Citizens Financial Group, Inc.

Good morning, everyone, and welcome to Citizens Financial Group first quarter earnings conference call. My name is Alan, and I'll be your operator today. Currently, all participants are in the 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 Kristen Silberberg, Executive Vice President, Investor Relations. Kristen, 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 our first quarter results. Brendan Coughlin, head of consumer banking, and Don McCree, head of commercial banking, are also here to provide additional colour. We will be referencing our first quarter earnings presentation located on our investor relations website. After the presentation, we will be happy to take questions. 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 reconciliations in the appendix. With that, I will hand over to you, Bruce.

Thank you, Kristen. Good morning, everyone. Thanks for joining our call today. We were pleased to start the year with a solid quarter. We continue to play strong defense to an uncertain environment with a CET1 ratio at 10.6%, our LDR at 81%, our allowance for loan loss ratio at 161%, and general office reserves now at 10.6%. On the P&L, we are still seeing a modest decline in NII, though our NIM was stable at 2.91%. Fees picked up by 3 percent sequential quarter, led by capital markets and CARD, and expenses were flat. Our credit trends are in line with expectations. We repurchased $300 million of shares during the quarter as we free up capital from our non-core rundown. Our guide for Q2 and full year remain consistent with our expectations at the outset of the year. Our strategic initiatives are making good progress. The private bank is off to a good start, reaching $2.4 billion in deposits at quarter end. We expect momentum to accelerate further over the course of the year. We are also focused on building out private wealth management through further investment in Klarfeld plus several imminent team liftouts. Our New York City Metro initiative continues to go well with the fastest growth of any of our regions and really strong net promoter scores. Our focus in the commercial bank of serving the middle market, private capital, and key growth verticals has put us in great position to benefit from a pickup and deal activity, which we expect to build further over the course of the year. And our top nine program is being executed well, allowing us to self-fund our growth investments while keeping overall expense growth rate muted. While there are still many uncertainties in the external environment, we feel we are in good position to navigate the challenges that may arise, and we maintain a positive outlook for citizens over the balance of the year, as well as the medium term. Over the past decade, we have undertaken a major transformation of citizens. Our consumer and commercial banking segments are positioned for success, and we are now looking to build the premier bank-owned private bank and wealth franchise. Our balance sheet has been repositioned with an exceptionally strong capital liquidity and funding profile, and we are deploying our loan capital more selectively to achieve better risk-adjusted returns. Our expense base has been tightly managed, with AI offering the potential for further breakthroughs. Lots accomplished with more to do. Clearly exciting times for citizens. With that, let me turn it over to John.

Thanks, Bruce, and good morning, everyone. As Bruce mentioned, the year is off to a good start. First quarter results were solid against the backdrop of a more constructive macro environment which supported an improvement in capital markets, stability in our margin, and credit performance that continues to play out largely as expected. We continue to maintain a strong balance sheet with capital levels near the top of our peer group, excellent liquidity, and a healthy credit reserve position. Importantly, This positions us to execute well against our multi-year strategic initiatives, including the build-out of our private bank. Let me start with some highlights of our first quarter financial results, referencing slides three to six before I discuss the details. We generated underlying net income of $395 million for the first quarter and EPS of 79 cents. This includes a negative three cent impact from the private bank which is a significant improvement from the 11-cent impact last quarter, as we start to see revenues pick up and we progress to our expected break-even in 2H24. It also includes the impact of the non-core portfolio, which contributed a 13-cent negative impact. While our non-core portfolio is currently a sizable drag to results, it is steadily running off, creating a tailwind for performance going forward. Our notable items this quarter were 14 cents, which primarily consists of an adjustment to the FDIC special assessment and top and other efficiency-related expenses. Excluding these notable items, our underlying ROTC for the quarter was 10.6%. Playing prudent defense remains at the top of our priority list, and we ended the quarter with a very strong balance sheet position, with set one at 10.6% or 8.9% adjusted for the AOCI opt-out removal. We also continue to make meaningful improvements to our funding and liquidity profile in the first quarter. Our pro forma LCR strengthened to 120 percent, which is well in excess of the large bank category one requirement of 100 percent. And our period end LDR improved to 81 percent from 82 percent in the prior quarter. On the funding front, we reduced our period end FHLB borrowings by about $1.8 billion linked quarter to a modest $2 billion. We also increased our structural funding base with a very successful $1.25 billion senior issuance and another $1.5 billion auto collateralized issuance during the quarter. And we have another $1 billion of auto backed issuance expected to settle this week. This is our fourth issuance, and it was executed at our tightest credit spreads to date. In addition, we expect to be a more programmatic issuer of senior unsecured debt going forward. Credit trends have been performing in line with our expectations, with NCOs coming in at 50 basis points for the first quarter. Our ACL coverage ratio of 1.61% is up two basis points from year end. This includes a 10.6 percent coverage for general office, up slightly from 10.2 percent in the prior quarter. We are well positioned for the medium term, with expected tailwinds to NIM that support a range of 3.25 to 3.4 percent. Regarding strategic initiatives, the private bank is doing very well. We continue to make inroads in the New York metro, and our latest top program is progressing nicely. In addition, we are poised to benefit from an improving capital markets environment with our investments in the business and synergies from our acquisitions positioning us to capitalize as activity levels continue to pick up. Next, I'll talk through the first quarter results in more detail, starting with net interest income on slide seven. As expected, NAI is down 3% linked quarter, reflecting a stable margin, a 2% decrease in average interest earning assets, given lower loan balances and day count. As you can see from the NMWOC at the bottom of the slide, our margin was flat at 2.91 percent as the combined benefit of higher asset yields and non-core runoff and day count were offset by higher funding costs and the impact of swaps. As expected, our cumulative interest-bearing deposit data remains in the low 50s at 52 percent. And although we continue to see deposit migration, the rate of migration is slowing. Overall, our deposit franchise has performed well with our beta generally in the pack with peers. Moving to slide eight, our fees were up 3% linked quarter given a notable improvement in capital markets and good card results. The improvement in capital markets reflects a nice pickup in M&A activity and strong bond underwriting results. Our capital markets business consistently holds a top three middle market sponsor book runner position and this quarter we achieved the number one spot. Our deal pipelines remain strong, and we continue to see positive early momentum in capital markets this quarter, with strong refinancing activity continuing in the bond market. In card, we had a nice increase, primarily driven by the benefit of a strategic conversion of our debit and credit cards to MasterCard. Our client hedging business was down a bit this quarter, with lower activity in commodities and FX. The decline in mortgage banking fees was driven by a lower benefit from the MSR valuation net of hedging and a modest decline in servicing P&L, partially offset by higher production fees as margin improved while lot volumes were stable. On slide 9, we did a nice job managing our underlying expenses, which were stable. We will continue to execute on our top program, which gives us the capacity to self-fund our growth initiatives. On slide 10, period end and average loans are down 2% linked quarter. This was driven by non-core portfolio runoff and a decline in commercial loans given paydowns and generally lower client loan demand, our highly selective approach to lending in this environment, along with exits of lower returning credit-only relationships. Commercial loan utilization continued to decline this quarter as clients remained cautious and M&A activity was limited in the face of an uncertain market environment. Next, on slides 11 and 12, we continued to do well in deposits. Year-on-year, period end deposits were up $4.2 billion, driven by growth in retail and the private bank. Period end deposits were down slightly linked quarter given expected seasonal impacts in commercial, largely offset by growth in the private bank and retail branch deposits. Our interest-bearing deposit costs were well-controlled, up six basis points, which translates to a 52% cumulative data. Our deposit franchise is highly diversified across product mix and channels. About 68% of our deposits are granular, stable consumer deposits, and approximately 70% of our overall deposits are insured or secured. This attractive deposit base has allowed us to efficiently and cost-effectively manage our deposits in the higher-rate environments. With the Fed holding steady, we saw the migration of deposits to higher-cost categories continue to moderate, and with the contribution of attractive deposits from the private bank, non-interest-bearing deposits are holding steady at about 21% of total deposits. Moving on to credit on slide 13. Net charge-offs were 50 basis points, up four basis points linked quarter. This includes increased commercial charge-offs related to Cree General Office, which were in line with our expectations. In retail, we saw a modest seasonal improvement. Non-accrual loans increased 8% linked quarter driven by Cree General Office. The continued runoff of the auto portfolio drove a modest decline in retail, while other retail categories were stable. Turning to the allowance for credit losses on slide 14. Our overall coverage ratio stands at 1.61%, which is a two basis point increase from the fourth quarter, reflecting broadly stable reserves with lower loan balances given non-core runoff and commercial balance sheet optimization. The reserve for the $3.4 billion general office portfolio represents 10.6% coverage, up slightly from 10.2% in the fourth quarter. On the bottom left side of the page, you can see some of the key assumptions driving the general office reserve coverage level. We feel these assumptions represent a severe scenario that is much worse than we've seen in historical downturns, so we feel the current coverage is very strong. Moving to slide 15, we have maintained excellent balance sheet strength. Our set one ratio is a strong 10.6%, and if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our SET1 ratio would be 8.9%. Both our SET1 and TCE ratios have consistently been among the top of our peers, and you can see on slide 16 where we stand currently relative to peers in the fourth quarter. Given our strong capital position, we resumed common share repurchases, and including dividends, we returned a total of $497 million to shareholders in the first quarter. On the next few pages, I'll update you on a few of our key initiatives we have underway across the bank, including our private bank. First, on slide 17, we have a strong, transformed consumer bank with a robust and capable deposit franchise, a diverse lending business where we are prioritizing relationship-based lending, and a meaningful revenue opportunity as we scale our wealth business. Importantly, we continue to make great progress taking deposit shares. with retail deposits up 20% year-on-year as we continue building our customer base in New York Metro. Slide 18, let me update you on our progress in building a premier private bank, taking the opportunity to fill the void left in the wake of the bank failures last year. Our build-up is going very well and gaining momentum. We are growing our client base and now have about $2.4 billion of attractive deposits with roughly 30% non-interest bearings. Also, we are now at just over $1 billion of loans and half a billion dollars of investments and continuing to grow. We just opened our newest private banking office in Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Clarksville wealth management business as the centerpiece of that effort. Next, on slide 19, we have built a formidable full-service commercial bank, which consistently punches above its weight. Our multi-year investments in talent, capabilities, and industry expertise put us in an enviable position to provide lifecycle services to middle market, mid-corporate, and sponsor clients in high-growth sectors of the U.S. economy. In particular, we are uniquely positioned to serve the private capital ecosystem. As evidenced by our consistent standing near the top of the sponsor lead tables, we are well positioned to take advantage of a more constructive capital markets environment And we are excited to start seeing the synergies from our acquisitions coming through in our results this quarter. Moving to slide 20, we provide the guide for the second quarter. We expect NII to decrease about 2%. Non-interest income should be up approximately 3% to 4%. We expect non-interest expense to be stable to down slightly. Net charge-offs are expected to be about 50 basis points, and the ACL should continue to benefit from the non-core runoff. Our Set 1 is expected to come in at about 10.5%, with approximately $200 million of share repurchases currently planned. We are broadly reaffirming our full-year 2024 guide. We expect NII to land within the range of down 6% to 9%, consistent with our January guidance, with margin coming in a little better than expected, offsetting the impact of lower loan demand. The other components of PPNR are also tracking to our January guidance. In addition, NCOs are trending in line with our expectations of approximately 50 basis points for the year. Our target SET1 ratio for 2024 is approximately 10.5%, and the level of share revertices will be dependent on our view of the external environment and long growth. Given the changing rate outlook, I wanted to update you on how the swaps and our non-core portfolio are expected to impact NII and NIM as we look out further in 2024 and beyond. We've included slide 25 in the appendix, which shows the expected swaps and non-core impact through 2027. By 4Q2024, we expect higher swap expense to be partly offset by the NII benefit from the non-core rundown. Looking out further, we expect a significant NII tailwind and NIM benefit from the impact of non-core and swaps over the medium term, given runoff and lower rates. This will be partially offset by the impact of the asset-sensitive core balance sheet, resulting in a medium-term NIM range of 3.25 to 3.4 percent. To wrap up, we delivered a solid quarter featuring stable NIM, strong fee performance led by capital markets and cards, tight expense management, and inline credit performance. We have a series of unique initiatives that are progressing well. Our consumer bank has been transformed, our commercial bank is exceptionally well positioned, and we aim to build the premier bank-owned private bank and wealth franchise. We enjoy a strong capital, liquidity, and funding profile that allows us to support our customers while continuing to invest in our strategic initiatives. Given several tailwinds, combined with continued strong execution, we are confident in our ability to hit our medium-term 16% to 18% return target. With that, I'll hand it back over to Bruce.

Okay. Thank you, John. And, Alan, let's open it up for Q&A.

Thank you, Mr. Vanson. We are now ready for the Q&A portion of the call. If you'd like to ask a question, please press 1, then 0 on your telephone keypad. You'll hear an indication you've been placed into queue and may remove yourself from queue by repeating the 1, then 0 command. And if you're using a speakerphone, we ask that you please pick up your handset and to make sure your phone is unmuted before pressing any buttons. Again, for questions, press 1, then 0 at this time. Our first question will come from the line of Ryan Nash with Goldman Sachs. Your line is open.

Hey, good morning, Bruce. Good morning, John. Morning, Brian. Maybe to start off with some of the guidance, you know, you broadly reiterated, can you maybe just flesh out how some of the expectations have changed, particularly around NII? John, I think you noted you still expect to be in the range, but, you know, what are the main drivers to get you there and what would it take to be better than the low end? And just as a follow-up on the margin, you know, you held it flat and it sounds like it could be a little bit better. How have the expectations changed relative to the 280 to 285 and the 285 you were expecting at the end of the year? Thank you.

Yeah, sure. I'll go ahead and talk through that. I'd say, as you may have heard in some of the opening remarks, we do expect that net interest margin trends have been quite good. And so we do expect net interest margin to come in a little better maybe at the high end of that range rather than where we were at the beginning of the year. And a lot of the drivers of that net interest margin can be pinned on the investments we've made in the deposit franchise over the years that are really starting to come to fruition. And when you look at it, deposit levels are better in the first quarter than we expected, and interest-bearing deposit costs are a little bit better. And funding overall, when you look at our borrowing mix, has improved significantly. So that's underpinning a lot of the net interest margin. And when you combine that with the other side of the balance sheet, where you see the front book, back book dynamic, playing out. It's very powerful. And so we're feeling better about NIM trajectory. And I think that's what you're seeing with respect to our confidence in hitting that net interest income range, given the confidence around net interest margin. As you get towards the end of the year, as I mentioned, I think previously we said our average, you know, our guide would be around 280 to 285. In that range, I'd say we're probably going to come in at the upper end of that range now when we look out. And maybe, you know, a tad above. We'll see as it plays out. And then we'll see the loans, just given where loan demand has started off the year, maybe average loans, maybe towards the lower end. of that original range. But those offset a couple of basis points of NIM equals about a percentage point on loans. So that math just works out to be right down the middle of the fairway in terms of our guide. What could cause it to come in a little better? Continued execution of our strategic initiatives. if we see our execution kind of accelerating, you know, across the private bank and our other key initiatives on the deposit side. And let's see how the second half commercial rebound plays out. We are expecting, you know, working capital starting to pick up. In the second half, we're expecting utilization levels to pick up. We're expecting activity in general, even in the M&A front and M&A finance, to be part of the story in the second half. And so if that starts a little earlier or comes in a little stronger, you could see us coming in maybe towards the low end of that original NAI guide.

Yeah, I would just add one thing, Ryan, as Bruce said. The fact that the loan demand is a little light is, I think, okay, given there's a kind of loop to what we're doing on the deposit side. So we're not going to chase loan growth. And if, therefore, there's a little shrinkage in the balance sheet, we can run off our higher cost source of either FHLB funding or broker deposit funding. So we're taking full advantage of that, which is helping bolster the NIM. The other thing is with less loan growth, you end up freeing more capital. And so that gives us the wherewithal to step up and continue to repurchase stock. And I think our stock is great value here. So we're all in on that.

Got it. And thanks for all the color. And just maybe as a follow-up, just Any color in terms of what you're seeing on the credit side, which seems to be tracking in line with your expectations, and maybe specific to office where we saw a jump in the losses this quarter relative to the past few? Maybe just some color on what's driving that. Was that increased severity? Are you front-loading some losses? And when inevitably do you think we could see the allowance in that portfolio peak? Thank you. Let me start and then flip to Don. Okay.

You know, I'd say there's no real surprises here, Ryan. So we can basically see all the office maturities. We've got kind of bespoke, careful handling on all of the significant exposures that we have, and we've been working with the borrowers. just to make sure that we can have a win-win situation so we can come through getting the best return on our loans and the borrowers can stay with their properties through a tough environment. And I think that's all going well. So if you have one quarter where the charge-offs tick up $20 million or the next quarter they go down $15 million, you're going to kind of see some modest variation around that line. But basically, to use a colloquialism, the pig is going through the python. And, you know, it's going to take a few more quarters for that to fully work its way through. But we're not seeing any surprises, which is the good thing. about this. And so, Don, with that, maybe you could pick up.

No, I think that's exactly right. We've taken our general office from about $4.2 billion to $3.4 billion, so it's actually coming down nicely. And the charge-offs have actually been modest. Most of the charge-offs are where we're selling out of properties and doing A-B loan structures. and basically deciding to move on. We've had quite a few pay downs also. So it's not all doom and gloom, but I'd go back to what Bruce said. It's name by name, property by property. We've got our workout teams fully involved. It's kind of playing out exactly as we expected it to be. If I took myself back a year and a half ago and looked at the office portfolio, there was a lot of uncertainty. I think there's a lot more uncertainty now. So remember, I've got a huge amount of absorption capacity just in my P&L for any losses that are materializing. and our reserve levels for the portfolio are well above where the severity of losses to date have been. So we feel like we're going to work through this, as Bruce said, over the next few quarters and begin to peek out the loss levels.

Yeah, and I just – and maybe, John, you can add to this, but, you know, in terms of – where do we go from here? You can see that the coverage ratio on office remains high, and it's gone from 10.2 reserves to 10.6, but that rate of increase is slowing. And so, you know, we've been taking the full charge off through the P&L and holding the reserve at high levels. At some point, we'll be able to start drawing down on that reserve. So I don't want to make the call on that, but just take note that that build is starting to slow, and so I don't know if it's maybe later this year or beginning of next year, but we will eventually get to a point where we can start drawing down on those reserves, which will be good for P&L.

Yeah, I agree with all that. I'll just add a point or two. So what's built into the 10-6, and you'll see it in some of our slide materials, is an expectation of a 71% decline in property values And that's what drives this 10.6% reserve for remaining losses.

Which is more severe than anything we've seen historically, including the great financial recession by a wide margin.

Exactly. And I think we should also mention that just given what we put behind us implies another 6% of losses that we've put behind us. So we've got 10.6% in the reserve. We've charged off about 6%. So you're up over 16% in terms of coverage. We feel pretty good about it, and that's where we think the losses are going to play out. And as Bruce mentioned, we'll charge us themselves. Maybe they peak later this year or early next, but we think we've got the reserves covered.

Thanks for the call, guys. They're very good. Okay, next question.

Your next question will come from the line of Scott Seifers with Piper Sandler. Go ahead.

Good morning, everyone. Thanks for taking the question. John, maybe just a thought on how much longer negative deposit migration continues. I think the prevailing wisdom is that it's slowing, but just curious to hear your updated thoughts on kind of when and why we might trough.

Yeah, I mean, we've been saying for a while that that things have been decelerating. And I'd say, you know, our deposit performance this quarter has been excellent in terms of, you know, versus what we were expecting coming into the year. So, again, deposit levels overall look good. DDA flows and low-cost to high-cost migration overall continuing to decelerate. And I think we can point to, if you look at where we are, We were at around 21% of DDA at the end of last year at 1231, and that flattened out. We were at 21% at 331. So DDA for us is stabilizing. However, the low cost to high cost, again, decelerating, and it will continue to decelerate. And what we've been indicating is that, you know, that's going to, you know, continue until you see the first cut out of the Fed, which is historically what we would expect. But it's getting to the point where it's having a diminishing impact on that interest margin. And so when you elevate overall, the contribution that our deposit franchises is delivering for net interest margin trends is excellent. And we're feeling very good about the trajectory of DDA stability throughout the rest of 24 and getting back to growth. Because when you think about what's idiosyncratic to us and the strategic initiatives that we're launching, The private bank non-interest bearing is accretive to the overall company. We're at maybe around 30% or more. And so that's dragging that number up. So I think we have to make sure. New York Metro offers another opportunity. And New York Metro as well is a really good point. So the combination of those strategic initiatives, we have some expectation of DDA flattening out and growing as you get into the latter part of the year, and that underpins the net interest margin quite nicely.

Yeah, maybe, Brendan, you could add some color.

Yeah, sure. We've been talking for a couple years now around how since so much of our deposit book comes through consumer that We believe that we've transformed the book to be peer-like or better, and I would just reiterate that that's what we're seeing. We were up modestly linked quarter on overall deposits in the consumer book with some benchmarking that we get from a variety of sources. We believe we were number one in our peer set linked quarter on DDA, so on a relative basis, We still have a lot of confidence that we're outperforming peers, and it's demonstrating the franchise quality that we've built. When you look at the customer level, customer deposits have actually been quite stable, around 31,000 per customer, and the remixing, as John pointed out, is pretty dramatically slowing. And I think that's kind of indicating that the COVID burndown is beginning to really run its course. So there may be a little bit more, but we feel pretty good that we're getting to kind of the end of that behavioral cycle. When you look at overall deposits on an inflation adjusted basis, they're back to, the operating floors here for consumer. Given the strength of low-cost deposits that we have had relative to peers, the other implication is how we're managing interest-bearing deposits. I do believe that we've peaked in the consumer segment in Q1 in our cost of funds. And why do I believe that? We had $3 billion in CD. rollover in March alone that were priced around 5%. We've retained 75% of those as they flipped over at materially lower prices between 3% and 4%. So you start to see the tailwinds building in that you can imagine the cost of funds in the consumer segment potentially beginning to reduce. We'll see how it plays out in rates are at, but I do believe we've sort of peaked here in Q1, and it's really driven by the strength of our low-cost performance, so we don't need to chase high interest-bearing costs as a result of that. So I feel really good about where we're at.

Perfect. All right, good. Thank you very much for the call-out.

Okay. Your next question will come from the line of John Pancari with Evercore. Your line is open.

Good morning. Good morning. I wanted to see if I could get some additional color on the loan growth commentary. I know you said it could come in at the low end of your initial expectation for the year, and you said a weaker line utilization at this point. Could you maybe elaborate a little bit where you see some weakness and what pockets, and where do you see some ultimate strengthening there in terms of timing? And then separately, a similar question around Your deposit growth expectation, I think, for the full year, you had fitted out at around up 1% to 2%. Any additional, you know, color you can provide or how you're feeling around that at this point?

David, I'll just start off on loans, and others can add. But, I mean, what we're seeing is that utilization coming in a little lower in the first quarter than was originally expected. But, nevertheless, we still see in the second half the interest around putting some working capital to work. and commercial activity starting to pick up is really going to drive a reversal of that utilization trend as you get into the second half. On the retail side of things, we're still seeing good opportunities in relationship mortgage and HELOC. And in the private bank, we've gotten a nice start in terms of, which is mostly a commercial lending-driven amount of activity in the subscription line space, and that we see that picking up. So all in, you know, 1H playing out about as expected, meaning maybe just a little bit lighter on loans, you know, but we had expected that would be the case. And then the, you know, the pickup on the second half will be coming out of the commercial business and private bank. Maybe any other color?

I think that's well said, Don. Any color?

Yeah, no, I'll – I think it's across the board on the commercial side and – Part of it is due to the booming bond markets, and we're seeing a lot of customers access the bond markets as opposed to draw down existing lines. And then I think there's a positive to it also, not for loan levels, but customers are running with lower leverage levels because they've been concerned about the economy. We're seeing a broad, more positive view of the overall economy across really wide swaths of our client base, so that would indicate that they're going to get more active in things like plant construction, working capital, growth, M&A, and so that should drive some bounce back in the back half of the year.

Anything from you, Brian? Yeah, the only thing I would add is maybe just strategically that there's a lot of ins and outs under the cover. So as we run down auto by essentially a billion and a quarter, and other non-courts getting replaced with high relationship, high returning asset growth, whether it's on the HELOC side or the private banks. So the headline numbers you can see around our loan growth, what you have to dig into is the transformative use of capital that we're doing around a handful of areas to have more durable, sticky revenue sources that are going to create more cross-sell around fees and other things over time. So we're pleased with how that's going.

Yep. And then you had a question about deposits. On the deposit side of things, in the first quarter, as I mentioned before, we saw DDA flatten out for the first time in many quarters. So that was really, really good to see. We also saw low-cost flatten out. So overall, we were at 42%. Last quarter in low cost, we're at 42% this quarter in low cost plus DDA. So the deposit trends from a mixed perspective have been favorable and from a quantity, a level of deposits at the end of the quarter came in higher than expected. That's driven by just strong execution and our strategic initiatives contributing, as we mentioned earlier, New York Metro and private bank, along with the blocking and tackling that Brendan and Don have been at for a number of years to invest in the franchise. And so all of those investments are paying off, and we do expect to see deposit growth supporting our loan growth in the second half of 2024.

Yeah, I would just highlight that. Just one last quick piece of color is that I'm very pleased to see the private bank now has had kind of two quarters with a billion-plus of deposit growth, and we certainly think that that's sustainable and could even accelerate. So the ship has landed, and we're off to a great start, and we expect that to continue and even accelerate.

Got it. All right. Thanks, Bruce. And then on the capital front, I did see the resumption in buybacks, the $300 million in repurchases this quarter, with CEQ1 here at around 10.6% or 8.9% when you dial in the ASCI scenario. How do you look at the likelihood of incremental buybacks from here in terms of a pace of buybacks? Do you think that That could be reasonable given where you're sitting right now on the CEP1.

Thanks. I think this capital position that we've generated and have maintained is really creating a lot of flexibility. When you think about our capital waterfall, our top priority is to put capital to work that is, you know, to support customers and clients that is accretive to our cost of capital over time. And that's really what we want to do and that we're expecting to do, you know, and that's what capital allows us, that flexibility. You know, it also cushions against uncertainties. And so there have been a number, you know, we look at the macro and being at a very strong capital level to be there for our clients, but also to cushion the downside to the extent uncertainties manifest is another, you know, use of a strong capital position. When you get down into, you know, kind of other potential uses of the capital, we support our debit end. Of course, that's top of the list. And then if we're left with elevated capital levels, then we're able to give it back to shareholders, which we did in the first quarter. We're planning to do that here in the second quarter. And that flexibility will continue into the second half. So as we monitor loan demand and the macro, that'll play into the trajectory of buybacks in the second half.

Yeah, and I would also just go back to an earlier comment that we have – I'd say a front-loaded plan this year because there's less loan growth. In fact, there's loan contraction earlier in the year that then turns around and we start to see loan growth in the second half of the year. That would, by definition, mean we need capital to support the loan growth and there'd be less capacity for shareholders. share repurchases. But anyway, you saw the 300 number in the first quarter. John mentioned 200 in the second quarter. And then we'll see where we get to in the second half. If the loan growth fully doesn't materialize, we can actually just turn around and keep repurchasing the stock.

All right. Thanks, Chris. Appreciate it.

Okay. Thanks. Your next question will come from the line of Peter Winters with DA Davidson. Your line is now open.

Thanks. Good morning. You guys maintained the net charge-off guidance for the year, but if we assume no rate cuts this year, could it lead to higher net charge-off than forecasting, just given kind of no relief on debt service coverage ratios or loans coming up for renewal at higher rates?

Well, what I would say on that is – You know, the broad credit quality is still very good. So if you look at our C&I book, that's in really good shape. Companies weathered the pandemic and leaned our business models, locked in lower cost financing. They're doing more of that. Now, early in the year, so we don't really see hotspots even with kind of a higher or longer scenario in C&I. Similarly, in consumer, we're still in very good shape. The consumer's benefiting from still strong liquidity levels, a strong labor market. And so we haven't seen any adverse migrations in delinquencies or NPAs or anything like that. So that's the bulk of the loan portfolio. kind of look at the commercial real estate and the general office in particular, that's relatively small as a percentage of the overall loan book. And I think there's potentially some trends. We're watching the reports that return to offices picking up, and so maybe there's a little countertrend in the office that offsets the kind of additional burden of the hire for longer. But I think at the margin, it's not going to change that charge-off number materially.

Peter, I'll just echo that from my side. We made no assumptions in our forecast that we were going to benefit from lower rates because we just didn't know, and that's our credit policy. We don't go out on the future curve. We run all our scenarios based on where rates are today. So I think you've got a peakish kind of rate environment. If it lasts another couple quarters or even another year, I don't think it's going to make a material difference to the way we Forecast charge-offs.

The only point I would add on consumer is that our delinquency levels are actually net down year over year, Q1 over Q1, led mostly by resi, but we're seeing really no signs of stress in the book, as Bruce pointed out. So I feel really good, even in a hire for longer, that unless there's a big economic shock, that we're in really good shape.

And then just quickly, just a follow-up on office, I guess. I believe that... more than half of the maturities on office happened this year. So do you think net charge-offs could peak towards the end of this year, maybe early next year, and then start to trend lower?

It's really hard to forecast that. I think they will be. early next year or late this year probably, but it depends how much we extend, how the negotiations go, how much capital is put into some of these transactions and working through the book, you know, loan by loan. I don't have the crystal ball to say exactly when the peak is, but I'll go back to what I said before is we're comfortable how it's kind of progressing and progressing according to our expectations.

All right.

Thank you. Your next question will come from the line of Ken Houston with Jefferies. Your line is now open.

Hi, good morning, guys. Just a question on the B side. It's really nice to see the capital markets improvement as you have been thinking as we're seeing more broadly. I'm just wondering, you know, a couple line items went well, a couple items kind of went backwards. Just wondering just how you're thinking about the fee progression, the drivers, and what's your pipeline look like relative to the, you know, the better start point here for the first quarter capital markets? Thanks.

Yeah, I'll start off, and others can jump in here. But, I mean, the drivers, I mean, you look at the big three for us, capital markets, card fees, and wealth, trust and investment services are all, you know, trending well, and we expect to be significant contributors in 2024. So each of those businesses has had significant strategic investment, you know, over the years and even more recently. So it's really nice to see them. The investments made in the capital markets business come to fruition. We had a good strong quarter in the first quarter. Number one in the lead tables on the sponsor side. Big rebound from the fourth quarter. And early in the second quarter, the activity, the pace of activity has continued. And we feel very good about the trends there, not only for 2Q, but for the full year. In the card business, you know, we've made a strategic conversion to MasterCard and that's driving you know, a number of positive developments there. And in the wealth business, as you know, all of the advisor hires, the clarified acquisition from a number of years ago are all coming together along with the private bank to drive those flows throughout 2024. So we're feeling quite good about the trajectory for fees.

I would just say, you know, to your point, Ken, also that there were those three strong areas and then We had a little bit of weakness in some other areas, service charges, mortgage, the global markets, FX and interest rate lines were a little below our expectations. The good news there is there's nothing structural that we worry about. I think we'll see bounce backs over the rest of the year, which will add to our overall growth and our confidence that we'll maintain strong fee performance for the year.

Okay, great. And just one more follow-up on the NII and the swaps. I'm just looking at your pages 25 and 26 from the deck, and it's pretty clear that you're saying the increases you've made to the swap book are all incorporated in the guide. And so that first quarter to fourth quarter, $35 million cumulative net interest income impact, is that inclusive of everything that is both active as of now and then will prospectively still come on as the year progresses?

Yeah. Yeah, it is. And so what that is, that $35 million is made up of about $50 million, primarily driven from active swaps that are outstanding. So there's about $20 billion notional of active swaps outstanding. That grows to about $30 billion by 4Q. That's incorporated into that number. But then it's offset by the positive benefit from non-core of about, call it, $17 million or so, or $15 to $20 million coming from non-core, and that gets you to the $35 million drag. But really, when you play it out for the rest of the year, again, broadly, net interest margin trends are coming in a little better, incorporating all of our swap activity. What you see on page 25 is just the receivix swaps. We actually have pay fix swaps in the securities portfolio that are offsetting this, as well as, of course, everything that's happening in the core balance sheet. So you've got to kind of think at the broadest sense that NIM trends are actually coming in a little better. And then as you get out to later years, you start getting, you know, all of this tailwind is really baked in, and you start seeing the fact that terminated swaps begin to contribute, it gets to the point where you get out into 2026 and 2027 that a majority of, a super majority, if you will, of the tailwinds are actually baked in and aren't rate-dependent. But you have that right in terms of the 4Q, you know, components. That incorporates everything on the receipic side plus non-core.

Okay, and I think it's... Can I just add a color there, Ken? I think coming into the year, people were concerned about that step up that we had forward starting swaps in Q2 and then more in Q3. the guide that we're giving and our confidence in the NIM outlook incorporate that. So we're able to absorb that because, you know, higher for longer is better for the core balance sheet. We have some pay fix swaps we did in the securities book. So we're able to absorb kind of that step up in the swap book and, you know, continue to maintain confidence in the NIM outlook for the year.

Yeah, that's great, Bruce. And if I can just bring that all together. So, you know, you broadly affirmed your broader guidance of down six to down nine, and we kind of know the first quarter and have the second quarter outlook. So what would be the biggest swing factors, you know, within that range, based on all these points that you're making about the NIM coming in better and now knowing more of this detail about how the swaps will work?

Yeah, to me, it's really volume would be the keys to where we land in that range. So, you know, do we actually see that strong growth in the private bank accelerating? That could be strong for deposits and attractive deposit funding and then The spread that they're making on their loans is also very attractive, so that's totally accretive to front book, back book. Do we see the growth in commercial that we expect come in? And I think we, based on our kind of pipelines and our conversations with our customers and also a feeling that the sponsor community right now, there's been a lot of pull forward in refinancing, but I think you're going to start to see some more new money deals in the second half of the year. So I think those volume factors will have a big impact, but the way we kind of see it looking out the window today, we're highly confident that those things will materialize. I don't know, John, if you want to add anything.

Yeah, I agree with all that. I'd say that even with a little bit of – You know, lighter loan demand, we still think that range is good. You know, maybe it comes at a higher end versus a lower end. But, I mean, I think that's a swing factor. All the other components of the balance sheet are playing out well. Our outlook for deposit mix and funding mix is underpinning the net interest margin. I would hasten to add that those pay pick swaps that we added last quarter in 1Q and also in 4Q, has really driven a really nice uptake in the securities yields. You see the securities yields up almost 40 basis points in the first quarter, and that's offsetting. That's a huge component of our balance sheet, and that's a big driver. And then I should also make clear, that the core balance sheet is contributing as well, where we're seeing front book, back book on the loan side that, you know, is, you know, in the range of 300 basis points in the first quarter. And you're getting front book back on the securities book of around 200 basis points. So, you know, there are, you know, good dynamics in the core balance sheet, and all of the swaps are baked in.

Okay, thanks for all that. You said we could come in at the higher end. I think you meant the better end. Yeah, exactly. Just for everybody's clarity on that point. Okay.

Your next question will come from the line of Matt O'Connor. Pardon me, I'm having technical difficulties. Your next question will come from the line of Matt O'Connor with Deutsche Bank. Your line is now open.

Morning. Most of my questions are going to answer, but I'm curious, when you talk about kind of this medium-term net interest margin, what are your thoughts on the size of the balance sheet? And I guess specifically, like, do you think the overall balance sheet will grow, or is there, you know, the remixing? You know, clearly you're running off the non-core book, growing the private bank, but do you envision kind of net balance sheet growth as you look out the next few years? Thank you.

Yeah, I'd say that we do expect the balance sheet to grow. I think we do have a balance sheet optimization program that's turning over a certain portion of the portfolio, but when you look at the grand total of the initiatives that we're putting in place, I think you see interest-earning assets will be growing in the second half of the year and as you get out over the medium term. So I think that we have the opportunity to optimize and grow, and that's our expectation.

Yeah, I would say the kind of flex point is kind of middle of the year when we – have done a lot of that heavy lifting on the repositioning. And then we start to see the private bank growth and commercial bank, as we discussed, start to kick in. So we should see net growth already in the second half of the year. And then kind of looking out 25 to 27, we would expect in a strong economy that we could get back to recently strong growth rates. Again, being selective where we play, focusing on primary relationships and primacy, but There's no reason we couldn't grow back at nominal GDP the way we did for kind of many years before we hit the pandemic. And that plays into, Matt, the delivery of positive operating leverage, which is part of how you get your return on equity up. And so that's the model we'd like to get back to.

Got it. Thank you.

Your next question will come from the line of Gerard Cassidy with RBC. Your line is now open.

Hi, good morning. This is Thomas Letty calling on behalf of Gerard. Circling back to capital deployment quickly, you guys were pretty busy in 2023 in terms of strategic actions. Can you update us on how you're thinking about further investment opportunities for the franchise and how you guys prioritize organic growth versus beam lift outs or even outright M&A?

Yeah, so... You know, I'd say that right now we have a very full plate in terms of the things that we're investing in, the organic growth initiatives we have. I would not, you know, we're not really looking much at inorganic situations or opportunities, and so I want to just stay focused on great execution. There's a big payoff for getting these initiatives right, and they're all kind of on the trend line. I would say team liftouts you mentioned is something that we're hinting at at this point because while we have the private bank in place and we have as part of a private wealth complex, we need to scale up our private wealth capabilities to a large extent. And so we are having discussions with teams You can watch this space because I think you'll start to see us build that part of the business out. But again, it'll be prudent. We'll treat them like they're kind of M&A transactions that are accretive and they fit our strategy and they're good cultural fits. But that's kind of the only thing I would say that we're looking kind of outside. And to some extent, that's organic. You can argue whether that's organic or whether it's acquisition-like, but we're kind of using the same acquisition lens on these as if they were small deals. And, Brendan, if you want to hit any color on that. Maybe two quick points.

One is that I just said the interest in citizens from a wealth management perspective is at a high like we've never seen before. So we're talking to some of the very best wealth managers across all the big brands in the United States. And so we're going to be very selective. But the interest in what we're doing here is quite unique and distinctive. So we expect to board some top talent and really give a boost to our wealth strategy. The point around capital that you mentioned, though, just even though we're mentally potentially thinking about the return metrics like we would an M&A deal, keep in mind that A lift out or what we do with the private bank really is a very de minimis impact on capital. And so that's why when we talk about the break even of the private bank being second half of this year, it's really just eating through the expense guarantees and getting the revenue throughput. So it has a very de minimis impact on capital. And the same will be true on wealth lift outs where, you know, the teams we bring on board will be much more expense guarantee mindset and getting them through their revenue curve versus having any real material impact on our capital. Yep.

Okay, great. That's helpful, caller. Thank you. And then just separately on loan growth, C&I demand has obviously been pretty tepid, despite pretty healthy growth in the economy as measured by real GDP. Do you think that lack of C&I loan demand is being driven by just general customer caution, or are you guys seeing more competition from non-bank players like the private credit market and others?

Yeah, I think it's just a general caution about what's going to happen in the economy. What's going to happen with rates? And I think most of our companies have had good years, but they're still expressing caution. So we're actually not losing business to private care. It's interesting. We're actually – it's coming the other way because there's been opportunities to take – loans that are out with private credit and move them over to the bank-syndicated lending market, refinance those, and kind of lock in lower-cost financing. So that's been a big part of the story here in the first quarter, and it's continuing into the second quarter.

I think that's right. I think the area that we see private credit most active is in the leveraged buyout market, which we don't hold a lot of that on our balance sheet anyway. So they're a source of distribution for us, and we've actually done a couple deals in the first quarter where we've distributed it into the private credit market. So it doesn't have a balance sheet impact, and it helps drive some of our fee lines.

Okay, great. Thank you for taking my questions.

Your next question will come from the line of Dave Rochester with Compass Point. Your line is now open.

Hey, good morning, guys. Earlier you mentioned that flows were a major driving swing factor of that NII guide. I know you mentioned expecting a little less loan growth this year, but you mentioned possibly hitting a better end of that NII range. If for whatever reason net loan growth doesn't materialize in the back half and CNI growth only ends up filling in for the runoff that you're expecting, can you still hit that NII guide for the year?

Yep. I mean, I would say that we're still confident in the range, and so if things break our way, we could be at the better side of that range. If they don't, we could be at the lower end of that range. So I'd still kind of use that as the guardrails. You'd have to have kind of quite a bit of deviation from expectation to fall outside of that range.

Yeah, great. And just to reiterate that point, what we've been saying is that we have an expectation that we'll come in at the better end of the range for net interest margins. based on the trends that we're seeing and the performance we were able to generate in the first quarter. So you would see us being at the upper end of that range, maybe a tad better on net interest margin. That's offsetting the fact that there's some lighter loan demand that we're also seeing. You put those together, and we're right down the middle there in terms of that range, and we have got back to the point Bruce just made, and that's our base case now that we're updating. And you know, there, there could be put some takes to that depending upon the volume point that Bruce made earlier. Yeah.

Perfect. All right. Thanks guys.

Okay. Your next question comes from the line of David Conrad with KBW. Your line is now open.

Hey, good morning. Sorry if I missed this earlier, but just kind of drilling down on the name discussion, just looking at this quarter, I'm curious on CNI yields dropped around 36 bps quarter over quarter. I didn't think this was a heavy swap onboarding this quarter, but just curious where we're looking at that maybe in the next quarter before the swaps come out in the third quarter.

Yeah, I mean, really what's going on as you've hit it, I'd say just broadly I would try to make the point that all the swaps are incorporated into the NIM guide. And when you look at the underlying fundamentals of the loan books, the front book, back book is driving an increase in loan yields ex-swaps. So that's the first point. As it relates to when you pull the swaps together from an accounting standpoint, why there is a negative impact from a swap standpoint is that there was a mixed shift. We had the swap notionals didn't change much, but we had some maturities at higher receives being replaced by some forward starters coming in at lower receives. And that overall, that net receive rate fell in the quarter, and that's why you ended up with that negative impact just on that line itself. But again, overall, net interest margin was flat for the quarter. And when you put it all together with all the components, we had quite a strong net interest margin, you know, performance, even incorporating that swap drag.

Yeah, agreed. And then, you know, you talked about the securities book earlier. both the front book, back book, and then the pay floaters coming out. But just curious, your outlook for the growth of the securities book going forward.

Yeah, I mean, I think we've gotten to the point where we had the liquidity build late last year. And that's basically largely done. And so where you see the securities book right now as a percentage of our overall registering assets is about where we'll be over time. As we grow loans, you know, we'll probably grow securities and cash. you know, on a similar mixed basis from a volume standpoint, but the percentage of cash and securities to overall interest earning assets at the end of the first quarter is about where we'll be for the rest of the year. And I would hasten to add that, you know, when you look at that, that's reflective of our deposit franchise and being primarily consumer and having a much higher proportion of insured, secured, insurance-secured deposits than most peers. And then if you crank it all through, the way the Fed looks at standardized Category 1 banks, RLCR incorporating all of that at 331 was 120%, which is incredibly strong from a liquidity standpoint. And that plays through based upon the balance sheet mix overall, including cash and securities.

Perfect. Thank you.

Your next question comes from the line of Manan Gosalia with Morgan Stanley. Go ahead.

Maybe as a follow-up to the last question, is there any change in how you're thinking through positioning in the medium term with the expectation for fewer rate cuts coming through? So, you know, with loan growth being a little bit weaker right now, deposit growth being pretty solid, as you noted, are you willing to put on a little bit more duration on the security side? And, you know, separately, has it got cheaper to put in some downside protection on NIM as you look into 2025 and 2026? And is that something you're considering right now?

Yeah, I would say on the security side, I'd say there's a couple of objectives being addressed. And it's the interplay between capital and liquidity. and interest rate risk management. So what we did over the last couple of quarters is we've added $7 billion of pay pick swaps. That's paid off quite nicely because of our view that rates were likely not to be down, you know, whatever, however many cuts we thought they were at the beginning of the year, five, six, seven cuts. We thought that was probably a little overcooked. And so we put on those pay pick swaps in part related to that. but in part related to the multi-year objective to reduce the duration of the securities book given how it will likely be treated from a capital standpoint. And so both of those objectives, you know, came into play when we shortened the duration of the securities book, which right now is about 3.8 years. We're likely to continue to shorten the duration book of that securities book over time and get down to something closer to three or thereabouts. And so that's really the driver there. But you've got to look at the overall balance sheet. And from an overall balance sheet standpoint, it made sense to add a little asset sensitivity in the fourth quarter and the first quarter. And at 331, we remain an asset-sensitive balance sheet. When it comes to adding downside protection in the out years, we do note that we have a significant drop-off. of receipt-based swaps when you get out into 2026 and 2027. And, you know, I think entry points matter. So if rates continue to stay elevated and we think there's value there, you know, we want to be careful that we don't give up our upside that the CNI loan book provides us, and we'll do that when the entry points are attractive in terms of that trade and locking it in. And in general, that would be consistent with something that would be north of 4% of a receive rate out into 26 and 27, and we'll be opportunistic as the rate environment plays out in terms of how we continue to protect the balance sheet over the medium term.

Got it. Very helpful. And then this morning, one of your peers suggested that they're seeing corporate behavior shifting from NIB to IB. Are you seeing some of your corporate clients take another look at optimizing their NIB balances in the higher for longer rate environment recently?

I think it's pretty much run its course at this point. We've had a little bit of a shift in the book, but it's really slowed down. I think the clients have been pretty opportunistic in terms of taking advantage of higher rates. So I'd say our book and our mix is pretty stable right now, and we expect it to stay here.

Yeah, I'd say overall you saw our DDA stable at 21% at the end of 1Q, 21% at the end of 4Q. That's important. That's the first time this has happened in a while. And so that stability we expect to continue as you get throughout for the rest of the year and actually see growth, as we mentioned earlier, based on other strategic initiatives and the private bank contributing.

Great. Thank you.

Great.

All right. There are no further questions in the queue. And with that, I'll turn it back over to Mr. Van Zandt for closing remarks.

Okay. Well, thanks, everyone, for dialing in today. We appreciate your interest and support for citizens. Have a great day.

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.