First Citizens BancShares, Inc. (FCNCA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens Bancshares First 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, and welcome to First Citizens first 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 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 edit nor guarantee the accuracy of earnings transcripts provided by third parties. I will now turn it over to Frank.

Thank you, Deanna. Good morning, everyone, and welcome to our earnings call, and thank you for joining us today. I'll start with -- by providing brief comments on our first quarter results before turning it over to Craig to review our performance in more detail. Starting on Page 5. Today, we reported solid financial results aligned with our guidance with adjusted earnings per share of $37.79. We remain encouraged by the performance of our operating segments and achieved loan growth in our Commercial Bank and SVB Commercial segments. Deposit growth was strong, concentrated in our direct bank and throughout our branch network. Credit performance remained stable with net charge-offs declining from the fourth quarter and at a 41 basis points coming in at the low end of our guidance range. We maintain strong capital and liquidity positions, which allowed us to return an additional $613 million of capital to our shareholders through share repurchases. This quarter's repurchases brought total repurchases since inception of the plan to $2.3 billion or 8.26% of the total Class A shares. In early March, we successfully reentered the debt markets, issuing $500 million of senior unsecured borrowings and $750 million of subordinated debt, providing us with additional funding and capital at attractive terms. We believe this was a proactive step that positions us to effectively manage our debt and capital structures to support future growth. On April 7, we terminated our loss share agreement with the FDIC, which we entered into as a part of the SVB acquisition. The agreement was put in place to protect the bank from material downside risk on the acquired commercial loan portfolios, despite SVB's long history of strong credit performance. After 2 years together, given the low likelihood of reaching the $5 billion loss threshold during the 5-year period covered by the agreement, the adequacy of our reserves and the purchase discount on the covered portfolio, and the operational complexity and cost of maintaining the agreement, we determined that the share loss agreement was no longer warranted. The decision to terminate reflects our confidence in the quality of the SVB portfolio. We continue to make progress on our strategic priorities as outlined on Slide 6 and remain focused on our commitments to our customers and clients, innovation and operational efficiency. Before I hand it over to Craig, I want to take a second to acknowledge the level of uncertainty in the macro environment -- in the macroeconomic environment. While tariff announcements and market volatility have been disruptive, the ultimate impact on the broader economy is unknown at this point and as such, quantifying potential impacts on our future results is difficult. Despite the level of uncertainty, we continue to operate from a position of strength supported by our strong capital and liquidity levels, which we believe will allow us to continue to support our customers and clients in a variety of economic scenarios. We will continue to monitor and respond to both known and anticipated policy changes and their potential effects on our operating environment. No matter what outcomes eventually materialize, we're committed to staying disciplined in our long-term strategic approach, which will enable us to remain resilient through short-term volatility while continuing to support our customers and clients with confidence. I'll now turn it over to Craig to review our financial results in more detail. Craig?

Thank you, Frank. I appreciate everyone joining us today. I will anchor my comments to the first quarter key takeaways outlined on Page 8. Pages 9 through 26 provide more details underlying our results and are for your reference. As Frank noted to start the call, first quarter financial metrics were aligned with our guidance. We reported adjusted net income of $528 million and EPS of $37.79. This translated into adjusted ROE and ROA of 9.64% and 0.95%, respectively. Our adjusted efficiency ratio came in at 59.6%. Headline NIM was 3.26%, and NIM ex accretion was 3.12%. As anticipated, headline net interest income was down from the linked quarter as the impact of lower loan and Fed funds yields, coupled with lower accretion income and 2 fewer days in the quarter more than offset lower deposit costs and higher investment securities income. Headline NIM contracted modestly from the linked quarter by 6 basis points, and excluding accretion by 4 basis points. The 4 basis points decline was driven primarily by the negative impact of Fed fund rate cuts late in the fourth quarter of 2024, which continued to pull through into the first quarter, lowering the earning asset yield, which was only partially offset by lower funding costs. However, the pace of the decline moderated from the prior quarter as we continued to execute on our down beta action strategy, including lowering deposit rates. Also, as anticipated, adjusted noninterest income decreased sequentially, but was aligned with our guidance range. The primary driver of the decline was the negative impact from fair value changes in customer derivative positions, driven by changes in the rate environment and the write-down of a held-for-sale asset. We also saw a $6 million decline in adjusted rental income as lower rental income and higher maintenance costs more than offset continued strong repricing trends. As we have called out previously, maintenance expense in this business can be lumpy quarter-to-quarter. While down on the quarter, the overall fundamentals in the rail business remains solid, and we believe it continues to conduct itself well, limiting the impact of possible recessionary effects through proactive sales practices. Only 16% of rail leases expire in 2025, while more than 45% expire after 2027. Additionally, repricing continued to be strong in the first quarter. These declines were partially offset by a $2 million increase in wealth management income as this business continues to see solid momentum, demonstrating the strength of our brand and the trust clients place in our advisers. Adjusted noninterest expense came in at the lower end of our guidance, increasing sequentially by less than 1%. The increase over the sequential quarter was driven primarily by higher personnel and marketing expenses. Increased personnel costs were due mostly to two factors. One, net staff additions and technology and risk management as we continue to scale for future growth; and two, seasonally higher benefit expenses. Marketing expense increased due to efforts in the direct bank to maintain and attract new deposit balances to help offset the strategic decision to shift approximately $2.4 billion in higher-yielding SVB commercial deposits off balance sheet and continue rightsizing our loan-to-deposit ratio. Despite the growth in balances, we were successful in bringing down rates in the direct bank during the quarter. These increases were partially offset by a decline in other noninterest expense, driven by several miscellaneous items with the most significant, including lower state-related non-income taxes, lower donations and other general and administrative expenses. Moving to the balance sheet. Loans grew $1.1 billion or by 0.8% sequentially with growth concentrated in the Commercial Bank and SVB Commercial segments. Commercial bank loans grew by $733 million, primarily driven by continued strong performance in our tech, media and telecom and health care industry verticals as well as higher balances in our factoring business. Our industry verticals continue to bring unique capabilities to our clients and our factoring business benefited from new client acquisition and higher facility usage from existing clients. SVB Commercial loans grew by $440 million, driven by global fund banking as new loan originations and draws outpaced paydowns and payoffs. Our pipelines remain robust, and we remain encouraged by our team's success even in this down market. Tech and health care business loans declined from the sequential quarter in line with our expectations given that macro environment challenges continue to be a drag on originations. General Bank loans decreased modestly about $40 million attributable to net declines in the business and commercial loan portfolio driven primarily by elevated prepayments and seasonal lines paying down in the first quarter. We also saw declines in our consumer and mortgage books as we shifted to move pockets of our retail production off-balance sheet to create additional liquidity, while generating supplemental noninterest income. Turning to the right-hand side of the balance sheet. Deposits were up $4.1 billion or by 2.6% sequentially and exceeded our guidance as we experienced strong growth in the Direct Bank and General Bank. The direct bank was the largest contributor to the increase, growing by $3.1 billion. As noted last quarter, we leveraged this channel to help retain and attract new clients given a shift in strategy for one of our SVB commercial deposit products. This high-yielding deposit product was moved off balance sheet in the first quarter, lowering total deposits and SVB Commercial by $2.4 billion. We continue to see solid elasticity in Direct Bank deposits, despite lowering rates and achieved strong growth in the first quarter, which resulted in us exceeding our guidance. In the General Bank, we experienced growth of $1.4 billion as we continued to maintain strong client relationships and grow deposits organically within the branch network, while also capitalizing on our national market share position in Community Association Banking, which typically has the most seasonal growth in the first quarter of each year. Despite the expected off-balance sheet movement, SVB Commercial achieved spot deposit growth of $496 million. Importantly, tech and health care balances were up when adjusted for the impact of the off-balance sheet migrations, demonstrating the competitive advantage we maintain in this business, despite continued macroeconomic headwinds impacting inflows for both existing and new clients. While average deposits were down from the sequential quarter, average total client funds increased as expected, and the strategic action helped to optimize our balance sheet and reduce deposit costs in SVB Commercial. These increases were partially offset by a $500 million -- $508 million decline in the commercial bank. Moving to credit. Net charge-offs declined by 5 basis points sequentially, and we're on the lower end of our guidance range. Consistent with prior quarters, net charge-offs were mostly concentrated in the general office, investor-dependent and equipment finance portfolios. We did experience a couple of larger losses in the broader SVB innovation portfolio and in our commercial finance business. As noted previously, the large hold sizes within some of our portfolios can cause net charge-offs to be lumpy between quarters. The losses in these two portfolios were idiosyncratic in nature and were reserved for previously. This time, we are not seeing any further trends that would signal wider credit quality concerns within these portfolios and believe we are well reserved. The allowance ratio decreased by 1 basis point to 1.19%. We feel good about our overall reserve coverage as well as the coverage on portfolios experiencing stress. Ultimately, our strong risk management framework, rigorous underwriting standards and diversified portfolio, help us maintain a resilient balance sheet, safeguarding us against losses. Moving to capital. Frank mentioned that we continue to make progress on our share repurchase plan. As the close of business on April 22, 2025, we had repurchased 8.91% of Class A common shares or 8.29% of total common shares outstanding for a total price of $2.4 billion. This represents approximately 69% of our Board approved $3.5 billion repurchase plan. Given the termination of the FDIC shared-loss agreement, or SLA, I will focus my commentary on our adjusted CET1 capital ratio. Recall that while the SLA benefited our capital ratios, we have always managed capital without the benefit of the SLA knowing that only provided a temporary lift. As a result, the termination does not impact our approach to capital management or related actions. The CET1 ratio, excluding the benefits of the [ LSA ] was 12.19%, a decrease of 14 basis points sequentially as risk-weighted asset growth and the impact from share repurchases outpaced earnings growth. We intend to manage CET1 towards the 10.5% to 11% range by the end of the first quarter of '26, which is the level it was following the SVB acquisition. We intend to accomplish this through regular share repurchases in 2025 as we continue to assess capital needs considering loan growth, earnings trajectories and the economic and regulatory environments. This contemplates an additional share repurchase plan in the second half of 2025, which we will discuss further during our second quarter earnings call. I will close on Page 28 with our second quarter and full year 2025 outlook. As Frank mentioned earlier, there's been an increased level of market volatility due to uncertainty regarding tariffs, and its impact on the overall macroeconomic outlook. We continue to monitor the situation, but it is early, and the fluidity of the changes makes it difficult at this time to narrow the range of potential impacts on the broader economy in our -- on our business lines and clients. Accordingly, we have not made significant changes to our guidance this quarter. However, we will be diligently monitoring developments and economic indicators and how they may impact our performance moving forward, and if we find that the impacts are likely to have a significant adverse effect on our earnings or growth prospects, we will reflect that in updated guidance. Starting with the balance sheet. We anticipate loans in the $142 million to $144 billion range in the second quarter, driven by growth in the Commercial Bank and SVB Commercial segments. Commercial bank growth will continue to come from our industry verticals. We expect SVB Commercial will benefit from the growth in the global fund banking business. Thanks to the strong pipeline it maintains, but we do remain cautious on the absolute level of growth given recent macroeconomic uncertainty. For the full year, we reiterate our previous guidance for loans in the $144 million to $147 billion range and anticipate growth will be driven by SVB Commercial and the commercial bank industry verticals. We expect that SVB Commercial growth will be more concentrated in the back half of the year, as the Fed's monetary easing cycle begins to take effect, and we expect the benefit of higher VC investment and capital markets activity. However, the overall level of growth will be dependent upon the final tariff policies implemented in the macroeconomic environment. We expect deposits to be in the $158 billion to $161 billion range in the second quarter, driven by growth in the General and Direct Banks. In the General Bank, we expect to continue to benefit from our branch network, leveraging new products and initiatives to deepen client relationships. We will also continue to focus on increasing our customer base by building deposits through proactive sales associate outreach, centralized marketing campaigns and increased community connectivity. We will continue to leverage the direct bank to drive growth in insured core deposits. While it is a higher cost channel, we anticipate benefiting from falling interest rates and believe it will provide us with a strategic agility to pursue our balance sheet optimization efforts. We also continue to benefit from a shift in consumer behavior through a digitally centric delivery platform, which is supporting client acquisition. We expect that this growth will be partially offset by a decline in SVB Commercial, discontinued client cash burn in muted public and private investment activity pressures growth. For the full year, we are raising our deposits guided slightly to the $163 billion to $168 billion range given strong first quarter results. Our interest rate forecast covers a range of 0 to 425 basis points rate cuts, which is aligned with our prior guidance with the effective funds rate range declining from 4.25% to 4.50% currently to as low as 3.25% to 3.5% by the end of the year. While our baseline forecast includes three rate cuts, we believe there is a possibility that a broader economic slowdown could lead to additional cuts. However, given stubborn inflationary metrics and possible impacts to the macroeconomic policy, we recognize these cuts may not occur. Therefore, we believe it's prudent to provide a range of expectations for the year. We expect second quarter headline net interest income to be relatively stable compared to the first quarter as lower deposit costs are offset by lower accretion and interest income on earning assets. Our guidance does include the planned impact of share repurchase activity for 2025 under our current share repurchase plan. For the full year, we are modestly lowering our headline net interest income guidance to be in the range of $6.55 billion to $6.95 billion from $6.6 billion to $7 billion. The revision reflects the new interest rate curves as well as the jumping off point from the first 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 second quarter net charge-offs in the range of 40 to 50 basis points aligned with the first quarter range. 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 2025, even as market disruption may lessen as more companies begin to reinstate office attendance requirements. We also anticipate continued stress in the investor-dependent portfolio throughout 2025. While the Fed cycle is a welcome change, the catalyst for buyers to become more acquisitive and for public investors to have an improved appetite for IPOs remain elusive especially given the market dislocation resulting from the tariff announcement. We did see a $14 billion uptick in VC investment sequentially, we remain guarded on the overall outlook as there were a few outsized deals in these totals, which are not part of our service addressable market. These large deals accounted for approximately 60% of investment in the quarter, and when large deals are removed, the first quarter total is aligned with the first quarter. We expect the continued improvement here will be facilitated by a higher fundraising environment driven by both M&A and IPOs. With respect to the full year range, we are maintaining our guide of 35 to 45 basis points, despite the lower jump-off point. This is because we 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. And timing-wise, they can easily fall into 1 quarter or another. It is important to note that our net charge-off guidance does include an estimate for the -- it's important to note that our net charge-off guidance does not include an estimate for the impact of tariffs, inflation or interest rates cuts, as it is too early to determine the 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 to our portfolio, but we do believe the diversity in our loan portfolio is a strength heading into this environment. Moving to adjusted noninterest income, we expect to be in the $480 million to $510 million range in the second quarter, which is aligned with a typical quarter for us. Overall, we continue to see potential strength in many of our core lines of business, such as rail, merchants, international and wealth. We have not changed our full year adjusted noninterest income ranges and expect this to be in the $1.95 billion to $2.05 billion range. This growth continues to be driven by a rail outlook, which includes a balanced railcar portfolio in a strategic exploration ladder. We are beginning to see some competitive pricing pressure because of economic uncertainty and our outlook will ultimately be dependent on the tariff regime going forward as well as its impact on overall economic activity. At this point, the potential impacts are unclear, but we do believe this business is well positioned to handle possible changes throughout 2025. We also expect continued momentum in our wealth business as we continue to organically add new clients as well as higher international and lending-related fees given the healthy fundamentals supporting these businesses. I do want to caution that given the changing rate environment; our client derivative positions can fluctuate between quarters causing some lumpiness in our noninterest income results. Moving to adjusted noninterest expense, we expect the second quarter to be flat to modestly up compared to the first as personnel expenses level out following seasonal increases, but are offset by investments in risk and technology to build towards Category 3 expectations and to simplify and optimize our platforms. Looking at the full year, we continue to see adjusted noninterest expense in the $5.05 billion to $5.2 billion range. Exercising disciplined expense management, while making opportunistic investments is a top priority for us giving -- given headwinds to net interest income. Our adjusted efficiency ratio is expected to remain 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 the Category 3 status when we cross that threshold. Longer term, our goal is to operate in the mid-50s. Finally, for both the second 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 tax items. To conclude, we are pleased with another quarter of solid financial performance, while maintaining strong capital and liquidity positions. Our focus now turns to the future, which currently includes an increased level of uncertainty. What we do know is that we will be here to support our customers and clients through it all. We have consistently demonstrated solid performance in periods of uncertainty given the strength of our capital and liquidity positions, risk management, client selection and our diversified business mix. All of these attributes serve as sources of strength and periods of stress and gives us confidence in our prospects moving forward and supporting our customers and clients. 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 today comes from Chris McGratty from KBW.

Craig, I guess a question on the buyback, the 10.5% to 11% by the first quarter. Basically would imply a pretty meaningful step-up in either growth or the pace of buybacks. Could you just help me reconcile how you get there over the next, call it, 9 months?

You're specifically referring how do we get to the 10.5% to 11% range over the next 9 months?

Exactly, from the [ 12.2% ] today, exactly. How do you pull 100 [indiscernible]...

Yes it assumes that -- you obviously complete the repurchase that's ongoing and that we implement another repurchase plan in the back half of 2025.

Okay. And then given -- I guess, given market volatilities and the stock valuation, I see what you've done quarter-to-date. Is there an opportunity just to step it up near term? Obviously, there's liquidity restrictions on a daily basis, but how do we think about near term where the stock is?

Obviously, where the stock is, is making our repurchases more effectual and we're able to repurchase more shares than otherwise. The pace of our share repurchases are really dictated by our capital plan, which we are very hesitant to deviate from. Tom, I'll let you add to that if you have any other comments.

No, yes. And as a large financial institution, we just wrapped up sort of our first quarter, submitted it to regulators and sort of going through that review process. And as Craig mentioned, provides more context on the next earnings call and sort of where we sit there. But I think overall share repurchases is sort of part of our capital strategy. And as we communicated when we keep it off, we'll continue to be methodical and something we want to continue to do all the time.

The next question comes from Christopher Marinac from Janney Montgomery Scott.

I wanted to ask about the FDIC receivable and what impact that's going to have on balance sheet and buybacks and even earnings beyond the next quarter?

So you're talking about -- are you talking about the purchase money note?

Yes, sir, correct.

Okay. And could you repeat the last part of that question?

Just in terms of how it's going to impact the balance sheet, when you pay that off. I think last quarter, Craig, you mentioned that it was going to get paid off by the end of this year.

No, I don't think we indicated that it would be paid off at the end of the year. What we do say is that if the arbitrage goes out of the note that we would pay it down. Right now, we don't anticipate the rates are forecasted to be paydowns in 2025. Although as we move into 2026, we would anticipate if the forward curve is correct, paying down a portion of that note.

Great. Thank you for that clarification. I appreciate it. And from a general margin standpoint, do you still see yourself as somewhat asset-sensitive? Or is that changing as time passes?

We are asset sensitive, and we'd anticipate staying that way.

The next question comes from Anthony Elian from JPMorgan.

I'd like to get more color on the total client fund growth you saw on SVB in the first quarter. But I mean average balances were up $2 billion in 1Q. They're up $4 billion in 4Q. I'm just curious and maybe if Marc is on the line, if he can dive a bit deeper into the growth you saw and if you think growth overall in total client funds can persist given the market volatility.

It's Marc. I'll start and leave it open for Craig or others if they wish to add. Starting with the first quarter, it is -- the way I think of it is the TCF, the total client funds growth that we saw and recognizing that there is a shift between deposits and off-balance sheet in the quarter, as Craig mentioned, I think is reflective of SVB's continued ability to execute, win business, drive balances despite the ongoing innovation economy headwinds that we continue to experience. Going to your question about the outlook for the rest of the year, I think all of that is reflected in our guidance, as Craig mentioned. And at the same time, there's an awful lot of uncertainty, as Craig also mentioned, hanging over all of this. And so will some kind of pause related to the uncertainty turn out to be a headwind. We'll all get to find out. But so far through the first quarter, very encouraged by our ability to execute.

And then my follow-up on the credit quality. I think you mentioned this in the prepared remarks, but I was hoping you could dive a bit deeper into potentially any loan portfolio, specific borrowers, you may be paying a closer attention to now that have outsized exposure to supply chain or tariffs? And maybe if you can size them up for us, that would be great.

Andy, you want to answer that one, please.

Sure. So we have done a review of the portfolio and asset class exposure that we think is at risk to certainly the tariffs and all that go with that. We looked at the level of tariffs by country and how that impacts any particular portfolio, the origin of the supply chain any potential impact on margins, volumes, collateral values, et cetera. Obviously, it's very difficult at this point to assess the full impact. But some of the portfolios that certainly that we're focused on is textile, footwear, retail, right, given that -- most of that comes from Asia with the largest impacts from tariffs there. Certainly, auto exposure. Equipment finance and innovation that would be some of the larger portfolios that we're watching. The good thing is we haven't seen any change in customer behavior regarding draws. I think everyone's being cautious as they try to get more clarity on the full impact. So it's still early days.

The next question comes from Brian Foran from Truist.

I'm just thinking about the stock in. It's kind of hard to reconcile 1.1x tangible book with the value you've created pretty consistently over time. The pushback I do hear a lot is, well, the current ROTCE only 9% or 10%. Even if you adjust for the excess capital, it's maybe 12%. Can you just share your updated thoughts when you look out 3, 5 years or maybe it's easier to speak to a normalized environment? How do you think about the normalized return potential of the franchise? And what are the big things to get there?

Brian, some of your question got muted out, but I think I have the gist of it. In terms of return, we've consistently produced pure leading total shareholder returns. I don't want to speculate on the multiple. I think you're asking about the price of tangible multiple. We do, though, we are carrying a good bit of excess capital right now. So that could be part of it, but anything like that would be purely speculation on my part.

Sorry. And I think the important part of my question got cut off. Sorry about that. And hopefully, it's coming through now. [indiscernible]. Yes. I was really asking more about the ROTCE because I think a lot of people justify the current valuation based on the current ROTCE, but is there any thoughts you can share on 3 to 5 years out, can you do a 15% ROTCE, 13%? Is there a range? Just your updated thoughts on what you think have normalized return is for the business.

Well, Brian, first of all, we're not big fans of ROTCE because it allows banks to take deals out of their premiums they paid or dilutive deals out of their denominator. So we're much more focused on ROE. And we also much more focused on tangible book value. We believe over time on that, that we can return on average over 10% TBV growth over long periods of time, which would lead to double-digit ROE. But ROTCE -- the difference between ROTCE for us and ROE is only about 30 basis points given that we don't have a high level of goodwill and intangibles on our balance sheet. So we're not really -- we're not really focused on ROTCE and really don't think it's a fair comparison between us and our competitors is they have a lot more goodwill on their balance sheet and a lot more AOCI as well.

And if I could sneak in one follow-up. The rate market has been all over the place. So I realize this can change tomorrow. But right now, it's kind of centered on the 4 cut scenario. Is there any help you can give us on the trajectory of NII and really kind of the exit run rate for the year, the jumping off point for next year. If we get that 4 rate cut scenario would quarterly NII by the end of the year still be kind of near that $6.5 billion bottom end of the range? Or could it actually get a little bit below that? Just I know it's hard to ask for quarterly guidance, but just any big picture thoughts if we can at the 4-way cut scenario. You could expect NII to trough.

Sure. Thank you. I will focus on comparing the first quarter '25 actual to the fourth quarter '25 exit. With three or four rate cuts, the fourth-rate cut would be late in the year. So the impact on this year would be muted. So with three rate cuts, our headline net interest income, we expect it to be up low single digits percentage points and headline NIM to be in the low 310s. And with three rate cuts, ex accretion, net interest income to be up low to mid-single digits percentage points and ex accretion NIM to be in the low 3s. And in terms of troughs, we would have pretty much everything troughing, all those measures, NIM ex accretion and headline, net interest income, excretion the headline to trough in the first quarter of '26. And that's subject to timing and magnitude of rates and we could have more rate cuts in next year, which would just push the trough out further.

The next question comes from Ben Gerlinger from Citi.

I was curious it's pretty clear you guys want to return shareholder capital via a buyback. I mean you teased another one in the second half of this year. And at these valuations, I totally understand that. But when you think about the economic outlook, you've cited some volatility. I have no issue with your credit profile, but you guys have always been good acquirers. Does this mean you really have no appetite for a potential partnership or acquisition should economic volatility increase, just kind of thinking about the deployment outside of the buyback over the next 12, 18, 24 months with this volatility economically.

Yes. I would not say that our appetite for M&A has changed, we're really dealing with what's in front of us right now and that's the share repurchase plan. That's the most effectible way for us to return capital at this point in time. But M&A remains an important part of our growth strategy over the long-term.

Got you. Do you mean to repay FDIC in its entirety or at all to do any meaningful deal?

We don't -- we do not think so.

The next question comes from Nick Holowko from UBS.

Maybe just thinking about that -- maybe just thinking about that NII cadence as we're moving throughout the year, heading towards that fourth quarter exit rate. Do you have any other plans to continue to grow the balance sheet either through further issuance of debt. I know you did some issuance this quarter. Maybe you can just talk about the nondeposit funding that you have outside of the FDIC note.

Yes. On the funding side, you obviously saw we went to market this quarter. I think that was a little bit of a mix of funding and capital. We're also looking, obviously, closely at our capital stack, if you look at us compared to peer, we are heavily concentrated in common equity, less so in Tier 1 and Tier 2 instruments. So I think that, that's also part of why we're going to market. I think from a funding perspective, our goal is really to continue grow core deposits. We prefer to be majority core deposit funding, and we'd like to get that concentration up from the 81% range where we are now to low to mid-90s range really over time.

Got it. And then just going through a bunch of the recent press releases you put out in terms of where you're winning deals and bringing on new balances on the loan side of the equation. It seems like for a while, there's been a bigger mix of things related to like environmental type businesses. I'm just wondering if that's an area you guys are emphasizing or a specific area where you're seeing a lot of positive momentum, or if there's anywhere else worth calling out in terms of growth opportunities.

Yes. I mean I think you've seen some of the releases. We've certainly had some good success in environmental and really energy, but I think it's really more broad based than that. I think as we talk to our global fund banking portfolio has an excellent pipeline, we've seen good growth there. I think if you look at commercial, tech media telecom, data center funding. And then in health care, kind of retirement facilities, it's all based. I think as we look for the year, our branch network, we continue to build business commercial clients. And so even though that might have dominated some of the releases, it's really pretty broad-based.

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 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 through our website. We hope you have a great rest today.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.