First Citizens BancShares Inc (Delaware)

NASDAQ:FCNCA

Earnings Call Analysis

First Citizens Q3 Earnings Show Growth Amid Challenges

First Citizens Bancshares reported a resilient Q3 2023 despite external volatility, with earnings per share at $55.92, a 6% increase from the previous quarter and a net interest margin over 4%. Pinned on strong revenue growth and efficient expense management, the company observed deposit growth of 14% annually and a sequential 3%. However, there was a noted increase in charge-offs, primarily from SVB investor-dependent loans. Solid growth was seen in loan originations, with an 18% quarter-over-quarter increase. Despite innovation economy pressures leading to bulky charge-offs, the long-term outlook remains robust. Return on equity (ROE) and return on assets (ROA) stood at 16.77% and 1.55% respectively, bolstered by a 1.5% rise in net interest income and a 5.9% cut in expenses.

Solid Performance Amidst Stabilization Efforts

With an emphasis on strong revenue growth and disciplined expense management, the company has secured robust returns for shareholders and delivered a 6% increase in earnings per share over the previous quarter. This increase is notably attributed to net interest income growth and a reduction in expenses. Impressively, the company maintained a net interest margin over 4% and an adjusted efficiency ratio at 46%, indicative of their operational discipline.

Expanding Breadth in Deposits and Loans

Deposit and loan growth stand as testaments to the bank's strategic success. A spirited focus on deposits has yielded a 14% annualized increase, while loan growth has been solid, particularly in commercial segments. The SVB acquisition stabilizes, advancing integration and pushing forward initiatives to invigorate engagement with clients within the innovation economy.

Navigating Market Pressures with Prudence

Despite muted fundraising and investment activities pressuring innovation companies, the company remains optimistic backed by the innovation economy's growth and a large reserve of untapped venture capital. Progress in wealth management has expanded the company's footprint beyond its traditional markets, fostering enhanced revenue diversification.

Ensuring Future Financial Resilience

The bank's commitment to delivering long-term value is clear as it continues to bolster its payment network and technological capabilities. Efficiency improvements and synergies from the SVB acquisition played a significant role in reducing non-interest expenses, contributing to a flourishing adjusted efficiency ratio and pre-provision net revenue. At the core of this stride is a substantial $71 million sequential dip in non-interest expenses and a strategic allocation of excess cash into secure investments.

Strategic Credit and Capital Management

Credit quality metrics remain in check despite portfolio pressures, underpinned by a slight increase in the allowance for credit losses. Capital positioning is robust with a CET1 ratio comfortably above the internal target range. To conform with anticipated regulatory capital and long-term debt requirements, the bank looks to raise substantial funds between $8 billion and $11 billion.

Outlook: Adapting to a Dynamic Market Environment

Foreseeing a shortcoming in the Global Fund Banking business due to less active venture capital investments, the company expects this decline to be counterbalanced by growth in the General Bank segment. These cautious yet forward-looking projections reflect the bank's adaptability in a volatile market and a dedication to maintaining growth momentum.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Third 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, executive]

Good morning, everyone. Welcome to our third quarter earnings call. Our Chairman and Chief Executive Officer, Frank Holding; and Chief Financial Officer, Craig Nix, will provide third 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, executive]

Thank you, Deanna, and good morning, everyone. Starting on Page 5. Despite a volatile external market, we've delivered another solid quarter of financial results marked by strong revenue growth and disciplined expense management. Our focus continues to be on growing our core lines of business, maintaining our safety and stability through strong capital, credit and liquidity, risk management and delivering long-term tangible book value growth to our shareholders.This morning we reported earnings per share of $55.92 excluding items noted in the presentation on Page 52. This exceeded our expectations and represented a 6% increase over the sequential quarter.Return metrics were also strong, improving over the sequential quarter despite an increase in credit reserves and capital levels. These return metrics were supported by a net interest margin that remained over 4% on an adjusted efficiency ratio of 46%. Deposits continue to be a huge focus for us during the quarter with period-end deposits up 14% on an annualized basis or 3% sequentially.In addition to deposit growth, our Commercial and General Bank segments posted solid loan growth. Our liquidity and capital positions remain strong and stable, driven by our focus on core deposit gathering and a conservatively managed investment portfolio.We also remain focused on managing credit risk prudently. We did experience an increase in net charge-offs this quarter, with the majority of the charge-offs related to investor-dependent loans in the SVB portfolio. While we continue to monitor this portfolio closely, given some of the macroeconomic headwinds facing the innovation economy, we remain encouraged by the resiliency of our clients in the face of elevated inflation and rising interest rates.On Page 6, we continue to make great progress in integrating SVB, and our initial stabilization efforts are complete. As a result of our continued focus on, and outreach to our clients, we continue to see stabilization in loan and deposit balances during the quarter.We have materially completed our strategic assessment work. Currently, we are leveraging the insights from this work to identify opportunities to grow our market position in the innovation economy.Finally, we remain focused on regulatory readiness through our Large Bank program and a dedicated team of leaders and associates are ensuring we have a framework to meet heightened regulatory expectations and ensure sound business practices for large financial institutions.On Page 7, our strategic priorities have not changed and are included here for your reference.On Page 8 we provided tangible examples of supporting our clients in the innovation economy. We remain excited by the green shoots we're seeing as new and returning business comes to SVB 6 months post acquisition. For example, during the third quarter, Global Fund Banking originations increased by 18% compared to the sequential quarter and its pipeline has grown over 70%.We are committed to building on and investing in the SVB business to preserve long-term client relationships and to generate new business with founders, entrepreneurs, innovation leaders, and venture capital and private equity clients.During the quarter, our commitment was exemplified when we launched a nationwide Yes, SVB campaign to increase awareness that SVB is open for business and that we remain dedicated to supporting the innovation economy.We are also investing in new capabilities including the rollout -- the continued rollout of SVB Go, an online digital banking platform to support our clients' needs by facilitating easier interactions, simple, secure and intuitive. The platform is designed for how our founders and innovation leaders run their businesses rather than how banks operate.Looking forward, we acknowledge headwinds facing the innovation economy. The muted fundraising and investment pace, coupled with limited exit opportunities continues to put pressure on innovation companies across all sectors and stages of development. This is resulting in some bulky charge-offs, which Craig will speak to in more detail during his comments.Historically, 12 to 18 months into a down cycle, VC investment reaches a [ floor ], after which valuations normalize and VC firms come back into the market. While U.S. VC firms' investment levels may continue to fall in the near term, we believe the long-term outlook remains positive, primarily related to tailwinds that remain intact despite the most recent dislocation.The innovation economy is stronger than in past cycles as it grew at 2.4x the rate of the overall U.S. economy between 2000 and 2021, and the COVID-19 pandemic has only accelerated digital adoption.Further, the innovation economy was 3.5x larger in 2020 than in 2000. While we do not believe we are likely to see 2021 levels of valuation and investment for some time, if ever, we know that there is substantial dry powder waiting to be invested, which gives us confidence in the long-term prospects of the innovation economy.Now turning to Page 9. We have exciting news in our Wealth division. Since 2013, we've focused on our Wealth Management capabilities and have made significant progress growing organically. As a result, our private banking, brokerage and trust services have become a significant revenue source for us, and we've recently expanded our reach beyond our legacy markets in the Carolinas to California and the Northeast. The SVB acquisition provided complementary expansion in terms of geographic distribution and accelerated entrants into attractive markets we were already targeting.The opportunities extend beyond our footprint, however, we're focused on maintaining the great client relationships fostered by SVB Private and deepening those relationships with our registered branch associates and digital platforms serving institutional, mass affluent and high net worth clients. Moving forward, we believe these complementary capabilities will accelerate the growth of our Wealth franchise.We remain focused on executing against our core strategic priorities, which are the building blocks for long-term sustainable value generation and are at the core of everything we do. I'd like to thank all of our associates for their strong commitment to serving our customers, clients and communities. Thanks to you, I'm confident we are well positioned to continue delivering strong results and long-term value to our shareholders and stakeholders.In conclusion, I'd like to address the recent tragic and horrible attacks inflicted on the innocent people in Israel. We are saddened by these events and wish for peace in the region and for the future security of everyone, and especially our clients, associates and their families.I'll now turn it over to Craig to provide an update on our third quarter financial results. Craig?

[Craig Nix, executive]

Okay. Thank you, Frank, and thank all of you for joining us today. I'm going to anchor my comments on our third quarter financial results to the takeaways outlined on Page 11. For your reference, Pages 12 through 32 provide more detail supporting those results. As Frank just said, our return metrics were once again strong in the third quarter. ROE and ROA adjusted for notable items were 16.77% and 1.55%, respectively, both exceeding our expectations. Our return metrics were supported by a 1.5% sequential increase in net interest income and a 5.9% sequential decline in expenses.Net interest income performance was the result of increased accretion income as well as the impact of higher rates, increasing our loan and investment yields. The cost of deposits increased by 44 basis points over the prior quarter to 2.12%, representing a cycle-to-date beta of 37%.Despite the rise in deposit costs, our quarterly NIM showed continued strength coming in at 4.07%, down 3 basis points from the linked quarter, but up 65 basis points from the same quarter 1 year ago. The modest decline in NIM during the quarter was driven by higher deposit balances as well as a higher rate paid on deposits and lower average loans, partially offset by higher yield on earning assets and the elimination of [ FHLB ] borrowings.With the sell-off in the longer to intermediate part of the yield curve, we allocated $5 billion of our excess cash in the short duration U.S. Treasury and agency mortgage-backed securities during the quarter to mitigate some of our sensitivity to falling rates. Given our excess cash position, we expect that to continue in the fourth quarter. We do not expect these purchases to have a material impact on baseline earnings as the investment rates are in line with interest we earn on cash reserves.Adjusted noninterest income increased modestly by 1% sequentially. Of note during the quarter was our rail business, which turned in another strong quarter with utilization rates above 98% and positive repricing trends. We have a well-diversified fleet with high capacity and efficiency, positioning our portfolio well for any future downturn in the economy.We are also focused on growing and expanding our fee-based business in areas such as payments and Wealth Management, as Frank alluded to just a moment ago. We have been working recently to expand SVB's real-time payment network, which will allow our clients to send and receive payments instantly.We are also working to offer instant settlement for merchants using payment facilitators and instant loan funding and disbursements, including early wage access. We are excited about the opportunity to accelerate SVB's capability and billing payment functions and are happy to be in a position to invest in opportunities such as these.Adjusted noninterest expense declined by $71 million or by 5.9% sequentially. Over 85% of the reduction related to synergies arising from the SVB acquisition. We also saw declines in our marketing costs, which as you may recall from previous calls have been primarily associated with growing deposits in the Direct Bank. We grew deposits in this channel by $6.4 billion during the quarter, while spending less in advertising with efficiency led by new clients from previous periods continuing to increase balances. Strong expense management and discipline will remain a significant focus for us moving forward.Putting all of this together, we achieved an adjusted efficiency ratio of 46%, which was an improvement of approximately 4% over the prior quarter. Our third quarter adjusted PPNR grew by 8.6% over the linked quarter, driven by the diversification and growth of our net revenue streams as well as disciplined expense management.Now moving to the balance sheet. Loans were up by $187 million over the second quarter. The General and Commercial Banking segments grew by approximately $1 billion each, 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 and our branch network. We are excited to continue to build long-term customer relationships in the General Bank and are pleased to see our investments in digital, call center and branch technology over the past several years pay off. Further, our product breadth has benefited from the CIT and SVB transactions, providing us with better ability to fulfill products based on the preferences of our clients and customers.In the Commercial Bank segment, growth was driven by strong production in our industry verticals, including energy, health care and TMT as well as seasonal increases in factoring as clients build out inventory ahead of the holiday season. While origination volumes remained strong in our industry verticals, they were down from the sequential quarter, but the balance sheet benefited from a decline in prepayments.The decline in SVB segment loans was due to 3 major factors: First, approximately half of the decline was the result of the expected wind down of our foreign exposure. Recall that we did not purchase any foreign entities as part of the acquisition. So we have been in the process of exiting these markets; second, lower new loan fundings as the private market investment landscape continues to face headwinds resulting in a difficult exit environment, lower fundraising numbers and fewer deals; and third, expected repayments. While foreign exposure had a significant impact on our third quarter loan balances, we do not anticipate it being a meaningful issue going forward as the majority of the exposure has been unwound at this point.We are also encouraged by trends in the technology and health care banking business. This business saw client attrition early on as a result of the March crisis. However, we have been pleased to see both new and returning business come back to this group, resulting from the initiatives we have undertaken since the acquisition.Deposits increased by $5.1 billion over the linked quarter, driven by $6.4 billion of growth in our Direct Bank. The Direct Bank now accounts for $35 billion or 24% of our deposit base. While this channel is higher cost compared to the traditional branch network, 92% of deposits are insured, and the increase in [ imbalances ] allowed us to reduce our wholesale funding reliance as we were able to pay off more [ extensive ] FHLB debt in the third quarter. We are pleased that the deposit growth we have experienced allowed us to work our loan-to-deposit ratio down to 91% from almost 99% at the time of the acquisition.Moving to credit quality. Our metrics remain within our risk appetite, but we continue to see deterioration in a few portfolios that we are diligently monitoring to quickly identify and address problems that may arise.The nonaccrual loan ratio decreased by 2 basis points to 0.68%, with total nonaccrual loans decreasing moderately to $899 million. The decrease was driven by net charge-offs outpacing loans migrating into nonaccrual status during the quarter.The net charge-off ratio increased by 6 basis points during the quarter to 53 basis points. Of the $176 million in net charge-offs during the quarter, $100 million was in the SVB segment, of which $56 million was previously reserved.With the SVB segment, net charge-offs were concentrated in investor dependent loans with charge-offs totaling $88 million in the third quarter compared to $49 million last quarter. At quarter end, this portfolio totaled $5.7 billion or 10% of SVB segment loans, with $1.7 billion in early-stage companies, the highest risk category, representing 3% of SVB's segment loans.We are carrying an ACL on the investor-dependent portfolio of $250 million of -- [ 4.42% ] of total loans and a purchase accounting discount of $288 million or 5.09%, equating to $538 million or 9.51% loss absorbing capacity on these loans.Within the Commercial Bank segment, net charge-offs were concentrated in the general office and small ticket equipment leasing portfolios. As we have been signaling for a number of quarters, we continue to see strength in our general office portfolio in the Commercial Bank, which totaled $1.1 billion at the end of the third quarter.This portfolio is concentrated in Class B repositioned bridge loans and is where we have seen deterioration in the past dues, criticized assets and charge-offs. We are carrying an ACL on these loans of 7.12% compared to 4% on the overall general office portfolio. We have completed target reviews across our business segments to assess credit and are remaining vigilant on our entire portfolio to identify areas of risk early on.We have historically performed well in challenging economic cycles due to our thoughtful approach to managing risk, measured underwriting practices, customer selection and long-term relationship development. We believe our disciplined credit and risk management approach will continue to support us as we navigate the most recent economic cycle.Our ACL increased 3 basis points to 1.26% driven by modest deterioration in the macroeconomic forecast and in the large balance Commercial real estate portfolio, which includes general office. These increases were partially offset by lower specific reserves and lower loan balances in the SVB segment. The ACL provided [ 2x ] coverage of annualized quarterly net charge-offs and covered nonaccrual loans 1.9x.Moving to capital. Our CET1 ratio decreased by 15 basis points sequentially, ending the quarter at 13.23%, well above our internal target range of 9% to 10%. Strong earnings generation added 50 basis points of capital during the quarter, offset by a decline in the loss share benefit of 63 basis points. We continue to operate at capital levels well above our target ranges on all of our risk-based capital ratios.Before closing with our fourth quarter outlook, I want to comment on pending regulation, specifically around capital and long-term debt. We continue to assess the proposed regulations and the potential impacts on our operations. As I mentioned on the last call, we have established a team whose mandate is to develop plans to ensure operational readiness for these regulations.Although we don't have the precise impacts to our capital ratios at this time, we do know capital requirements will increase. On the long-term debt front, we expect we will need to raise between $8 billion and $11 billion to satisfy these requirements.While we have not traditionally leveraged the debt capital markets to raise funding, we believe our strong and stable capital and liquidity positions will allow us to be flexible as we enter the market in 2024. As we mentioned last quarter, we will continue to pause share repurchases and will consider reinstating them when we submit our capital plan in 2024 and better understand the full impacts of these proposed regulations.I will close on Page 34 by discussing our fourth quarter outlook. We anticipate further declines in the Global Fund Banking business from lower levels of venture capital investment, lower capital deployment and the final stages of intentional rundown of select portfolios that were located internationally at the time of the merger. We also anticipate a modest decline in our Tech and Life Sciences business as marketing activity continues to be depressed.As a result, we expect SVB loan balances to be in the mid-$50 billion range by year-end, down from $57 billion at the end of the third quarter. We expect that SVB declines will largely be offset by mid-single-digit percentage growth in the General Bank segment driven by continued momentum in our branch network as well as growth in our equipment finance line of business.Despite clients feeling pressure from the elevated rate environment, we still have great momentum in our branch network where we continue to emphasize full banking relationships. We have invested significantly in our equipment finance sales platform, and those efforts are continuing to pay off with increased efficiency and balance sheet growth.We do expect slight loan declines this quarter in our industry verticals, mainly related to timing and some of the larger loans in our pipeline pull through in the third quarter, and we expect some payoffs to be pushed through in the fourth quarter.On deposits, we expect a low to mid-single-digit percentage point decline in the fourth quarter, primarily related to a decline in SVB deposits. We had sizable deposit growth in the second and third quarters, and we're able to retire more costly short-term FHLB borrowings, which coupled with low expected loan growth reduces our need to raise deposit balances at the same rates we did during the last [ 2 ] quarters.While we're encouraged by the stabilization of SVB deposits since April, we anticipate that SVB clients will continue to experience a level of cash burn that exceeds funds sourced from fundraising. It's worth noting that we expect broader market VC funding to remain subdued in the range of $30 billion to $35 billion for the fourth quarter of 2023, which is significantly down from prior years and in line with the muted activity we've seen throughout the first 3 quarters of 2023.Consequently, we're projecting an approximate $5 billion decline in SVB deposits in the fourth quarter. This estimate could be conservative as the SVB team is laser-focused on obtaining and winning back balances, which could partially offset some natural runoff.Our interest rate forecast follows the implied forward curve. We forecast one more 25-point rate hike in the fourth quarter with the Fed funds rate ending the year at 5.75%. While we expect the absolute level of margin and net interest income to remain elevated, we do expect them to begin to decline in the coming quarters. We expect this to occur as the accretion from some of the shorter portfolios we acquired, such as Global Fund Banking, fully accreted and we experienced continued pressure on deposit pricing.The impact of lower accretion and higher deposit costs will be partially offset by higher loan and investment yields. We anticipate our full-cycle beta increasing to approximately 43%, up from our previous estimate of 39%, primarily due to the higher absolute beta at this point in the rate cycle as well as the strong growth we've experienced in the Direct Bank.On adjusted noninterest income, after a strong third quarter, we see a slight retreat to the $430 million to $450 million range, primarily due to the lagged impact of lower SVB off balance sheet funds and less overall innovation economy market activity, leading to lower client investment fees, international fees and other service charges as well as slightly lower net rental [ still ] income on operating leases due to higher expected maintenance expense in the fourth quarter. We expect continued growth in our Wealth and [ Merchancy ] income lines of business.On adjusted noninterest expense, we expect to be flat to slightly down compared to the third quarter. Continued acquisition synergies will be partially offset by slightly higher expected consulting and project costs related to strategic priorities as well as our continued investment in Large Bank Program and initiatives.Some of these professional consulting and project costs were lower in the second and third quarters as we assessed and reprioritize areas of focus heading into 2024. We anticipate by year-end that we will be more than halfway to our 25% to 30% synergies goal on SVB's $2.6 billion premerger expense base. We anticipate materially all synergies to be reflected in the run rate by the end of 2024.It's worth noting, we do expect a onetime $30 million FDIC assessment to be recognized in the fourth quarter that will be paid out over 8 quarters, which is not included in the adjusted total. The timing of this will be dependent upon when the rule is finalized, meaning it could potentially move into 2024.We expect annualized net charge-offs in the range of 50 to 60 basis points in the fourth quarter at or above the level we saw in the third quarter. This will bring the full year net charge-off ratio to the mid-40 basis points range. This is an upward revision to our previous estimate and is primarily the result of higher-than-expected charge-offs in our investor-dependent general office CRE in the Commercial Bank and small ticket equipment leasing portfolios.In closing, we are aware that we are in a time of change and dislocation in the banking industry. We believe we are well positioned to successfully navigate macroeconomic headwinds as well as the changing regulatory landscape, just as we have done so many times before. These changes present us with opportunities, and we are committed to serving our clients through all market conditions, while continuing to deliver long-term value to our shareholders.Our solid capital and liquidity levels not only position us well for changes resulting from the proposed changes in regulatory requirements, but also provide flexibility to be proactive instead of reactive during this uncertain backdrop. We are confident in the long-term outlook for our business. Our business flows are good and our risk management practices are strong. We are focused on maintaining [ expense ] discipline while continuing to invest in the future. We have an established track record of successful integration efforts, which we look forward to continuing with SVB.I will now turn it over to the operator for instructions for the question-and-answer portion of the call.

[Operator]

[Operator Instructions] Our first question today goes to Stephen Scouten of Piper Sandler.

[Stephen Scouten, analyst]

Craig, you gave some really good color, and Frank, you gave some good anecdotal thoughts around the SVB stabilization. But I'm wondering how you guys think about that into 2024? Do you think we can start to see outright stability there as opposed to just the decline in the runoff? And how do you think about that book of business as we look into next year?

[Frank Holding, executive]

Mark, would you weigh in on that, please?

[Unknown Executive]

Certainly. , Noting that we have not provided any preliminary guidance for 2024 in this call, they're, I think, reflective of the stabilization that you see, the hope, right, that, that turns the corner in '24. At the same time, we need to recognize that we're still going through the valuation reset that Frank alluded to, and we expect that, that could continue into 2024 and continue to be a headwind. And so again, that's probably in part why we are not providing preliminary guidance yet beyond the fourth quarter. And so I'll stop there. I hope that was responsive.

[Stephen Scouten, analyst]

And then you guys noted the elevated charge-offs, some of the small-ticket leasing office. I appreciate all the detail around the reserves related to the SVB portfolio. But as you look forward, do you see things worsening at all? Or is it more -- I know you noted macroeconomic trends changing in your CECL modeling. How is that going to potentially drive reserves moving forward as you see it today?

[Frank Holding, executive]

Well, I think right now we can consider ourselves to be adequately reserved, and actually, our reserves are very strong on all 3 of those areas when you look at general office, and particularly in the Commercial Bank, you look at the equipment finance and then you look at the innovation loans, the investor-dependent loans. We feel like our reserves are strong there. We're close to 2x covered if you look at those in the aggregate. So we believe our reserves are strong. But we do think for a couple of quarters out the charge-offs will remain a little bit elevated in those areas. Andy, I don't know if you have anything you'd like to add to any of that, or Randy?

[Unknown Executive]

No, I think that's right. Certainly, we'll continue to work through the office portfolio, and that's going to take some time throughout 2024. And we would hope to see some improvement in the equipment finance portfolio. But to Craig's point, we will see -- continue to see elevated charge-offs in those areas into 2022.

[Frank Holding, executive]

And that -- it is why you see us raising our net charge-off guidance to [ $50 million ] to [ $60 million ] from [ $35 million ] to [ $45 million ].

[Operator]

And the next question goes to Brady Gailey of KBW.

[Brady Gailey, analyst]

I wanted to start just with the possible share buyback in 2024. I know you mentioned you need to wait and submit your 2024 capital plan. Just remind us of the timing of that? I think in prior years, that's been around July?

[Frank Holding, executive]

Yes. If we -- we certainly will consider a share repurchase plan as part of our capital plan in 2024. And if that should be included and approved, it would commence in the second half of 2024, consistent with prior plans.

[Brady Gailey, analyst]

And then on the NII guidance, it's down around 7% linked quarter. That would suggest there's some NIM decline as well in the fourth quarter. Is that more a function of accretable yield declining, which I think you hinted at a couple of minutes ago? Or is that more a function of the core net interest margin declining? Or is it a little bit of a...?

[Frank Holding, executive]

Yes. If you isolate it, ex-accretion in the fourth quarter, we expect NIM to decline by 1 basis point. So we have some stabilization there. With accretion, we're expecting it to decline by 19 basis points. So it is an accretion issue, both on net interest income in dollars and on the margin.

[Brady Gailey, analyst]

And then I appreciate the 4Q expense guidance. It feels like you're going to get more cost saves out of [ SVB ] as we look into 2024. So how do you think about expenses next year? You'll have some cost saves, but you also have some legacy expense creep. Like could you potentially keep expenses flattish next year?

[Frank Holding, executive]

We -- right now, we're looking -- we're not providing 2024 guidance, but just directionally, I think flattish to low single-digit percentage increase going into '24.

[Operator]

And the next question goes to Steven Alexopoulos of JPMorgan.

[Steven Alexopoulos, analyst]

So to start on the SVB side and regarding the new campaign, the Yes, SVB. So what's the feedback so far from customers? And could you address that maybe from the VC side, what you're hearing from VC firms and what you're hearing from the start-ups? And is this yet translating into you guys seeing net new operating account growth at the account level, not the balance level?

[Frank Holding, executive]

Mark, I'm going to let you handle that one. I know we have picked up some new clients.

[Unknown Executive]

We have indeed. And we had, in the quarter -- I believe the stat was 600-plus new clients, which means starting with one solution or another. And then I believe we were almost up to 50 new in the last couple of quarters that -- what I would call broad-based new wins, including their operating accounts, operating business. So I think going back to your original point, the ad campaign -- but as much or more so, the very laser-focused calling effort -- reactivation effort calling on new clients, et cetera, we think is ultimately turning around that perception that there's a void and very much reinforcing that SVB is here and open for business. And again, I think part of your question was about feedback. And overall, the feedback, including the ad campaign, has been really very positive on the whole. And so I'll stop there.

[Steven Alexopoulos, analyst]

And Mark, I saw the news of Jennifer Gaskins rejoining the company. Congrats on that. She's the superstar of Life Sciences and the health care space. But is that a one-off or are you guys starting to see former SVB employees reengaging to come back to the company?

[Unknown Executive]

So I will start on, the others may wish to comment. Jennifer was certainly a very high profile rehire, recognizing she was coming back from the SVB Capital entity. And having said that, not the only former SVB there to rejoin with us. The key point there being that, I believe the others that we've had in the new hire mix were SVBers -- legacy SVBers that had departed several years ago as opposed to [ some key ] events of March. And so that too is encouraging to see, some of our former colleagues look at what we have going on here so far in our first 2 quarters up together in [ essence ], and both were their [ feed ] to come join us, again, Jennifer being the most high profile of those, which we are so, so excited to see her return.

[Steven Alexopoulos, analyst]

And Craig, maybe just one follow-up, in your response to the question on expenses, maybe flat to low single-digit increase for 2024. So how should we think about the efficiency ratio wherever you guys end up in the fourth quarter? Do you see that improving fairly materially in 2024?

[Craig Nix, executive]

Well, what's going to happen is the accretion is going to offset some of the decrease or stabilization in expense. So what I would say in the fourth quarter, you might see it matriculate up to the high 40s, low 50s. And then next year, I think you'd see it in that same range per quarter. So I would go with -- I would think high 40s, low 50s for the next 5 quarters, and that's really a function of just declining accretion income.

[Steven Alexopoulos, analyst]

Yes, sounds like [ this is more ] [indiscernible] business perspective. Yes, you can see a positive trend [indiscernible].

[Craig Nix, executive]

We'll be -- we're really satisfied with the efficiency ratio in the low 50, high 40s.

[Operator]

The next question goes to Christopher Marinac of [indiscernible].

[Christopher Marinac, analyst]

I wanted to ask a question about being able to raise your loan yields related to deposit balances and if they were to sort of go below certain levels? Are you able to do that? And is there still more push on loan yields as we move into the next few quarters?

[Craig Nix, executive]

Is your question around the yields or the balances? You're saying first on loan yields. I mean we continue to price loans in excess of where we're pricing deposits and -- are you talking about spreads?

[Christopher Marinac, analyst]

Well, Craig, I'm talking more about, I guess, in your loan contracts with new loans that -- my impression is that there is the ability to kind of push yields higher if compensating balances go below certain levels. It's sort of a enforcement to get more deposits, but also kind of have better pricing if customers start to pull the funds.

[Craig Nix, executive]

I think what you're referring to is on the SVB side, and we've not pushed any of the deposits to come back and to push those loan yields higher. I think in general, there's obviously opportunities as market rates continue to increase, the reprice loans higher. Main opportunity for us right now is obviously in the fixed rate loan book where we reprice approximately 20%, 25% a year up on an ongoing basis, and we expect to continue to see that momentum going into next year.

[Christopher Marinac, analyst]

And then any other general thoughts about kind of where your adversely rated credits may go next year? Would you think that they change and deteriorate? Or would you see them kind of stable from here?

[Unknown Executive]

That's not turned in adversely classified loans how do we expect that to go next year.So obviously, with the inflation pressures and elevated interest rates, we are seeing migration. We would continue to see that to some degree. And obviously, the areas that we are most challenged, the ones Craig has referenced, which is certainly office and the small ticket equipment finance.

[Operator]

[Operator Instructions] Our next question goes to Brian Foran of Autonomous.

[Brian Foran, analyst]

I just wanted to clarify on the expenses, recognizing it's not like a formal '24 guide, but just to make sure I'm using the right base. When you say flat to low single-digit as potentially an outcome, is that relative to the full year at $4.12 billion to $4.15 billion, or is that relative to 4Q annualized, which I guess would be about $4.5 billion?

[Frank Holding, executive]

Brian, the way I'm looking at it, since we were not merged in the first quarter, I'm comparing the 3 quarters of '23 to the 3 quarters of '24, where we were comparable, An- that's what I'm saying is flat to a one single digits up.

[Brian Foran, analyst]

So the 9 months where the 2 companies together...?

[Frank Holding, executive]

We obviously look year-over-year, we're going to be up because we -- the first quarter SVB persists [indiscernible] merged. So you're going to see -- you could see a double-digit percentage increase year-over-year given the first quarter.

[Brian Foran, analyst]

I initially plugged in relative to the full year and had you guys making like $250 per share and maybe got a little too exciting. So I appreciate the verification.

[Operator]

And our next question goes to Brode Preston of UBS.

[Broderick Preston, analyst]

I wanted to start just maybe on credit. Craig, I just wanted to better understand the charge-offs within the SVB book. I think last quarter, you had one that you had called out, and then you had a couple of others that you kind of cleaned up. These seem to be clustered in the innovation portfolio. I'm sorry, I guess I wanted to ask, was this more of a cleanup quarter as well? And I say that just because the charge-off rate on that portfolio seems to be -- or this quarter, at least was running close to what [ SVB ] experience back during the GFC. So I just assume that there was some cleanup charge-offs there that you had marks again?

[Craig Nix, executive]

No. I wouldn't characterize it that way. Again, approximately $56 million of the $100 million was reserved for. So we did anticipate the charge-offs, they were just -- we guided to $35 million to $45 million. Charge-offs came down higher than we expected at 53 basis points for the quarter. But I would not characterize it as this was a cleanup quarter or that last quarter was. I think we expect the charge-offs to remain elevated at least through the first half of next year, consistent with these numbers. And then we'll see what happens in the second half. Again, we're not giving guidance today going forward. But no, I would not characterize it as a cleanup.

[Broderick Preston, analyst]

Do you happen to know what the mark you have against the innovation book is?

[Craig Nix, executive]

We have a [ 4% ] -- we have -- our allowance on the innovation portfolio is 4.42%. We also have a purchase accounting discount of 5.09%. So that's a 9.51% loss absorbing capacity, which gives us 2.1x coverage on that portfolio, which we believe is conservative and strong.

[Broderick Preston, analyst]

And then I just wanted to ask one last one on the noninterest-bearing deposit trends. It looked like the [ SVB ] book started to stabilize a bit, but still came down, but the NIBs are quite a bit stronger than, I guess, I would have reasonably thought just relative to the guidance you'd given before. What I wanted to ask was there good NIB growth -- was there NIB growth in the Commercial or the Consumer Banks at all that kind of helped offset some of the cash outflows from the SVB client base?

[Craig Nix, executive]

Well, if you look just from last quarter, noninterest bearing deposits actually declined, but it did not decline at the rate we anticipated. So we did have a decline in those from -- and it was about $1.4 billion. So we had projected a decline that was a little larger. So that's why we would -- we might have come up with a lower mix of noninterest-bearing to total deposits. And we did drop from 30% to 28% in the quarter. And the 32% to 30%, we expect to drop to that 28% in the fourth quarter if our deposit projections hold.

[Broderick Preston, analyst]

And do you think that 28%, is it getting close to a bottom?

[Craig Nix, executive]

I think we have -- there's more running for it to fall given that -- especially if rates are higher for longer, potentially into the mid-20s -- Tom, do you want to [indiscernible] that?

[Unknown Executive]

I was just going to mention -- I mean, obviously, it's a priority as we go-to-market together these noninterest bearing deposits. I think as you look at the third quarter and in the [ Core ] Bank, it's actually really strong if you sort of neutralize for the impact you typically see as corporates make cash -- tax payments in September. So overall, I think the underlying trends look pretty good.

[Operator]

I'm not showing any further questions at this time. I'd like to turn the call back over to our host, Deanna Hart for any closing remarks.

[Deanna Hart, executive]

Thank you, and thank you, everyone, for joining our quarterly earnings call today. We appreciate your ongoing interest in our company. And if you have further questions or any additional information, please feel free to reach out to the Investor Relations team through our website. You have a great day.

[Operator]

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