Citizens Financial Group, Inc.

Good morning, everyone, and welcome to the Citizens Financial Group First Quarter 2025 Earnings Conference Call. My name is Ivy, 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 Kristen Silberberg, Head of Investor Relations. Kristen, you may begin.

Thank you, Ivy. Good morning, everyone, and thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Thorn. 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 color. We will be referencing our first quarter 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 in the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results in the presentation and the reconciliations in the appendix. And with that, I will hand over to Bruce.

Thank you, Kristen, and good morning, everyone. Thanks for joining our call today. We announced financial results today that were in line with our expectations. Highlights include NIM expansion of three basis points to 290, core long growth of 1%, resilience in our fee categories despite some softness in capital markets given market uncertainty, and credit trends remaining favorable along with continued share repurchases. Our balance sheet remains very strong with set one ratio of 10.6%, LDR of 77.5%, virtually no federal home loan bank borrowings, and a strong credit allowance position. During the quarter, we entered into an agreement to sell $1.9 billion in purchased student loans, which reside in non-core. $200 million of the portfolio was sold in Q1, with the balance to be settled ratably over the next three quarters. We will use the proceeds to pay down high-cost funding, purchase low-risk weight securities, and repurchase shares. The transaction will be accretive to NIM, EPS, and ROTC. We had already included the impact in our full year guide. During the quarter, we also issued $750 million in senior debt, further bolstering our funding base. We executed well on our strategic initiatives during the quarter. The private bank continued to see excellent growth, reaching $8.7 billion in deposits and $5.2 billion in AUM. We added private wealth teams in Florida and Southern California during the quarter, and another one today in New Jersey. Our New York City metro, private capital, and payments initiatives also saw continued progress. As we look forward, there has clearly been an increase in uncertainty in the macro environment given the policy decisions and rollout emanating from Washington. This has caused many market participants to hit pause on investments or deal activities. On a positive note, our corporate and consumer borrowers are generally in good shape and are in position to weather these challenges. The basis for our full-year guide had anticipated some choppiness in the first half of the year tied to the rollout of tariffs and downsizing of the federal government. Our view held that as the lower tax deregulation and pro-energy agenda kicked in later in the year, we would see a pickup in loan demand and deal activity in the second half. So with respect to an update to our full year guide, at this point, we reaffirm our EPS estimate, though there could well be some puts and takes. Events in the Q2 will help clarify whether the second half outlook will solidify as we had planned. On our guide slide in our presentation, we call out some risks that affect both us and the industry at large given the environment. And we also show some potential offsets to the full year guide. The main risk associated with continued economic uncertainty and a slowing economy include a push out in capital markets fees, slower loan growth, and higher credit provision. Potential offsets to these possible impacts include even better performance on funding costs, greater share repurchases, and further efforts on cost transformation. It's worth noting that there is a significant amount of pent-up demand around M&A activity. We are working on a record number and dollar value of transactions and are hopeful that they get done as uncertainty subsides. So while it's still early to make a call as to how the environment plays out, we remain focused on pulling the levers we can to offset any macro headwinds as we did in 2024 in meeting our initial year guide. And as we look to the medium term, we remain confident in our NIM trajectory, which powers our ROTC improvement and in our ability to execute on our key strategic initiatives like the private bank. In short, we feel good about our positioning overall from a strategic business and financial standpoint. We will stay focused on execution and the things we can control as we continue our efforts towards building a distinctive great bank. With that, let me turn it over to John.

Thanks, Bruce, and good morning, everyone. As Bruce indicated, we delivered first quarter results which were broadly in line with our expectations and reflected typical seasonal impacts. Referencing slides five and six, we delivered EPS of 77 cents for the first quarter with ROTC of 9.6%. Net interest income came in at the better end of our expectations for the quarter, as we performed well on our margin, which continued to benefit from the time-based decline of non-core and terminated swaps, along with strong deposit cost performance. Fees were up nicely year over year, and linked quarter performance reflects the impact of seasonality and market uncertainty on capital markets. Wealth fees were a record for the quarter, as we continue to build out the private bank. Expenses were managed tightly, including the usual seasonality in salaries and benefits. Credit came in as we expected, and we maintained a strong reserve coverage level. During the quarter, we entered an agreement to sell approximately $1.9 billion of non-core education loans. This acceleration in non-core runoff will be accretive to NIM, EPS, and ROTC, with the redeployment of the freed-up capital and liquidity as the sale settles over the course of the year. We continue to execute well against our strategic initiatives. Notably, the private bank continued to steadily grow its profitability, contributing $0.04 to EPS and finishing the first quarter with $8.7 billion of deposits. Also, we continue to make good progress in New York Metro, and our Top 10 program is well underway. We ended the quarter in a very strong balance sheet position with SEP 1 at 10.64% or 9.1% adjusted for the AOCI opt-out removal, a pro forma category one LCR of 122% and an ACL coverage ratio of 1.61%. This includes a robust 12.3% coverage for general office. We also executed $200 million in stock buybacks during the quarter. taking advantage of our strong capital position. Next, I'll talk through the first quarter results in more detail, starting with net interest income on slide seven. Net interest income decreased 1.5% linked quarter, driven by the day count impact of about $28 million, and slightly lower interest earning assets, which was partially offset by the benefit of higher net interest margin. As you can see from the NIMWOC at the bottom of the slide, our margin was up three basis points to 2.9%, driven primarily by the time-based benefits of non-core runoff and reduced drag from terminated swaps, and the benefit of improved deposit costs, partially offset by the net impact of rate-driven impacts on the balance sheet. We continued to execute our down-rate playbook in the deposit portfolio. Our interest-bearing deposit costs decreased 18 basis points. while maintaining the mix of non-interest-bearing deposits at 21 percent, stable with the prior quarter. Our cumulative interest-bearing deposit down beta improved to 53 percent in the first quarter. Moving to slide eight, non-interest income is down 3.5 percent linked quarter, with seasonal impacts in capital markets and part fees. Capital markets saw lower M&A and loan syndication activity given seasonality and the impact of uncertain market conditions pushing M&A deals out. Debt and equity underwriting improves coming off a slower fourth quarter. Even in a quarter impacted by seasonality and market volatility, we managed to perform well in middle market-sponsored book runner deals, ranking number three by volume. Our deal pipelines across M&A and DCM remain very strong despite market uncertainty. In fact, our M&A pipeline is at all-time highs in terms of number and value of transactions given pent-up demand. We are hopeful these deals get done as market uncertainty subsides. The wealth business delivered a solid quarter with increased annuity sales activity. We also continue to see positive momentum in fee-based AUM growth from the private bank. Our global markets business was up slightly this quarter with increased client hedging activity in FX and energy-related commodities. On slide nine, expenses were managed tightly, up 1.7% linked quarter, primarily reflecting seasonality in salaries and benefits. Our latest top program is underway, and this gives us the capacity to self-fund our growth initiatives. On slide 10, period end and average loans were down slightly. This reflects the non-core transaction of $1.9 billion, as well as auto runoff of $700 million. Excluding non-core, loans were up approximately 1% on a period end basis. The private bank continued to make good progress with period end loans up about $550 million to $3.7 billion at the end of the quarter. Commercial loans were up slightly with a modest increase in line utilization as some of our corporate banking clients drew down on their lines to finance inventory bills ahead of tariffs. We also saw a modest increase in capital call line usage given M&A activity in our sponsor base. And core retail loans grew slightly driven by home equity and mortgage. Next, on slides 11 and 12, we continued to do a good job on deposits, growing on a spot basis, primarily in low-cost categories, in what is typically a seasonally down quarter. Period end deposits were up approximately $3 billion, or 2%, driven primarily by low-cost growth in the private bank and consumer, partially offset by a seasonal decrease in commercial. The private bank continues to add customers and grow nicely, with period end deposits increasing by about $1.7 billion to $8.7 billion at the end of the first quarter. Our retail franchise grew deposits in low-cost categories this quarter, and we continued to maintain strong CD retention rates, even as we reduced yields. Stable retail deposits are 68% of our total deposits, which compares to a peer average of about 55%. This was a big driver of our improving deposit costs this quarter, as our deposit franchise continues to perform well in a competitive environment. Our interest-bearing deposit costs are down 18 basis points length quarter, translating to a 53% cumulative down beta. We continue to maintain a robust level of liquidity with a pro forma LCR of 122%, significantly above the Category 1 bank requirement. Moving to credit on slide 13. net charge-offs of 58 basis points for the quarter included a seven basis point impact from the non-core transaction. Excluding this impact, net charge-offs were 51 basis points, which was down modestly from 53 basis points in the prior quarter in line with our expectations. Commercial charge-offs were down modestly driven by a sequential decline in general office. Retail charge-offs were broadly stable, excluding the impact of the non-core transaction. Of note, Non-accrual loans were down 5% linked quarter, reflecting a decline in commercial as we continue to work out general office loans. Retail non-accrual loans also decreased as a result of the non-core transaction and continued runoff of the auto portfolio. Turning to the allowance for credit losses on slide 14. The allowance was relatively stable at 1.61% this quarter as portfolio mix continues to improve due to back book runoff and lower loss content front book originations, offset by a slightly more conservative loss forecast. The economic forecast supporting the allowance reflects a mild recession similar to last quarter and macro impacts from tariffs. The reserve for the $2.86 billion general office portfolio is $351 million, which represents a coverage of 12.3%, broadly stable with the prior quarter. Note that the cumulative charge-offs plus the current reserve translates to an expected loss rate of about 20% against the March 2023 loan balance when industry losses commenced. Moving to slide 15, we have maintained excellent balance sheet strength. Our set-one ratio is 10.64%. Adjusting for the AOCI opt-out removal, our set-one ratio was stable at 9.1%. Given our strong capital position, we repurchased $200 million in common shares, and including dividends, we returned a total of $386 million to shareholders in the first quarter. Turning to slide 16, we provide some details on the non-core portfolio. As I mentioned earlier, we took the opportunity to accelerate the rundown of the portfolio with an agreement to sell approximately $1.9 billion of education loans. We recognize a $25 million charge-off associated with this portfolio that was covered by a pre-existing allowance. $200 million of the sale settled in the first quarter, with the remainder scheduled to settle ratably each quarter through 2025. We expect to use the proceeds to pay down high-cost funding, invest in low-risk investment securities, and repurchase shares. With this redeployment, the transaction will be accretive to NIM, EPS, and ROTC. Moving to slide 17, we are well positioned to drive strong performance over the medium term with our overall three-part strategy, a transformed consumer bank, the best positioned commercial bank among our regional peers, and our aspiration to build the premier bank-owned private bank and private wealth franchise. We continue to make excellent progress on the private bank. We delivered our strongest deposit growth quarter so far. adding $1.7 billion of deposits to end the first quarter at $8.7 billion. And the mix continues to be very attractive, with slightly over 40% in non-interest bearing. We also ended the quarter with $3.7 billion in loans and $5.2 billion in AUM. With a 4% contribution from the business in the first quarter, we are tracking well against our 5% accretion estimate to citizens' bottom line in 2025, and to deliver a 20 to 24% return on equity. Moving to slide 18, we provide our guide for the second quarter. We expect net interest income to be up approximately 3%, driven by an improvement in net interest margin of approximately five basis points and day count. This pickup in net interest margin is primarily attributable to the time-based benefits of non-core runoff and reduced drag from terminated swaps. Non-interest income is expected to be up mid to high single digits, led by capital markets, with some risk if market uncertainty persists. FX in derivatives and wealth should also provide a lift for the quarter. We are projecting expenses to be broadly stable. Credit trends are expected to improve slightly from the first quarter charge-off level, excluding the non-core transactions. And we should end the second quarter with set one in the range of 10.5 to 10.75%, including share repurchases of approximately $200 million, which could increase depending on loan growth. Currently, our full year outlook remains broadly in line with the guide we provided in January, which contemplated a pickup in business activity in the second half of the year. However, if the current challenges in the external environment persist, there could be select risks that impact us as well as the broader industry. Persistent market volatility could impact capital markets revenue and anticipated loan growth in the second half of the year. While the assumptions incorporated in our current reserve are conservative and our corporate and consumer borrowers are broadly in good shape, heightened likelihood of a deeper recession could lead to higher provision. However, if these risks arise, we have potential offsets we can leverage. Lower loan growth could facilitate additional share repurchases, as well as the opportunity to further lower deposit costs as we continue executing our deposit pricing playbook. We would also take the opportunity to manage expenses down through streamlining our operations and further cost transformation. Looking out to the medium term, we see a clear path to achieving our 16% to 18% ROTC target. Expanding our net interest margin is an important driver And we project to be 305 to 3.10% in 4Q25, 3.15 to 3.30% in 4Q26, and in the 325 to 350% range in 2027. Slide 21 in our appendix provides some incremental details on our net interest margin progression to 2027. combined with the impact of successful execution of our strategic initiatives, should drive ROTC meaningfully higher by 2027. To wrap up, we delivered Q1 results that were in line with our expectations, highlighted by growth in net interest margin. While the market uncertainty has impacted capital markets' revenues, deal backlogs are at all-time highs. We accelerated the runoff of non-core with the education loan sale, which will be accretive to NIM, EPS, and ROTC. We entered the quarter with strong capital, liquidity, and reserves, which puts us in an excellent position to support our clients while navigating market uncertainty. And we continue to drive forward our strategic initiatives with the private bank progression particularly noteworthy. With that, I'll hand it back over to Bruce.

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

Thank you, Mr. Vanson. We were now ready for the question and answer portion of the call. At this time, if you would like to ask a question, please unmute your phone, press star 1, and record your name clearly when prompted. If you need to withdraw your question at any time, press star 2. Again, that's star 1 to ask a question. Your first question comes from the line of John Pancary from Evercore ISI. Please go ahead.

Good morning. Hi. Good morning. Just on the balance sheet growth, I just want to see if you can give us a little bit more color around loan demand, what you're seeing here in this backdrop. Are you seeing some of the trends in line utilization? Are you seeing any weakening of the pipeline and also any type of pre-tariff inventory build that might have driven a little bit of the growth in the near term, but It might be more of a pull forward versus the outlook. If you can just give us some color there. Thanks.

Yeah, I'll start off, and others will chime in here. But maybe just starting in commercial, we are seeing some line utilization increases. We saw that up a couple percentage points at the end of the first quarter compared to the fourth quarter. That was driven by a number of factors. I mean, we think tariffs is part of the story, but I'd also say that M&A and some working capital is in there as well. And that was both in our corporate banking business as well as on the sponsor side and our utilization in our subscription line side of the house and commercial. So we are seeing some of that trending. And frankly, given the expected pickup in business activity in the second half, you know, there's some expectation that we'll see that continue assuming some of this uncertainty subsides. On the consumer side of things, we're seeing good take-up on the Reggie and HELOC side of the ledger, given where the rate environment is. HELOC in particular has been a really strong story for us. And last but not least, I'd throw out the private bank, which continues to drive growth. So you're seeing all three of the legs of the story, as you heard earlier, contributing to the loan growth outlook. And maybe I'll just pause there and see if there's other color to add.

Yeah, I would affirm what John said, Don. I think as we talk to customers, we're hearing a little bit of expansion desire. They've gone a little bit to the sidelines right now, just given what's going on with the uncertainty in the environment. The other thing, John, that's been going on really powerfully in the first quarter is we've gotten disintermediated by the bond markets. We had an extremely strong bond quarter, and some of that came off of our balance sheet as clients accessed particularly the high-yield market. I think that probably is going to reverse given where rates are right now. So that'll be a tailwind behind us in terms of loan growth. I don't know how much of it is tariffs in terms of the line draws. I think it's just general working capital build. People are running their businesses really tightly. So I don't think we've seen the tariff impact yet, and that could be a tailwind also. And then we'll have to see on the capital call lines. That's a pretty big part of our balance sheet. Not huge, but it's about a $10 billion exposure overall of which about half is drawn, and that's running at relatively low utilization. So to the extent we get some of the deal activity kicking in, particularly in the second half, that should grow nicely. It's Brendan.

On the consumer side, if you put aside our non-core rundown, which, as John pointed out, was down about a billion linked quarter, and look at the underlying business that we're still originating, we're seeing decent growth, 1% up year over year. as John pointed out, heavily led by residential and secured. The portfolio is 75% secured. Keep in mind on the consumer side with incredibly high credit strats with high FICOs and relatively low LTVs. HELOC, we're actually up 9% year over year and believe we're right at the top of the league tables on net growth versus peers. And that's through a bunch of innovative investments we've made and analytics and customer experience that has driven a little distinct advantage for us. We will continue to take advantage of that given the high quality nature of the customer and expect that growth level to persist throughout the year. And mortgage, even though you have high rates, the portfolio growth is actually decent, up 3% year over year. Again, high quality customers, prepay speeds really low on the back book given the lack of a refinance activity. So we're seeing net positive growth. The other portfolios, student and credit card, have been flattish. Student given higher rates and credit card honestly by design as we look to launch some new products here mid-year. We expect that to see some higher returning growth assuming the economy plays in our favor in the second half of the year. So we feel pretty good that underlying loan demand is high for the second half of the year. In the private bank, as John pointed out, we grew about $500 million linked quarter. What we're seeing there is still strong demand from that customer base as the consumer part of that portfolio builds. The mix has shifted modestly to consumer, so that's now 30% of the book where it was in the low 20s about a year ago. That's a good sign. We expect slow and steady continued progression and balancing out the book. demand seems to have picked up. Our mortgage originations in the private bank are about double what they were same time this year, despite a similar rate environment. So activity is strong. We expect growth rates to accelerate in the back half of the year for the private bank.

Okay. Great. Thank you for that call. I appreciate it. And just quickly on my second question is just around capital. I know you're sitting here around 10.6 to ET1, and you cited expectation for around 200 million to buy back similar to this quarter or to last quarter. But also I know you mentioned, I think Bruce, you mentioned this and John, you mentioned as well that, you know, if you did see weaker loan growth and weaker macro, you could see higher buybacks. Can you just maybe help frame that? Like, you know, if the, if we do see weaker loan growth and a weaker economy, would you, would you conversely maybe be more cautious and therefore maybe be a husband, more capital or, versus step-up buybacks. Can you just talk about how you view that trade-off? Thanks.

Yeah, I'll go ahead and start there. I mean, we're committed to that range that we articulated at $1050 to $1075. If there's less RWA, then we would feel opportunistically, you know, a willingness to step up on the buyback side of things. And the reason for that is a couple of things. I think the starting point on capital is very strong. both before and after AOCI. So you look at our AOCI haircut, we're still north of 9%, which is quite a good number. We would also have to look at what the uncertainty would hold. And if you look at our reserve position that we've already set aside, we actually have a recessionary scenario already contemplated in our provision and loan loss reserve situation. So from that standpoint, I think that we could see a number of scenarios throughout 2025 that would be consistent with continuing to be able to upside buybacks in the face of lower loan growth.

And what I would add to that is if you go back to 2024, we also had a pickup in growth that would build over the course of the year. When that didn't happen, we basically used the freed up capital to buy back our shares And we thought our shares were very attractive. And I'd say given kind of the crack in bank stock prices since the macro uncertainty and the rollout of the tariffs, we still feel that the stock is cheap relative to inherent value. And so it presents a real opportunity to offset any impact that would hit in the P&L from slower loan growth if that happened. through buying back our stock and buying it back at very attractive pricing.

Yeah, just a case to add, as we keep growing our tangible wealth value per share, the earnbacks on buying back stock at these levels is well under a year. And so it's pretty attractive. And so we would still get it for all those reasons stated.

Great. Okay, thank you.

Your next question comes from Ken Usden from Autonomous Research. Please go ahead.

Thanks. Good morning. Guys, I wonder if you could talk through that push and pull on the capital markets outlook and the fee guide. So I guess, first of all, the record pipeline, what's your level of confidence in terms of closing those transactions? And I guess, secondly, if that capital markets embedded expectation doesn't pull through, how do we understand the comp ratio offset and the magnitude of flex that you can have to Keep PP&R close to in line. Thanks.

Yeah, so I'll start, and then maybe John or Don can follow on. But again, I think the exciting aspect of this from our standpoint is that we've, over time, built out really strong capital markets capability and a very broad M&A capability that covers middle market companies through mid-corporate and specializes in industry verticals that we think are going to be active. And so the fact that there's pent-up demand from sponsors to do deals, there's industry sectors that are very active, for example, data centers where we have a really strong group of folks focusing there, I'd say it's heartening to see that We've got record numbers of engagements. Our people are working very actively. And on a probability assessment, none of these deals have dropped, and I think we're just waiting to see some of this uncertainty subside. So we still feel optimistic that things will settle down here a little bit and that we should be able to pull that through. What I would say, if that is not the case and then things do push out a bit, there's other things to consider. One is that we're broadly diversified, so we've had the ability to, if one area doesn't fire on all cylinders, like if M&A is soft, then oftentimes our financing, our syndicated loan capability, our debt underwriting will pick up and provide an offset. And then the FX and interest rate derivatives and commodities hedging risk management business also is seeing an uptick in activity. And depending on the circumstances, that could provide an offset. So the first line of defense is kind of diversity within the fees that could help offset any push out on M&A volumes. And then secondly, there's obviously incentive compensation that would drop if the deals don't deliver. And then just broader, looking at the expense base, we're constantly working on ways to streamline our businesses and perfect how we're running the bank to make it more efficiently. So we have a top 10 program up and running, but we're certainly not content with that given all of the opportunities we see around new technologies like AI and ways to deploy that just to run the bank better and serve our customers better. I'd say that would be the broad playbook, but maybe for color on the revenue side, you might want to add anything there.

Yeah, I'd just echo a couple things that Bruce just said. One is I'm really encouraged by the diversity of the franchise and the people that we continue to add. Actually, we're continuing to hire really strong talent into some of our industry teams, so that provides an ability to continue to transact in the market. I also want to remind people that A significant part of our M&A business in particular is mid-sized companies coming out of our core franchise, and they continue to have a really strong desire to sell and transact, and a lot of those go into private equity. And the other thing I'd say is that the financing markets are generally pretty attractive, so we can get these things financed, and they're not $10 billion deals. They're $100, $200, $300 million deals, so they're eminently executable companies One of the things that's been interesting is you would ask the question of why are these things pushing? Part of it's due to the de-staffing of the FTC and the SEC. So it's just taking longer to get these transactions done. And I think the most important thing that Bruce said is we have not lost one mandate out of the pipeline. So it's not as if these transactions are going away. They're just taking a little bit longer to execute. So I'm super confident that we're going to be able to get these things across the finish line, whether it's the second quarter, the third quarter, we'll have to see. And some of it will be volatility, but there's very little tariff dependency in any of these underlying deals. So, you know, the big picture is we should generate the revenue and hopefully my bonuses aren't going to go down by year end, but Bruce will do that to me as he's done in the past, if that does happen.

John, anything to add?

No, I would just highlight the diversity point that you made. And just on the expense side, I mean, we would, you know, in an environment like that, you get the direct offset that you mentioned on incentives. And then you take a harder look at some discretionary stuff that we also touched on before. And then just more broadly, you know, just feeling like the net interest income story has just a number of great tailwinds that are part of why we feel good about the guy for 25 as well.

Okay. Thanks for all that. Okay, Ken.

Your next question comes from Peter Winter from DA Davidson. Please go ahead.

Good morning. I was wondering, just looking at interest rates, which have been extremely volatile, it seems like the forward curve changes daily, but can you talk about what the ideal interest rate environment is for citizens and yield curve, and conversely, what type of rate environment And it would put the NIM outlook potentially at risk. And are there any plans to reduce some of the asset sensitivity?

Yeah, good questions there. I mean, out the window, you know, our asset sensitivity is plus or minus 1% to a plus or minus 100 basis point change in, you know, a gradual shift in the yield curve up or down over the next 12 months. So we are slightly asset sensitive. Yeah, we're close to neutral. based on just how those numbers are playing out. And I'd say that first and foremost, the net interest margin trajectory is primarily not rate dependent. So you've got the time-based benefits that are really driving net interest margin, both in the near term and over time. So for example, in the first quarter, we had about five basis points of time-based benefits And given the slight asset sensitivity and seasonally lower deposits, that's why we ended up at three basis points of net interest margin growth in the first quarter. When you look out to the second quarter, again, we're going to get about five basis points of time-based benefit and better balance sheet trends. So that's why all of that drops to the bottom line. And really, you get that momentum continues to build not only through 25, but out into 26 and 27. And we have in our slide deck an illustration of the fact that by the time you get to the fourth quarter of 2027, the cumulative time-based benefit is 35 basis points. If you add that to the 290 that we delivered in the first quarter, we're already at the lower end of the range without having to deal with interest rates. And so then from there, the rest of the story that takes us into our range of 325 to 350, you would also look at fixed asset repricing which really is more about long end rates. And there's a lot of baked in turnover of the balance sheet given coming out of the lower rate, you know, environment that we're in coming, you know, in the pandemic. So you got 15 to 20 basis points there. And now we can talk about rates. And so there's, and we're pretty, but we're pretty well hedged from a, from a swaps standpoint in through, you know, out through the middle of 2027. So yes, we will do a little better. if rates are higher. So, you know, if rates are, you know, the terminal rate out the window appears to be around 350, that's a good outcome for us. And that would put us in the middle of our range. But, you know, higher rates, you know, terminal rates like 4% would be consistent with the upper end of our range of around 350. But we could tolerate as low as 3% on Fed funds or even a touch lower and still hold the low end of our range at 325. So we are basically comfortable with a wide range of scenarios on rates. We feel pretty well hedged with a slight orientation towards performing a little better, you know, a couple of years out if rates are a little higher. And we think about inflation and stiflationary scenarios when we think about positioning the balance sheet that way. But the objective of trying to have a lot of non-rate-related tailwinds is something that you need to think about when you think about our recovery on net interest margin.

That's great. Thanks, John. If I could ask just kind of a follow-up to Ken's question, you know, you talked about the puts and takes with this uncertain environment, but can you just give an update on the positive operating leverage for the full year versus January's forecast of 150? I realize there's all this uncertainty, but just wondering how you're thinking about it.

Yeah, we think we're reaffirming that outlook. We believe that that's very achievable around the 150. And a big driver of that, again, back to net interest margin, we see net interest margin rising to 305 to 310 by the end of the year. That implies about a 15 basis point increase in net interest margin year over year. That's pretty powerful on the NII line. And therefore, that 3% to 5% NII is a huge driver of our positive operating leverage, and we feel good about that. And we talked earlier about the diversity on the capital markets and feline broadly and how our pipelines are consistent with being able to deliver the guide with some levers to pull if certain scenarios play out.

I would add to that that in 2024, most banks, including ourselves, were very tight on expenses and 2025 were inflating a little bit. So the guide was for roughly 4% expense growth. And that reflects the fact that there's lots of great things for us to invest in as we build out the franchise here. So things like making sure we're adding to the private bank, we're adding private wealth teams, we're opening private bank offices, we're investing in AI and various projects, data analytics capability. There's a our payments capabilities. So there's things that we want to keep investing in to position us for that medium-term growth outlook that, you know, in a tougher environment, we can throttle some of those things a little bit. But our preference is to not do that, to keep investing and keep building. So just kind of putting that in context, there are some levers to pull, preferences to keep going, make those investments for the future. But we can pull back a little bit if need be.

The other structural benefit that we do have as well on the private bank, keep in mind that the majority of that cost base was compensation guarantees. And so as the team is productive and we have confidence in hitting our revenue outlook, that revenue is gobbling up existing expenses and compensation, not necessarily adding to it. So it's the operating leverage right there naturally versus last year, which we have a lot of confidence to deliver the revenue outlooks. That should be a structural advantage for us too. Great point, Brendan.

Thank you.

Your next question comes from Erica Najarian from UBS. Please go ahead.

Hi. Good morning. You have alluded to this in how you've responded to all the questions, particularly the PPNR one, but You know, as you know, the net interest income outlook is quite important. And, you know, as I pull up the slide from last quarter, you know, it set up 3 to 5%. So if I think about, you know, affirming, you know, the exit NIM on slide 21, and then, you know, the balance sheet seems to be fairly in line, at least average earning assets were in line this quarter. unless we think that the balance sheet will shrink it seems like that up three to five percent is still um you know broadly in line right in terms of what you're affirming so just wanted to confirm that um in terms of um the full year look yeah you've got that right erica and sean um you know that three to five feels pretty good if you just think about minimum that would take us to the upper end of that range

But what we indicated in the guide was that, at least back in January, that we might have interest-earning assets down about 1%, which is what put us into the middle of the range. There's some flexibility there. When you think about relative value in the securities portfolio and what we're seeing in deposit flows, which are actually coming in a little better than we expected, there's another lever there with respect to interest-earning assets in the securities book that we'll be monitoring throughout the year. But net interest margin trends, exactly as expected, feeling very good about that, with some leverage to pull, even in the securities portfolio and on interest-earning assets, if relative value looks attractive and deposit flows continue the way they've been going. So that's the way that we think about that three to five.

Thank you. And switching topics on the reserve. So this is a two-part question. Number one, just a broad question here. What unemployment rate is your reserve sort of looking forward to? And second, John, could you talk through the dynamics that's perhaps unique to citizens about the non-core runoff? So as we think about perhaps, you know, the baseline case of unemployment potentially getting worse or, you know, the company weighting the downside case more, you know, what is sort of the offset of, you know, the $1.9 billion student loan sale and, you know, the runoff portfolio, you know, and obviously, you know, the commercial real estate portfolio has been, you know, you've been resolving parts of that for some time now. So walk us through those two dynamics as we think about how to think about the provision from here as we think about perhaps a more uncertain economic backdrop, but also a specific optimization of your loan mix.

Yeah, I'll head both of those and others may chime in here. We have a number of scenarios that get applied to different parts of the portfolio. Our base scenario baseline scenario has an unemployment rate of 5.1% that covers a large portion of our book, primarily in C&I and in retail. But when you get into the CREE portfolio, and also that 5.1% is paired with a decline in GDP that would imply a mild recession. So a majority of the book has a mild recession associated with it. But when you think about the Cree book overall, we have a combination of a moderate to severe recession assumption applied to Cree. And so the unemployment assumption there is higher than 5.1. So on a weighted average basis, you'd end up with an unemployment rate that's above 5.1. I mean, just as an example, our general office portfolio has a severe recessionary scenario with an unemployment rate of 9.3%. and a GDP decline of 4.4%. So just giving you a sense that generally it's something higher than 5.1%. And that's why I think what we're saying is that a lot of the uncertainty and concern about recession for 2025, we feel like it's mostly baked into our allowance. I mean, we'll be monitoring it, and we're keeping an eye on it, and we're watching charge-off trends coming down in line with our expectations. So that all feels very good on the credit side.

John, you might have the number on the top of your head, but Erica, we're about 161 in terms of the allowance to loans. Kind of the day one CECL was 142. If you adjust it down first for the investor's deal and then for the actions we're taking in non-core, what is that number? 125 to 130. 125-ish, yeah, in that ballpark. Okay. Anyway, we feel that over time we've continued to improve the focus on kind of where we want to lend. We want to lend to deep relationships in commercial. We've been moving more up market so that 80% of the CNI portfolio is now investment grade equivalent. And in the retail book, you know, 95% of the book is super prime and high prime. 78% of the book is retail secured. And then homeowners are the ones that we're lending on an unsecured basis. Two-thirds of the borrowers are homeowners, which tend to have a better credit profile. So we have a bunch of those stats back on pages 24, 25, and 26. The CRE portfolio, we've taken a lot of the pain there already so that pigs have been going through the Python, so to speak. So we feel that we're well-reserved for different scenarios that could ensue over the course of the year.

Yeah, and to the other point of the question you had, Erica, regarding non-core rundown, I mean, I think you can kind of pair in some respects. I mean, certainly the balance sheet is fungible, but you can sort of think about non-core and private bank in some respects together because we're we're taking a lot of that liquidity and capital down in the non-core space, but we're growing in private bank and in commercial. So on the private bank, we have a year-end target on the loan side that is similar to the rundown in non-core that's being accelerated in 25. So what you're seeing is pulling back on a lower rate customer value assets in the non-core space, growing high customer attractive RWA in private bank and in commercial and in core retail. So the engine here is humming along really well and probably a little faster than we expected given our opportunistic transaction.

When we set up non-core, that was roughly broad numbers, $10 billion running down in the consumer market. runoff portfolio and $10 billion running up in the private bank. And by the way, the credit quality in the private bank, I mean, the group that came over from First Republic had virtually no credit losses. And so far, we've had no credit losses in that book. So you can't say that'll always be the case, but it's very, very high credit quality. So that alone is going to average down the net charge-off ratio through the cycle to something in the low to mid-30s from something that had been kind of higher 30s to low 40s.

Brandon, you want to add anything there? Just a couple of quick stats, maybe just to build on your points. On private banking, we have zero customers that are in delinquency or criticized right now. So to John's point, we're replacing the non-core rundown with that quality of asset. The other thing to make note of on non-core, which is seasoned now and in rundown with no new originations coming through with auto products, As the portfolio gets more seasoned, you have the dynamic of you drive the car up a lot and immediately reprice this down, and you're upside down a little bit on LTV until paydowns happen. The portfolio is a couple-year season now, so we feel pretty good that we've got our arms around lost content. It shouldn't be hypersensitive to unemployment unless there's a really significant event in the market. So that should be stable, and we feel good about the quality there. And just on the retail book, to everybody's point, 79% of it on the core side is residential secured. On the home equity book, 99% is below 80% CLTV. On the mortgage book, 51% CLTV. So there's very, very little lost content there unless there's a significant housing market correction, which obviously we're not seeing a high chance of that. And then when you unpack the unsecured book, while over time we'd like to have more exposure to credit card, right now we're undersized on credit card, and that's a good thing if there's an unemployment spike. And on the student book, 98% is co-signed by the parent on in-school, and 40% of our student loan refinancing book is with folks with advanced degrees, which are less sensitive to spikes in unemployment. So when you net all that together, I feel like on a relative basis, we should be in a very strong spot if there's a blip in unemployment.

Very thorough. Thank you.

Your next question comes from Matt O'Connor from Deutsche Bank. Please go ahead.

Good morning. A couple of follow-ups on the fee revenue categories. The service charges were quite strong year over year, and you mentioned cash management, which I think is pretty straightforward, and then also overdraft. Just elaborate on the overdraft. Is it increased frequency, and why do you think that is? Were there some pricing changes, or what drove that component?

Yeah, most of the service charge numbers actually in cash management and business banking is seeing really strong growth. It's in technology investments that we've made in the consumer business to drive stickier, engaged customers. By the way, that's also showing up in our low-cost deposit trend. So the increases that we're seeing are largely driven by healthy fee creation versus punitive, which we are very, very pleased with. Our overdraft line has obviously been on a downward slide for a decade, and it's now relatively stable. We've not made any pricing changes. And while there's, you know, the mass market population is generally back to paycheck to paycheck, they are, in fact, pretty stable. So we're not seeing any behavior in that base. Spending trends are still strong but stable. We're not seeing anything in that base that would suggest a breakout of economic stress yet. which obviously would be tied to an increase in overdraft fees, too. So, you know, we feel like that's going to be kind of range-bound. Hopefully the growth that we see will be in the positive fee creation through customer advice and services that we provide, largely in cash management. And overdraft is, you know, in a range. Obviously, I'm sure you all saw the – court case that is out there on overdraft, and then the House and the Senate both signed off on eliminating the rule from the CFPB. So we also think the risk that potentially existed in the back half of the year about that maybe coming down is de minimis at this point, headed to the President's desk for signature. So anyway, overdraft is stable, not growing, not really decreasing in any material way.

Okay, that's helpful. And then in credit card, they were down, obviously, verse 4Q on seasonal trends, but also down a little bit year-over-year, and they were trying to grow it. Is that just the cost of rewards and upfront sign-ons, or what's driving that drop on a year-over-year basis? Thanks.

Yeah, we have – there's been a little bit of our prior expansion activity we were doing with credit card we've paused. for a short period of time while we launch new products in May and June. So we're very, very excited about a couple of new products that are coming out late spring into the summer. The customer spending trends have been broadly stable for a bit here, and so we're expecting that to get back into growth mode. As you probably remember, going back 18 months, some of the growth in credit card and debit card fees were structural related to the MasterCard arrangement that we did. that really drove some net positive fee growth to the bottom line. As we generate more spending activity and grow the net portfolio in cards in the back half of the year, we expect that line to continue to modestly grow.

Thank you.

Your next question comes from Gerard Cassidy from RBC Capital Markets. Please go ahead.

Hi, Bruce. Hi, John. Hi, Gerard. Guys, can you share with us as a follow-up to your comments on the non-core loan portfolio and in view of the sale of the non-core student loans, can you give us the pros and cons of selling the entire portfolio that you outlined on slide 16?

Yeah, I'll take that. John, you can chime in. But, you know, I think that there's relatively high predictability in terms of the runoff of auto, which is basically what's left. Uh, and, uh, should we want to, uh, accelerate, uh, that sale, there's going to be a liquidity cost that has to be paid. So our view is since this is short duration paper, it runs off predictably. It runs off fast duration of the papers, roughly two years, uh, that we're better off preserving the capital and not incurring that liquidity cost, if you will.

So, yeah, I agree. And so we've got very strong capital on liquidity. So there's no need to accelerate it beyond the accelerated rundown. I mean, if you look in the fourth quarter of 25, by the end of this year, the entire book is going to be down to $2.6 billion. You know, a 1.5 of that is, or a little more than 1.5, about 1.7 or so, is sitting in an auto-collateralized structure anyway and therefore wouldn't be able to be sold. So that's sort of ring-fenced. and just runs down on its own. So you're basically under a billion dollars by the end of the year from the round trip from the beginning of this journey in terms of running down Encore, and this is going to be kind of in the rearview mirror very soon. And from that standpoint, we think the transaction that we did was the accelerant.

That was the longer-lived asset with the bigger tail. So to move that out really helps accelerate the whole rundown.

And, you know, who knows, maybe in the future there could be a cleanup, but it would be something that really wouldn't have much of an impact given that it's in such a low profile by the end of the year anyway.

Great. Thank you. And then as a follow-up, obviously your credit, you've got it under control and you talk very thoroughly about the office commercial real estate portfolio and the challenges there. I noticed in the C&I portfolio, and I know the numbers are not large, and it could be the law of low numbers that one or two loans going non-accrual will push the number up. But in slide 28, you do give us that breakdown of non-accruals. Can you give us some color in the C&I portfolio? The uptick, again, wasn't material and nominal levels. But what are you guys seeing in the C&I, especially in view of your outlook of the uncertainty we're all confronting with this economy?

Maybe just to start off, on 28, the allowance is really, when you see those numbers go up, that's really us being a touch more conservative with respect to areas that we're seeing that make sense to flow additional allowance over to.

That's the non-accrual, though. I think that You're talking about the 0.57 going up to the 0.65? Right.

Correct. But it's small. I understand it's small, but I'm just curious.

Yeah, I think that's just the law of kind of small numbers in terms of if you have one thing move into non-accrual as we work through some issues, that can make modest adjustments from quarter to quarter there. But nothing really to call out, I think.

Yes, Gerard, I'll just jump in. We're seeing no macro deterioration, CNI. You know, I go back to what I've said for a couple of years now is people really tighten their belts during COVID, both from a debt standpoint and an efficiency standpoint, and that's going to help them go through any kind of uncertainty that we have. So we see no broad trends of deterioration at all in our CNI book.

Yes. And I would say it's more a question of they're in good position and they've positioned themselves to be resilient and adaptable to the environment. To me, the bigger question is how much offense do they want to play? And the macro actually holds them back from further growth in their businesses. And that potentially affects loan demand or deal activity. But I don't really view it as any kind of material credit risk. In fact, when you look at the sectors that we lend to, we don't have huge exposure to the sectors that are most exposed to tariffs. So in general, we feel really that this is more an issue about how much offense comes out of the customer base as opposed to are we worried about credit deterioration. Great. Thank you, guys.

Your next question comes from Ibrahim Poonawalla from Bank of America. Please go ahead.

Hey, good morning. Just two very quick follow-up questions. John, maybe for you, not sure if I missed, when we look at your fee income guidance, you talked about the capital markets pipeline. What are we assuming for capital markets just from a fee revenue standpoint for second quarter and for the full year, if you don't mind sharing that?

Yeah, it's a driver, and I think I'd go back to the diversification points that we said earlier. I think we've got in the capital markets, we've got M&A certainly as part of the story, but there's loan syndications, some equity capital markets opportunities, and you heard Bruce earlier talk about client hedging that are all contributing to the second quarter as well as the full year. And then we're also focused on the fact that on the consumer side of the house, card and wealth are also expected to be contributing in 2Q and in 2025 as well. But we haven't broken down the details separately from fees in 2Q or 2025.

It's a material driver to the 8% to 10% growth we had for the year. in the original year guide and then in the second quarter lift that we have. And I would say the kind of level of the capital markets activity to me is why we have a little bit wider range in the second quarter fee guides. So we still think we'll see a nice bounce off of Q1 levels, but we'll, you know, we'll have to wait and see how that plays out. But I think the broader point John just made about diversity and, you know, when one thing is a little soft, we have enough levers that, you know, I think we're pretty confident that we'll be able to find offsets at capital markets. It's a bit sluggish.

Got it. And I guess maybe just to follow up on the margin outlook, when you have the margin for the end of the year, end of 26th, Can you remind us what the Fed funds rate underpinning that is? I appreciate the time sensitivity of what the NIM does, but what's the Fed funds rate if we get 100 basis points of Fed funds cut, let's say, between now and year end? Does that create some downside risk to the 25, 26 outlooks or not?

Yeah, I'd say, as I mentioned, we're pretty well hashed. We've got, you know, we've got... When you look out the window, we said two cuts in January. But out the window, maybe there's three. But that third cut happens late in the fourth quarter, number one. And number two, we are close to neutral from an asset sensitivity perspective. So that 305 to 310 feels very good and very comfortable with respect to delivering that range. The terminal rate of about 350... getting out into 26 and 27 puts us into the middle of our 325 to 350 net interest margin range. You'll see on the slide there in the back where we articulate that outlook. And so 2026, also just one other thing to add in case there's any follow-ups, you know, the net interest margin growth in 25 is very comfortable and we feel good about it. It's maybe implies about 15 basis points year over year. 2026 is a significant amount of tailwinds associated with some accelerating trends, and much of the time-based benefit actually really starts to kick in in 2026, and that's something to keep an eye on also.

Thank you, Mark.

Thank you, and our final question comes from Manon Gosalia from Morgan Stanley. Please go ahead.

Hi, good morning. Just a couple of quick follow-up questions. You know, one was on loan growth. Can you talk about how much of the loan growth over the past year has come from NBFI loans and how you're thinking about the credit risk of that portfolio?

Yeah, I mean, I'll start off, and Don may add in here. I mean, we do have exposure, like many of our peers do, into the NBFI space. It's part of our the ecosystem of interacting in the private credit space and the private capital construct that we do a very good job of covering. I would say that I'd hasten to add that the credit exposure for the places where we play is very low. You think about the kind of interactions that we do in whether it's business credit intermediaries or in the private equity space, that credit profile has been very low over time.

Yeah, I agree with that. And the growth hasn't been, you know, massive in terms of actually adding exposure. We've seen a little bit of growth due to higher utilization. So you see that coming through in the numbers a little bit. But we very much like the structures that we have in place, both for the private equity complex and the private credit complex. And they're both kind of investment grade-like in terms of their credit profiles. So very low losses, very strong structures, ABS kind of structures, particularly in private credit. And we feel very good about those exposures. And the other important thing is back to everything we're doing in the NBFI space, it's about a broad relationship. So we're doing multiple different things with each of the people that we're lending to. So it's not as if we're going out there and building a loan book. We're doing M&A with a lot of these complexes and We're actually distributing some of the private credit funds into our private bank and wealth management areas now, so there's a lot of different relationship orientation, and we're very selective in terms of the underlying clients that we'll actually bank.

I would just add two other points of color. One is that the definitions for this category are changing a little bit, and so some exposures that might not have been considered NBFI are now getting pushed into that a little bit. So it's hard to do a long period of time straight apples to apples comparisons. But I think once we get through the reclassification process, then you'll going forward have more continuity in those forecasts. The other thing is that where we are growing somewhat is in the private bank. And so that's a little bit of a different kind of complementary perspective to some of the bigger funds that Don's folks are covering. So, Brendan, I don't know if you want to add that, but we're making capacity there for kind of PE and VC funds where we know those firms extremely well. and we want to be the bank to the fund complex and the partners if those firms. And so that's really good business. That was always really good business at First Republican working. growing that business here.

Yeah, the credit structures, as Don mentioned, we believe are well-structured with incredibly low risk. They're one-year subscription lines, so the duration of it, if there's anything that we see that is worrisome, we can move on pretty quickly. We also, and the private bank, won't do the credit unless we have their operating cash management relationship, and so a very deep relationship with the firm with strong underwriting and then eyes all over cash flows and the whole community that we're banking. So we feel good about the exposure. Yeah.

Very helpful. And then as my follow up, just on the non-core loan sale in the first quarter, how should we think about the benefit to NIM from that sale? I know the year-end NIM guide is relatively unchanged, so I was wondering if there's some offsets there, if there's a higher probability that you can hit the higher end of that guide?

Yeah, we had anticipated that we would have an opportunity to accelerate in 2025, so that was included in the January guide broadly. So the 305 to 310 is is already incorporated this sale.

You may recall that on the first quarter call, I hinted that we were working on acceleration. So we were pretty far down the track that we would get something done. So when we had the guide, we had assumed that. So it's not that dramatic of a lift to NIM, but we'll pick up basis points here and there. It all adds up and builds our path towards hitting those year-end numbers, those fourth quarter numbers.

Okay. Thank you.

Okay. All right. Well, I think that brings us to the end of the call. Thanks again, everyone, for dialing in today. We appreciate your continued interest and support. Have a great day.

That concludes the Citizen Financial Group first quarter earnings conference call. Thank you for your participation. You may now disconnect.