First Citizens Bancshares (FCNCA) discussed their fourth quarter 2023 financial results, highlighting a strong net interest margin, an adjusted efficiency ratio of 48%, and growth in loans. The company reported solid financial results, despite an increase in the allowance for credit losses and a decline in net interest income.
They announced strategic additions to their leadership team and outlined their focus on client services, expansion of wealth business, and talent development. CFO Craig Nix provided insights into the financial metrics, including capital market fees and deposit trends.
Key Takeaways
- First Citizens Bancshares reported a strong net interest margin and an adjusted efficiency ratio of 48%.
- Loans grew in general and commercial bank segments, with the highest risk category in early-stage companies totaling $1.4 billion.
- The company announced the addition of David Leitch to the Board of Directors and Greg Smith as Chief Information and Operations Officer.
- They aim to improve efficiency and risk management while maintaining unique capabilities to support growth.
- Net interest income is expected to decline in the first quarter, with a full-year projection of $6.9 billion to $7.1 billion.
- Noninterest income is anticipated to be between $1.8 billion and $1.9 billion for the full year.
- The company plans to allocate capital towards deeper relationship business and targets an adjusted efficiency ratio in the low 50% range for 2024.
Company Outlook
- Loans are projected to remain flat to modestly increase in the first quarter, with a full-year projection of $139 billion to $143 billion.
- Deposits are expected to grow by a low to mid-single-digit percentage for the full year.
- Anticipated tax rate of 27% to 28% for both the first quarter and full year.
Bearish Highlights
- Allowance for credit losses increased by 5 basis points to 1.31%.
- Elevated net charge-offs are expected in the innovation, general office, and equipment finance portfolios.
- SVB segment experienced a decline in loans and deposits.
Bullish Highlights
- The company remains resilient with strong capital and liquidity positions.
- They expect to fully convert legacy silicon private businesses in 2024.
- Noninterest expense is expected to be flat to up low single digits percentage points for the second through fourth quarters of 2024.
Misses
- Decline in net interest income and client investment fees due to lower anticipated interest rates.
- Flat growth in net operating lease rental, wealth management, and mortgage income.
Q&A Highlights
- The company discussed asset sensitivity, cash balances, SVB business, and loan growth.
- They addressed concerns about criticized loan trends but expressed no cause for concern in the C&I portfolio.
- The issuance of $8 billion to $11 billion in debt this year is expected to have a muted impact on net interest income.
- Share repurchases are scrutinized with the same rigor as purchasing another bank.
First Citizens Bancshares showcased a robust financial standing in their latest earnings call, with strategic priorities set to steer the company through the evolving economic landscape. The company's leadership expressed confidence in their business model and their ability to continue providing value to clients and shareholders alike.
InvestingPro Insights
First Citizens Bancshares (FCNCA) has demonstrated a commitment to growth and shareholder returns, as reflected in their recent financial results and strategic initiatives. To provide further context on the company's performance and outlook, here are some insights based on real-time data from InvestingPro and InvestingPro Tips:
InvestingPro Data highlights a remarkable revenue growth, with the last twelve months as of Q3 2023 showing a 94.64% increase. This is further solidified by a quarterly revenue growth of 105.74% in Q3 2023. The company's P/E Ratio stands at an attractive 1.95, suggesting that the stock may be undervalued compared to earnings. Additionally, the company boasts a strong operating income margin of 36.72% for the same period, indicating efficient management and profitability.
InvestingPro Tips reveal that First Citizens Bancshares has not only raised its dividend for 7 consecutive years but has also maintained dividend payments for 38 consecutive years, showcasing a reliable commitment to returning value to shareholders. Moreover, analysts predict the company will be profitable this year, with expectations of net income growth and sales growth in the current year.
For readers interested in a deeper dive into First Citizens Bancshares' financials and future prospects, InvestingPro provides additional tips. There are 11 more InvestingPro Tips available for FCNCA at https://www.investing.com/pro/FCNCA, offering insights into the company's performance and valuation metrics.
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Full transcript - First Citizens Bancshares (FCNCA) Q4 2023:
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens Bancshares Fourth Quarter 2023 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, Senior Vice President of Investor Relations. You may begin.
Deanna Hart: Good morning, everyone. Welcome to our fourth quarter earnings call. Our Chairman and Chief Executive Officer, Frank Holding; and Chief Financial Officer, Craig Nix, will provide fourth quarter business and financial updates today. During the call, we will reference our investor 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 our results to differ materially from expectations. We assume no obligation to update such statements. These risks are outlined for you on Page 3. We will also reference non-GAAP financial measures. Reconciliations of these measures against the most directly comparable GAAP measures can be found in Section 5 of the presentation. Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of earnings transcripts provided by third parties. I will now turn it over to Frank.
Frank Holding: Thank you, Deanna, and good morning, everyone. I'm going to focus my comments today on our fourth quarter accomplishments and our 2024 strategic priorities before turning it over to Craig to cover our fourth quarter financial results and outlook for 2024. Let's start on Page 5. The fourth quarter capped off another exciting and successful year at First Citizens. We kicked off the year, 1 year into our successful merger with CIT and rang out the year combined with SVB, all as we celebrated our 125th year anniversary. I'm really proud of what we accomplished in 2023 and believe we have tremendous opportunity ahead of us. There is an undeniable sense of momentum at First Citizens and our ambition is to serve our clients in ways never imagined 125 years ago. And we're well positioned for the future, thanks to continued focus on our clients and customers and our solid financial results. We delivered another quarter of solid financial results, driven by a strong net interest margin and adjusted efficiency ratio of 48%. We're pleased that both our general and commercial bank segments grew loans by double-digit percentage points in 2023. Due to strong deposit growth during the year, we improved our liquidity position significantly and ended the year with a strong capital position marked by a CET1 ratio of 13.36%. We recently announced 2 major additions to our team, which will help us to continue to successfully navigate the ever-changing landscape for large financial institutions. First, David Leitch was appointed to the Board of Directors in January. David is a distinguished leader, executive and attorney and he brings extensive experience and valuable insight to our Board. He retired from Bank of America (NYSE:BAC) in 2022, where he served as Vice Chair from 2021, 2022, and its Global General Counsel from 2016 to 2021, and we're excited to have David join the Board. Second, we announced that Greg Smith will join our executive leadership team as the bank's Chief Information and Operations Officer. Greg joins our team from TD Bank Financial Group in Toronto, Canada, where he served as Head of Transformation and Corporate Operations. In this leadership role, he set the vision and built key capabilities to drive end-to-end transformational change. He was also responsible for managing corporate projects and technology platforms. In the CIOO role at First Citizens, he will be responsible for the strategic enablement of technology, operations, cyber and data functions across the enterprise. Greg's extensive background and depth of experience will make him well suited to take on these important responsibilities, and we're excited to have him on board. Moving to Page 6. We remain intently focused on our core strategies, and I'll highlight a few of them for 2024. First, we remain focused on our clients and customers. Our combinations with CIT and SVB introduced us to new strategic markets that allow us to deliver expanded products and solutions across our diversified lines of business. We continue to support SVB's innovation economy clients and are focused on capturing synergies with the commercial businesses we acquired from CIT. In the general bank, we have enhanced our deposit campaigns to continue to grow quality core deposits. As we noted last quarter, we continue to expand our wealth business across our geographic footprint and our expanding advisory and self-service options for our clients in that space. Developing our associates and adding talent to support growth remain important priorities. Our integration efforts are centered on ensuring that we retain our culture which emphasizes a relationship-based approach to banking, a client-centric customer -- client and customer-centric service delivery model, a long-term focus and strong risk management. Operational efficiency is very important to us. In addition to disciplined expense management, we are managing our balance sheet to optimize our liquidity and capital positions to support continued profitable growth. Core deposit growth will be a major priority as we continue to increase deposits as a percentage of our total funding mix. We also continue to make regulatory readiness, a top strategic priority. We have made meaningful progress on our efforts thus far, but acknowledge we need to continue to refine and mature our processes to support the change in the company's size and complexity. We will be intently focused on these efforts in 2024. Now let's look at Page 7. We continue to make good progress on SVB's integration. Our efforts there have been extremely important, helping us retain clients, stabilize deposit balances and develop strategic priorities for the combined organization. As we discussed on the last call, we developed an integration road map, and we expect the majority of those efforts to be completed in 2024. Our goal remains to support the acquired lines of business, maintain their unique capabilities, all while improving efficiency and risk management, positioning us for future growth. We acknowledge the headwinds in the innovation economy as well as the increased competition in the space. However, we remain encouraged by the strength and value the SVB franchise brings to its client base and its unwavering commitment to providing a relationship-focused service that is unmatched in the innovation ecosystem. To conclude, I am very pleased with our performance in 2023 and excited about growth opportunities as we enter 2024. Despite industry adversity in 2023, we were able to protect and grow customer relationships, stabilize deposits at SVB, grow core deposits and loans in our general and commercial bank segments and build upon our strong capital and liquidity positions. I'd like to thank all of our associates for making 2023 a successful and positioning the bank for a successful future. With that, I'll turn it over to Craig Nix. Craig?
Craig Nix: Thank you, Frank, and thank you all of you for joining us today. I'm going to anchor my comments regarding our fourth quarter financial results to the takeaways outlined on Page 9. Pages 10 through 29 provide more detail supporting the results for your reference. Our return metrics remain solid and in line with our expectations. ROE and ROA adjusted for notable items from 13.53% and 1.28%, respectively. Compared to the third quarter, these metrics were impacted by an expected 3.9% sequential decline in net interest income driven by a reduction in accretion income and higher deposit costs. These impacts were partially offset by higher loan and investment portfolio yields, which benefited from maturity and replacement of lower-yielding assets during the quarter. These higher yields offset by higher deposit costs drove net interest income ex accretion to be essentially flat to the sequential quarter. NIM contracted by 21 basis points during the quarter to 3.86% driven primarily by the same factors affecting the decline in net interest income I just discussed. Ex accretion, NIM declined by 5 basis points to 3.46%. Adjusted noninterest income was down modestly by 3% sequentially and majority of the decrease related to a decline in the fair value of customer derivative positions as a result of lower interest rates. Additionally, as we previously guided, our rental business experienced a decline in net rental income due to higher maintenance expenses. As a reminder, given strong utilization rates and positive repricing trends, we made the strategic decision to pull forward regulatory requalification programs in order to increase the number of available cars for leasing in 2024. These updates position us well to continue to provide our customers with the equipment they need. While we expect some normalization to historically high utilization levels in 2024, we believe that our well-diversified fleet positions us well for the future. A bright spot in the quarter was an increase in capital market fees as our capital markets business had its highest figure on record as we were able to take advantage of market dislocation as many banks pull back. Adjusted noninterest expense was largely in line with expectations, increasing sequentially by less than 1%. We experienced expense growth during the quarter in consulting and project costs related to strategic investments we had delayed earlier in the year. As we noted on the third quarter call, consulting and project costs were lower in the second and third quarters as we assessed and reprioritized areas of focus heading into 2024. In addition, fourth quarter expenses reflected our expanded CRA commitment as part of our integration efforts to assist communities in Northern California and Eastern Massachusetts. These increases were almost completely offset by lower FDIC insurance and personnel expenses. We remain very cognizant of the importance of expense discipline as we head into 2024, given headwinds to net interest income facing us and many in the industry. Credit continues to normalize and traced with our expectations for the quarter with net charge-offs coming in at the lower end of our guidance range of 50 to 60 basis points. Net charge-offs were $177 million during the quarter, representing a ratio of 0.53% of average loans, basically flat compared to the third quarter. Losses were largely in the same portfolio where we experienced charge-offs in previous quarters. Within the commercial bank, net charge-offs were concentrated in the general office and small ticket equipment leasing portfolios. We also experienced an idiosyncratic loss in the energy portfolio this quarter that we believe is not indicative of broader terms in the portfolio. While we continue to see stress in our general office portfolio in the commercial bank due to continued inflationary pressure, elevated interest rates and market dislocation, we have limited exposure which totaled $1.2 billion or roughly 1% of loans at the end of the fourth quarter. As a reminder, this portfolio is concentrated in Class B repositioned bridge loans and is where we have seen deterioration in past dues, criticized assets and charge-offs. General office CRE continues to be carefully monitored, and we are carrying an ACL on these loans of 9.37% compared to 4.77% on the overall general office portfolio. Net charge-offs in the SVB segment remained elevated due to continued stress in the investor dependent portfolio, but did decline sequentially by $35 million. At quarter end, this portfolio totaled $4.3 billion or approximately 3% of total loans with the highest risk category, early-stage companies totaling $1.4 billion or just over 1% of total loans. The allowance for credit losses increased sequentially by 5 basis points to 1.31% due to some adverse credit migration in our commercial portfolio and higher specific reserves on loans individually reviewed. Under the current macroeconomic backdrop, we continually look for indicators of portfolio stress by reviewing delinquency trends and grading migration by industry and/or geography to identify areas of concern. While credit quality remains within our risk appetite, we anticipate elevated net charge-offs in the innovation, general office and equipment finance portfolios this year. We have taken proactive steps to help limit losses, and we feel that we are properly balancing our growth and underwriting strategy, emphasizing opportunities to build upon our expertise and provide an appropriate risk-adjusted return. Now moving to the balance sheet. Loans were up $100 million over the third quarter. The General and Commercial Bank segment grew loans by $1.3 billion and $716 million respectively, while the SVB segment experienced a decline of just under $2 billion. In the General Bank, growth was concentrated in small business and commercial loans in our branch network as we continue to grow our customer base and deepen relationships. We are focused on executing our strategy of growing our customer base and supporting existing clients where we have a relationship and a proven history. We believe this relationship banking approach will continue to serve us well. In the Commercial Bank, Growth was driven by strong production in our industry verticals and middle market banking. Within the industry verticals, growth was concentrated in TMT, health care and energy. Growth in our TMT vertical continues to be driven by strong demand for new data centers. Our energy vertical is benefiting from the power infrastructure and renewable energy markets. As for middle market, the team continued its expansion strategy in 2023, adding bankers in Boston, New York, Santa Monica, Atlanta and Dallas, contributing to increased loan production during the year. The reduction in SVB segment loans was driven primarily by a decline in global fund banking, but to a smaller extent we saw a reduction in our technology and health care banking business. Despite a slowdown in private equity and venture capital markets, we are encouraged by strengthening loan pipeline in Global Fund Banking, which expanded by approximately 40% [indiscernible] quarter as the team continues to support our existing clients as well as add new relationships. Global Fund Banking closed on $4.8 billion in new deals in the fourth quarter, a 129% increase over the third quarter. While utilization room is depressed due to the macroeconomic environment, we have the largest finance team in the market and total approved exposure on the loan book has stabilized and has started to ramp up as the team continues to execute. We remain the primary banking partner for the vast majority of our GFB clients, which positions us well to ramp up both loans and deposits quickly when the macroeconomic environment improves. The decline in technology and health care banking was driven by paydowns outpacing new fundings as the private market investment landscape continues to face headwinds resulting in a difficult exit environment, lower fundraising numbers and fewer deals. Deposits were down a modest 0.3% sequentially driven by a $1.5 billion decline in the SVB segment due to continued client cash burn and muted fundraising activity. Importantly though, investment inflows increased from the third quarter, while outflows from burn declined, which helped us beat our third quarter forecast of an approximate $5 billion decline. The branch network declined by $492 million due to expected seasonal outflows. These declines were partially offset by a $2 billion increase in direct bank deposits. While the direct bank channel is higher cost and now accounts for 26% of our deposit base, it is an additional lever we continue to use to remain resilient through a turbulent environment and is a strong source of insured consumer deposits supporting our liquidity base. It also enabled us to pay down higher-cost FHLB debt earlier in the year and most recently redeemed some of our smaller subordinated debt issuances given excess capital and liquidity positions. Moving to capital. We continue to maintain a position of strength as our CET1 ratio increased by 11 basis points sequentially and ended the quarter at 13.36%, which remains well above our internal target range of 9% to 10%. The impact from our loss share agreement continues to provide for higher capital levels and contributed approximately 120 basis points to our CET1 ratio this quarter, down from 140 basis points last quarter. Even without this benefit to our ratios, we remain well above our target capital ranges and anticipate operating at an elevated level in the near term. We are currently in our annual capital planning process which includes reassessment of our goals and targets for consideration of both SVB and future regulatory changes. This process includes a full stress test, including the acquired SVB portfolio. Additionally, we continue to monitor the proposed Basel III rules but remained well positioned for any changes, including the inclusion of AOCI marks. Our CET1 ratio at the end of the fourth quarter was estimated at 11.8% when these AOCI marks are included and the impact from the loss share agreement is removed. We have confidence in the rate that we are accreting capital and our absolute capital levels relative to our internal targets, our capacity to handle balance sheet growth, our SVB integration efforts and our positioning with respect to the Basel III end game. Therefore, we do anticipate that our 2024 capital plan will include a share repurchase plan, which once approved, will commence in the second half of this year. We also anticipate beginning a programmatic issuance of long-term debt in 2024 to ensure compliance with the proposed long-term debt requirements by the expected phase-in deadlines. We expect our binding and strain to be risk-weighted assets for long-term debt and estimate our long-term debt shortfall to be approximately $8 billion to $11 billion. While this strategy is partly dictated by regulatory requirements, we anticipate these funding actions along with our deposit growth strategies will support the replacement of some portion of the FDIC purchase money note, which matures in March of 2028. I will close today on Page 31 by discussing our first quarter and full year outlook for 2024. We anticipate that loans will remain flat to modestly increase in the first quarter, driven by low single-digit percentage Commercial Banking segment due to continued strong performance in our industry verticals. We anticipate SVB loan balances to remain flat in the mid-$50 billion range. As mentioned earlier, the Global Fund Banking business is benefiting from a strong pipeline due to being back in the market for clients during the second half of 2023 following the pause prior and immediately after the acquisition. This growth, however, will continue to be pressured by headwinds in the private equity and venture capital markets. We also anticipate a modest decline in the technology and health care banking business as lower levels of new fundings and line draws coupled with increased loan payoffs result in loan portfolio contraction. Looking at the full year, we expect loans to end in the $139 billion to $143 billion range or mid-single-digit percentage growth. We foresee increased volumes in our Global Fund Banking business as a result of increased outreach beginning in the second quarter of '23 and our increased pipeline. Additionally, we continue to see strong growth in our general and commercial bank segments. However, we do expect moderation to mid-single-digit percentage growth in these segments in 2023. Turning to deposits. We expect a low single-digit percentage point increase in the first quarter, primarily due to growth in the branch network driven by leveraging new products and initiatives to deepen client relationships that emphasize deposit growth as well as seasonal growth prior to April tax outflows. We are also focused on increasing our customer base by building deposits through proactive sales associate outreach, centralized marketing campaign and increased community connectivity. For the full year, we anticipate low to mid-single-digit percentage growth primarily related to growth in the general bank previously discussed and a mid-single-digit percentage growth in SVB deposits as market activity and the impacts of customer outreach begin to help produce deposit growth in the back half of 2024. With respect to SVB deposits, we expect the venture capital environment to remain challenging, particularly in the first half of 2024. Since April, we've seen SVB deposits remain largely stable despite continued cash burn exceeding funds sourced from fundraising activities. Encouragingly, we also added over 60 new primary operating business clients between April and November of 2023. We believe our emphasis on client engagement, coupled with better fundraising in the back half of 2024 will help propel modest growth in this segment. We'll continue to raise deposits in our direct bank. However, given the excess liquidity on our balance sheet, this pace will be moderated from the growth we experienced in 2023 with a growth rate of less than 10% anticipated in the channel. This obviously could change if we have unexpected deposit outflows elsewhere. Our interest rate forecast follows the implied forward curve, which includes 6 rate cuts in 2024, with the effective Fed funds rate declining from 5.5% to 4% by the end of the year. The implied curve currently diverges from the Fed dot plot expectations, which includes 3 rate cuts with effective Fed funds rate declining to 4.75%. It is our belief that we will see closer to 3 or 4 rate cuts given the continued strength in the labor market and the fact that inflation remains stubbornly above the Fed's target rate. Therefore, for our net interest income guidance, we provide a range with the top end assuming 3 rate cuts and the low end assuming 6 rate cuts. For the first quarter, we expect net interest income to be down in mid-single-digit percentage points range with and without accretion. The decline in headline net interest income will be driven by the impact of lower accretion and higher deposit costs, only partially offset by higher investment yields. For the full year, we expect net interest income in the range of $6.9 billion to $7.1 billion, with the low end assuming fixed rate cuts and the high end, assuming 3 rate cuts. In either case, we project accretion income close to $485 million for the year, which is a decline from $725 million in the last 3 quarters of '23 as loan discounts on some of the shorter portfolios have been fully recognized. Isolated net interest income for the second through fourth quarter period to take into effect the timing of the SVB merger with 6 rate cuts, we expect headline net interest income to be low double digits percentage points and ex accretion by high single-digit percentage point. With 3 rate cuts, we expect headline to be down high single-digit percentage points and ex accretion down low to mid-single-digit percentage points. We anticipate our full cycle data to be approximately 44%, which is materially in line with our previous estimate of 43%. Moving on to adjusted noninterest income. We expect the first quarter to be relatively in line with the fourth quarter in the $440 million to $460 million range. Looking at the full year and isolating for only the second through fourth quarters, we anticipate being flat as continued growth in net operating lease rental, wealth management and mortgage income are offset by a decline in client investment fees due to anticipated lower -- the anticipated lower interest rate environment. We expect full year noninterest income to be in the range of $1.8 billion to $1.9 billion. As Frank mentioned in his comments, we are excited for the continued build-out of and momentum in our wealth platform and will look to fully convert the legacy silicon private businesses in 2024. Moving to expenses. We expect a modest increase from the fourth quarter due to seasonal increases in personnel expense from higher benefits and incentives and software costs due to continued build out of product capabilities that will help us be a premier partner in the innovation economy in areas such as cash management, FX and payments as well as continued investment in our wealth capabilities that will help us sell deeper into our new national reach. Furthermore, we will continue the modernization of our platforms in consumer, equipment finance and factoring to ensure we are well equipped to scale in the future. We also have a few regulatory projects we will be completing this year related to ISO payments and Dodd-Frank. In addition, as Frank alluded to earlier, we were focused on building out our capabilities in the large bank and regulatory spaces which will require some focused builds. As of this -- all of this will be partially offset by continued acquisition synergies. Looking at the full year and isolating for the second through fourth quarters, we anticipate noninterest expense to be flat to up low single digits percentage points which equates to an adjusted noninterest expense target for the year of between $4.6 billion and $4.7 billion. While we expect to achieve the lower 25% band of our cost saves goal by the end of 2024, these savings will be offset by continued capability build out for large bank expectations as well as costs related to the strategic priorities I just mentioned. Our adjusted efficiency ratio is expected to be in the low 50% range in 2024, up slightly from 49% for full year 2023. On credit, we anticipate net charge-offs to remain in the 50 to 60 basis points range in the first quarter, given continued pressure in the general office real estate, small ticket equipment leasing and innovation portfolios. For the year, we expect net charge-offs in the 45 to 55 basis points range as we expect some of the pressure in the investor dependent portfolio to soften in the back half of the year as well as some of the changes we made in underwriting small ticket leases in 2022 began to favorably impact the net charge-off ratio. For both the first quarter and full year of 2024, we expect our tax rate to be in the 27% to 28% range, which is exclusive of any discrete items. In closing, we have accomplished a lot in 2023, including the transformational acquisition of SVB, which brought significant scale to our business and new product offerings through our geographically diverse client base. While economic and geopolitical uncertainties remain, we believe the strength of our diversified businesses, our strong capital and liquidity positions and our hard-working and dedicated associates will help us continue to take care of our customers and clients and deliver meaningful returns to our shareholders. As we've proven during previous economic downturns, our business model is resilient and recession-ready in large part due to our disciplined through-the-cycle credit underwriting standards and robust risk management infrastructure. In 2024, we remain focused on allocating capital where we can drive deeper relationship business with the goal of continuing to deliver top-tier financial returns. I will now turn it over to the operator for instructions for the question-and-answer portion of the call.
Operator: [Operator Instructions] The first question today comes from the line of Steven Alexopoulos from JP Morgan.
Steven Alexopoulos: I want to start on asset sensitivity and the net interest income guidance. So part of what makes you guys so asset sensitive, right, is the outsized cash position. How do you guys see cash balances trending through 2024? What's in the guidance? And if the Fed does start cutting rates, is that the time to start putting more cash to work? Or are you still more focused on SVB deposits and other issues?
Craig Nix: Well, first of all, right now, cash is around 17% of earning assets. And ideally, over time, we'd like to see that migrate to 10% to 12% replaced with either loans or investments. So -- but at this point in time, where we are in the cycle, we believe we have time to get that down, especially given the purchase money note. I'll let Tom talk a little bit about the rate sensitivity and the cash balance and what we may be looking for doing to position ourselves going forward.
Tom Eklund: Yes, Steve. During the second half of last year, we put about $8 billion worth of migrated from cash to securities, and we expect that to continue into 2024. Really, what we're doing is we're taking a methodical approach, not trying to buy the curve on any one day, but sort of do it over time and we'll continue to do that. We also put on about $1 billion worth of fair value hedges where we moved some of our fixed rate borrowings to floating rates. And you can expect to see that sort of continue to mitigate that asset sensitivity over time.
Steven Alexopoulos: Okay. Got it. But you're generally expecting cash balances to stay fairly elevated in terms of what's in the NII guidance, right? That's what you're saying.
Craig Nix: Yes, I think that's true, although I think the percentage might drop some, but not into that 10% to 12% ban at the end of 2024.
Steven Alexopoulos: Okay. And then my follow-up question, I don't know Mark's on the line but in terms of the SVB business, last quarter, you guys talked about some green shoots, positive signs, right, new account openings. Curious, what do you see in the most recent quarter in terms of clients' prospects coming back to the bank and what's your assessment of the state of the market right now? I saw early-stage losses up a bit. Capital falls down, pipeline up. Just looks like the view on the current ecosystem at the moment.
Craig Nix: Mark, do you want to take that?
Unidentified Company Representative: Yes. Happy to jump in there. Steve, it's [Mark Cater]. And the fourth quarter was really, in this regard, a lot like the third quarter, continued momentum with new clients, new lending, winning back business that had departed to other financial institutions, et cetera. And so very encouraged by that as we look ahead to '24. At the same time, as I think Craig already mentioned, our target markets, the innovation economy continues to go through the reset, its own downturn. And as mentioned, we expect that's going to continue in '24. And so our intention is to keep doing what we were doing in '23. And hoping that '25 and ahead is better conditions, but again, feel good about the momentum we've got and going into '24, notwithstanding that we still have market headwinds.
Operator: The next question today comes from the line of Brody Preston from UBS.
Brody Preston: Craig, I just wanted to follow up on the cash comment. So if we're -- if you're using the forward curve, which has the Fed funds ending at 4% at the high end of the target range for 2024, so like [3.78] at the midpoint. Why not use the cash at the end of the year or sometime in the first quarter of '25, maybe to pay back that FDIC note. I mean, you'd just be earning like 35 to 40 basis points on it at that time. So it's pretty NIM dilutive. And I'm assuming that you all feel like you have a pretty decent handle on the SVB deposits now. Like is that contemplated in your thought process at all?
Craig Nix: Yes, I'm going to let Tom amplify what I'm going to say here. But right now, where rates are, there's a positive arbitrage in there. And while it's dilutive to NIM, it's accretive to net interest income. Obviously, as we move into more rate cuts, it becomes less attractive to leave that purchase money note out there. And with the excess liquidity we have, we would have some optionality of pulling that down. Tom, would you like to amplify that?
Tom Eklund: I mean, I think the only comment I'd make is that, again, that excess liquidity and having that cash provides that option for us should raise all of the forecasted path and the forward rate curve. That's where it...
Brody Preston: And then I did want to circle back. I think I heard you earlier, Craig, that you said you expected the SVB loans to remain around like in the $50 billion-ish kind of area for this year. I guess I wanted to ask like a little bit of a 2-part question here. What is kind of like the mix that you're assuming within that just because I saw that the cash flow dependent balances were up about $1 billion this quarter. And then two, like how do you think about the components of growth and what it does to the multiple? Because you kind of have these 2 divergent paths, right? If you can grow SVB that should naturally come with higher DDA balances, and that's really enhancing to your multiple over the long term versus kind of growing the higher-yielding commercial bank and maybe funding it more with your savings product is great for balance sheet growth, but I think investors would do that as less multiple enhancing? Like how do you think about those 2 paths?
Elliot Howard: Yes. Brody, this is Elliot Howard. I think on the SVB growth, we're expected to be up slightly from about mid-50s range this year, and a lot of that in the Global Fund Banking. Craig mentioned that our pipeline was up $1.5 billion in the fourth quarter from where it was, just really as a result of kind of being back in the market more fully in the second quarter. I think we're still seeing headwinds as Mark mentioned, second health care, just given the overall kind of environment. Longer term, I think we're bullish on the SVB growth, market activity returns, just with a similar of a client in the outreach to new clients. I think with that, certainly, with the loan growth, we'd expect more deposit growth to come as well as that returns, and that's a -- keep a rate on what we have certainly again our savings product and direct banks. The more that we can grow the SVB, we do think that will be setting better for the overall bank in earnings.
Brody Preston: Got it. So just to confirm, though, for 2024, it does sound like we're leaning more into the commercial bank and maybe kind of funding that with higher cost savings deposits. Is that fair?
Craig Nix: We're also projecting mid-single-digit growth in the general bank as well. So it's just pretty spread across the loan portfolios.
Operator: The next question today comes from the line of Christopher Marinac from Janney Montgomery Scott.
Christopher Marinac: Just wanted to ask more about the general criticized loan trends beyond what we saw in the DAC on office and the SVB portfolio?
Andy Giangrave: Yes. Sure. This is Andy Giangrave. Obviously, it's -- the trends we're seeing are concentrated in general office and innovation. I think we have seen moderate migration in C&I, but nothing at this point of any concern.
Christopher Marinac: Great. And then the charge-off guide being a little higher now in Q1 and then a little lower for the whole year, does that indicate to sort of kind of past clean up or clean up from past issues? Or do you see sort of, I guess, some greater shoots that, that credit can improve as this year goes on?
Andy Giangrave: Yes. I think it's going to be the continued theme that we spoke about last quarter and this quarter. It's going to be concentrated in office innovation and our equipment finance. Obviously, there's the secular shift in office that's still a challenge, especially in this interest rate environment. The innovation, I think Mark highlighted well the challenges in the market. And then in the equipment finance side, it's really working through some of those older vintages, but we feel like the tightening of our underwriting in that portfolio and some of the increase in collection efforts should start to show some benefits in the back half of the year.
Operator: Our next question today comes from the line of Brian Foran from Autonomous.
Brian Foran: Maybe to follow up on credit and these 4 kind of main portfolios, the Class C office, the 2 investor-dependent and in the small ticket equipment finance. I think they total about $6.5 billion now, and you give us the reserves on most. But then I guess you also have pretty heavy charge-offs already and some purchase accounting marks. I don't know if it's easier to talk about them as a group or some of them separate. Is there any way to like frame between the allowance, the charge-offs to date and the purchase accounting. Like what is the cumulative loss you've now recognized on these portfolios.
Craig Nix: Brian, this is Craig. I'll take those individually and in aggregate because I think it's important to really size that portfolio relative to the overall loan portfolio. If you take those 3 components, commercial, general office, equipment finance and the investor-dependent loans, whether the growth stages or early stage. Those totaled about $11.3 billion which is 8% of the loan portfolio. If you look at -- and now -- and so all those portfolios, we have total loss absorbing capacity of around 6.06% on net charge-offs for the year of around [$3.6 billion]. So if you aggregate those portfolios, our coverage is 1.9x, if we slice it down to the individual portfolios, commercial, general office, we have a coverage ratio of 1.1 and allow us 7.99% on charge-off price of $7.48. On the equipment finance, the allowance is 3.52% and charge-offs 1.87% to around 1.9% coverage. And then on investor dependent, we have an allowance of 5.21 and a purchase discount of 3.58 which totals the total loss of building capacity of 8.79. So the allowance covers the charge-offs of 4.66, but when including that purchase discount, which is available to absorb losses takes it to 1.9x. So we feel really good about both our projections there and about our coverage in terms of charge-offs both that we've incurred and that we expect to occur moving forward.
Brian Foran: That's really helpful. I guess on the buyback, I'm assuming you're not going to answer the obvious question of sizing it for the second half of the year. But maybe can you just remind us, as we've moved through this year, there's been CET1. There's been CET1 ex the loss share. There's been the leverage. It seems like some of the divergent metrics are starting to converge. But when you look at kind of your excess capital position and what number are you focused on? Is it the roughly 12 pro forma CET1 versus the 9% to 10% target? With the different capital metrics, what's the focus right now as you move to midyear?
Craig Nix: Yes. We look at it sort of -- I mean, if we do an asset test as of 12/31/23, with Basel III, it's around 12%. If we do an asset test with Basel III at [ex loss] share, it's around 11%. So that range of 11% to 12% sort of asset debt, that’s at 12/31/23 leaves us well above our target ranges. And then obviously, as time goes on, we're accreting earnings at about 36 basis points a quarter and risk-weighted assets, we're taking at 27. So we look -- it's going to continue -- our capital position is going to continue to build. So we do think that share repurchases are going to -- we feel confident about share repurchases, not only rate accreting capital, but just the absolute levels of capital, our capacity to handle our balance sheet growth, SVB integration efforts and our positioning with respect to Basel III, all give us confidence in a very purposed plan. And you're right, I really can't speak to the size of that until we get through our internal stress testing, which is being conducted now as part of our capital plan. We do expect the timing subject to necessary internal and regulatory approvals to be in the second half of this year. So I hope that's helpful, but we are looking at definitely target that our capital ratios are well above our target ranges, looking at it in a myriad of different ways.
Operator: The next question today is a follow-up question from Steven Alexopoulos from JP Morgan.
Steven Alexopoulos: So the market is pretty happy with the news of buybacks coming back in the second half. My question is, so given the tangible book value growth, such a key focus for the senior team, at this valuation, I'm sure you'd love to be buying back the stock today. But at what valuation do buybacks become less attractive, right? I mean if the stock is trading, Mark delivers what we think at SVB, just saying it's 1.5% or something like that. This year, do you still buy back in the second half? Like where is like the line of the sand where you don't find buybacks as attractive?
Craig Nix: Well, we look at it just like we would any other acquisitions. So there are a myriad of payback periods and tangible dilution payback periods that we look at. I'm not going to get into our modeling on it. But we certainly scrutinize repurchases just like we would scrutinize purchasing another bank in the open market. Tom, do you have anything else? Tom is responsible for some of the modeling we do there. But I think that's generally -- I don't think I left anything out there.
Tom Eklund: No, I think that's exactly right. I mean we bought back above tangible value in the past and it really has to do with sort of what our earnings trajectory looks like and sort of what other opportunities are out there. So yes, it varies, but it's not like there's a firm feeling.
Steven Alexopoulos: Got it. Okay. Just one other one. On the NII guide, do you guys include the expected cost of this $8 billion to $11 billion debt issuance? Is that in there? Or if you issue, will that then impact the NII guide?
Craig Nix: It's in there, but the issuance this year would be muted, so it won't have a significant impact on this year's NIM. But going forward, it will based on where our costs are today and what the costs are anticipated on that will probably be a headwind moving forward.
Operator: The next question today is a follow-up question from Brody Preston from UBS.
Brody Preston: I just had a couple of clarifying questions that I wanted to ask. The first one was just on the innovation C&I and cash flow dependent portfolio. As I said earlier, that was up $1 billion in balances. Was there any like movement from like the growth stage portfolio there? Was that kind of like true growth within that portfolio? And if so, do you happen to kind of have a read on what the industry verticals were that drove that growth?
Craig Nix: Mark, do you have any insights on that? I don't have that right in front of me here.
Unidentified Company Representative: Yes. So for the SVB portion of the portfolio, the cash flow dependent growth would have been largely centered in sponsor finance and our project finance portfolios and where we've continued in sponsor to have some elevated criticized but on the new loan production. And generally speaking, these are loans that fund pretty close to inception. We're seeing really nice opportunities there, notwithstanding the broader backdrop. Hope that's helpful.
Brody Preston: Okay. Great. That's helpful. And Craig, do you have what the unfunded commitment balances for the bank were at 12/31?
Craig Nix: Not on hand. We'll take that offline.
Deanna Hart: Yes. Brody, I can follow up with you. This is Deanna, on those numbers.
Brody Preston: Okay. Great. And Deanna, just last one, I got you. That 198 loan accretion number, does that include any PAA that's related to the unfunded commitment book?
Deanna Hart: Yes. It would be inclusive of both the on balance sheet and off balance sheet.
Operator: I'm not showing any further questions at this time. So I'd like to turn the call back over to our host, Deanna Hart for any closing remarks.
Deanna Hart: Thank you, and thanks, everyone, for joining our 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 our Investor Relations team. We hope you have a great rest of your day.
Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.
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