Citizens Financial Group, Inc.

good morning everyone and welcome to the citizens financial group third quarter 2021 earnings conference call my name is alan and i'll be your operator today currently all participants are in a listen-only mode following the presentation we will conduct a brief question and answer session as a reminder this event is being recorded now i'll turn the call over to kristin silberberg executive vice president investor relations kristin you may begin

Thank you Alan. Good morning everyone and thank you for joining us. First this morning our Chairman and CEO Bruce Van Saan and CFO John Woods will provide an overview of third quarter results referencing our presentation which you can find on our Investor Relations website. After the presentation we'll be happy to take questions. Don McCree, Head of Commercial Banking and Brendan Copland, Head of Consumer Banking are also here to provide additional colour. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on page two of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on page three of the presentation and the reconciliation in the appendix. And with that, I will hand over to Bruce.

Thanks, Kristen. Good morning, everyone. Thanks for joining our call today. We had a successful and busy third quarter featuring continued strong execution of our strategic initiatives, good financial performance with positive operating leverage and 7% sequential PPNR growth, and the announcement of three acquisitions. We are playing offense, and we feel that we are taking the steps to position us for solid growth in franchise value, in earnings, and in returns. Our financial performance in Q3 reflects strong revenue growth of 3% sequentially as both net interest income and fees grew nicely. NII benefited from a pickup in spot loan growth with retail up 3% and commercial up 1% excluding PPP impact from loan forgiveness. The gradual improvement in loan volumes we have expected is materializing, though held back a modest amount in Q3 by impacts from the Delta variant on the recovery, as well as by supply chain issues and labor shortages. These impacts should continue to abate going forward, and we expect even faster loan growth in Q4. Interestingly, the amount of PPP forgiveness is roughly equivalent in the first and second halves of 2021, though Q3 saw a meaningful pull forward, which benefits Q3 at the expense of Q4. Nonetheless, the faster loan growth we expect in Q4 should largely offset the lower PPP impact on Q4 net interest income. Strong sequential fee growth once again demonstrated the diversity of our business model. Mortgage had a bounce-back quarter, which helped offset some seasonality in capital market fees, while wealth hit a new record and consumer fees continued their recovery towards pre-pandemic levels. We expect this diversification to play out again in Q4, with capital markets poised for a strong quarter, given exceptional pipelines, and mortgage set for a seasonally softer quarter. We kept expenses under control, given our efficiency initiatives, which led to positives And credit continues to be in great shape, with NCOs of 14 basis points in the quarter, well below our guidance range for the quarter of 20 to 25 basis points. These strong results across expenses and credit should continue into Q4. The strategic initiatives we're focused on across consumer and commercial continue to go well, and there's more on that in the presentations. We feel we are focused on prioritizing the areas where we can differentiate ourselves and where we have a right to win. The acquisitions we've announced year-to-date are all attractive from a strategic and financial standpoint and present only modest execution risks. The investors in HSBC transactions give us a top 10 deposit market share in New York City Metro and over a million new customers who collectively we feel we can do more for. We also gain a big augmentation to our digital bank customer base from HSBC's online bank, and we gain a thin branch network in Washington, D.C., and Miami. Our integration efforts so far are progressing nicely. Our JMP acquisition is also strategically compelling. Upon closing the deal in mid Q4, we'll have a much broader and deeper corporate finance coverage in technology, healthcare, and financial services, Plus, we gain an equities business that is very well-run, focused, and highly regarded. As non-bank lenders continue to take lending market share from banks and private equity ownership of companies continues to increase, it's important that we broaden our capabilities to be able to compete successfully in this new landscape. We will increasingly generate more fee revenue across our customer base given these expanded capabilities. Also worth noting is that the Willamette transaction dramatically expands our valuation services business with a prestigious outfit. This capability is highly synergistic with our M&A and broader capital markets effort. So to sum up, we're taking serious strides forward as an organization in 2021, and we feel very good about our positioning and our future outcome. With that, I'll turn it over to John.

Thanks, Bruce, and good morning, everyone. First, I'll start with the headlines for the quarter. We reported underlying net income of $546 million and EPS of $1.22. Our underlying ROSI for the quarter was 14.2%, which includes the impact of a modest credit provision benefit. Revenue at $1.7 billion was up 3% length quarter, giving growth in both fee income and net interest income. Period end loans were up 1% in the quarter, with strong originations in retail and commercial. Loans were up 2% excluding PPP forgiveness, giving us good momentum heading into the fourth quarter. Key highlights include strong results in capital markets notwithstanding seasonality, another strong quarter for wealth, and a rebound in mortgage fees. And we delivered positive sequential operating leverage of over 2% this quarter with well-controlled expenses. We recorded a credit provision benefit of $33 million which reflects strong credit performance with lower charge-offs. Our ACL ratio is now at 1.65%, excluding PPP loans. We are in a very strong capital position, with Set 1 at 10.3% after returning $167 million to shareholders in dividends during the quarter. And finally, we continue to grow our tangible book value per share, which was $34.44 at quarter end, up 7% compared with a year ago. Next, I'll provide some key takeaways for the third quarter while referring to the presentation slides. Net interest income on slide six was up 2% linked quarter given interest earning asset growth, stable net interest margin, and higher day count. The net interest margin was 2.72%, flat sequentially, as the benefit of accelerated PPP forgiveness and improved funding costs were offset by the impact of higher cash balances as well as lower earning asset yields given low rates. One highlight is our continued progress on lowering interest-varying deposit costs, which are down two basis points to 14 basis points. Our asset sensitivity decreased to about 9.8% from 10.7% at the end of the second quarter. The decrease primarily reflects loan and deposit exchanges and the addition of $2.5 billion in receivables in the quarter. We saw good entry points for the swaps given some steepening in yield curve. So far in the fourth quarter, we have added another $1.25 billion. The hedging actions we've executed to date in 2021 are one of the levers we are pulling to address headwinds from swap runoff and other impacts of the low-rate environment. We expect to continue adding to the receipic swap portfolio and further moderate our asset sensitivity as the curve steepens, while maintaining meaningful upside benefit to higher short-term rates. Referring to slide seven, we delivered solid fee results this quarter, demonstrating the strength and diversity of our fee income, with strong results in capital markets and wealth. Mortgage fees rebounded in the quarter, up $23 million, as production fees benefited from lower agency fees, and we saw improvement in MSR hedge results. Diving further into this performance, Production revenue was up $12 million linked quarter, benefiting from a modest improvement in gain-on-sale margins across channels, given improved agency pricing and favorable execution. This was partially offset by a decline in adjusted lock volume, down sequentially about 10%, which is broadly in line with industry-level trends. As expected, we continue to see a shift towards purchase originations, which increased from about 48% of the total in second quarter to about 54% in the third quarter. The contribution from servicing operations decreased 4 million linked quarter, reflecting higher MSR amortization. Our third-party servicing book grew to $87 billion, up 3% linked quarter and 8% year-over-year. Lastly, our MSR hedging results improved 15 million late quarter, given an unusually large negative result in Q2. Capital markets were down a bit from record levels, reflecting seasonality, particularly in syndication fees. However, MA advisory fees were higher, and our pipeline heading into the fourth quarter is exceptionally strong. Wealth fees were up slightly, continuing to build on record levels, reflecting an increase in assets under management from net inflows. Moving on to other positive fee contributors, we saw improvements in service charges and fees and car fees, which benefited from the strengthening economy as debit transactions and credit card spend continued to exceed pre-pandemic levels. On slide 8, expenses were well controlled, up 1% length quarter, as good expense discipline and the benefit of efficiency initiatives largely offset higher operational and travel costs. Period-end loans on slide 9 were up 1% linked order, or 2% excluding PPP. Retail loans were growing, up 3%, and commercial loans were up 1% excluding PPP in a tough operating environment. Average loans were down 1%, but still up 1% excluding PPP. Diving into drivers a bit more, the diversity of our retail lending business produced another quarter of record originations, though we continue to see high payoffs. Strength was noteworthy in mortgage, auto, and education. Commercial is seeing strong underlying activity with spot loans up 1% in the quarter, excluding PPP. We had a very robust origination quarter led by commercial real estate, asset-backed lending, and subscription-line financing supporting deal-related activity. This was largely offset by continued elevated payoff activity, which in part reflects favorable conditions for commercial companies to access the debt capital markets. Line utilization levels were up around 50 basis points, still near historic lows. We foresee a gradual recovery in coming quarters as some of the issues holding back investment, such as supply chain challenges and labor shortages, resolve themselves. In addition, our period end commitments are up around 2%, which will benefit us down the road once investment picks up. Overall spot loan growth of 2% for the quarter ex-PPP provides good underlying momentum for loan growth in the fourth quarter. On slide 10, deposit flows continue to be robust, especially in low-cost categories, and our liquidity ratios remain strong. Average deposits were up 1% length quarter and 7% year-over-year, with strong demand in demand deposits, which now make up 32% of total deposits. Interest-bearing deposits were broadly stable, as the decline in term deposits was offset by growth in demand deposits and low-cost categories. We continued to make good progress on deposit rephrasing, with total deposit costs down two basis points to nine basis points. Interest-bearing deposit costs were down two basis points to 14 basis points during the quarter, with opportunity to reduce further. Moving on to credit on slide 11 and 12, we saw excellent credit results this quarter. Net charge-offs dropped from 25 basis points to 14 basis points for the third quarter, driven by improvements across the portfolio. Not accrual loans decreased 4% linked quarter. Given the improving outlook and strong performance of the portfolio, our reserves decreased, ending the quarter at 1.65% XPPT compared with 1.75% at the end of the second quarter. Moving to slide 13, we maintained excellent balance sheet strength. Our step one ratio remained stable at 10.3% at the end of the third quarter, after returning $167 million in capital to shareholders through dividends in the quarter. This is at the top of our list of capital priorities on the slide. We paused our stock repurchase program pending the investor shareholder vote scheduled for November 19th. After the vote, we had the opportunity to resume repurchases with $655 million of capacity remaining under our current board authorization. The estimated set one impacts of our pending acquisitions are on the slide, along with the targeted closing time. Before I move on to our 4Q outlook, let me highlight some exciting things that are happening across the company on slide 14. Our top six program is in its final stages. Everything is on track, and we will achieve our targeted results. We are preparing for the launch of a top seven program with more details to follow later this year. These top programs have been critical in the funding of our strategic initiatives and in driving positive operating levers. which are key to achieving our medium-term financial targets. On the ESG front, I'm very excited to say that we've launched a new green deposits program to allow corporate clients to direct their cash reserves towards companies and projects that are expected to generate a positive environmental impact by improving energy efficiency, promoting sustainability, and reducing greenhouse gases. An area of high focus for us has been moving more rapidly to digital channels. which we accelerated given the behavioral changes we've seen coming out of the pandemic. You can see some of the year-over-year stats on slide 15. Digital book sales, for example, are up 24%. Mobile active users are up 20%, and the number of Zelle transactions are up 34%. We continue to enhance our digital capabilities, and by the end of this year, consumers will be able to perform about three-quarters of all transactions directly through the mobile app. And by the end of 2022, this will include nearly all transactions. This provides us with strong leverage to continue repositioning our branches towards an advice-based model. Moving to slide 16, as part of our ongoing efforts to help customers better navigate their financial lives, we recently announced several initiatives designed to make banking more transparent and accessible, including a new way to avoid overdraft fees and a commitment to helping ensure that underserved communities have access to banking services. We introduced Citizens' Peace of Mind, a new deposit feature providing customers with the ability to avoid the unnecessary overdraft fees. This feature will come with new capabilities to monitor and alert customers to overdraft withdrawals and a grace period to fund their account. The financial impact of our overdraft policy changes will be to forego the return to historical overdraft fee levels. You can expect 2022 service charges and fees to stabilize around 2021 year-to-date annualized levels. The benefits of these changes are shown on the right side of slide 16. We expect higher satisfaction, lower attrition, and lower operational costs to offset the foregone overdraft revenues over time. Lastly, we also announced a new commitment to serving underbanked communities, including the introduction of a new checking account with no overdraft fees and features that will meet the Bank on National Account standards. These are designed to ensure that everyone has access to a transparent, easy-to-use, and affordable transactional accounts. And now for some high-level commentary on the outlook on slide 17. We expect NII to be broadly stable to down slightly, giving a lower benefit from PPP forgiveness due to the pull forward into the third quarter. NII is expected to be up around 2% in the fourth quarter ex-PPP index. Most importantly, we are well-positioned to see overall loan growth accelerate in the fourth quarter, with average loans up 1.5% to 2%, or 2.5% to 3% ex-PPP, and spot loan growth up around 3% or around 4% ex-PPP. We expect continued strength in retail across mortgage, education, and auto. And in commercial, we expect to see growth led by subscription-line financing, supporting deal-related activity, and asset-backed lending. This loan growth positions us well for 2022 and helps offset the impact from PPP runoff. B income is expected to be broadly stable as a seasonal decline in mortgage as well as some expected pressure on margins given excess industry capacity is expected to be offset by some real strength in capital markets given exceptional pipelines. Non-interest expense is expected to be broadly stable in the fourth quarter, benefiting from our efficiency initiatives. And we expect net charge-offs will be broadly stable with the provision expense lower than net charge-offs. I should add that this guidance excludes the impact of the JMP acquisition, which we are targeting to close in the middle of the fourth quarter. To wrap up on slide 18, this is a strong quarter for citizens with good momentum heading into the end of the year. With that, I'll hand it back over to Bruce.

All right. Thank you, John. Alan, let's open it up to Q&A, please.

Thank you, Mr. Van Sant. If you would like to, we are now ready for the Q&A portion of the conference call. If you would like to ask a question, please press 1 then 0 on your touchtone phone. You'll hear an indication you've been placed into queue and you may remove yourself from the queue by repeating the 1 then 0 command. If you're on a speakerphone, we ask you to please pick up your handset and also to make certain that your phone is unmuted before asking any, pardon me, before pressing any buttons. We'll go to our first question. That will be from the line of Scott Severs with Piper Sandler. Please go ahead. Good morning, guys.

Thanks for taking the question. Hey. Let's see. John, maybe I was hoping you could provide a little more color on what's going on with the swap book that you've been adding to. I was hoping specifically you could sort of talk about the balance between adding new swaps and maintaining your rate sensitivity. And in particular, I guess, what is your preferred choice? sensitivity to higher rates? In other words, is there something that specifically that we're targeting? Or how should we be thinking about that?

Yeah, just kind of big picture here. I mean I think that we've, as I mentioned, seen some good opportunities to start in this new sort of steepening cycle to start layering in swaps broadly. As I may have mentioned, our asset sensitivity is down to about 9.8% or so at the end of the third quarter. As we migrate across the entire tightening cycle that may come, We expect to try to migrate down to something that would be low single digits. And in order to get there, that would require not only the hedging that we've done to date, which would be about $12 billion in 2021 through October, but would require in all likelihood another $20 billion or so to get us to a low single-digit asset sensitivity when we get near the top of the tightening cycle. The other thing I'll also offer up is that the acquisitions of ISBC and HSBC will also add asset sensitivity, and that will require another $1.5 to $2 billion to offset. So big picture, our philosophy is to maintain good upside. to short-term rates, which we have, and the majority of our exposure is to short-term rates. And as we continue to see attractive opportunities to, you know, monetize that asset sensitivity as the, you know, the steel yield curve steepens, we'll continue to dollar cost average into that over time.

Okay. Perfect. Thank you. I appreciate that. And then switching gears just a little, was something you could Talk about any differences in deposit growth trends that you're seeing between your retail and your commercial customers.

Yeah, I mean, I think we're seeing good uptake, and maybe we'll go ahead and let Don and Brendan highlight. But in the third quarter, we had growth both in average and spot of 1%. And I think that that was driven primarily by commercial in the quarter, but we're seeing strong deposit flows on both sides. We're still seeing positive growth on both consumer and commercial, and maybe I'll just offer it up to Don and Brendan to see if they want to add anything. Yeah, I think that's right. On the commercial side, we're still seeing a lot of deposit flow, notwithstanding the fact that we're trying to push pricing down. So we still have a little bit of surge deposits, but probably a billion or two we see running off as we go into next year. So we think deposits will continue to be strong well into 2022.

Yes, similar trends on the consumer side. The non-interest-bearing deposits have been very sticky despite consumer activity and spending ticking up. The deposits have been hanging around, and so they're still a bit elevated with the surge deposits. The second and third rounds of stimulus generally were not spent. They were more saved or used to pay down debt, and we're seeing that with the balances hanging around the customers' On the interest-bearing side, we're seeing a rundown of CDs, and it's generally replaced with low-cost deposits with basic savings and some low-interest-bearing products like seaweed. So that's allowing the cost of funds to continue to gear down. Consumer cost of funds all in is sub-six basis points now, so we're kind of at basement levels and still seeing the deposits very, very sticky.

One thing to hasten to add that with those surge deposits that we suspect most of that stays around and deposits stay relatively stable over time given organic growth offsets any potential marginal runoff of some of the COVID-related deposits. So that's a good sign.

The one last point to add, it's Bruce, would be the demand deposits now are about 32% of total deposits. That's been an effort where we've really focused on trying to raise that as a percentage of our total funding base, and we've had some good success on the consumer side and mass affluent and growing the commercial side, and so feel really good about where that sits. Thank you.

Good.

All right. Thank you very much. We'll go next to Matt O'Connor with Deutsche Bank. Go ahead, please.

Good morning. I was wondering if you could talk a bit about loan pricing trends, and I guess especially in commercial where one of your peers yesterday talked about kind of continued pressure there as new loans have come on versus kind of what's rolling off and repricing. Yeah, why don't I take that, Matt?

It's holding up pretty well. You know, it depends on the type of transaction, but we're seeing a little bit of deterioration but not material. So you see it in our NIM. Our NIM is holding up nicely. We're trying to stay disciplined. So where we see things, we haven't changed our approach one bit. So we look at overall return on relationships of which loan spread is a piece of it. So we'll compromise a little bit on loan spread if we see other fee business attached to that loan. But if we don't see the fee business, we're not going to chase yield, just to book a loan.

Yeah, similar discipline in consumer. I'd say there's some asset classes still are mildly elevated on what we would tend to see in this rate cycle, like auto. The spreads are a little bit expanded. We've got front book, back book challenges, given the state of the yield curve that our back book, the runoff is at a higher yield than what we're putting on. But front book returns are still very, very strong. I'd say there's one or two spots where we're seeing some intensity of competition on the particularly where there's fintechs involved, whether it's in point of sale or student lending in particular. But we're keeping our discipline and making sure we're priced to adequate returns to support driving up our ROTC. And we feel good about able to get growth and make that balance, as you can see in our numbers.

And I guess taken together, as you think about growing loans, it sounds like you're confident that the volume is enough to offset any margin or pricing pressure. going forward?

Yeah, on the consumer side, I do. I see us continuing to be able to sort of moderately accelerate our pace of loan growth and keep in mind that our growth levels now, when you think about the last question around elevated deposits, it's in an environment where customers are also flush with cash. So as that starts to draw down, we expect loan growth to pick up even more as consumers need more leverage, where right now they're sitting on a lot of cash. So we feel really good about the medium term for our loan growth prospects.

And then why don't I add to that on the commercial side? As John mentioned, the highlight numbers are strong, but we're seeing our pipelines on the loan side, not only on the capital market side, but on the loan side, you know, 10%, 15%, quarter on quarter, and then another 10%, 15% as we go into the Into the fourth quarter, we're adding new clients at a very good pace as we benefit from our expansion markets in particular, and we're growing our commitment book faster than our loan book. So as utilization begins to pick up, it will be picking up off a larger commitment book. So it all feels reasonably good as we sit here today.

Okay. Thank you very much. We'll move next to the line of Gerard Caffey with RBC. Go ahead, please.

Good morning, everyone. John, can we come back to the swap portfolio? Can you share with us? what interest rate environment you will benefit the most from with the book that you've put on, meaning rising short-term rates by 100 basis points or long-term rates going up by 50 basis points? Can you kind of work through that? And then second, as part of that question, if you didn't put the SWOT book on, what would have the asset sensitivity been of your balance sheet today?

Yeah, I'll just hit that with high level. We're more exposed to the short end of the curve than the long end. It's about 60-40, short to long, and rising, frankly, as we migrate through the cycle. The environment that will work well for us is when the Fed liftoff begins. That's an environment that will really drive net interest margins and NII growth. upward given the unhedged portion of our CNI book and other floating rate exposures that we have. So that still remains our most favorable sort of environment that would work well for us. And to just give you a sense for how the math plays out on that, you know, a 25 basis point rise on the short end drives about 80 million or so of NAI for us. So that helps you kind of quantify what we're, you know, where the benefit comes from. You know, in terms of asset sensitivity, we would be in the low teens, low to mid teens without without continuing to hedge. And it's not really where our risk appetite is. Rates can go up, and we hope they continue to go up, but they can go down as well. And so there's a risk profile there that over time we're not only attempting to, you know, kind of preserve our asset sensitivity, but we're also cognizant that there is downside exposure that we're taking off the table when we dollar-cost average in with the swap-up.

Very good. Thank you. And then as a follow-up, John, you gave us some good data on slide 15 on your digital metrics. And I was curious, when you look at your mobile active users, what percentage of the households are mobile active users? And then second, when you look at your digital book sales, great growth year over year, what percentage of your sales are now coming through that digital channel?

Yeah, great question. It's Brendan. We look at a lot of different metrics on digital. When we have the customer's primary relationship, the digital active users are incredibly high. It's over 80% of our customers. basis is digitally engaged. So we feel good about that foundation. Our efforts now are moving from just general active to full service transactional banking done in a much more everyday way on mobile. So we've got a lot of efforts underway across the company which are driving these metrics up. including in the branches and the call center efforts to communicate and nudge our customers to get more engaged with digital. It's hugely retentive for us with our customers, but also, as you know, if we can get them really engaged, we can pivot the branches more to advice, and there's a cost dynamic here at Play that we can then go back and reinvest in the top of the funnel for customer acquisition growth. So we feel really good about the trends in mobile, and I see a lot of upside here looking forward. Okay, thank you. Percentage of digital sales. Oh, I'm sorry, percentage of digital sales. Yeah, it's rapidly growing, and it's very different category by category. So some of our lending businesses are principally digital first. You'll see in things like student, you know, a 75% to 80% rate of digital, whereas in something like DDA and deposits, it's more in the 25% to 30% range. But growing, you know, two years ago it was in the 15% range. So we're seeing active upticks. The branch channel for basic deposit products is still the largest source of customer acquisition, but there's some balance coming into play.

Very good. Thank you.

And for our next question, we'll go to the line of Ken Houston with Jefferies. Go ahead, please.

Hey, thanks. Good morning, guys. Hey, John, on the other side of the rate sensitivity, you had previously talked about wanting to keep the securities book around mid-teens of earning assets and see that you've added some securities at period end versus average. Given what we're seeing in the environment, what's your appetite for continuing to move some of that excess cash into the book and any change thoughts vis-a-vis what you've already talked about on swaps? in terms of what you want to do and where you want the securities book to go. Thanks.

Yeah, yeah, I appreciate the question. I think that you may see the securities book rise, but as it relates to a percentage of total interest earning assets, we're still in that mode of around mid-teens or thereabouts. It could tick up a little bit, but there's not really any plans for a large change in the percentage of securities to interest-earning assets. And I think the reason for that is twofold. One is that given our loan growth opportunities, you know, really that's our preference is that we would prefer to deploy our excess liquidity into, you know, our loan opportunities, which, you know, from when you look at our consumer lending, which is, the diversity of that and seeing commercials starting to really lift off a bit, that's where we want to put that cash. And so that's what the plan would be in the near term for that to head in that direction. I think the other aspect of it is that we just have a view that the rate risk hedging, which the securities books can also do double duty on, we think it's a bit more efficient to do that off balance sheet with swaps. And so that's still the plan is to dollar cost average over time in that space.

Got it. And, John, on NII, in the slide deck you talked about PPP being a seven basis point increase sequentially. Can you just level set us on how much PPP was in the NII and, you know, just what you expect to trail that out as the program runs down? Thanks.

Yeah, I mean, big picture you've got, I mean, I think the way I would talk about that is that, you know, all throughout the year we've had a sense that PPP was going to be about the same, first half and second half, and that's playing out. But there has been a $15 million increase in the third quarter versus, you know, the second quarter in PPP contribution to NII, that $15 million really is coming from the fourth quarter. So really, that's really how it's all going to play out, is that $15 million increase in PPP from 2Q to 3Q, and then because of the pull forward from 4Q, a $30 million decrease from 3Q to 4Q on PPP. But I would hasten to add that ex-PPP, in the third quarter and the fourth quarter, we're seeing NII growth. And that's really good to see, and I think we mentioned that we're up about 2% in terms of 4Q NII ex-PPP. So a lot of that PPP downdraft is getting offset, given the fact that our guide is really stable to down only slightly.

Yeah, I would just add that. Ken, I would just add that, you know, this has been an issue of great interest for analysts and investors, like what's been the impact of PPP. We always view it as something that was transitory, that eventually these were nice earning assets for us for 2021, but, you know, they would and then they would fall off and not have much of an impact on 2022. So the real key was can we develop enough loan growth to basically substitute core consumer loans, in particular for the PPP loans that are running off. And we think with the stock loan growth we had in Q3 and what we're expecting in Q4, mission accomplished, that we'll be in good positions to offset any future impacts as it relates to, you know, the first half and all of 2022.

Absolutely. Can I get just one quick one in? How much, John and Bruce, is still running off from the other retail? Because I know you have the citizens pay presumably growing in there, but what's weighing against that? Thanks, guys.

Yeah, what's weighing against that is the personal unsecured portfolio that we've ran up about two years ago and then decided it's best when the COVID era hit to run that back down and stop new originations. So that's been a little bit of a dead weight in the unsecured area, which masks a little bit the nice growth we've had in citizens' pay and some of the rebounding that we're seeing in the card. Brendan, you may have the exact numbers of what's left of that at this point. Yeah, it's about a little shy of $900 million left on the personal loan book, and it's about $150 million-ish of a drag quarter-on-quarter to loan growth. The other book that's in rundown mode for us is Marine RV as well. That's much smaller over the years. It's a longer duration that's been built in our run. The biggest drag is really the personal loan book, so $900 million or so. Okay, thanks very much.

We will go next to John Pestare with Evercore. Go ahead, please.

Morning. Morning. Also, on the loan front, I know on the line utilization, you indicated the 50% increase in the gradual recovery expected. Can you just maybe elaborate a little bit more on the areas of expected strength as you see that rebound and line utilization taking hold? I know you mentioned the subscription finance M&A and ABL. Is that the areas where you continue to expect that momentum to build, or do you expect that to broaden? And if you could comment on what areas? Thanks.

Yeah, I'll make a few comments, and Don will elaborate on that. I mean, I think the areas that we're seeing looking forward into commercial We've seen strength in asset-backed securitizations. We see that continuing. Subscription-line finance, as I mentioned in my remarks, in part due to M&A activity, is an area of continued growth. Cree is a place where we're seeing some good uptake maybe in the office space with Build-A-Suite and in the industrial space as well. So that's starting to contribute now as well. And then to your point about CNI utilization, I mean, I think two points related to it. So we're seeing commitments rising. And even if utilization doesn't really lift off, that still provides some loan growth, even if utilization levels are up just a very tiny bit. If overall commitments are up, then that still creates a positive contribution. And there's a handful of sectors that are driving that. You've got construction, energy, manufacturing are a couple of the areas. And it is somewhat broad-based. It is, you know, it's a small increase, but somewhat broad-based, you know, number of sectors where we're seeing, you know, small increases in utilization and maybe just turn it over to I think you kind of covered it. I think the good news, John, is that we are seeing in our core middle market and CNI book the beginnings of a little bit of daylight in terms of utilization. As John said in the opening remarks, clearly the supply chain and the labor issue is restraining the performance of some companies. So they would be performing better than they even are now if they didn't have some of their supply chain problems. But in the last couple months, we're beginning to see some course in our utilization. You know, the financial capital markets oriented, which is where subscription lines and ABS and the stuff sits, have been really strong all year, and we expect them to continue to be strong as we get into the fourth quarter and into next year.

So kind of combination. And, Don, you probably also hit on the point, the middle market is where you're seeing that. take up on line utilization, bigger companies.

Companies that don't have access to capital markets. So the challenge that we've had on loan growth is predominantly pay downs because people are going to the capital market, given the strength of the capital market. So the middle market guys are beginning to see some light at the end of the table. Part of it is just CEO confidence, frankly. They really, really, really squeeze down on on their companies. And as they begin to see COVID really begin to wane, they're beginning to grow their companies a little bit quicker at the margin.

Yeah, good. Got it. Okay, thanks. And then separately on the capital markets business, I know you mentioned a few times a very, very solid deal pipeline there. Can you maybe talk to us about how you're thinking about that line when you look at 2022 as you're budgeting? And then also, Can you remind us how much we should assume that falls to the bottom line in that business, particularly as the top-line momentum really builds?

Thanks. I think we continue to get more and more optimistic about 22. I was sitting here maybe mid-year saying, wow, 21 is really a banner year. There's a lot of this that may be keying off potential tax changes, both on the M&A side and on the capital market side. but our pipelines continue to build, and we think it's going to be very strong as we go into next year. I think my general view is you've got an environment where you're going to have a relatively strong economy, you're going to have relatively low interest rates, and you're going to have very high liquidity, and that's a very, very strong backdrop for growth. for 22. One of the things that we've got our eye on and we just don't know yet is how much is going to get pulled into 21. So we're going to have to be rebuilding pipelines maybe in the first quarter to get going. So you may see a fourth quarter, first quarter kind of swing, but we'll have to wait until the balance of the year to see that. And I don't really – I'd say I don't know what the marginal contribution is. It's actually lower than the lending business because the comp payouts are higher, but I don't have that number – at the tip of my fingers. And remember, we pay a lot of different people. We pay bankers. We pay corporate finance people. We pay M&A people. We pay capital markets people. So it all blends together. And the way I look at it is our overall efficiency ratio is actually pretty good. Yeah, so we have a 40% efficiency ratio. You know, it washes out to the bottom line.

Yeah, and I would just add, too, that we see these secular trends. We see private equity pools of capital growing and looking to put money to work and opportunity to gain some very attractive leverage levels and financing costs are low. So those trends will continue. And one of the reasons why we're hell-bent on assembling broader capabilities, including what we've done with some of the M&A boutique acquisitions and JMPs. We want to be an intermediary in those flows of putting money to work. And if our middle market companies want to sell themselves, we can take them to market and get a good price. So we've got the customer base. We increasingly have the product capabilities. And so that's reason for optimism in and of itself. I think we'll continue to gain a lot of synergies as we look out into 22.

Yeah, and the only thing I have to add, Bruce, is, you know, with J&P coming on board, it's the last piece of the puzzle, really. Not only do we have full service capabilities to help our clients do whatever they need to do, we've got a nice diversity in terms of product sets. So it will let us kind of benefit and, you know, benefit when markets are good and the equities or the debt markets and vice versa.

Got it. All right. Thanks for taking my questions.

If there are any additional questions, please take this opportunity now to press 1 and 0 on your touchtone phone. We'll go next to Ibrahim Poonwala with Bank of America. Ibrahim, we seem to have lost your line if you took yourself out of queue. There we go, one moment. Your line is open. Go ahead, please.

Ibrahim Poonwala, Bank of America Bank of America Bank of America As we look through the deal closings, one, I guess we're still on track for a 1Q closing for HSBC and investors. Any risk of a delay there? And remind us, as you close those transactions, are there any aspects of those balance sheets where we could see any runoff that may impact results as we look or perform for the deal?

I'll go ahead and start. So the expectation The expectation for HSBC is to close mid-first quarter, and that's very much on track. We're deep into the sort of preparations for that. It's both a close and a conversion on the same day.

And we have the regulatory approval in hand.

Exactly. We have regulatory approvals in hand on that transaction, so that one is looking just exactly as we expected. And I think the other larger transaction, which we look at these as overall one big strategic allocation of capital, but ISCC is a separate legal entity that we've got the shareholder vote scheduled for November 19th and the regulatory approvals are pending on that. The expectation and target for that is that we receive those approvals sometime in early 2022. and we have an opportunity to close that in 2Q, but nevertheless, that's pending, and we'll keep monitoring it. As it relates to runoff, we're not expecting to have runoff. I think the way we've described it is that we would continue those businesses, but the front book sort of activities would have a different profile than the back book, in particular with investors, because of all the capabilities that we're bringing to the table. And so we're not expecting to have any meaningful runoff, but we are expecting the loan book to have a different profile, you know, a year or two down the line, given more CNI and more consumer lending that we'll be able to generate off that platform as you look ahead.

I would just add a couple points there, John. First off, on HSBC, the price is tied to what comes over. So if there is any runoff, we would I have a shock absorber there in terms of what the ultimate premium is that we pay. And secondly, just when it comes to JMP, we're working very diligently to try to get that closed mid-fourth quarter here. So we should have four to six weeks, say, in the results here in Q4, which would be accretive, of course.

That's helpful. And just one separate question. You all spend a lot of time on the payments with CitizenPay. what you're doing in buy now, pay later. When you think about Zelle and you put a stat about 34% growth in Zelle, is there more that you think, and I understand you don't call the shots in Zelle, but do you think Zelle should be doing more in terms of enabling banks such as yourself to compete with some of the tech players in the business in terms of in-store payments, et cetera?

Yeah, it's Brendan. I think Zelle, the rails that have been built for Zelle are adequate, and I think the industry, including citizens, needs to kind of take control of the UI layer that sits above the rails and innovate on our own around the customer experience. whether it's peer-to-peer payments that's facilitated with Zelle or whether it's purchasing something direct with a merchant, which would be more a citizen pay platform. So we're making big investments in both of those environments. Can you see a world where those capabilities converge a little bit? It's a similar experience, whether you're buying something from a merchant or whether you're sending money to a friend. I think that's possible. But I think the rails are adequate. I don't necessarily think Zelle in particular needs to do anything dramatic to innovate. I think it's more around what we can do in the UI layer to make things easier for customers to increase engagement. As you can see our numbers, that's happening. And we continue to want to scale that up further and get more customers deeper engaged. It's just focusing on the use cases and where we can differentiate ourselves. And so we've got, you know, a central effort enterprise payments capability that's really coordinating between commercial and consumer to drive our decision-making there and make sure that we're investing in things that will really drive future growth.

Got it. Thanks for taking my questions. Sure.

Sure. And for our next question, we will go to the line of Vivek Ganesha. Go ahead, please.

Hi. Thanks for taking my question. Just a clarification. The PPP, since you've not given numbers, and maybe that might make it easier, but if I look at the seven basis points, that seems to equate to about $30 million in terms of the change from 2Q to 3Q. I heard you mention 15, so I'm trying to understand what am I missing there when we do that. I mean, as I said, is it easier to just give the numbers what it was in 2Q and 3Q?

Yeah, we did give the number that it is a 15 delta. And the reason that it shows seven basis points on that is there's a numerator effect and a denominator effect. So you have loans running off, which affects the denominator. So it really doubles the impact. You probably have about three basis points from the NII pickup, and then you get three to four for having the loan balances run down and be forgiven.

Got it. That's helpful, Bruce. And the roll-on, roll-off on the securities yields, how is that going? Can you give us some color where that stands and how much further?

Yeah, sure. I mean, so we've had several quarters come back for a while now with securities yields falling. And I think the dynamic there has been not only the pure front book, back book, which has been negative by about 40 basis points or so, but also you've got premium amortization, which has been a drag. And I think our outlook, however, for securities, is for that to stabilize and frankly start to turn around in the fourth quarter. I think in large degree, we will see the front, the pure front book, back book start to narrow, call it, it'll fall to something in the neighborhood of 30 basis points. But at the same time, we're also seeing as rates rise, premium amortization will also slow and that'll provide a net positive to security seals in 4Q.

So, yeah, it's really we're at about an inflection point there, Vivek. So, you know, with that steeper curve, as John indicated, front book, back book, when you factor in reduced amortization, we're now going to see that turn to be a tailwind from being a headwind for the first three quarters of the year.

If I may, one more. The other retail you've been talking about, Citizens Pay, you've signed up a lot of partners. Hard to see, although, because it's overcast by the runoff portfolio. What are you seeing in those loans in terms of growth, citizens pay related? Is there some numbers that you can give us? Because the combined number doesn't look so great, but I recognize it's muddied.

Yeah, the growth in citizens' pay has been pretty substantial. So all things kind of buy now, pay later is up around 40% year over year with balances. And we continue to see that accelerate. We've got a lot of activity in the back half of this year on bringing on new clients and it takes a while for these things to ramp. We pilot them, they come online, we work with merchants to bring them to life, to market them to their customers. So it's a bit of a ramp up period. And so all the leading activities that need to happen to continue to have confidence that this can scale through 2022 and beyond are there. So we feel pretty good that it's headed in the right direction. We're building a lot of new technical capabilities that's broadening out our value proposition within citizens' pay as well. So underlying very good, healthy growth. Sounds like, Kirsten, that we could probably shed some light and be a little more transparent in that unsecured area for future developments. presentation at a conference or in our general releases. Thank you. Thanks for the question.

If there are any additional questions, please take this opportunity now to press 1, then 0 on your touchtone phone. There are no further questions in queue. With that, I'll turn it over back to Mr. Van Zandt. Please go ahead. All right.

Thank you very much. So thanks, folks, for dialing in today. We always appreciate your interest and support. Have a great day. Everybody stay well. Thanks.

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation, and you may now disconnect.