradual replacement of that funding, it will just provide us more flexibility as we manage the sensitivity position on the balance sheet inherently there.

Our next question comes from the line of David Chiaverini with Jefferies.

I wanted to touch on loan growth, strong SVB commercial and capital call line utilization. Can you talk about the outlook from here? How sustainable it can be? And also, it sounds like Tech, Healthcare, Middle Market is also performing well. Can you talk about the outlook?

Yes. I think on both of those, we're very positive right now. I think Global Fund Banking, I mean, we've had a lot of really strong production and utilization over the past few quarters. I think we would expect utilization to moderate, but we would still, even with that, expect balances to grow. We have very healthy pipelines right now. I think we've seen good activity.

And then Tech & Healthcare, certainly had a great quarter. It was our highest quarter of growth really since 2023. I think there's some very strong fundamentals kind of industry-wide there.

In Middle Market, I think Middle Market is really kind of a build of that line of business, right? We put a lot of effort as we're kind of translating some of the legacy SVB products over to that line of business. I think we've seen strong growth, and that's really kind of extended to the loan side as well. So really kind of positive, I think, across kind of those 3 lines of business right now.

Marc, Craig, I'm not sure if you want to add anything.

Elliot, I think you covered it very well. Thank you. Nothing to add.

And that's my follow-up. Loan pricing. Can you talk about how spreads are trending and the competitive environment?

I think the competitive environment is strong. I think we've seen spreads come in even in areas like Global Fund Banking. I would say we started to see some moderation in some of that spread tightening. So we might have a little bit more to go, but we think kind of the worst is probably behind us. But I think overall in regional banking, I think competitors are out there. I think they're lending. And so competition is strong out there, but we feel like we're competing very well even against that backdrop.

Our next question comes from the line of Anthony Elian with JPMorgan.

Just on the other side of SVB's balance sheet, the deposit trends on and off slowed a little bit from the prior quarter. Marc, maybe what are you seeing there? Has sentiment changed now that the forward curve has a hike in it? Anything there would be great.

Sure. So our clients continue to like that there are interest rates and an ability to get a return these days. But having said that, based on the -- really focusing on the average numbers, we continue to be pleased with the continued execution, our ability to attract new client balances. And as I think [ Arty ] referenced, very pleased with the strong execution through the first half.

And then on credit, the large reserve release you saw this quarter, driven by lower specific reserves, improvements in credit quality, it looks like you had some model updates. Would you categorize that as being one-time in nature? Or are there more model refinements and fine-tunings to come in the second half that could drive additional releases?

No, those are largely behind us, model enhancements.

Our next question comes from the line of Janet Lee with TD Cowen.

On deposits and the paydown of the FDIC purchase note, if and when SVB deposits increase meaningfully, at what point would you be inclined to use some SVB deposits to potentially pay down the purchase note? Or is that out of the question?

Janet, this is [ Arch ] here. On the SVB deposits specifically, we do have some of those on balance sheet. We are circling those from a conservative nature to bring and retain those on balance sheet that provide us with the liquidity factors and quality that are preferred to us as we manage the balance sheet and liquidity position. As you can see with the off-balance sheet build that we've had, we continue to manage those relationships very dynamically and very well with the growth in that business and those client relationships.

There are certainly questions around how we think about that off-balance sheet deposit quality over time as we continue to get our hands around the deposit franchise. But for where we're sitting right now, as we look at the purchase money note path, we are not bringing in any sort of that off-balance sheet product as it's positioned today to kind of support how we are looking at the forecast path for the purchase money note.

Got it. Could you give us a little more color around where the deposit -- at what price or at what rate the deposits are coming in from the Direct Bank channel today? And is it largely still neutral to NII as you're using those to pay down the purchase note?

The spot rate right now in the Direct Bank is 3.71%. The highest offered rate is 4.1%. And the 3.71% compares to the cost of 3.70% during the second quarter, so fairly neutral.

Okay. And should we assume that, that is going to be the primary avenue to pay down alongside brokered? Or are you -- I mean, is that a fair assumption?

Well, our assumption is that it will come from excess liquidity, which will be deposit growth in excess of loan growth. About 1/3 of that for the remainder of the year, we expect to come from the Direct Bank. And then again, FHLBs out there, long-term debt issuance is an option and further broker deposit issuance, if needed. But we feel very confident in our ability to prepay the purchase money note.

Our last question comes from the line of Christopher Marinac with Brean Capital.

I wanted to ask about additional deposit acquisitions beyond the BMO transaction. Is BMO unique? Or are there others out there that you can do?

We have no other current ones in the queue. We're very pleased with the BMO acquisition, though.

There will be no further questions at this time.

I'd like to turn the call back over to our host, Ms. Deanna Hart for closing remarks.

Thank you, and thank you, everyone, for joining our call this morning. 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. 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.

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares First Quarter 2026 Earnings Conference Call. [Operator Instructions]

As a reminder, today's conference is being recorded. I would now like to introduce the host of this conference call, Ms. Deanna Hart, Head of Investor Relations. You may begin.

Good morning, and thank you. Welcome to First Citizens First Quarter 2026 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 first quarter business and financial updates referencing our earnings call presentation, which you can find on our website.

Our comments 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 guarantee the accuracy of earnings transcripts provided by third parties.

I will now turn it over to Frank.

Thank you, Deanna. Good morning, and welcome, everyone. Thank you for joining us. I'll start by highlighting our overall performance for the quarter before turning it over to Craig Nix to take you through our financial results and outlook for 2026 in more detail.

Starting on Page 5. We were pleased with our first quarter results. This morning, we reported adjusted earnings per share of $44.86, representing an adjusted ROE and ROA of 10.39% and 0.97%, respectively. While lower rates were a headwind, we saw strong deposit growth. Credit quality remains strong and expenses came in below our expectations.

Deposit growth accelerated this quarter, up by 5.7% sequentially, anchored by increased client activity in tech and health care and global fund banking. In addition, deposits grew in the General Bank segment and the direct bank. This growth was also supplemented by the strategic use of broker deposits to further bolster our liquidity position.

We also achieved solid increases in off-balance sheet client funds driven by the tech and health care and global fund banking businesses. We continue to optimize our capital stack, returning another $900 million to shareholders through share repurchases. Due to our strong liquidity position, we were able to prepay another $2.5 billion to the FDIC -- on our FDIC promissory note, money note during the quarter.

Turning to our announcement this morning. We are expanding our commercial solutions and optimizing our brand portfolio to better serve our clients and drive growth. In 2026, we are accelerating our strategic road map by expanding capabilities in payments, international banking and digital assets. As part of this growth, we will transition to a united brand structure in the fourth quarter, featuring innovation banking and fund banking sub-brands under the First Citizens umbrella.

Now brand adjustments always generate questions, and we want to be perfectly clear that while names are changing, the client experience is not. Our relationship teams remain the cornerstone of our service, providing the same deep specializations that our clients rely on. This brand alignment simply opens the door to a larger platform of solutions and a more connected network of experts for the future.

Despite a complex global backdrop, we continue to operate from a position of strength. Our capital, liquidity and risk discipline provide a solid foundation that allows us to focus on what matters most, serving our clients and customers and continuing to drive long-term shareholder value. We are confident in our strategy, disciplined in our execution and very optimistic about the path ahead.

I'll conclude with that and pass it over to Craig Nix to take us through the financial results for the quarter and guidance for the remainder of the year. Craig?

Thank you, Frank, and good morning, everyone. I will anchor my comments to Page 8 of the presentation, Pages 9 through 27 provide details underlying our first quarter results.

In the first quarter, we delivered adjusted earnings of $44.86 per share on net income of $560 million. The sequential decline of $6.41 per share largely reflects the impact of lower interest rates on our net interest margin. However, we were pleased that lower noninterest expense helped offset a portion of the net interest income decline. In line with our previous guidance, net interest income declined by $101 million, with NIM compressing 11 basis points to 3.09%. This decline was primarily driven by lower earning asset yield following the Fed's rate cut in late 2025, alongside a shorter day count this quarter. However, these headwinds were moderated through strong organic loan growth, lower funding costs and a reduction in average borrowings.

Noninterest income was down $9 million from the linked quarter, but in line with our previous guidance. The majority of the decline centered in other noninterest income, which was down $15 million, largely attributable to a decrease in other investment income, a line item subject to fluctuation on a quarterly basis.

Outside of the decline in other noninterest income, our core fee categories performed well. We saw solid growth in deposit fees and lending-related capital market fees though these increases were partially tempered by seasonal declines in factoring commissions. Additionally, while the Fed funds rate environment pressured client investment fees, we successfully mitigated that impact through a $3.9 billion increase in average off-balance sheet client funds.

Adjusted noninterest expense was $38 million lower sequentially, outperforming our previous guidance. This reduction reflects a $16 million decline in professional fees as we successfully completed several technology and risk management projects at the end of 2025. Marketing costs also declined by $15 million as we pivoted our funding strategy this quarter to leverage lower cost broker deposits rather than higher cost deposits in the direct bank. While the direct bank remains a critical funding source, and we expect marketing expense to normalize in the future, we will remain agile, balancing deposit growth with cost efficiency to protect our margins.

Finally, we saw a $16 million seasonal normalization and other expenses. These reductions were partially offset by seasonally higher benefits expense due to resets as well as continued deliberate investments in our technology platforms, which are essential to scaling our operations and enhancing our client experience.

Turning to the balance sheet. Period-end loans grew $762 million or 0.5% sequentially, driven by global fund banking, which was up $1 billion on record production of over $6 billion, surpassing the record set just last quarter. With average line utilization also trending higher, we see evidence of higher client demand and a robust pipeline moving forward.

In middle market banking, we added $327 million in growth and stable production was bolstered by lower prepayments. While we are pleased with this quarter's growth, we maintain a guarded outlook given the broader macro environment. General bank loans decreased $591 million, primarily reflecting a strategic decision to move $365 million in SBA loans to held for sale. Excluding this balance sheet optimization, the decline was driven by typical first quarter seasonality. On an average loan basis, loans increased $2.2 billion sequentially, led by our global fund banking business.

Turning to the right-hand side of the balance sheet. Period-end deposits grew by $9.3 billion or 5.7% sequentially. This growth reflects strong organic growth in our core business segments as well as execution of our balance sheet optimization strategies.

Within SVB Commercial, we saw significant momentum in global fund banking and tech and health care where deposits grew sequentially by $5.6 billion, driven by a visible pickup in VC investment and exit activity. Growth here underscores the strength of our franchise within the innovation economy. While these inflows were encouraging, we remain disciplined in our outlook as a portion of this growth stem from large short-term deposits.

As we've noted before, these inflows can be lumpy and we have already observed some anticipated outflows in April. We are managing these balances with a strict focus on liquidity and funding cost optimization in mind.

In the General Bank, deposits grew by $1.1 billion. This was largely driven by successful seasonal campaign within our [ CAB ] business and solid growth in our branch network, demonstrating our ability to consistently execute on core deposit gathering initiatives.

To support the transition away from the purchase money note and limit impacts to net interest income, we also tactically utilized $1.8 billion in broker deposits. This was a flexible lever for us this quarter as the all-in cost was lower than leading rates in the direct bank as we continue to monitor pricing and tenor to ensure a resilient and cost-effective funding mix. On an average basis, deposits also performed well, growing by $2.7 billion or 1.7% sequentially, driven primarily by tech and health care banking and [ CAB. ]

Finally, off-balance sheet momentum was equally strong. SVB commercial client funds rose $8.1 billion to nearly $78 billion, while average off-balance sheet funds grew by $3.9 billion.

Turning to credit. Provision was $103 million for the quarter, up $46 million from the linked quarter. The increase was driven almost entirely by a larger reserve release last quarter rather than a negative shift in credit quality. In fact, the net charge-off ratio came in 9 basis points lower than the linked quarter at 30 basis points with net charge-offs totaling $111 million. This was favorable to our previous guidance, though I'd characterize the beat as a matter of timing on specific resolution efforts, particularly within our general office book rather than a significant change in our overall outlook.

While nonaccrual loans moved slightly higher to 96 basis points, the change was isolated to a few specific credits. We do not view this as a signal of broader migration or systemic pressure across the portfolio. This is supported by our $8 million reserve release this quarter, which was underpinned by growth in high-quality segments like Global Fund Banking and changes to the macroeconomic outlook.

Given the heightened market focus on private credit and NDFI exposures, we've included a new slide today to provide additional transparency. Our NDFI exposure stands at $38.8 billion, but it is critical to look at the structure, 83% of this book consists of capital call lines. These are backed by contractual LP commitments, not investment performance, and historically carry exceptionally low credit risk. The remainder of the book is diversified, well collateralized and supported by structural protections. Traditional private credit represents approximately 8% of the NDFI portfolio and includes lines provided to credit funds and warehouse lines, both of which are well secured.

To summarize, our exposure to the private credit ecosystem is defined by conservative structures, significant sponsor equity and rigorous covenant protections. While we remain vigilant in a volatile macro environment, our credit culture is built for this backdrop. We are confident that our disciplined standards and resilient portfolio position us well to navigate the cycles ahead.

Turning to our capital position. We continue to execute on our commitment to a disciplined capital return. As of April 21, 2026, we have made significant progress on our 2025 share repurchase plan having repurchased over 20% of total common shares outstanding for a total of $5.7 billion. This includes the successful completion of our 2024 plan, and roughly 52% of our current $4 billion authorization.

Our first quarter CET1 ratio stood at 10.83%. While this represents a 32 basis point sequential decrease, it was a deliberate outcome as we balance loan growth and share repurchases against first quarter earnings. As part of our annual capital planning and informed by internal stress testing, we adjusted our CET1 target range down by 50 basis points to 10% to 10.5%. We believe this recalibrated level provides the ideal balance of ensuring we remain strong for severe stress events while maximizing our flexibility to support both client growth and shareholder returns.

Regarding the pace of repurchases moving forward, we returned $900 million to shareholders this quarter. However, as we approach our new target capital range, we anticipate a slower pace for the remainder of the year. This shift reflects prudent management of the balance sheet, accounting for anticipated organic growth, the shifting economic backdrop and our commitment to a conservative capital buffer.

Finally, we are encouraged by the revised Basel III proposal released in March. Our initial assessment indicates a potential 70 to 100 basis points benefit to our CET1 ratio, primarily driven by lower risk-weighted assets under the new standardized approach. While the proposal includes the phase-in of AFS and pension-related AOCI, we don't expect a material impact given our short duration investment strategy and limited AOCI risk. Overall, these regulatory developments represent a clear step forward providing us with enhanced capital flexibility to drive long-term value for our shareholders.

Turning to Page 29, I'll conclude with our outlook for the remainder of 2026. The macroeconomic backdrop remains fluid, making it difficult to narrow the range of potential impacts on the broader economy and our business lines and clients. Accordingly, we have not made significant changes to our previous guidance, but do continue to monitor the environment and how it could impact our performance.

Starting with the balance sheet. We expect loans to land between $149 billion and $152 billion at the end of the second quarter. In the Commercial Bank, we expect loan growth to be anchored in Global Fund Banking where we are managing a robust $12 billion pipeline.

While we expect long-term expansion, we remind everyone that ending balances can ebb and flow based on the timing of client draws and we anticipate some quarter-to-quarter volatility here even as absolute levels grow. Outside of growth in Global Fund Banking, we are projecting growth in commercial finance industry verticals and middle market banking portfolios. In the General Bank, as seasonal headwinds abate, we expect growth to be supported in the branch networks business and commercial loan portfolios.

For the full year, we are reiterating our loan guidance of $153 billion to $157 billion, inclusive of the $1 billion in the BMO acquisition. To optimize our balance sheet, we continue to evaluate strategic sales similar to this quarter's $365 million SBA securitization to efficiently fund the repayment of our purchased money note.

Now to deposits and funding. We anticipate second quarter deposits between $171 billion and $174 billion. We expect growth in the General Bank segment and in the direct bank as we are seeing strong momentum in both where competitive pricing and marketing are helping us capture share. Growth in these channels will help mitigate expected outflows in Global Fund Banking and within tech and health care as those clients continue to utilize cash for operations or move to off-balance sheet investment products. For the full year, we reaffirm our range of $181 billion to $186 billion, including the $5.7 billion BMO infusion. This range continues to include significant growth in the direct bank as we look to continue to prepay the purchase money notes.

We've made significant progress on the purchase money note with $5.5 billion in total prepayments through today, including $2.5 billion this quarter and another $500 million in April. Moving forward, we expect to pay down at least $500 million to $1 billion per month, utilizing excess liquidity, broker deposits or other funding levers as interest rates and market conditions dictate.

Next, our net interest income and rate outlook covers a range of 0 to 2, 25 basis point rate cuts where the Fed funds rate may decline from a range of 3.50% to 3.75% today to a range of 3% to 3.25% by year-end. We expect second quarter headline net interest income to be in the $1.6 billion to $1.67 billion range. While we expect strong earning asset growth, we think it will be partially offset by modest increases in funding costs as deposit competition remains intense across all channels.

For the full year, we are marginally tightening our range to $6.5 billion to $6.8 billion. This accounts for the persistent pressure on DDA balances in a higher for longer environment, continued deposit competition and a projected $100 million reduction in loan accretion.

Moving to credit. We expect second quarter net charge-offs in the 35 to 45 basis point range. We are actively managing the commercial general office portfolio and the SCB commercial books where we expect losses to remain elevated in the medium term, while the equipment finance portfolio losses have largely stabilized, we are watching one larger deal that could result in elevated losses in the second quarter. Reflecting first quarter performance, we are lowering our full year net charge-off outlook to 30 to 40 basis points with the range reflective of the fact that a handful of large deals can cause lumpiness in the ratio.

Moving to noninterest income. We expect it to be in the $520 million to $550 million range in the second quarter. Overall, we continue to see strength in many of our business lines, such as fees from wealth, rail and credit card and merchant services. For the full year, we are raising our adjusted noninterest income guidance to $2.12 billion to $2.22 billion, driven by our rail business, repricing momentum, deposit fees and service charges, growth in wealth and lending-related fees as we continue to benefit from loan growth and capital markets activity.

On to expenses. We expect the second quarter to be in the $1.34 billion to $1.38 billion range, slightly up from the first quarter. We expect the growth to come primarily from higher direct bank marketing costs given our focus on client acquisition in that channel. As we continue to focus on bending the cost curve, we are reducing our full year range to $5.34 billion to $5.43 billion. The increase in full year expenses includes merit-based increases, marketing costs, tech scaling and the BMO acquisition impact, which will add less than 1% to our overall expense growth in 2026.

As Frank mentioned earlier, we are excited to implement a united brand strategy to continue to align platforms and provide expanded solutions for our clients. While we are still assessing the impact of this announcement, we believe it will add an additional $20 million to $30 million to full year noninterest expense.

We expect that our adjusted efficiency ratio will be in the lower 60% range in 2026 as the impact of prior year rate cuts have put downward pressure on net interest income. We believe that the investments we have made in our franchise while driving up costs in the short and medium term are foundational to delivering positive operating leverage over time.

Meanwhile, exercising disciplined expense management is a top priority for us given headwinds to net interest income, and while we are not providing guidance beyond 2026, we are committed to returning to positive operating leverage as the interest rate environment normalizes, and we begin to recognize some of the efficiencies from the investments in our franchise. Longer term, our goal remains to operate an efficiency ratio in the mid-50s.

And finally, for both the second quarter and full year 2026, we expect our tax rate to be in the range of 24.5% to 25.5%, which is exclusive of any discrete items.

To conclude, our first quarter results are reflective of the strength and resilience of our diversified business model. Thanks to our long-term focus and continued investments in our business, we're well positioned to continue delivering value to our clients, customers and shareholders.

This concludes our prepared remarks. I will now turn it over to the operator for instructions for the question-and-answer portion of the call.

[Operator Instructions] Our first question comes from Chris McGratty with KBW.

Great. Craig or Frank, on the new CET1 target, I just want to make sure I got all the pieces, 10%, 10.5% is the new target. And then on top of that, there's a 70 to 100 benefit on the Basel III.

How should we think about -- I hear you on the near term on the buybacks. But is there any bias within the range near term? Any changes in uses of capital near term?

Yes. If you go back to '25 and so far '26, our repurchases have ranged from $600 million to $900 million per quarter. And as we move closer to that range, the 10% to 10.5%, we would expect to moderate to the lower end of that range for the next 2 quarters.

Okay. And then on the NII guide, I appreciate the fluidity of the curve. But any -- last quarter, you gave some comments on troughing expectations and margin expectations. Any refresh of that, both on a core and a reported basis, Craig?

Sure. In terms of just the tightening of the guidance, we would still, for the full year, expect low single-digit percentage decline in the absolute dollar amount of net interest income. If we look at the trajectory, though, for 2Q '26, we would expect both headline and ex accretion, net interest income to be down low single digits percentage points. And NIM to be in the mid-3.0s, and ex accretion in the high 2.90s. As far as fourth quarter exit we expect both headline and ex accretion net interest income to be up mid-single-digit percentage points and expect headline NIM to be in the high 3.0s and ex accretion in the low 3.0s.

And in terms of troughing, I think you asked about that. We would expect that headline net interest income and ex accretion net interest income to have already troughed in the first quarter, but the NIM will trough in the third quarter.

Our next question comes from Casey Haire with Autonomous Research.

Great. I wanted to touch on the deposit growth outlook, very good start here in the first quarter, a lot of it coming from the SVB side of things. Craig, I think I heard you say that you expect direct bank to drive a lot of the growth going forward. But just wondering what the outlook is on the SVB side of things after a strong quarter.

Why don't you do the SVB, and Marc, you can weigh in on this as well.

Yes. I'll start with the SVB. I mean we do expect continued growth through the end of the year. I think when you look at the balances, as Craig mentioned, we did have some very large inflows, client accounts that we do expect to either go back out and/or transition to off balance sheet. And so I think second quarter from a Silicon Valley perspective, we do think moderate, but we do see growth really through the end of the year.

And nothing to add.

What do you think, Marc? Nothing to add, Marc. Okay.

Nothing to add.

Okay. Great. And then on the credit quality front, on the NPL uptick, Craig, I heard it's nothing systemic. But I was just wondering if you could provide a little more color as to what drove that, those credits, what type of credits they were and resolution efforts to reduce the NPL ratio of around 1% going forward?

Andy, would like to take that one, please?

Yes, sure. The increase was driven specifically by 3 main credits, 2 of which were our multifamily that have moved to nonaccrual. We really don't see a lot of loss content on those 2, reviewed them for specific reserves and are working through resolution on those. The third was an account in our innovation portfolio, been criticized for some time. It's currently up for sale, and we hope to have resolution on that credit at some point this year.

In terms of efforts to bring down our NPLs. The majority of our NPLs really reside in our general office. And so as Craig noted at the beginning, charge-offs in our general office portfolio were down this quarter, and we anticipate -- and a lot of that was timing on resolution. So we would anticipate, as we work through this year, to see some of those resolutions come to fruition. And as a result, we would anticipate NPLs to come down.

Our next question comes from Anthony Elian with JPMorgan.

Craig or Frank, I appreciate the new slide you have on the NDFI book. Could you help us quantify your exposure to companies in the software industry for both loans and deposits? I don't think this has been disclosed since you acquired SVB a few years ago.

Yes. I will let Andy elaborate. But in terms of on-balance sheet, software is $8.1 billion and about $14.4 billion of exposure. But I'll let Andy talk about what that portfolio looks like.

Sure. Thanks, Craig. So having back the innovation economy for quite a while, we obviously had some very deep experience managing tech credit portfolios through multiple economic cycles and changes in tech shifts there. We have seen improvement throughout the last several quarters on our criticized levels within the [indiscernible] portfolio.

And if you think about our portfolio, couple of main buckets, if you will. The first would be emerging growth, VC-backed type companies. And they are focused on being kind of the disruptors themselves and are really AI native or investing heavily in AI. And so you can think about those really being the investor-dependent type transaction. So they're really focused on access to capital, and that's where the risk would be.

The other large bucket would be the middle market software companies kind of PE controlled or the late-stage venture-backed companies. These are actively focused on AI adoption and the evolution to address any potential disruption. And that would be the second bucket. And then there's also within that $8 billion, there's probably 25-ish, 30% of which are either cash-secured or ABL transactions. So we feel good about that credit risk as well.

We have done a deep dive into the portfolio to evaluate any attributes for vulnerability or strength within each of those borrowers, including looking at, are they a system of record? Do they have proprietary data? What is the level of switching costs, et cetera. So we've got a good sense for strengths or weaknesses with each of those borrowers.

We're also leveraging our deep relationships with the VC firms themselves to get additional insight. And as we go through the second quarter, we will be doing additional focal reviews at a finer segmentation. That's kind of the overview, high level overview of our software exposure. I think you touched on NDFI as well.

Within our private credit book, we did a deep dive there this quarter as well. The software exposure within that portfolio average is about 14% of software exposure for any given fund, so not too outsized. And as Craig said, those structures are very well collateralized and have a lot of structural protections.

And then finally, as part of that deep dive, we did a stress scenario and assume some very conservative either default rates and recovery rates and found that any losses would be manageable coming out of that portfolio.

Great, Andy. And then my follow-up from an earlier question. Craig, on the exit NII guide you gave earlier, you gave a range of up mid-single digits. Could you make clear what time period that was for? And what comparison period was the base?

The up mid-single digits was the first quarter to fourth quarter exit.

Both for core and GAAP NII?

That's correct.

Our next question comes from Bernard Von Gizycki with Deutsche Bank.

So just a question on the competition that remains intense in deposits. Could you just maybe provide some commentary on just thoughts in your franchise or what you're seeing with terms and pricing from peers?

I think competition is intense, pricing betas haven't moved much given pricing pressures. So I would describe competition as intense. I will let Marc maybe talk about a little bit what he's seeing at SVB, and Elliot a little bit of what we're seeing in the branch network in the direct bank.

So I will start. It's Marc Cadieux on SVB. And as Craig mentioned, the competition is intense. We see it from all manner financial institutions, neobanks, fintechs, et cetera, competing for balances. And as I think the quarter indicates, we are holding our own, notwithstanding the competition, allowing as already mentioned that there is some volatility to the balances and all of which is reflected in our guide. I will pass it along.

Yes. And I think as it relates to both the branch network and especially the direct bank, where we're really seeing the pressure is on a lot of the money market promos, CD rates do now with kind of the expectation of really net rate cuts. And so we're seeing competitors still out there with really kind of a 4% type rate. I think our hope would be that betas would have shifted down a little bit that we would assume something kind of more in the high 3s, but competition has really remained and those lead rates have really stayed elevated through the first quarter.

Great. And just as a follow-up. The commentary about the broker deposits being all in lower cost versus the direct bank. Just any commentary you can provide on what the -- maybe the spread differences between the 2, just to give us a sense?

Yes, sure. This is Tom. If you look at the broker deposits, I mean, during the first quarter, you were able to raise those what I would consider in the high 3s. Whereas to Elliot's point earlier, some of the competition we've seen in the direct bank and even some of the branch network, we've seen rates north of 4% there. Obviously, the brokered market is efficient. Marketing costs are sort of fixed at that 10 basis points. So you have an all-in cost below that 4% handle in that channel. So that's really what drove us to shift a little heavier into that space. And again, we'll continue to monitor market conditions as we move ahead.

Our next question comes from David Chiaverini with Jefferies.

So on the loan outlook, it sounds like the pipelines for Global Fund Banking are robust, but you sounded more guarded on the middle market side of the business. Can you talk about what's driving this? Is it macro uncertainty or geopolitical risk? Just any color there would be helpful.

Yes. I think in the middle market and really, come to the industry vertical space, I think we still do expect growth. I think, certainly, with the geopolitical events occurring right now, a little bit of uncertainty. We did see prepayments pick up a little bit in the first quarter. But I think all is equal, we are expecting growth really kind of in the, call it, mid-single digits in industry verticals and really that middle market space. So still optimistic. But I think we do have a little bit of hesitation just with kind of the uncertainty that's out there right now.

Great. And in terms of the loan pricing environment and the competitive environment there, can you provide some commentary there? It's clearly very intense on the deposit side, curious about the loan pricing side.

Yes. We've -- generally, I think over the past few quarters seen spreads come in a little bit just due to the competition. What I'd say is I think we're reaching more of a stabilization on really those spreads. So I think competition is fierce right now, but I think we'd characterize it really throughout '25 and certainly in first quarter '26 as remaining intense.

Our next question comes from Christopher Marinac with Brean Capital, LLC.

Is there a further goal on the FDIC purchase money note beyond what you've already done in April?

With further goal, we would anticipate at a minimum, based on the roll-off of the loans collateralizing our U.S. treasuries collateralizing the note to pay down an additional $500 million to $1 billion per month, so that sort of gives you an idea of the trajectory we're on.

Sure. And then back to the other conversation about broker deposits, you really are a long ways away from having any restraints on how many brokered funds you can do. Is that correct?

Yes, that's correct. I mean these were really sort of the first deposits. We had another slug of broker deposits that matured. I believe it was back in October last year. So we're really coming off of a very low base here. And really, the way we look at that is we look at those deposits in conjunction with the direct bank and sort of look for, as I spoke about earlier, opportunities from a cost perspective where we can get the best execution.

Great. But in general, in the big picture, the direct bank is still going to grow. It might just be more of a timing difference in terms of where you are this year, next year, et cetera?

Yes, that's right. We still expect the direct bank to continue to grow. It's just that we might moderate some of the expectations if we continue to put on broker deposits to augment that growth if that turns out to be cheaper.

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.

Thank you, and thanks, everyone, for joining our 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. 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.

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares' Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to introduce the host of this conference call, Mr. Deanna Hart, Head of Investor Relations. You may begin.

Good morning. Welcome to First Citizens' Fourth Quarter 2025 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 fourth quarter business and financial updates referencing our earnings call presentation, which you can find on our website. Our comments 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 the 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, and welcome, everyone. Thank you for joining us for our fourth quarter earnings call, and we'll start by highlighting our overall performance for the quarter and provide comments on our strategic priorities for 2026, then I will turn it over to Craig to take you through our financial results and outlook for 2026.

Starting on Page 5. The fourth quarter was a continuation of what was a successful year for First Citizens in 2025. This morning, we reported adjusted earnings per share of $51.27 and adjusted ROE of 11.93% and an adjusted ROA of 1.1%. Despite the headwinds of lower rates, these earnings metrics exceeded our expectations marked by resilient net interest income and stable credit quality.

Before I highlight our balance sheet performance, I'd like to point out that we made a change in our operating segment reporting during the quarter. Previously, we reported SVB Commercial as a separate operating segment. In the fourth quarter, it was consolidated into the Commercial Bank segment. Now despite this change in reporting, we remain committed to the innovation economy, and we will continue to report key metrics like loans, deposits, off-balance sheet client funds at the SVB commercial level.

Compared to the linked quarter, loans were up $3.2 billion or by 2.2% driven mostly by our global fund banking business within SVB Commercial due to strong production and increased line utilization. Deposits were down sequentially $1.16 billion or by 1%, primarily driven by anticipated shifts into off-balance sheet client funds and seasonal distributions. Despite the decline in actual balances at the quarter end, due to late quarter outflows, average deposits were up by $2.6 billion or by 1.6% driven by broad growth in the General and Commercial Bank segments.

We returned another $900 million to our shareholders through share repurchases, moving us closer to our long-term capital targets. Despite loan growth exceeding deposit growth during the quarter, and the prepayment of $2.5 billion of the FDIC Purchase Money Note, our liquidity position remains strong.

Now turning to Page 6. We made significant progress on our strategic objectives in 2025. And for 2026, our strategic priorities remain consistent with 2025 and are to, one, to deepen client relationships; two, develop, retain and recruit talent; three, optimize our balance sheet; and four, make investments in our franchise to improve our capabilities and poise us for growth in the years ahead.

In 2025, we made great progress in improving our customer support capabilities within the General Bank. We continue to make investments in our digital capabilities to serve customers in their channel of choice. These capabilities have enabled us to deepen relationships with existing customers and acquire key new ones through both branch and digital channels, and we also continue to invest in our wealth business by expanding to new markets and increasing product and service offerings.

We're excited about the momentum in the commercial bank as we head into 2026. By investing in technology and our teams, we're growing relationships and adding new clients. And during 2025, we simplified the organizational structure and streamline processes to make us meet the needs of our clients. In 2026, we will continue to [indiscernible] we'll start focus to optimizing systems and platforms for an improved end-to-end client experience. For example, we are investing in our payments capabilities to achieve client growth and an increased capture of core deposits.

Now we can't do any of this without our associates, and we remain indicated to attracting, retaining and developing our associates given that customer and client service is paramount to our success. Operational efficiency remains a key priority. We did a lot of foundational work in 2025 to reduce operating complexity and position the bank for continued growth and expect to continue to do so in 2026. With those efforts -- while these efforts have resulted in expense growth over the past few years and will continue to have an impact in 2026, we're committed to delivering positive operating leverage over time and recognize that responsible growth is balanced through operational efficiency. Effectively managing expenses remains a priority for us.

We made significant progress on balance sheet optimization in 2025, moving our capital ratios closer to our long-term targets, growing core deposits and beginning repayment of the purchase money note. In 2026, we will continue to focus on a funding remix to core deposits, repaying the purchase money note and moving capital ratios to our target range through share repurchases, all while supporting quality loan growth in our line business.

I'd also like to take a moment to thank our Chief Risk Officer, Lorie Rupp, for her outstanding leadership and unwavering commitment to First Citizens throughout her 13-year career at the bank. Lorie intends to retire in June of 2026, and we wish her all the best in this next chapter of her life. She will be replaced by our current Treasurer, Tom Eklund, who is a seasoned executive with substantial experience, managing capital, market, liquidity and compliance risk. We're confident Tom will build on our strong risk foundation and drive continued success as we remain committed to maintaining a robust risk governance framework in pursuit of our long-term objectives.

To close, 2026 was a successful year for First Citizens despite a challenging macroeconomic backdrop that included interest rate volatility, competitive pressure on lending spreads, competition for deposits and geopolitical uncertainties. As always, we remain vigilant on the macro and geopolitical landscape and keep prudent risk management at the core of our actions.

I want to emphasize that even in volatile periods across markets and rates, our diverse business model and disciplined risk posture are key differentiators that have and will continue to serve us well. I want to thank all our associates for their contributions to making 2025 a successful year for our company, clients and customers. We enter 2026 on a strong footing and I'm excited about what we can accomplish in the years ahead.

With that, I'll turn it over to Craig to take us through our fourth quarter financial performance and 2026 outlook. Craig?

Thanks, Frank, and good morning, everyone. I will anchor my comments to Page 8 of the presentation. Pages 9 through 26 provide more details underlying our fourth quarter results and are for your reference. We had adjusted net income of $648 million in the fourth quarter or $51.27 per share, which was up $6.65 over the linked quarter driven mostly by a decline in provision for credit losses due to lower net charge-offs and a higher net provision release related to lower specific reserves on impaired loans, a mix shift to higher credit quality loan portfolios and improvement in the macroeconomic outlook.

Tangible book value per share grew by 11% in 2025 and 3% sequentially, including the impacts from share repurchases, which as of year-end totaled $4.7 billion since the July 2024 inception of the plan. Headline net interest income declined $12 million sequentially aligned with our guidance. Net interest income ex accretion was unchanged sequentially. Interest income ex accretion declined by $46 million, but was offset by a similar decline in interest expense due mostly to a lower rate paid on deposits.

Headline NIM was 3.2%, lower by 6 basis points sequentially, while NIM ex accretion was 3.11%, down 4 basis points sequentially. The decline was primarily due to a lower yield on earning assets impacted by the Fed rate cuts in the second half of 2025, only partially offset by lower funding costs and a higher average loan balance.

Adjusted noninterest income exceeded our guidance and was up 2% sequentially. The increase was broad-based, but the most significant items contributing to the increase were rental income on operating leases and wealth management income. Rental income benefited from a larger fleet and lower maintenance costs. Wealth benefited from higher assets under management and increased sales activity, including brokerage income. International factoring and deposit service charges were also up during the quarter. These increases were partially offset by a decline in client investment fees due to the lower Fed funds rate, only partially offset by a $3.1 billion increase in average off-balance sheet client funds.

Adjusted noninterest expense was up $89 million sequentially, driven by higher personnel, technology and direct bank marketing costs. Personnel costs increased $38 million, mostly driven by higher temporary labor to support technology-related projects, performance-based incentive compensation, benefit expenses due to a seasonally higher health insurance claims as employees reach their out-of-pocket deductibles and termination costs.

Technology-related costs contributed $22 million of the increase related to higher amortization expense of several technology-related projects were placed into service late in the third quarter as well in the fourth quarter. In addition, software costs were up as we continue to scale our technology platforms and invest in new capabilities. And finally, direct bank marketing costs contributed to $12 million of the sequential increase.

As I will discuss in a moment in our 2026 outlook, we expect year-over-year adjusted expenses to be up in the low to mid-single-digit percentage range with less than 1% of the increase coming from the BMO acquisition expected to close in the second half of the year.

Compared to the annualized run rate of the fourth quarter, we expect expenses to be flat to slightly down as episodic fourth quarter items are offset by increases from merit as well as the full year impact of higher depreciation from completed projects.

Moving to the balance sheet. Period-end loans increased by $3.2 billion or 2.2% sequentially led by strong growth in Global Fund Banking. Global Fund Banking loans were up $3.8 billion sequentially and loan production was over $5 billion, the highest since acquisition. Average line utilization continued to trend higher, resulting in growth in outstanding balances. We are encouraged by the momentum in this business driven by increased market activity.

General bank loans were down $267 million sequentially as we moved approximately $700 million of mortgage loans to held for sale in advance of a strategic plan sale in the first quarter of 2026. Removing the impact of this transfer, general bank loans increased modestly driven by growth in business and commercial loans within the branch network and wealth.

Period-end deposits declined by $1.6 billion or 1% sequentially mostly driven by expected outflows of global fund banking deposits into off-balance sheet, client funds and from seasonal fund distributions to limited partners. The decline was partially offset by growth in tech and health care banking given higher VC investing activity during the fourth quarter.

In the General Bank, deposits were up modestly as balance growth was partially offset by seasonal outflows. Direct bank deposits were down $344 million compared to the linked quarter. On an average basis, deposits performed well during the quarter, growing by $2.6 billion or 1.6% sequentially, supported by strong customer retention and acquisition in both the Commercial and General Bank. Encouragingly, this was achieved while we continued to reduce our total cost of deposits.

SVB Commercial off-balance sheet client funds totaled $69.7 billion up $2.7 billion sequentially, while average off-balance sheet client funds were up $3.1 billion over the third quarter.

Now let's shift to credit. Provision declined $137 million sequentially due to lower net charge-offs and a larger reserve release. Net charge-offs totaled $143 million or 39 basis points annualized in the fourth quarter, a $91 million or 26 basis points decline. The reserve release increased by $66 million over the linked quarter. You will recall that there was an $82 million single name loss in the third quarter, which was the largest contributor to the sequential decline in net charge-offs, both fourth quarter and full year net charge-offs were within our guidance.

Reasonably consistent with prior quarters, approximately half of the net charge-offs were concentrated in the SVB investor-dependent Commercial Bank, general office and equipment finance portfolios. The larger reserve release this quarter was driven by lower specific reserves, growth in higher credit quality loan portfolios and improvements in the macroeconomic outlook. The allowance ratio was down 8 basis points sequentially, driven by these same factors.

On the capital, Frank mentioned that we continue to make progress on our 2025 share repurchase plan. As of the close of business on January 20, 2026, we had repurchased 18.3% of Class A common shares or just over 17% of total common shares outstanding for a total price of $4.9 billion. Note that this is inclusive of the 2024 plan which we completed in the third quarter of 2025. With respect to the $4 billion repurchase plan approved by the Board in July 2025, we have completed approximately 30% of this authorization.

Share repurchases will continue to be a tool to support capital management activities, providing us with an opportunity to return capital to our shareholders and to be more capital efficient over time. During the fourth quarter, repurchases were $900 million, and we expect repurchases to remain near or at that level during the first quarter of 2026. The pace will slow down as we get closer to our target range. And as we regularly assess our growth outlook, economic conditions, the regulatory environment and overall capital deployment.

The fourth quarter CET1 ratio was 11.15%, a decrease of 50 basis points from the third quarter as the impact from share repurchases and loan growth outpaced earnings.

I will close on Page 28 with our first quarter and full year 2026 outlook. Starting with the balance sheet. We anticipate loans in the $148 billion to $151 billion range in the first quarter. In the commercial bank, we remain optimistic about the momentum in Global Fund Banking as we enter 2026. Pipelines remain robust at approximately $11.5 billion as of year-end. While we are optimistic here on absolute loan levels over time, I think it bears reminding that loan outstandings can ebb and flow based on client draws and repayments and we may see some volatility in ending balance this quarter-to-quarter.

Outside of growth in Global Fund Banking, we are projecting growth in our commercial finance industry verticals and middle market banking. Within the General Bank, we expect loan growth to be supported by continued strong performance in our business and commercial portfolios within the branch network as well as in our wealth business. Additionally, we expect to close the BMO branch acquisition in the second half of the year, which we expect will add approximately $1 billion in loan balances.

For the full year, we anticipate loans in the $153 billion to $157 billion range as we expect growth in both general -- both in the general and commercial banks. We are continuing to explore some strategic loan portfolio sales similar to what we did in the mortgage book this quarter to provide liquidity for repayment of the purchase money note, which could impact absolute growth levels in 2026.

We expect deposits to be in the $164 billion to $167 billion range in the first quarter. We think growth will be broad-based across our channels, including the direct bank due to competitive pricing and marketing efforts, expansion in the general bank within the branch network in wealth and growth in SVB Commercial as investment activity and overall valuations continue to improve.

For the full year, we anticipate deposits in the $181 billion to $186 billion range representing low to mid-teens percentage growth over 2025, driven by the momentum across our lines of business as well as the BMO branch acquisition, which will add approximately $5.7 billion in deposits in the second half of the year.

We are projecting more significant growth in the direct bank as rate decline -- as rates decline and we begin repaying the purchase money note more aggressively. While it is a higher cost channel, it provides us with a source of insured granular deposits, and we anticipate benefiting from falling interest rates. The direct bank will be an important source of repayment of the purchase money node even if leading to elevated marketing costs in the near term.

Next, I'd like to take a minute to talk about our plans for repayment of the purchased money note. We began pledging U.S. treasury securities against the note in 2025 as loan collateral available to secure the note diminished. As Frank mentioned, we made an initial payment of $2.5 billion in December as rate cuts in the back half of 2025 and the differential between the note rate and the yield on the planet securities diminished.

As we look into 2026, we expect -- at a minimum, we will make payments against the note for the incremental loss in loan collateral, which averages $500 million to $1 billion per month. We will also consider making other incremental payments if interest rates continue to decline and/or alternative funding sources become cheaper as we anticipate based on our interest rate forecast. Currently, our rate forecast covers a range of 0 to 425 basis point rate cuts in 2026, with the effective Fed funds rate range declining from 3.5 to 3.75 currently to as low as 2.5 to 2.75 by the end of the year. Our baseline forecast includes 2 rate cuts but we do believe that stubborn inflationary metrics and possible impacts of macroeconomic policy could lead to fewer or no cuts. Therefore, we believe it is prudent to provide a range of expectations as we have done in prior quarters.

With that in mind, we expect first quarter headline net interest income to be in the range of $1.6 billion to $1.7 billion, a modest decline from the fourth quarter as the full impact of the December rate cut pulls through, resulting in a lower yield on earning assets. This decline will be partially offset by earning asset growth and lower funding costs.

For the full year, we believe our headline net interest income will be in the range of $6.5 billion to $6.9 billion. We project loan accretion will be down approximately $100 million for the year. Given continued rate cuts, we expect loan interest income to decline driven by a declining yield despite asset growth levels. We also expect interest income on cash and investments to decline given the reduction in yields as well as balances driven by lower absolute levels of cash and investments due to a reduction in excess liquidity. While despite balance sheet growth, we project a net reduction in interest expense due to lower cost of total deposits, this will only partially offset the decline in interest income.

On credit losses, we anticipate first quarter net charge-offs in line with our previous range of 35 to 45 basis points. We expect losses to continue to be elevated in the Commercial Bank general office portfolio and other portfolios where we have seen stress. While rate cuts could ease some of the pressure on borrowers in this sector, we believe losses will remain elevated in the medium term. even as market disruption may lessen as more companies reinstate office attendance requirements.

While losses in the equipment finance portfolio have largely stabilized, we have a larger deal we are watching that could elevate losses during the first quarter. Additionally, we expect SVB commercial losses to remain slightly elevated in early 2026. With respect to the full year range, we anticipate losses in the same range of 35 to 45 basis points.

Moving to adjusted noninterest income, we expect to be in the $500 million to $530 million range in the first quarter. Overall, we continue to see strength in many of our business lines such as fees from lending-related activities in capital markets, deposit fees and service charges, wealth, rail and card and merchant services.

For the full year, our adjusted noninterest income range is $2.1 billion to $2.2 billion. We expect year-over-year growth to continue to be driven by our rail business, which includes a balanced railcar portfolio and a strategic exploration ladder. We further expect rail to have continued momentum on repricing rates throughout 2026. We also expect continued growth in our wealth and deposit businesses.

Moving to adjusted noninterest expense. We expect the first quarter to be in the $1.34 billion to $1.38 billion range, essentially flat to slightly down from the fourth quarter as we had some nonrecurring items in the fourth quarter expenses that will not impact our run rate. These declines will be offset by continued investments in our technology platforms to allow us to scale efficiently and improve customer -- our customer experience. We also -- we will also be impacted by the seasonal benefit resets for social security, unemployment and 401(k) that drives the first quarter higher from a personnel expense perspective.

Looking at the full year, our adjusted noninterest expense range is $5.37 billion to $5.46 billion. This is a low to mid-single-digit percentage increase from 2025, driven primarily by higher personnel costs due to merit-based increases, higher cost and equipment expense and third-party processing given continued tech investments and the full year impact of projects that went into depreciation in the last half of 2025.

Marketing expense is also expected to be up given our focus on client acquisition and retention in the direct bank. Not that full year -- not that the full year increase also includes the impact of the BMO acquisition, which will add slightly less than a percentage point to overall adjusted noninterest expense growth, which will be realized during the second half of the year.

Our adjusted efficiency ratio is expected to be in the lower 60% range in 2026 as the impact of the Fed rate cut cycle puts downward pressure on net interest income. We believe that the investments we have made in our franchise while driving up cost in the short and medium term are foundational to delivering positive operating leverage over time. Meanwhile, exercising disciplined expense management is a top priority for us given headwinds to net interest income. And while we are not providing guidance beyond 2026, we are committed to returning to positive operating leverage as the interest rate environment normalizes, and we begin to recognize some of the efficiencies from our continued investments in the franchise. Longer term, our goal remains to operate at an efficiency ratio in the mid-50s.

Finally, for both the first quarter and full year 2026, we expect our tax rate to be in the range of 24% to 25%, which is exclusive of any discrete items. In summary, our 2025 financial performance reflected the strength and resilience of our diversified business model. We generated strong returns, maintained credit discipline, grew our balance sheet, returned significant amounts of capital to shareholders, all while retaining strong liquidity and capital positions. We are excited about the opportunities in front of us and are well positioned to continue to deliver long-term value for our shareholders.

This concludes our prepared remarks. I will now turn it over to the operator for instructions for the question-and-answer portion of the call.

[Operator Instructions] Our first question comes from Chris McGratty from KBW.

Craig, maybe to start with the guide for a moment. The -- I hear you on the 0 to 4 on rates. And I think you said in your prepared remarks, 2 was your base case. Is it as simple as I guess, putting 2 as the midpoint. How are you thinking about, I guess, the cadence of NII? And I think in past quarters, you've tied it kind of exit rates. So any comments on exit NII and margin would be great.

Okay. Yes. Chris, our baseline forecast calls for 2 rate cuts in 2026 in June and October. So in terms of the guide, I would direct you in the baseline to the middle of that range. So for the first quarter of '26, we expect both headline and ex purchase accounting, net interest income to be down mid-single digits percentage points. We expect headline NIM in the mid-3.10s and XP purchase accounting in the mid-3.0s or 3.00s.

In the exit quarter fourth quarter '26, we expect both headline and ex purchase accounting, net interest income to be flat with the fourth quarter '25 with 2 cuts, we also expect that headline and ex purchase accounting, net interest income will trough in the first quarter of '26. We expect that net interest margin headline in the mid-3.0s and ex purchase accounting in the high 2.90s and expect headline NIM to trough in the fourth quarter of '26 and ex purchase accounting in the second quarter of '26. So that's the trajectory at our baseline, which includes 2 rate cuts, one in June and one in October.

On the investments, I think I heard you talk about kind of the focus on operating leverage, maybe not near term, but medium term. And I guess I'm interested in the cadence and the pace of technology and investment spend at the bank now that you've grown obviously, scars on the horizon. Are we nearing the kind of the peak investment? Am I hearing kind of you're nearing the peak investments and then over time, you kind of grow into the returns a bit?

Yes. I think that's a fair statement. I mean we've been very intentional about investments in our franchise and particularly in the areas of building out our risk management capabilities, and in our technology infrastructure. As we strive to -- if we've grown 4x, we're striving to reduce operational complexity, we're striving to meet Category 3 expectations. All of this is to meet regulatory requirements, improve our client experience. And we recognize that this has put pressure on our efficiency in the short term, but we do like where we're heading. We are materially complete with the implementation of our risk management capabilities and are transitioning to maturity or a business-as-usual model.

We will continue to make investments in technology, and really that is to enable client-centric business solutions for our General and Commercial Bank to streamline our processes to improve efficiency and to build a technical infrastructure commensurate with the bank's future growth. So those investments will continue, but we are hyper focused on bending the cost curve and costs were up 8% last year. We expect them to be low to mid-single-digit percentage points this year. So we're starting to bend the curve. And we do have a lot of focus on improving operating leverage as we move forward.

Greg, I don't know if you have anything else to add to that on the technology side other than we are continuing to invest in our franchise. But the focus is now as we've gotten our risk management infrastructure sort of behind us and we're in the maturity model to start bending that cost curve going forward.

Yes, Craig, I think you did a great job there. So this is Greg Smith, the CIO. And Chris, the question is a good one, and we do recognize that we're on the higher end of our spend when you compare it to our peer group. But you have to put that in context with where we were, where we are in our maturity. So just like Craig said, we -- at the end of our acquisitions in 2022 and '23, we took a step back and we looked at our entire technology environment. We laid out a very clear plan to simplify and modernize the environment, and we are in full execution mode there. So the simple answer is we are indeed peaking in 2026 from a spend on the tech road map.

But a couple of the key things that we're working on. So just coming into the year or leaving 2025, we've simplified or reduced over 1/3 of our applications. So that's a big win as well. We have at least 2/3 of the actual program up and running in full execution mode. And this is both simplifying as well as modernizing our applications and our infrastructure. So another simple example is at the beginning of 2024, we had 8 different data centers, by the end of '26, we will only have 2 data centers. Now that means we're closing 7 and we're building a new one. But the benefits of all that means that at the end, we will not only have efficiency coming out of that example. But we'll also have a much better resiliency and more flexibility and scalability in our environment. So those are the kind of things that we're working on. It is a multiyear plan, but the simple answer is we will peak in that plan in 2026, and that will allow us some more capacity to spend in other areas of the business.

And then just quickly on the tax rate, Craig, in the quarter. Was there a specific charge in the quarter on the taxes?

This is John Wilson, the Tax Director. The only charge in the quarter was a return to provision adjustment we recognized after filing our 2024 tax returns, primarily related to the estimate that we had for tax credits for the prior year provision.

The next question comes from Anthony Elian from JPMorgan.

Craig, your expense outlook is quite wide. The range is about $100 million. I'm curious, I know I recognize your previous comments on tech spend. I'm curious just what gets you to the high end versus the low end? How much LFI CAT III expenses you have that's baked in that may eventually go away?

This is Elliot Howard. I think when you look at that range, $100 million on the entire base is only really kind of 2 percentage points. And really what puts us probably at the top end of that range is that includes -- we're doing the heavy lift on direct bank advertising to really kind of raise deposits. And then I think as we kind of progress along the year, just kind of the timing of the tech expenses and when we can get efficiencies. So full year, I think being able to kind of get the efficiencies faster and less in marketing expense would put us closer to the lower end of that range. And then really having more competitive really rate environment on the direct bank side would probably give us a little bit higher to the top end of that range.

Okay. And then if Marc is on the line. You guys saw another really strong quarter in SVB total client fund growth. What specifically drove that? And I didn't hear the level of cautiousness that you guys have emanated the past couple of quarters on the outlook for SVB. So how are you guys thinking about that business and the growth in total client funds for this year?

This is Marc Cadieux. And I think the -- the growth in total client funds that we saw in fourth quarter and really over the course of '25, I think is a function of the incremental improvement that we're seeing, venture investment, year-over-year innovation economy activity. And the longer we have been with First Citizens, the more things have stabilized within our 4 walls and our ability to go to market and execute has just continued to get better. And so it's really a function of it's improving out there. As reflected in the guidance there is that further expectation of further incremental improvement and our ability to capture continues to improve as well. And so that in a nutshell is the story if you behind the positive TCF trends.

Next question comes from Bernard Von Gizycki from Deutsche Bank. We will move on. The next question comes from Casey Haire with Autonomous.

So Craig, I wanted to touch on the purchase money note, if -- if I heard you right, it sounds like the pace of retirement is going to be a little bit slower between $0.5 billion and $1 billion a month. So $9 billion a year, if that's right. So just wondering -- I thought the first tranche was going to be the biggest. It just feels like it's a little bit slower. So just maybe a little more color on that. And how much -- how low are you willing to go on the cash front as a percentage of earning assets?

Okay. The reason for the lower than anticipated payment in December was really related to the loan growth that we experienced versus deposit growth, and it impact on our excess liquidity. So that's the simple math there. In terms of just the $500 million to $1 billion, that relates to the amount of loan collateral that rolls off monthly is an estimate of that. And that would sort of indicate the minimum that the loan collateral the loans that are eligible would be loans in place at the time of the acquisition and as those loans mature, that collateral pool gets diminished. And we have pledged U.S. treasury securities as well to that. But that gets into whether or not we pay off that get into the rate arbitrage between those securities in the purchase money note. So we're trying to balance both the need to get the note paid efficiently with doing it in a way that's most profitable, if that makes sense. So the $500 million to $1 billion would be sort of -- and you should think of that as sort of the minimum amount that we'd pay off this year. Tom, I'll let you amplify anything there.

No, I think that was very clear on the $500 million to $1 billion being the minimum. And obviously, looking at the alternative funding cost is why we've sort of moderated our pace of pay down with the 3.5% we're paying on the purchase money note. So as alternative funding costs come down, you can expect to see us accelerate those payments. I think you also asked about cash sort of as a percentage of earning assets we're currently right at about 10%. I think you can see that come down a little bit from there, but it'll remain in that 8% to 10% range is sort of what we'll manage to from a liquidity risk perspective.

Okay. That's great. So -- and then I guess just switching to the loan growth outlook. So a very strong result in the fourth quarter here. The pipeline is up and yet you're calling for growth to moderate to a mid-single-digit pace in '26. The deposit growth guide does imply that the loan-to-deposit ratio moves up to the mid-90s. So I guess the question is like, are you purposely constraining the loan growth for liquidity reasons? Or do you expect loan growth to moderate from this near double-digit pace?

Yes. I think there's a lot of positives certainly on the loan front. I think SVB, we talked about pipelines are full. We feel very good about the activity in the fourth quarter and where we are heading in the first quarter. I think we have really good outlook on commercial finance. And then in our general bank kind of in our business and commercial side, I think that said, as Tom touched on the purchase money note. We will look at certain places to sell portfolios. We had the $700 million that we moved mortgage. I think we're exploring potential sales elsewhere SBA, where kind of the financials make sense. And so we're going to be there for our clients. We're going to continue to lend. But I think the reality is we still do have $33 billion that we need to repay on the purchase money notes just going to be a function of how much we can really generate deposits [indiscernible]

I think one other component -- this is Tom. One other component to add is when you look at the capital call line and the nature of the loan growth that has come through there, as you get further into that, obviously, a larger portfolio is going to lead to larger paydowns. So even with same elevated activity, it will lead to moderating growth.

At portfolio natural duration.

That's right.

Yes. Okay. All right. Just last one housekeeping. Craig, very helpful to walk through all the headline and core NIM, NII. Just and I apologize if I missed this, but what is the outlook for purchase accounting this year?

For just -- are you speaking of net accretion income?

Yes.

Yes. We expect to be -- for 2025, we recognized around $250 million of net accretion income. We expect that to drop to about $203 million this year, so around a $50 million decline, so not very significant -- not as significant as a entertain prior years as some of those shorter portfolios ran.

[Operator Instructions] I'm not showing any further questions at this time. So I'd like to turn the clack over to our host, Mr. 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 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.

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens Bancshares Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce the host of this conference call, Ms. Deanna Hart, Head of Investor Relations. You may begin.

Good morning. Welcome to First Citizens Third 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 third quarter business and financial updates referencing our earnings presentation, which you can find on our website. .

Our comments 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. Thank you for joining us for our third quarter earnings call. During the third quarter, our business segments continued to deliver strong performance. I'll focus my comments on our earnings metrics for the quarter and how we are positioning First Citizens to achieve our strategic initiatives as we move forward. I'll then turn it over to Craig to review our performance in more detail and provide guidance on the fourth quarter.

Starting on Page 5. Key earnings metrics were solid, marked by net interest income growth, stable NIM and adjusted noninterest expense at the low end of our guidance range. We reported adjusted earnings per share of $44.62, an adjusted ROE of 10.62% and an adjusted ROA of 1.01%. We achieved 2.5% loan growth over the linked quarter spread across all our operating segments, but led by SVB Commercial where global fund banking loans increased 10% sequentially, driven by increased utilization and strong production in our capital call portfolio.

Deposits were up by $3.3 billion or 2% sequentially, with notable inflows from our SVB Commercial and General Bank segments. We are pleased that this marks our 7th consecutive quarter of deposit growth. We also maintained strong capital and liquidity positions supporting the balance sheet growth I just mentioned and allowing us to return another $900 million to our shareholders through share repurchases during the quarter.

We recently announced an agreement to purchase 138 branches from BMO Bank and while we offer our clients a variety of different ways to interact with us, our branches continue to be integral to our franchise. Building on the scale of our current nationwide platform, we are excited about this opportunity to expand into new markets and offer our client-centered approach in even more regions. Strategically, the net deposit position is expected to enable us to further enhance our liquidity position and provide additional flexibility to support our strategic initiatives including the repayment of the purchase money note as interest rates move lower.

Looking ahead on Page 6. We remain committed to deepening client relationships, optimizing our balance sheet and making investments in our franchise that underpin scalable growth. So far, we have made real progress on our strategic initiatives, including platform integration and alignment. We continue to align teams to improve client experience, client segmentation and product orchestration. We have increased outreach across our business segments to deliver more holistic solutions to our clients.

Digital and operational improvements. We continue to streamline workflows through automation where it makes sense with the goal of simplifying our operating environment to make us more operationally efficient. Capital and liquidity resilience. We've maintained capital ratios well above regulatory thresholds and our liquidity profile continues to afford us the optionality to support clients, invest in our future and pursue external opportunities.

As always, we remain vigilant on the macro and geopolitical landscape, which remains somewhat uncertain. While we recognize that some elements of the landscape could serve as tailwinds and other headwinds, we are pleased to be operating from a position of strength.

In closing, I want to emphasize that even in volatile periods across markets and rates, we continue to believe that our diverse business model and disciplined risk posture are key differentiators. Over the last several quarters, we've delivered consistent results even as external conditions shift. We remain deeply committed to being a dependable, thoughtful partner to our clients, communities and shareholders while maintaining flexibility in a dynamic economic environment.

With that, I'll turn it over to Craig, who will take you through our third quarter results and forward-looking guidance for the fourth quarter. Craig?

Thank you, Frank. Thanks for joining us today. I will anchor my comments to the third quarter key takeaways outlined on Page 8. Pages 9 to 26 provide more details underlying our results and are for your reference. Frank mentioned, we had another solid quarter in terms of term and return metrics exceeded our expectations. Adjusted net income of $587 million was driven by positive operating leverage which included net revenue growth and expenses at the low end of our guidance range.

Positive operating leverage was partially offset by an $82 million charge-off related to the first brands bankruptcy representing our full exposure to the company. We don't believe this loss is reflective of broader issues within our supply chain finance portfolio, and we're confident in the strength of our broader loan portfolio.

Tangible book value per share increased by approximately 8% over the prior year and 2% sequentially despite share repurchases totaling $4 billion since inception of our share repurchase plan in July 2024 and $900 million in the third quarter. Headline net interest income was up 2.3% sequentially and in the upper half of our guidance range, driven primarily by higher average earning assets and day count.

Net interest income ex accretion grew by 2.7% sequentially. Headline NIM was 3.26%, and unchanged from the Link order, while NIM ex accretion was 3.15%, up 1 basis point sequentially as we were able to continue to manage deposit costs down while the earning asset yield remained relatively stable. Adjusted noninterest income came in just above our guidance range, increasing modestly by 1% sequentially. The primary drivers of the increase were gains on the sale of previously foreclosed assets and higher client investment fees driven by an increase in average off-balance sheet client funds in SVB Commercial.

These increases were partially offset by a $9 million sequential decline in adjusted rental income resulting from higher maintenance costs in our rail business. We continue to believe the underlying fundamentals in this business are solid with utilization close to 97% and continued positive repricing trends. Adjusted noninterest expense came in at the lower end of our guidance range and was virtually unchanged from the linked quarter.

Moving to the balance sheet. Loans increased by $3.5 billion or 2.5% sequentially and led by growth in Global Fund Banking within the SVB Commercial segment, followed by modest growth in the general and commercial bank segments. Global Fund Banking loans increased $2.9 billion and quarter end loan balances were at their highest level since the acquisition in this business. New loan production was strong, and we saw increased utilization in our capital call lines of credit. The pipeline for GFB remained strong, totaling approximately $10 billion as of the end of the quarter.

We are encouraged by some signs of increased market activity in GFB, which we believe may continue to be a positive driver over the medium term. General Bank loans grew by $238 million, driven by -- primarily by growth in the commercial portfolio within the branch network and wealth business. Recall, last quarter, we saw a contraction in the commercial portfolio. So we were pleased with its performance as runoff slowed and production increased. Meanwhile, our Wealth business continued to benefit from increased originations and in the third quarter.

Commercial Bank loans also increased $150 million with middle market banking experienced growth offset by declines within our industry verticals as we saw elevated prepayments as deals move to permanent financing and some deals in the pipeline move to the fourth quarter. We continue to maintain pricing discipline, which was reflected in our loan yield as the ex accretion loan yield held up well, only declining by 1 basis point during the quarter despite the impact of lower interest rates.

Turning to the right-hand side of the balance sheet. Deposits grew by $3.3 billion or 2% sequentially as we experienced growth across all our operating segments. SVB Commercial was the largest contributor of the increase, growing by $2.1 billion, driven by growth in both Global Fund Banking and Tech & Healthcare. Deal events led to an increase in GFB deposits, while Tech & Healthcare benefited from new client acquisition and an improving investment environment. Encouragingly, average deposit balances and average total client funds in the SVB commercial business grew by 5.9% over the second quarter.

While we are encouraged by this growth and some positive signs in the innovation economy, we remain guarded on the forward-looking impact on the balance sheet, giving known outflows following the end of the quarter and the overall state of the innovation landscape. In SVB Commercial, we remain focused on winning market share that is stable and profitable. In the General Bank, growth was primarily concentrated in the branch network and wealth where we continue to focus on deepening existing relationships and acquiring new customers.

As noted last quarter, we have implemented additional deposit growth tactics to help identify both near- and long-term opportunities to accelerate growth through deepening relationships, encouraging more local decision-making, and improving digital capabilities, and we are excited to see these efforts pull through on the balance sheet. We were also encouraged by our ability to grow noninterest-bearing deposits for the third consecutive quarter helping us keep our noninterest-bearing deposit mix stable at 26% despite continued strong growth in total deposits.

Moving to credit. Net charge-offs increased by $115 million to $234 million and were 65 basis points for the quarter. As I noted earlier, $82 million of the increase was a result of the first brands bankruptcy, which contributed 23 basis points or made up around 35% of our total net charge-offs for the third quarter. We don't believe this loss is reflective of broader issues within our supply chain finance portfolio, which totaled $300 million as of the end of the quarter. Outside of this loss, net charges -- outside of this loss net charge-offs were within our expectations and the guidance we provided for the third quarter.

Excluding the first brands charge-off, net charge-offs were mostly concentrated in the SVB commercial investor-dependent portfolio, the commercial bank general office portfolio and our equipment finance portfolio reasonably consistent with prior quarters. While we still see stress in the equipment finance portfolio, we continue to see signs of improvement and trending toward long-term expectations. We have taken steps to mitigate future losses through tightening underwriting as well as increasing collection staff to work through earlier vintages.

We expect these efforts to return this business to historical net charge-off levels in the medium term. There are a couple of larger charge-offs this quarter. And as we have noted on past calls, net charge-offs can be lumpy quarter-over-quarter, given the hold sizes of some of our credits. While we continue to monitor these portfolios, we don't see further trends that would signal wider credit quality concerns and believe we are well reserved.

The allowance ratio was down 4 basis points to 1.14%, driven by improvements in the macroeconomic outlook, a reduction in reserves related to Hurricane Helene and growth in higher credit quality loan portfolios. We feel good about our over observe coverage as well as the coverage on portfolios experiencing stress. Ultimately, our strong risk management rigorous underwriting standards and diversified portfolio helps safeguard against losses.

Given recent industry headlines, I want to briefly touch on our exposure to nondepository financial institutions or NDFI. While the exposure can look sizable based on our call report, approximately 85% is to high-quality, low-risk capital call lines to private equity and DC sponsors. These are backed by institutional investors with committed capital many of which have historically generated solid risk-adjusted returns and credit performance has been excellent. So while the regulatory classification may label them as NDFI, from a credit perspective, we view them as safe, well-managed assets.

Moving to capital. Frank mentioned that we continue to make progress on our 2025 share repurchase plan. As of close of business on October 21, we had repurchased just over 15% of Class A common shares or 14% of total common shares outstanding for a total price of $4 billion. Note that this is inclusive of the 2024 plan, which we completed in the third quarter of 2025. With respect to the $4 billion repurchase plan approved by the Board in July 2025, we have completed approximately 7% of this authorization. During the third quarter, repurchases were at the top end of our $600 million to $900 million range -- per quarter range.

We expect that repurchases through the end of 2025 and into the first part of 2026, will continue to be near the higher end of this range as we manage CET1 towards our target range. The pace will likely slow down when CET1 is closer to our target range, assuming earnings and RWA growth are in line with expectations. Share repurchases will continue to be a tool to support capital management activities, providing us with an opportunity to return capital to our shareholders and to be more efficient -- capital efficient over time.

Although we expect that CET1 will remain above our target range of 10.5% to 11% in 2025, given our current growth expectations and where our capital ratios were to start the year, we believe the repurchase plan will enable us to methodically manage CET1 down to that level over time as we regularly assess our growth outlook, economic conditions, the regulatory environment and capital deployment. The third quarter CET1 ratio was 11.65%, a decrease of 47 basis points from the second quarter as the impact from share repurchases and loan growth outpaced earnings.

I will close on Page 28 with our fourth quarter and full year 2025 outlook. We continue to monitor the overall macroeconomic environment but acknowledge that fluidity of changes makes it difficult to narrow the range of potential impacts on the broader economy and our business lines and clients. Accordingly, we have not made significant changes to our guidance but do continue to monitor the environment and how it could impact our performance.

Additionally, as Frank noted earlier, we are excited about the recent announcement of the branch acquisition with BMO Bank, given the expected close -- given that the expected close is in mid-2026. The impacts of this deal are not included in the guidance. With those disclaimers out of the way, I'll start with the balance sheet where we anticipate loans in the $143 million to $146 billion range in the fourth quarter, driven primarily by the same areas we have seen growth year-to-date.

As I noted earlier, while we had strong third quarter growth, we remain cautiously optimistic on absolute loan levels as we head into year-end. In the Commercial Bank, we expect recent trends to abate and are projecting growth in our industry verticals. Market activity remains positive. And while there is increasing competition as banks continue to lean into the lending market, our pipeline remains strong, going into the end of the year. Credit metrics remain stable and optimism is being signaled across the industry, pointing to a strong end of the year for the lending market.

We expect some pullback in global fund banking in the fourth quarter as we aren't projecting utilization to remain at the levels we saw in the third quarter. Loan outstandings in this business can ebb and flow based on client draws and repayments. And while we are very bullish over the medium term on the continued expansion in this line of business, we are realistic that quarter and snapshots of outstanding balances can be more volatile.

We expect deposits to be in the $161 million to $165 million range in the fourth quarter. We expect drivers of growth to be continued expansion in the general bank through the branch network and wealth as we continue to focus on deepening existing relationships, inquiring new customers to help drive organic deposit growth. We expect that this growth will be partially offset by a decline in SVB commercial given known outflows from deposits into off-balance sheet products post quarter end that increased third quarter deposit balance on balance sheet.

We continue to be focused on strategies to best serve our clients in this business while reducing funding and liquidity costs, which could impact absolute deposit growth levels. Our interest rate forecast covers a range of 0 to 225 basis points rate cuts in the fourth quarter of 2025 with the effective Fed funds rate range, declining from 4% to 4.25% currently to as low as 3.5% to 3.75% by the end of the year. While our baseline forecast includes 2 rate cuts, we believe stubborn inflationary metrics and possible impacts of macroeconomic policy could lead to fewer or no cuts.

Therefore, we believe it is prudent to provide a range of expectations. With that in mind, we expect fourth quarter headline net interest income to be relatively stable compared to the third quarter. For the full year, we are tightening our headline net interest income guidance to be in the range of $6.74 billion to $6.84 billion from $6.68 million to $6.88 billion. The revision reflects the new forward interest rate curve as well as the jumping off point from the third quarter. In either case, as expected, we project that loan accretion will be down by over $200 million for the year compared to 2024.

On credit losses, we anticipate fourth quarter net charge-offs in the range of 35 to 45 basis points, in line with the range we provided in the third quarter but below our third quarter results. As previously discussed, our third quarter net charge-offs were higher than anticipated given 1 large charge-off. We expect losses to continue to be driven by the same portfolio as we have been discussing for a number of quarters, equipment finance, general office and the SVB investor-dependent portfolio. We remain focused on client selection and prudent underwriting and have tightened in certain sectors and asset classes for specific client profiles.

In commercial real estate, while rate cuts could ease some of the pressure on borrowers in the general office sector, we do believe losses will remain elevated in the fourth quarter even as market disruption may lessen as more companies have reinstated office attendance requirements. With respect to the full year range, we are increasing our guide of 35 to 45 basis points to 43 to 47 basis points given the higher jump-off point. We also continue to see some lumpiness and losses in the portfolio and as we mentioned earlier, we have a portfolio where a handful of large deals can swing the ratio.

It is important to note that our net charge-off guidance does not include an estimate for the long-term impact of tariffs given the continued shifts in expectations and the difficulty in determining full impact on our asset quality. While higher tariffs could drive economic stress in the form of inflation and/or lower growth, we believe the credit risk is manageable. We will continually assess the potential impact on our portfolio, but we do believe that its diversity is a strength in this environment.

Moving to adjusted noninterest income, we expect to be $480 million to $510 million range in the fourth quarter aligned with a typical quarter for us. Overall, we continue to see strength in many of our core lines of business such as rail, merchant, card, wealth and lending-related fees. Given that we have 3 quarters behind us, we have tightened our full year adjusted noninterest income range to $1.99 billion to $2.02 billion. Year-over-year growth continues to be driven by our rail outlook, which includes a balanced railcar portfolio in a strategic exploration ladder.

We also expect continued growth in wealth and international fees, thanks to new client acquisition and an increase in flow of funds. We are also encouraged by the performance of our capital markets business as we are on target to achieve another year of record fee income. The increase in off-balance sheet client funds has also benefited client investment fees. I do want to caution that given the changing rate environment, our client derivative positions can fluctuate between quarters causing some lumpiness in our results.

Moving to adjusted noninterest expense. We expect the fourth quarter to be up modestly compared to the third quarter as we continue to invest in category 3 readiness and to help simplify and optimize our platforms to allow us to scale efficiently in the future. We also have seasonal expenses that generally pull through in the fourth quarter like higher travel, client entertainment and year-end contributions, making it a bit lumpy.

Looking at the full year, we tightened our adjusted noninterest expense range to $5.12 billion to $5.16 billion. exercising disciplined expense management while making opportunistic investments through the cycle and technology and risk management is a top priority for us given headwinds to net interest income. Our adjusted efficiency ratio is expected to be in the upper 50% range in 2025 as the impact of the Fed rate cut cycle puts downward pressure on net interest margin and we continue to make investments into areas that will help us scale to Category III status. Longer term, our goal remains to operate in the mid-50s.

Finally, for both the third quarter and full year -- for both the fourth quarter and full year 2025, we expect our tax rate to be in the range of 25% to 26%, which is exclusive of any discrete items. To conclude, we are pleased to deliver another quarter of strong financial results, reflective of the strength and resilience of our diversified business model. Thanks to our long-term focus, continued investments in our business and strong risk management framework, we're well positioned to continue delivering value to our clients, customers, communities and shareholders.

I will now turn it over to the operator for instructions for the question-and-answer portion of the call.

[Operator Instructions] And our first question comes from Chris McGratty at KBW.

Craig, on the NII guide, I want to start there. It looks like you just added a cut to the guide from last quarter. Can you help us about -- within the range for Q4 if we get the forward curve, is the $1.7 billion the right number if you get 2 cut? I know there's a lot moving on with the balance sheet.

Yes. If we get 2 cuts, which frankly would be our base forecast, we think it's more likely than not having any cuts or 1 cut. So when we look at both headline net interest income and net interest income ex purchase accounting, we would expect those numbers to be down low single digits percentage points sequentially. And if we look at NIM headline. We're looking in the high 310s. And if we look at NIM ex accretion in the high 300s for the fourth quarter.

Okay. And then I guess, fast forwarding, I mean, I guess the question is, when do you assume NII bottoms?

Really all -- both headline NII and ex-accretion NII and headline NIM and ex-accretion NIM with trough in the first quarter of '26, But let me point out that there's a little nuance there that if the interest rate forecast holds, which assumes 2 more rate cuts this year, with the Fed fund rate ending at around $375 million, we do anticipate paying down the note as the arbitrage in it either disappears or becomes as opposed to where we have a 70 basis point spread right now.

So at that point, repayment would have a positive impact on NIM to the extent, which will be determined by the amount of our pay down. So our NIM troughs are pulled forward to the first quarter, even despite our asset sensitivity given that the paydown will be accretive to NIM, absent the paydown, which wouldn't make any sense if there's an arbitrage in it, those troughs will be pushed out to the first part of '27.

Okay. And on the $35 or so billion, are you thinking tranches? How are you thinking about repayment? Any kind of color there?

Yes. On the purchase money note, we can pay portions of it. So we would not go out and pay off the whole things as it makes up a substantive, obviously, a portion of our balance sheet and also we do the optionality obviously carries some value above and beyond the rate we're paying on it. So it would be something we would sort of leg into but maybe make a slightly larger first payment on. .

The next question is from Bernard Von Gizycki from Deutsche Bank.

I know you mentioned the $82 million charge-off to First Brands and represents all your exposure there. But can you just share any information on any additional monitoring you might have conducted throughout that portfolio? I think it was called out that the allowance for loan losses, there were some higher specific reserves for individually evaluated loans. So just any color you can share on that?

Sure. This is Andy. Just to remind, our supply chain follows about $300 million across 24 borrowers. So it's, on average, about $13 million of exposure, we don't have the level of concentration in the remainder of that portfolio that we did with First Brands, certainly did a deep dive post-perse brands and feel very comfortable with the remainder of that portfolio. Obviously, there's a lot of widespread allegations around fraud there. but it's going to take some time to work through that through the bankruptcy process before we learn more there. And we don't think that it's emblematic of the supply chain portfolio or supply chain in general.

And just as a follow-up on M&A, post acquisition of BMO's branches expected to close for mid next year. Just given the favorable regulatory backdrop, can you just talk about your appetite to do an additional branch acquisition or a whole bank acquisition?

Yes. Beyond BMO, we have no specific M&A plans. But as BMO indicates, long term, M&A will remain a significant part of our growth strategy. So we don't have -- and outside of BMO, we don't have a specific time line on when we'll be back in the market as we continue to focus on category 3 readiness and capital efficiency. But when we do enter the market, we will be the same opportunistic buyer focused on accretive M&A that brings more scale and enhances our ability to compete and makes us a better bank for our customers and clients.

The next question comes from Casey Haire with Autonomous.

I wanted to touch on the loan growth. So the loan growth guide, I hear you that it's that you expect lower utilization in fund banking, but you just put up a 10% annualized growth, it sounds like the pipeline is just as strong. So -- but the guide introduces the possibility of loans coming in, in the fourth quarter. Just in want to get a little color on what you really expect loan growth because it seems a little conservative.

Let me -- let Marc start with that and Elliot amplify.

Sure. So this is Marc speaking specifically about the GFB segment. Totally understand your point, given the 10% quarter-over-quarter growth in the third quarter. a call out there though. And maybe going back to something, Craig, I think you said earlier, is borrowings and repayments tend swing around a lot. And with Global Fund Banking, in particular, that can happen. And it's probably best illustrated when I think about the average loan growth in that segment versus the period end, that average loan growth is sub-$1 billion over the course of the third quarter.

And that obviously is quite a bit less than the plus 3% by period end basis. And so I think that illustrates sort of the point right there. And by extension, I think hopefully explains the appearance of conservatism in that part of the fourth quarter loan growth outlook. I'll stop there and pass it to you, Craig.

Okay. And just on the expenses. So first off, I guess, a pretty wide range in the fourth quarter, up 10%, up 50%. Just what are the wildcards within that? And -- just as a follow-up, that implies 6% to 7% expense both on the year and 25%. Just wondering how much of that is Category 3 and when we could see relief on the expense pressure.

Yes. I'll let Elliot talk about the guide, but I'll handle the last part of that question, but the escalation of expenses in '25, as we guided previously, are related primarily to that work. large financial institution program as well as several large projects related to that work as well. So that is the reason for the mid- to upper single-digit expense growth 25% over 24%. I'll let Elliot speak to the guide a bit for the fourth quarter.

Yes, sure. Craig touched on some of the script. I mean I think when you look at the fourth quarter, there are certain things that are kind of more particular so seasonal to the fourth quarter. We see kind of elevated client entertainment, we see elevated travel, in addition, when you look at something like health insurance, a lot of employees have hit their deductibles, so we see that pull through at a higher rate in the fourth quarter.

In addition, I think third quarter, we had some larger meaningful projects close out. And so the depreciation impact is now get reflected in the fourth quarter. So as far as what could tipped up or down, I think some of those aforementioned things and then really just the timing of kind of idiosyncratic project expenses really related to kind of the tech build-out and simplification.

Okay. And just credit, the Category 3 expense -- is that -- can we -- when can we start to see some relief on those expenses? Is that a near-term event? Or is that further down the road?

I would call it medium term. I think in terms of -- we made a lot of progress there. And there's certainly a great focus within our company to continue to make progress there. Most of the Category 3 requirements are either enhancements to what we currently do or represent formalization of rules they already comply with. But there are -- there's a lot of work around data modeling and reporting frequency, which really has us reworking processes, systems and data delivery.

So there are some expenses there. I think we're probably to use a baseball analogy in the 7th inning stretch there. So there will be some expenses pulling through there, but we may -- but I do want to mention we have made a lot of great progress on that. We do intend to be able to meet those requirements in the first half of '26.

The next question comes from Anthony Elian from JPMorgan.

On total client funds, I'd like to get I'd like to get more color on total client funds. What specifically drove the strong growth you saw in 3Q. And I know in Craig's prepared remarks, there's a level of cautiousness on the outlook for SVB. But given the backdrop of lower rates, more IPOs coming to market and VC investments continuing at a strong pace. What exactly is causing you to believe that the strong level of activity won't continue?

So I will start, others may wish to contribute as well. I think this really goes to the caution that was represented in Craig's comments and with regard to Q4 guidance. It certainly has been encouraging and was encouraging to see that growth in the third quarter. At the same time, you mentioned IPOs, and there were 7 over $1 billion or with pre-money valuation over $1 billion, I think it was in the quarter, but not yet again, a target pace there.

And as I think we all know, thus far, in the fourth quarter, there are no IPOs, FCC, I believe, remains closed. And so, that would be 1 factor. We are encouraged by some improving exit activity outside of IPOs. And I'm speaking specifically to M&A that could potentially result in further improvement in venture capital sentiment improvement in investment. But there are so many -- again, as Craig referenced, uncertainty, headwinds, et cetera, out there that is just really difficult to predict at the moment, whether that trend we saw in the third quarter will continue in the fourth and beyond.

And so that hopefully helps to explain some of our caution there. And maybe actually just one last comment. While venture capital investment to, I think, another point you made is on track to have a second best year ever. That concentration in the mega around end of the segment over $30 billion going to the large AI round. -- the -- what's left after that really hasn't changed terribly much when you look at what that represents on a quarterly basis and early-stage investment, which is particularly important to the SVB segment. really hasn't come back yet aside from maybe deal count in certain segments having gone up a bit.

And so with all of that for context, hopefully, that explains our more cautious outlook there, and I will pass it, Craig, to you if you have anything to add there.

I have nothing to add.

And then my follow-up on credit. I'm curious if you've done any broader reviews on policies and procedures, particularly on the CIT portfolio beyond supply chain after first grants and the other recent credit events that have happened across the industry.

Yes. I mean, that is part of our normal course where we're continuously looking at policies, procedures, our credit standards. It goes through a regular cadence of reapproval, and to ensure that is in line with our risk appetite. So yes, that is part of our normal cadence and our risk management.

The next question comes from Steven Alexopoulos from TD Cowen.

I want to start, go back to Casey's question. So you have elevated expenses related to LFI prep. And if we think about the work you're doing I think we're all trying to figure out how much of the expense level is sticky, right? You're just hiring more full-time people, et cetera. And once you get done with this, let's just say, argument's sake mid-2026 do expenses from that point start growing at a more normal cadence? Or are there costs in the run rate now that will actually fall out that caused expenses to step down a bit before they start growing?

Yes, Steve, I think a few things there. I think while there might be some that falls out, it's ultimately going to be replaced with a lot of the investment that we're doing in tech and simplification. As we look to -- you referenced kind of the 6% to 7% guide kind of from the end of the year this year '24, we would expect that to probably be in the of mid-single digits next year. So it certainly pulled back a little bit. But I think as we look towards kind of that longer-term road map, as we look to some of the investments in the tech space are going to help scale us for growth. We don't see really the expenses pulling back and going down, but more moderating from the levels they've been at.

So they just get replaced with other expenses. Okay. That's helpful. And then -- which is tied to that actually. So if we look at the ROTCE PAA is a factor, but ROTC is down about 11% adjusted this quarter. So it's down quite a bit over the past year. Now I know you're active and purchasing shares already this quarter. But what's stopping you from getting much more active, just given you're above your target stocks down, I don't know, 17% or so year-to-date just above tangible book. Why not get even more active here? It seems like you have a window to do that.

And just to be clear, you're talking about in terms of share repurchases getting more active?

Yes.

Okay. Yes. Well, first of all, the -- we lay out our plan for share repurchases in our capital plan. And we've always said that we want it to be methodical about that. And we believe a range of $600 million to $900 million, which on the time of that is aggressive is a good pace. And that's what we would intend to do going forward. We obviously have to be very cognizant of while we're doing this of our growth outlooks, internal growth, an economic environment, regulatory changes and just capital deployment options in general. So we believe that, that range is really getting after it. We've repurchased 15% of our A shares and 14% of total common since the commencement of the plan. So we believe our pace is getting after it.

The next question comes from Brian Foran from Truist. Brian.

I'm not sure if you can speak to this, but 2026 NII is obviously such a big debate given the tension of underlying growth and rate cuts. So appreciate the comments that you think or forecast that NII would bottom in 1Q. Is it possible to give any bounds on the level? And then as you look to 2Q 206 and beyond, any thoughts on the directional bias would you see it as more flat do you think you can grow even with Fed rate cuts?

And again, totally appreciate it's early for 2016 guidance, but it's the biggest question I hear from investors. So any thoughts would be helpful.

Sure. I'd be glad to give you some directional color there, with 2 rate cuts and 2 in '26, we could -- we would expect both net interest income and headline and ex accretion to be fairly stable and the NIM headline NIM and ex accretion, NIM to be fairly stable with the exit in the fourth quarter of. So fairly stable. If we had more rate cuts, obviously, that would change -- that could change.

That's really helpful. Maybe for Marc more just qualitative one, can you speak to the AI boom and where that's benefiting FCB? And then conversely, anywhere, it's not benefiting FCBs, is it a size of deal thing? Is it a client coverage thing? Is it a your choices and selections of what you want to be involved in, just broadly, if you could speak to the AI trends that are such a big part of market right now. .

Sure. So starting with venture investment as referenced in my earlier remarks, there's an awful lot of capital going into the space that has been very dramatically different in terms of the investment pace valuation trends, et cetera, relative to the broader venture backdrop, that's where things have been going through a reset or whatever, we would call it, since around mid-'22. So where SVB benefits is -- and in fact, AI is working its way into all of the other sectors that we focus on in 1 way, shape or form, an enabler, a feature, et cetera.

And that for the companies that are successfully weaving that into their offering. That is enabling them to so many words, get in on the AI boom and be more attractive to investment and there's some parsing there that I think investors are doing not too different from what happened in dotcom when suddenly everyone was dotcom, you had to figure out who really was. Some of that is going on here. But clearly, that spread of that enhancement into these sectors, again, is driving investment in helping us find those better opportunities to bring clients on to lend, et cetera.

Where we don't see as much benefit as those mega rounds I mentioned earlier, those going to the very largest AI companies, LLM companies, et cetera, that really hasn't been a factor for us in terms of driving business results. And so hopefully, that color helps with the bifurcation. The very biggest ones, not really our target market, starting to see some benefit across the sectors we bank elsewhere.

This is [ Jim Hudak ], One thing to just interject to Marc's point and other places where we're benefiting in for citizens -- we have had a very good ride on the data center side. And a lot of that growth in data centers is a need for capacity -- computing capacity from AI. So on the places where we're actually financing some of the infrastructure, a lot of that has actually been driven by AI. And that's actually helped us on the loan growth side.

And one other point I just wanted to make was in relation to -- looking at our loan growth, we've actually benefited from the fact that there's so much liquidity in the market. So even though we are doing quite a bit on the data center side, sometimes we will get paid out because as those data centers get built and stabilized, they'll be taken up to the securitization markets and then we will go and recycle that money.

And where that shows up for us is actually enhanced capital markets fees. It may not necessarily be in quarter-over-quarter strong growth each time. But a lot of benefits to us when we're financing infrastructure, where it's -- where a lot of that is promoted by the demand for AI.

If I could sneak in a follow-up there, but do we know the size of this data center lending book and geographically, does that show up at FCB? Or does that show up somewhere else in your disclosure?

So the data center side is on the commercial bank side, commercial finance. And our exposure is about $3.5 billion.

The next question is from Samuel Varga at UBS.

I just wanted to go back to FCB for one more finer point on 2026. Just based on the commentary you've provided this morning, is it fair to say that the growth to come is more on the new client acquisition side rather than utilization uptake? Or it could be still from both into next year?

I will start, and I think it could be both, right? It's early-stage venture investment, would you to pick up. that would certainly be helpful on the new client acquisition side and helpful to our Tech & Healthcare banking business. And generally speaking, if investors are investing more, that is going to help with utilization of those capital call lines, but typically are how VCs fund those investments, recognizing that there is a large significant portion really more than half of the capital call portfolio that is private equity and not really about venture investment, innovation economy, et cetera.

Though as we saw in the third quarter, that was certainly part of the utilization story as well. I'll try to stick the landing here in that we think in an improving environment, we would hopefully see both. But I'll end by saying, again, given our caution, the mixed outlook, et cetera, nothing I've said should be taken as a guidance for '26 at this point. Craig, I'll pass it to you if you want to add anything?

I think that covers it, Marc. Thank you.

And then just a short one on credit, nonaccruals moved up a little bit, as you noted, Craig, in the prepared remarks. Can you provide any updates or any further color on migration trends or the mitigation trends?

Yes. I think it was driven by a handful of larger credits. We had 1 in the innovation portfolio, which was a non-investor dependent transaction that migrated this quarter. We had a couple of credits in our wine portfolio migrate as well and then an additional credit in CRE Outside of that, everything has been pretty stable. I think I would point out that our criticized and classified assets did come down for the second quarter in a row by about 4.5%. And -- and to Craig's point, I think from a charge-off perspective, absent first brands, it's right in line with where we would expect things to come up this quarter. So we're feeling pretty good about credit.

Next question comes from Christopher Marinac from Janney Montgomery Scott.

I just wanted to go back over the years as you've had other fraudulent situations. Can you just walk us through kind of how you have evolved your fraud detection in general, post CIT and now post FCB?

So this is [ Greg Smith ]. I run the enterprise operations fraud has always been a key focus for us, and we have invested quite a bit of money over the past few years in talent and in technology I won't get into some of the details. But on a day-to-day basis, we now use AI. We have different algorithms to detect fraud. And we've really seen I'll say, stability in that market, although it is something that is a key focus, and it may grow over time, we have spikes once in a while for individual products, but we have strengthened our environment quite a bit over the last few years.

Great. And then Craig, just a quick one for you. As the branch acquisition closes next year. Does that help you become more neutral from a rate risk perspective? .

It certainly is net deposit based, so less asset sensitive, yes. I won't say -- I haven't really calculated the actual position. So I wouldn't say neutral because it's just relatively small relative to the overall balance sheet but certainly is directionally in the right place. I'll let Tom mention or say something about that as well.

I think really, if you're thinking about asset sensitivity, I think the major driver is as we start paying down that fixed rate purchase money note is what's going to help get that down. And obviously, if you look at that branch acquisition, that's replacement with deposit funding to that purchase money note, I think that's an accurate statement. .

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, everyone, for joining us today on our earnings call. 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.