Citizens Financial Group, Inc.

Good morning, everyone, and welcome to the Citizens Financial Group Third Quarter 2025 Earnings Conference Call. My name is Denise, and I'll be your operator today. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this event is being recorded. Now I'll turn the call over to Kristin Silberberg, Head of Investor Relations. Kristin, you may begin.

Thank you, Denise. Good morning, everyone, and thank you for joining us. First this morning, our chairman and CEO, Bruce Van Saan, and interim CFO, Chris Emerson, will provide an overview of our third quarter results. Brendan Coughlin, president, and Don McCree, chair of commercial banking, are also here to provide additional color. We will be referencing our third 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.

Thanks, Kristen. Good morning, everyone, and thanks for joining our call today. We announced very strong financial results today as our momentum continues. We feel like we are firing on all cylinders. Financial highlights include EPS growth of 13 cents sequential quarter, or 14%. We have strong NII growth of 3.5% sequentially, paced by NIM expansion of five basis points, and net loan growth across consumer, private bank, and commercial, similar to last quarter. Fee growth was 5% versus Q2, paced by a tremendous quarter in capital markets, our second highest ever, as well as continued nice growth in wealth fees. Sequential positive operating leverage was 3%, as expense growth was held to just 1%. We continue to experience favorable credit trends, and we still have a robust balance sheet. Our set one increased 10 basis points to 10.7%. We have an LDR of 78.3 and virtually no wholesale borrowing. We continued the strong execution of our strategic initiatives during the quarter. The private bank had a banner quarter on deposits with spot growth of $3.8 billion to $12.5 billion, which is already ahead of our year-end $12 billion target. Loans and AUM continue to track well. We have now added eight wealth lift-outs to the private wealth platform with more in the pipeline. We continue to build out our private bank team with additional hires in Southern California, and we now have around 500 people in the business, quite the ramp from a startup in 2023. In addition, our efforts across New York City Metro, private capital, and payments are all tracking well. Our efforts around Reimagine the Bank continue to make good progress. We've systematically evaluated all areas of the bank to seek opportunities to improve how we are serving customers and how we are running the bank. We will give the full parameters of this effort on the January earnings call. Overall, we expect benefits to largely offset costs, including one-timers, in 2026. with net benefits beginning to positively impact results in 2027 and becoming quite meaningful thereafter. One of my priorities this year has been to commence the transition of the leadership team I assembled a decade ago to the new, refreshed team that can take us forward for the next decade. Most recently, we announced that Don McCree will be retiring in March 2026, having handed the reins to Ted Swimmer earlier in October. Don has been a great partner and has made a big contribution towards our success. It's been a real pleasure working with him. We've been planning Don's succession for some time, and I have every confidence that Ted is the right leader to take us on the next leg of the journey. When Inouye Banerjee arrives in 10 days as our new CFO, the team will have been largely refreshed with several younger, dynamic, outstanding new leaders. Turning back to the financials, with respect to Q4, we expect to continue to see attractive earnings growth based by positive operating leverage, favorable credit trends, and share repurchase. We remain highly focused on executing our strategic agenda, which should deliver superior organic EPS growth relative to our peers over time, as well as further improvements in returns. We are positioned well to sustain our momentum into 2026. The macro environment remains positive despite continuing uncertainty with respect to fiscal and monetary policies. We will stay focused on execution and the things that we can control as we continue on our journey towards building a top-performing bank. With that, let me turn it over to Chris Emerson, our interim CFO. Chris?

Thanks, Bruce. Good morning, everyone. As Bruce mentioned, we delivered a strong revenue performance with disciplined expense management in the quarter. driving both sequential and year-over-year positive operating leverage of about 3% and 5% respectively. We saw good growth in deposits, with the private bank hitting $12.5 billion in deposits for the third quarter, up $3.8 billion. Lending continued to pick up during the quarter, with growth led by increasing sponsor activity in commercial and the private bank. Given our strong outlook, the Board of Directors has declared a quarterly dividend of $0.46, which is a $0.04 or 9.5% increase. Referencing slides five and six, we delivered EPS of $1.05 for the third quarter, an increase of 13 cents or 14% over the second quarter. PPNR was up 9% sequentially and 20% year-over-year. Capital markets delivered a record third quarter and our best performance since the all-time high fourth quarter of 2021. Performance was strong across all categories, demonstrating the power of our capabilities as market activity picks up. Net interest margin continues to steadily expand, up five basis points to 3 percent, and average loan volume was up 1 percent, which combined delivered 3.5 percent NII growth. Expenses were well managed, and we had 3 percent positive operating leverage. Credit trends continued to be favorable, and net charge-offs were lower, as expected. We continue to maintain robust capital, strong liquidity levels, and a healthy credit reserve. We ended the quarter with our set one ratio at 10.7% while executing $75 million in stock buybacks during the quarter. And importantly, we are executing well against our key strategic initiatives with very strong momentum in our private bank and private wealth build out. The private bank continues to steadily grow its earnings contribution, adding $0.08 to EPS this quarter, up from $0.06 in the prior quarter. With this, the private bank hit an important milestone this quarter, achieving cumulative break even with the EPS contribution since the launch in 2023 completely covering our investments and then some in about two years. Next, I'll talk through the third quarter results in more detail, starting with net interest income on slide seven. Net interest income increased 3.5% linked quarter driven by continued expansion of our net interest margin and a 1% increase in average interest earning assets. The margin expansion of five basis points was driven by the time-based benefits of non-core runoff and reduced impact from terminated swaps, as well as fixed-rate asset repricing. We continued to do a good job optimizing deposits in a competitive environment. Interest-bearing deposit costs were stable, while total deposit costs were down slightly. Our cumulative interest-bearing deposit beta was 53% through the third quarter. Moving to slide 8, fees are up 5% linked quarter and up 18% year-over-year. As I mentioned earlier, capital markets delivered a record third quarter and our second-best-ever quarterly performance, an increase in market activity for strong M&A results even before including the deals that were delayed from the prior quarter. We saw a meaningful pickup in debt underwriting, primarily driven by refinance activity, and we delivered a solid performance across loan syndication fees and equity underwriting. We continued to perform well in the league tables, ranking fourth for the last 12 months on deal volume, for middle-market sponsor loan syndications, and our deal pipelines across M&A, debt, and equity capital markets remain strong. Our wealth business delivered a record quarter with higher advisory fees from continued positive momentum in fee-based AUM growth, given strong inflows from the conversion of private wealth lift-outs, as well as market appreciation. As expected, mortgage and other income came down from elevated levels in the prior quarter. On slide nine, Expenses are up 1%, reflecting continued investment in the build-out of private bank and private wealth and strong capital markets performance. Disciplined expense management and strong revenues resulted in approximately 170 basis points of improvements in our efficiency ratio to 63%. Our top 10 program is progressing well and is on target to deliver $100 million pre-tax run rate benefit by the end of this year. I'll provide an update on our Reimagine the Bank initiative in just a few minutes. On slide 10, period end loans were up 1%. This includes non-core portfolio runoff of roughly $600 million in the quarter. And excluding non-core, loans were up approximately 2% on a spot basis. The private bank delivered a solid loan growth again this quarter, with period end loans up about $1 billion to $5.9 billion, reflecting a pickup in commercial line utilization and growth in retail mortgage. Commercial loans were up slightly on a spot basis, given increased line utilization tied to sponsor activity. We continued to reduce CRE balances, which were down about 3% this quarter and 6% year-to-date. And core retail loans grew by about a billion, driven by home equity and mortgage. Next, on slides 11 and 12, we continued to do a good job on deposits, with non-interest-bearing balances increasing by about 1.5 billion, or 4%, maintaining a steady mix at 22% of the book, as our overall spot deposits increased approximately $5 billion to $180 billion. Average deposits were up 1%, driven by increases in the private bank and commercial, with spot up 3%, including some larger transactional flows towards the end of the quarter. We continue to focus on optimizing our deposit funding costs, with a further reduction of higher-cost Treasury broker deposits this quarter and a decline in retail CD rates. Our interest-bearing deposit costs are stable linked quarter, translating to a 53% cumulative down beta. And importantly, stable retail deposits are 66% of our total deposits, which compares to a peer average of about 56%. Moving to credit on slide 13, net charge-offs of 46 basis points are down from 48 basis points in the prior quarter, driven primarily by a decrease in CNI. Credit trends continue to trend favorably, with non-accrual loans down slightly linked quarter, driven by CNI and CRE, with criticized balances also declining. Turning to the allowance for credit losses on slide 14, the allowance was down slightly to 1.56% this quarter, as the portfolio mix continues to improve due to non-core runoff, the reduction in the CRE portfolio, and lower loss content front book originations across CNI and retail real estate security. The economic forecast supporting the allowance is relatively stable to the prior quarter. The general office balance of $2.5 billion continued to decline modestly in the third quarter, driven by paydowns and charge-offs. This is down by $1.6 billion since March of 2023, roughly 40%. The reserve for the general office portfolio is $314 million, which represents a robust 12.4% coverage. Moving to slide 15, we maintain excellent balance sheet strength our set-one ratio increased to 10.7%. And adjusting for the AOCI opt-out removal, our set-one ratio is 9.4%. We returned a total of $259 million to shareholders in the third quarter, with $184 million in common dividends and $75 million of share repurchases. Moving to slide 16 and 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. The private bank continued to make excellent progress, as you can see on slides 18 and 19. The private bank delivered its strongest quarter of deposit growth so far, with end-of-period deposits up $3.8 billion to $12.5 billion, and average deposits up $2.2 billion to $10.7 billion. The overall deposit mix continues to be very attractive, with about 34% in non-interest bearing at the end of the quarter. We also delivered strong loan growth this quarter, adding roughly $1 billion of loans to end the quarter at $5.9 billion. This reflects growth in subscription finance, as line utilization rose with increased client transaction activity, as well as good growth in mortgage. So far, we've added eight wealth teams to our platform, with more in the pipeline. We ended the quarter with $7.6 billion in AUM, up $1.1 billion linked quarter, reflecting the continued strong conversion rates of the wealth liftouts. And with year-to-date earnings of 18 cents, we are tracking to approximately 7% earnings contribution, which is above our target of 5% plus accretion to citizens' bottom line in 2025. We continue to remain focused on sustaining strong growth in the private bank while maintaining a high level of profitability. with ROE in the 20% to 25% range in 2025 and over the medium term. Moving to slide 20, our Reimagine the Bank initiative continues to take shape. We feel very good about how we are currently positioned. However, the pace of change is accelerating, and competition is fierce. So we are taking the opportunity to think boldly about what will be needed to take the bank to the next level. We have a team of executives from across the bank working on cultivating technology and AI-enabled ideas that will empower our colleagues to run the bank better, and we are looking at all our key customer touchpoints to simplify and improve the customer experience. Aside from technology, we are looking at areas like reducing the number of vendors we use and rationalizing how they serve us across the bank. We are also looking at how we use our corporate facilities and how best to optimize our branch network to build our market share and key markets. We will have more details on the contours of the program for you on our year-end earnings call, But suffice to say, we will be running the program with our usual financial discipline, with an eye toward minimizing the impact of one-time costs and capital investments in 26 by executing initiatives with faster paybacks. The program will drive positive net benefits in 2027 that we expect will accelerate into 2028. With this program, we aspire to deliver fully phased-in run rate benefits greater than top six, which was in excess of $400 million. On slide 21, We provide our guide for the fourth quarter, which contemplates two 25 basis point rate cuts, one in October and another in December. We expect net interest income to be up approximately 2.5% to 3%, driven by an improvement in net interest margin of approximately five basis points and interest earning assets up slightly, maintaining a fairly consistent spot LDR to the third quarter. We expect non-interest income to be stable, with capital markets holding steady to the third quarter and some puts and takes across other categories. We are projecting expenses to be stable to up slightly, and we expect to deliver sequential positive operating leverage for the third quarter in a row and for the full year. Credit is expected to continue to trend favorably, with charge-offs in the low 40s basis points. And we should end the fourth quarter with a set one ratio stable at 10.7%, including share repurchases of roughly $125 million, which, depending on the amount of loan growth, could be revised. The fourth quarter tax rate should be approximately 22.5%. Moving to slide 22, 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, along with the impact of the successful execution of our strategic initiatives in improving credit performance. To wrap up, our strong third quarter results demonstrate the quality and potential of our fee businesses, as well as the consistent improvement in our net interest margin. Coupled with our continued expense discipline, we achieved positive operating leverage for the second quarter in a row. Credit trends continue to improve, and with our strong reserves and capital level, we are in an excellent position to continue navigating a dynamic environment while supporting our clients and continuing to progress our strategic initiatives. And with that, I'll hand it back over to Bruce.

Okay. Thank you, Chris. Denise, let's open it up for some Q&A.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. To withdraw your question, press star two. Our first question today comes from Scott Cyphers with Piper Sandler. Your line is open.

Morning, everyone. Thanks for taking the question. Maybe, Chris, with something you could spend just a moment discussing the expected margin trajectory, sort of both near term and then toward the 325 to 350 medium-term target. I know the fourth quarter margin should come in around 305, which is, you know, up, but sort of toward the lower end of the range you all had discussed previously. So, you know, maybe just thoughts on how things are trending versus your expectations and then sort of the puts and takes as we go out beyond the fourth quarter in your mind.

Yeah, thank you for the question. Scott, as you mentioned, we're forecasting the 305 into the fourth quarter. And as you know, that's on the back of a lot of the time-based activity, the non-core runoff, the terminated swap benefit, fixed asset repricing. And although we're slightly asset sensitive, we believe that positives on active swaps and a mix will overcome the asset sensitivity and allow us to hit 305 into the fourth quarter. And as we project out across the medium term to our 325 to 350 range, we really look at that in a couple of buckets. We've got our time-based benefits, which is the majority of everything that you're going to see there. as well as the front book, back book, which is adding a couple of basis points each quarter to round it out. And then the net of our mixed pricing and others should take us the rest of the way into that range.

Yeah. I would also say, Scott, it's Bruce, that the initial several quarters back view was that we could exit 305 to 310. I'm still happy to be at 305. A couple of things have happened over the course of the year. One is that the back end of the curve has come down. So I think our original view was the 10-year would be in a 425 to 450 range. And so it's lower than that, which crimps a little bit the front book, back book benefit. It's still there, but we assumed it would be a little higher. The other thing that's happened is that commercial loan pricing spreads have come in. It's a bit tight. And so it's those two factors, really, which have brought us in. Kind of still within the range, but more at the lower end of that range.

Perfect. That's good color, and thank you. And then, Bruce, maybe sort of a broader top-level question. The ground seems to be shifting a little in the large regional space. I think since, you know, last quarter where it looks like we're going to create a new Category 4 name with one merger and then move another Category 4 bank up to Category 3 eventually. You know, any updated thoughts on the role M&A might play in the citizen story over the next couple of years? Or is it still that you've got, you know, just plenty of organic runway that you'd rather sort of maintain that organic momentum?

Yeah, I'd say that's still the case, Scott. So we have, I think, our own somewhat analogous acquisition to what other people are doing was the startup of the private bank. And we're getting significant accretion to the bottom line. And we didn't have to expend any capital to do that. We took a little risk in the startup of the business, which has now already covered the initial investment. And it's an excellent, well-positioned business that has, you know, we're feeding that to continue to get growth while we're achieving very strong profitability levels. And so that's our focus is to make sure We execute well on that. We set that business up to be a really valuable franchise in the medium and long term. I think we're on that trajectory, which we feel good about. We have a bunch of other initiatives, too, looking at New York Metro and the growth that we're achieving there, looking at some of the investments we've done in the commercial bank and how we're covering private capital. And we've been waiting for activity levels to pick up. to really demonstrate the prowess of how that business is positioned. And now when you see activity levels picking up, I think you can see the power of what we've assembled. So we have a lot of strong growth. You know, we're always alert for opportunities, but as I said in the past, it'd have to be a pretty high bar for us to, you know, go down that path and look at things in organic.

Terrific.

All right, wonderful.

Thank you for the color. Yep.

Thank you. Your next question comes from Dave Rochester with Cantor Fitzgerald. Your line is open.

Hey, good morning, guys. Nice quarter. Thanks. Just real quick on the private bank outlook. You reiterated the levels you talked about before in terms of, you know, loan deposit targets, AUM. You're already there on deposits, so it would be great to just hear your outlook there. over the next quarter, the next year. And then in terms of AUN, it looks like there may be a little bit of a gap. If you could just talk to your confidence in hitting that target by the end of the year, that'd be great. Thanks.

Sure. I'll start, and then Brendan can offer color. But, you know, I'd say the path on deposits is not going to be linear. So you're going to have, you know, I'd say in the second quarter, we saw some outflows near the end of the quarter, and The third quarter, we saw some inflows near the end of the quarter, and so you kind of have to look at this kind of over the trajectory over several quarters. It averages out. We feel really good that we're already at the year-end level, and we would expect to see some growth, but I don't think it will be that significant. We won't have another quarter like we had in Q3 and Q4, but we should still achieve net growth from here, so that's good. I think loans is tracking well. AUM, which you pointed out, is a combination of things. So some of it is lift outs that we've already done and how fast they're converting over their client base. Some of it is lift outs in the pipeline and when they close. And some of it is the referrals that we're getting from the private bank over to private wealth. And so I think the wild card as to whether we hit that number or not at the end of the year is going to be A couple of the lift-outs in the pipeline, do they happen in Q4 or do they spill into Q1? I'm not concerned by that. I mean, if it's just a timing-based difference, the good news is that we're continuing to see a lot of interest in the platform. We've gone around the whole circuit and we've got kind of two wealth teams paired up with each private banking team. And so, you know, we feel good about how it's building, the quality of what we're assembling. We have more in the pipeline. We'll see exactly when that timing hits. So with that, let me turn it over to Brendan. Yeah, thanks, Bruce.

Maybe start with a point or two on the medium-term outlook and then add to Bruce's comments about Q4. We feel really confident over the next year or two that this momentum we're seeing will continue. And to kind of give you a few points here, but the original team that we brought over Back in 2023, we'd estimate maybe they've got 50 to 60% of their book of business size of what they had prior to First Republic's failure. Now, we don't expect that to get back to 100% given the market we're operating in and higher rates and so on and so forth, but the capacity to continue to grow is there. Then you supplement that with the management actions we've taken since we brought that team on board. Bruce mentioned and Chris did too. We started with about 150 people. We're up to 500 people. We're slowly and surely adding scale and capacity, expanding geographies. We've added new capabilities in family office. We've added new products and partner loan programs, so on and so forth. And we're doubling the number of PBOs that we have. between now and the end of next year. And you can see in our DAC that PBOs have over 300 million, which is incredibly large for such a short time period to open a retail branch. So that should give us fuel in the tank. We also have done a really nice job connecting the franchise, particularly as of late, with One Citizens. And so we're starting to see a lot of cross-pollination of the private bank, just us protecting it, incubating it to grow. Now it's starting to become upscale, and they're working – more effectively with the commercial bank, with our investment bankers, with our business banking team, with the retail banks, the wealth team. We're seeing a lot of cross-pollination that it's not just about growing, getting their clients back. It's now about cross-selling into the existing citizens franchise in private banking. So there's a lot of tailwinds here that we see in the future that should give you broad confidence on sustaining this performance. And, you know, not a lot to add to Bruce's comments about Q4. I would just add on the AUM front that if a team pushes out into next year, it's got a negligible net income impact in the short term. It's basically break-even in the first year. And so, really, it's just the headline metric. And if we If we end up missing by a little bit and it pushes to Q1, it's not going to take us off our financial profile or outlook at all. And we've got a very robust pipeline of talent that has high degrees of interest in joining our wealth platform. So, anyway, we still feel good. We've got a real good shot to hit our metrics, and that's about it.

I would just close with one thought here is that when we initially did the deal, we gave targets out into – where we thought we'd be in 24 the next year, and then the year after that being 25. And so it's likely that we'll want to refresh kind of over the next three-year view, where do we think we can take this business? And I think I've said publicly that, you know, the contribution to our bottom line could double theoretically within the next three years if we stay on this trajectory. So we have high growth ambitions for the business, but At the same time, we want to run it profitably and sustain that ROE in the 20% to 25% range. So I think this business ultimately will occupy some of the white space that First Republic created when they went under. But, you know, we'll do it. And I think the 2.0 version is going to be even better, given the totality of what Citizens offers with a solid commercial bank. I think we can be in position to really be the bank for successful people and entrepreneurs and kind of across all, all industry realms, PEBC and as commercial real estate and other sectors. So that's what we're aiming for. And I think we're really on the way to achieving that.

Well, it all sounded good guys. I really appreciate that. Maybe just one last quick one on slide 22. I noticed you dropped your Fed funds range here by 25 bps, but you still kept the margin range intact at 325, 350. I know it seems like a small change, but the sensitivity of that, the 325 to 350, is something investors have been asking about quite a bit. So I thought this was a positive that you reduced that, the Fed funds, but you kept the margin range. So what kept the range the same? And then you know, if you could give any color on the sensitivity of that range to Fed funds changes, that would be great. Thanks.

Yeah, sure. And so, you know, over time, we've been layering in hedges to protect the kind of downside if the Fed cuts rates more aggressively. And so that's been a focal point. But, you know, again, we don't want to be wrong. We don't want to just concern ourselves with kind of the Fed's cutting more aggressively because we still have a lot of inflation and we could stay sticky high. And so we haven't we've kept kind of a balanced view as to let's let's put those hedges on opportunistically when we see little spikes. And so so over time, if you look back over the six quarters, I think we've increasingly solidified our view that we can sustain that cone at 325 to 350, kind of at lower Fed funds rates down to 275, even I'd like to say down to 2.5, given the direction of travel potentially with Feds. And so we're working on that. But anyway, it's good to spot that because, you know, to bring that down to 275 to 375, I think, is progress in how we're trying to position ourselves from an interest rate risk management standpoint.

Great. Appreciate it. Thanks, guys. Sure. Sure.

Thank you. And your next question comes from Ibrahim Punawalla. Your line is open.

Hey, good morning. Hi. Just as a follow-up on the – very quick on the sensitivity of the Fed funds to the margin. Bruce, you talked about the 10-year having coming down took – has taken out some wind from the back book repricing. Is there a level that you're watching on the 10-year where – it really begins to sort of hurt that C25 medium-term sort of margin outlook that we should be aware of?

No. So one of the other changes that you may not have noted was down in that footnote around the 10-year range. We've also moved that lower, being reflective of kind of where the 10-year is out the window. I think our view still is that we stay – kind of between four and four and a half, and that the curve will stay steep as the Fed cuts. So that's kind of the house view. The fact is, though, that we're more sensitive to the short end of the curve and what happens with Fed funds, less sensitive to kind of the steepness of the curve, although it can have an impact. But even though we took down that range on the 10-year, we've solidified where we are in this cone. That kind of shows you that Moving that 425 down to 415 didn't have much of an impact. And so, you know, we'll see where things go. I'd be surprised if we get kind of meaningfully below four. But even if we did, I don't think it has a very significant impact. It can cost us a few basis points. But I think the trajectory with time-based is the predominant driver going forward. And the front book, back book has been positive. It could be a little less positive. but actually not a big concern at this point.

That's helpful. And I guess just another one looking at slide 20, and I know we'll get a bigger update in January, but as we think about the one-time costs tied to this reimagining the bank and re-architecting it, any sense of just what cost-save opportunities are there that could help fund that investment as All of us think about what expense growth could look like next year. Thanks.

Sure. And so if you look back historically in terms of what were those, you know, one-time costs, they tended to be either severance-related or consulting to implement some of the ideas or some frictional cost in terms of vendor tear-ups or write-off of technology. I wouldn't expect the kind of one-timers to vary from that bucket. And the question is, like, what's the pacing on how we're incurring those costs? And then can we make sure we have a list of fast, actionable items that can start to spin up some benefits in year in 26 so we can largely neutralize that? So what we tried to do on this slide was really just show you contours of the exercise so like we're turning over every rock we're looking at customer touch points how we're running the bank etc etc but then when we bring it back to a financial framework we're trying to make sure it scales so that ultimately we achieve meaningful size similar to or better than top six that we don't go backwards and have a negative impact on kind of 26, and if we do, it's quite mild. It's moderate, modest, I would say. And then, you know, that we start to already see some real benefits coming in in 27, and that kind of really the ship comes in in 28. So that's kind of the way we're thinking about it. Brendan, you can add some color to that and maybe talk about a couple of the fast action ideas that we're thinking about for, you know, 2026. Yeah, sure.

So if you bucket our ideas into two categories, I'd sort of broadly describe them as tech and AI-enabled for 50% or so, and the other 50% would be less so around tech and AI-enabled. and maybe you could categorize them as more traditional than what we would have seen in a project top in the past, but with a longer-term outlook, a more strategic application of those categories, so vendor simplification, post-COVID reevaluating our workforce and where we want it to be over the next five years, and cleaning up our corporate facilities where we can take out some excess seating capacity and strategically restructure to build our culture and have people co-located to move faster, more innovative ways. So there's Things like that. The branch network, as an example, we think it's time to position it for long-term net household growth and deposit growth. We have made strong and steady progress, but there's more work to do now that we can have better visibility into what post-COVID world will look like for retail banking. We still have a number of branches that are underperforming and can help fund the journey of repositioning the network and densifying in other markets to position for growth. All of those things We have analyzed and we have enough quick wins there to drop to the bottom line that it can self-fund whatever one-time costs come along with it. When you turn your attention to the tech and AI-enabled initiatives, it will require technology investment, which will be a little bit higher probably than some of our other top programs, just given the amount of the runway of three years multiplied by, you know, introducing new things like AI, like data and analytics into the ecosystem. So because we would capitalize that over time and get the benefits over time, those – costs are, you could consider them one time as an investment, but the way you would account for them, they would be linked to the benefits over the three-year window. So it allows us to smooth it out and make sure that there's the de minimis J curve on the portfolio of initiatives that we're going after, and we feel pretty good that we can accomplish that. And certainly our principal objective is to deliver our 16% to 18% RASI target over the medium term, and this should be accretive to that, not take us in the wrong direction. And so we've engineered the whole program to do just that.

That's great, Collin. Thank you. Thanks.

Thank you. And your next question comes from Anan Gosali. Your line is open with Morgan Stanley.

Hi, good morning. I wanted to check in on the capital market side. You noted it's second best quarter ever, the best third quarter. You know, I understand some deals were pushed from 3Q, pushed to 3Q from 2Q. But can you talk about the pipeline that you're seeing today, what the outlook looks like going into 4Q and going into next year?

Sure. I'll start and flip it to Don. But, you know, I think we've seen strength this quarter across the board. So if you look at the major places that we're playing, our bank lending, syndicated lending business has been strong. Our bond business has been strong. The equities calendar has opened up, so that's been strong. And then M&A activity has picked up. So if you think of those are kind of the four big areas, we're doing well across all four. And I'd say looking out the conditions that, you know, we've gotten used to the uncertainty and some of the headline risk that takes place, but market participants are saying this is the new normal and we have to get on with doing business. having spreads really tight is good for refinancings and pull forward and kind of that realm. But anyway, we have strong pipelines into Q4, and we feel good about, you know, how we're positioned and we can have a sustained period of increased activity, which benefits us relative to peers based on what we've built out in the capital markets. I'll turn it over to Don with that.

I don't really know what I can add to that. It was pretty complete, I think. I think the thing is, I look back at the third quarter, and as I look into the fourth quarter, into 26, it's the diversity of the flows. So as Bruce said, we're seeing it across M&A pipelines, bond pipelines, IPO pipelines, equity follow-ons, and syndicated finance. The one thing that we haven't really seen, which feels like it's beginning to get going right now, is private equity leaning in. I mean, you've seen some big private equity mega deals be announced. But the core middle market private equity, President and I were at one of the houses yesterday, and they said, finally, we're starting to see the 2021 vintages begin to get refinanced. So that is not in the pipeline in a significant way. And we think that that could be quite a big opportunity for us as we go forward. But I would just say that it's, as I look back on second quarter, third quarter, into fourth quarter, into 26th, We've just got a real diversified flow of business. Remember, we are a middle market investment bank, and we basically make a lot of our money and a lot of our transactional volumes with our core clientele and with our core private equity relationships. And I don't really see it slowing down any time in the future. And as Bruce said, I think the backdrop is better than I've seen it in three or four years just in terms of you know, Washington sentiment, liquidity in the marketplaces, interest rates. There's a lot of positives out there that should continue to propel the capital markets.

That's very helpful. And maybe if I can pivot over to credit, there's a lot of focus on the risks around private credit this quarter. You have a slide at the back where you show that the exposure is about 3.3 billion. Can you give us some more color on what that exposure looks like and where you see potential risks and what you're broadly seeing there?

Yeah, why don't I pick up on that also? So the way we lend to the private credit complex is really through securitization structures. So it's very, very high credit quality with diversified pools of collateral. You know, I haven't looked completely, but I don't think we've had any losses in our private credit pools related to any of the big headline kind of bankruptcies that have happened in terms of the underlying. But just think about it. We lend against 100 to 150 different collateral pools of individual credits, and we have very strong structures, very strong protections in terms of covenants collateral kickouts visibility into the underlying structures. So we are super, and as you said, it's a very small portion of our overall book, but it's actually one of the highest quality things that we do across the entirety of the commercial bank. So I'm very comfortable with it. And the thing I always look at is, are there structural degradations going on in terms of terms and conditions, in terms of how people are lending into some of the private credit funds? We haven't seen it, and the structures are holding up pretty well so far. But most of these are 364-day lines. They're pretty short-term, so we can adjust the book if we see anything that disturbs us pretty quickly.

I would just add that if you look at big categories like subscription line financing or securitizations or asset-based structures, they're – kind of loss history is pretty pristine, and they're all investment grade across those three categories. So we're very diligent on who we're kind of lending money to, and we're very diligent around the structures that we feel protect us. So we have a very positive view on credit in that area, in those areas.

Great. Thank you.

Thank you. Your next question comes from Chris Magrati with KBW. Your line is open.

Oh, great. Morning. Bruce, the 16 to 18 percent ROTC over time, I'm trying to connect the Reimagine the Bank benefits to the range that you've previously given. Do the benefits from this new plan, which we'll get in January, does that give you a bias to a certain part of the range or perhaps a sooner realization? I'm just trying to connect the two.

Yeah, so we're on our way to 16 to 18, and we're not reliant on the reimagine the bank today to get into that range. So to me, the question is, you know, how soon do they have meaningful impact? And that should allow us to torque those numbers up I think it's too early to do that. We're just kind of flashing you the contours of the program. But anyway, I think we'll have more specific color on that when we get to January and we give you a more fulsome forward outlook.

Okay, so it's additive. I guess you're not announcing this plan because you're not on track to get it.

This gives you greater confidence that you're going to get there. Right. then the question is how much will flow straight through versus do you want to reinvest and accelerate the growth rate in private bank and have the flywheel go even faster, which creates positive operating leverage and more PPNR growth. And so you have all those decisions. But I think importantly, if you're improving your cost structure and your cost base and your customer experience, that puts you in a very strong position to have optionality of the things you want to do. So that's how I would think about it, Chris.

Okay. And thanks for that. And my follow-up would be on just use of capital. You've talked about the earnings contribution of the private bank picking up, the loan growth is picking up. Any other, I guess, near to intermediate-term uses of capital, either organic or inorganic, that we might need to be thinking about? Thanks.

Yeah, I think the number one is to facilitate the loan growth as it comes back, which we think will continue. We want to grow the business and grow the number of customers that are customers of the bank. And so you saw also we announced a dividend increase. We want to now get back on a regular cycle of dividend increases. I don't at this point see meaningful uses of capital on bolt-ons. We can look for other M&A boutiques and industry verticals that we have. If we don't think we have full coverage, we can look at doing some interesting tech-oriented acquisitions in the payment space, again, which won't use a huge amount of capital. So, you know, there's a good likelihood that we'll continue to be repurchasing our share with the excess capital we're generating. And as I like to say, I still think the stock is cheap if we continue to execute. We're buyers here at this stock price.

Okay, great. Thank you so much.

Thank you. Your next question comes from John Pancari with Evercore ISI. Your line is open.

Morning. Hi. Just on the expense front, you know, I know you cited the, you know, ongoing investments in the private bank and teams as well as in, you know, the parts of the commercial bank, but also the reimagining initiative. Given all of that, And given where you're running right now in terms of your expense growth, how do you think about the pace of expense growth that's reasonable as we look at 2026? And if you're unable to give us too much around that, is there a way we could think about the degree of positive operating leverage that's attainable as we look at it? Because, you know, certainly it's a pretty wide range in terms of some of the projections out there, and it could be pretty meaningful as you look at the pace of your revenue growth at this point.

Yeah. So, again, if you look at this year, we're already back into positive operating leverage territory. And I think we'll continue to see that NIM expansion and NII growth, which really comes without a lot of additional expenses. So that's very accretive to the efficiency ratio improvement and positive operating leverage territory. Where we have been leaning in on investing expense dollars has been the buildup of the private banks. So this year we were running, say, two and a half to three on the core business and then add another one and a half plus to the private bank. And I think investors should feel really good about that. We're getting a great return on those expense dollars. So I think looking out into next year, and I don't want to get into guide because I say we're going to do it in January, but I think we'd have even more positive operating leverage because I think we'll have higher revenue growth for the full year, and the expense growth shouldn't be too far off of what we're doing this year. It's just an early glimpse.

Okay. Thanks, Bruce. I appreciate that, Colin. It's helpful. And then regarding the margin, I know you earlier you cited – a bit tighter commercial spreads that have impacted the margin performance and your outlook a bit here. Can you maybe elaborate a little bit? Where are you seeing that tightening and what areas is it, you know, what competitors are you seeing that, you know, that is driving that pressure? Is it more temporary or do you think there's a degree of permanence to this that's going to require a reaction out of you?

No, I think what, if you look at the broad markets at every credit index, were tightening across the board. And the good news is that that's reflective of lots of liquidity in the marketplace, but it's putting a little bit of pressure on refinancing. And, you know, as we think about returns in terms of the customers that we're banking, we, of course, focus on NIM and return on credit allocation, but we look at overall returns on relationships. And you add in what Brendan's done on the private bank. It's just another way that we can kind of interact with the clients that we're banking. So the real strategy that we've tried to build over the last 10 years has been one of broad-based financial services applications where we can make a combination of fee income and NII on the commercial side of the equation. And I think that that's proven to be, you know, quite effective. If you look at our overall returns on our client relationships, they're going up quite a bit. If we're giving a little bit back on spread here and there, we're making it up on fee income. And you can see that in some of the results that we've been doing. But I think it's – I don't see that equation changing a lot over the next year or two. There's a lot of liquidity, and I think spreads are going to remain tight. And we've just got to pick our spots and make sure that we generate broad returns across the relationships that we're trying to bank.

Got it. Thanks so much, Don. Very, very helpful. Thanks.

Thank you. The next question comes from Matt O'Connor with Deutsche Bank. Your line is open.

Good morning. This is Nate Stein on behalf of Matt O'Connor. I wanted to ask a quick follow-up on the cost base. Costs were really right in line with the guidance range this quarter despite a really solid fee print. Were there any specific flexes you engaged during the quarter to keep costs relatively well-managed?

I would say that you can count on us to be disciplined on expenses, and so we're still driving. We're now pivoting all the attention to reimagine the bank, but we still have our top 10 program that is gaining traction and ramping up some benefits. And so notwithstanding strong capital markets and we put away a little more in compensation, we're still trying to excise you know, expenses through the top program that we can repurpose for kind of more customer-facing investments. And when we see the productivity results that we're getting that we have to put away more compensation, we can offset that with some of the things through these top efficiency programs.

Thank you. And then just following up on the Reimagine the Bank program, I totally appreciate we're going to get more financial details in January, but I guess just wanted to ask on your confidence in the 400 million plus total run rate benefit over time.

Well, I would say if you learned anything about this leadership team over the past decade, we don't throw numbers out there that we don't think we can achieve. So we're pretty darn confident.

Thank you. Okay.

Thank you. Your next question comes from Peter Winter with DA Davidson. Your line is open.

Thanks. Good morning. So nice to see average loan growth turn positive this quarter. I was just wondering, could you provide some additional color on the drivers to loan growth going forward and maybe how loan demand has changed over the last 90 days?

Yeah. So I think, you know, you've now seen two quarters in a row where we've achieved net loan growth, meaning that we've had growth in consumer, we've had growth in commercial, we've had growth in private banks. And that is offsetting reductions in non-core, as well as some balance sheet optimization in the CNI book and in Cree, where we're seeing some meaningful paydowns. So anyway, that's good to see. And I think over time, the non-core is waning, so that'll be less of a drag. I think the C&I will be lower going forward. We've done a lot of that balance sheet optimization. You know, Cree, we're still managing that down to get kind of back to the playing weight that we'd like to play at. But, you know, I think there's still good dynamics around consumer, commercial, and private bank. that will lead to continued growth. And the amount will depend on kind of what we see in the external environment. On consumer, it's been really led by mortgage and HELOCs. HELOC has been the shining star. We have some hope in the future for card loan growth to pick up now that we've launched a whole new card family. We might be a little more selective in mortgage and not continue to use our balance sheet as much. I'll kind of restrict it more for important relationship customers and focus more on conforming. So anyway, that's a tactical shift that you could see going forward. You know, commercial, we've seen a lot of growth in the NDFI space, but we still are investing in middle market to achieve growth in some of our expansion regions. You know, we could consider New York an expansion region, but also Florida and California, where we've added some really great talent, and we're starting to see that spin up a little bit and achieve some growth. And private bank is kind of very consistent now. We have a bunch of penetration in the PEVC space. This past quarter, we saw a pickup in line utilization. We're starting to see The individual customers come in and borrow for greater mortgages and HELOCs and some of the similar dynamics that we're seeing on the consumer side. So anyway, I think we're well-positioned to capture growth across all of those three segments, and we'll have less of an offset coming from non-core in the future.

Got it. That's helpful. And then just one follow-up. Credit continues to trend favorably, but economic growth is slowing. Job growth has been weakening. Are you seeing any signs of credit weakness in either the consumer or within the commercial borrowing base?

I'll put that to Brendan first and Don second.

I'll just start with the mix of the portfolio and our NCO rate. You should expect it to continue to go down in the consumer business, in part with the non-core running down, and auto has a higher loss rate than the rest of the consumer portfolio. Consumer portfolio is in the high 40s. at the moment in terms of basis points for loss rate. Auto historically has been in the 70 to 80 basis point range. So as that dwindles down, the denominator shrinks and you should see losses come down overall. Inside of each category, NCOs are very stable. Delinquencies are very stable. I would broadly just characterize it as fully normalized from COVID. In the card book, as an example, that many of our peers saw too, the 21 and 22 vintages had a little bit of a short-term blip with FICO inflation coming off of the stimulus impacts of COVID. That has generally run its course. You're seeing delinquency rates actually come down in our card book. Right now, it's a smaller part of the portfolio, so it doesn't show up in mass in terms of our total net delinquency rates or charge-off rates, but there's nothing I'm looking at right now that gives me any pause. When I look at the health of the actual U.S. consumer, it's also very, very stable. You have to really de-average it to see stress, and it's on the lower end of the market in the bottom two to three deciles of the United States where you're seeing both deposit stress, you're seeing some increased overdraft occurrences, and where they have credit, you're seeing modest credit stress. We just don't typically lend to those customers, so it's not in our portfolio. So there is some tail risk, but that doesn't exist in our bank at scale. So we feel really good. I don't see anything right now that would suggest even really a blip in terms of consumer credit right now for us.

Yeah, I would echo that on the commercial side. I mean, other than Cree office, which you know our story and we're very well reserved and we're very comfortable. We've seen almost no migration on that side of the equation in the last year, year and a half. So we're well kind of positioned for, you know, how we work out that book of business. We're seeing really no deterioration on the C&I side at all. And I think One of the things that's been encouraging to me is that you hear a lot in the press about middle market companies and the impact of tariffs and the impact of employment and things like that. But these companies have been operating ever since COVID in a very difficult environment, and they're running their businesses in a really professional way. And they've deleveraged, they've gotten working capital efficient, and we're just seeing no deterioration on the credit side at all. You know, we have a lot of early indicators around watch meetings and things moving into workout, and everything looks stable from the, you know, six-month to 12-month out forecasting. So we feel very good about the contours of our book overall.

That's great. Thanks very much.

Thank you. Your next question comes from Gerard Cassidy from RBC Capital Markets. Your line is open.

Good morning, Bruce. Hi, Gerard. Don, just to follow up on your comments about credit, two-part question. You answered earlier about the private credit, how you're looking at the structural degradations, and there really aren't any. Are there any other points that we outsiders can look to since private credit is growing rapidly, as you all know? that we can keep an eye on to see if there is any potential credit deterioration coming? Even though we recognize it's held up well, you guys don't have any real issues with it as well.

Yeah, I would say, you know, you see a lot of the filings that all the different credit companies provide. And, you know, there's a bankruptcy here and a bankruptcy there. And what I would say in terms of the way we manage the business is we have pretty strong visibility into the underlying contours of the individual portfolios, and it seems okay broadly to us so far, but I would look at the 10-Ks and the regulatory filings, and, you know, the BDC is going to be different than the private credit fund. It's going to be different than a SPED situations fund, and you know that, Gerard. I mean, all of the different kind of attachment points for each of these complexes is going to be quite different from an LTV standpoint and a valuation standpoint, so it's really hard to generalize. And, you know, as Bruce said before, we try to pick our counterparts very carefully. They're professional investors. A lot of them are both, you know, in the equity side and the debt side of different equations. They usually don't mix those two involvements, but they're, you know, very strong analytical kind of complexes, which we have a lot of confidence in, and that's the way we pick our client space. We wouldn't go in broadly and buy private credit across the board, but that's not the business we're in. So I would pay attention to the filings, and some of them are more complete than others, but we look at them all. So that's the only advice I'd give you, Gerardy.

No, no, I appreciate it. Thank you. And then possibly for you, Bruce, this administration has shown that when they say something, they follow through on it. And our Treasury Secretary about two months ago, Scott Besson, said that this country has got a housing emergency. And aside from the actual structure of building more houses, reducing regulations, putting that off to the side for a moment, From the financing side, mortgage rates obviously are much higher today than they were four years ago. What do you think they could do, Bruce, to lower mortgage without moving the government bond yield curve down, which I don't think they can do? But that spread today between mortgage rates and government bond rates is pretty wide. It's over 200 basis points. Do you have any thoughts on what they might be able to do to try to bring that down, which would then lead to refinancing activity for you guys and mortgage originations?

Well, I think they're thinking about this holistically, that there's an affordability issue, which is at the root of why the market is tepid. And so housing prices have run up too much, and there's kind of new supply constraints in terms of regulation. So there's all of that to deal with. And then I think that spread, do they, through their quantitative tightening, do they what's the strategy around mortgages is one lever that they have to pull. But it's kind of a thorny problem. It's nice to talk about it. I'll be curious to see when they unveil if this is really a national crisis that we have to deal with, what the plan is when it comes down the pike. We're not counting on ultimately a big lift in our mortgage business. We like refocus the business to use our capital to support good customers in their life journey and giving them mortgages that we have broader relationships with. So I think the days, if you go back to 2019 after we bought Franklin and rates came down and we coined all this money, it was a bit of a sugar high. It felt good. It protected capital, generated capital. We didn't really get credit for it as a sustainable earnings driver. So I'd say where we are today is that that business has been right-sized, repurposed, feel really good about how we're running it, good net promoter scores, efficient, always room for improvement, but it's much more targeted than it was before. If rates come down and there are chances to catch some of the refinancing wave, sure, we'll catch some of it, but it's not going to be in the magnitude it was before. and recognize we also have exited the wholesale business over the last three years as well, and that was one of the drivers for why we captured so much upside. So where we're going with the fee, the fee reliance is still capital markets. I think we've built the Cadillac among the super regional banks, and so we should continue to see strong growth there over time. We have a really good risk management business in our FX interest rate and commodities hedging business. so we have a wealth business that just hit another record high this quarter. Every quarter this year we're hitting record highs as we build out the wealth business. The card business we've been investing in, there can be growth in card fees, and so we're kind of pivoting to, I think, what are more durable, sustainable, maybe a little less volatile fee revenue sources and a bit not as reliant on mortgage. Brendan, if you want to add to that.

Yeah, just a few points. If there's any Washington intervention, I think the challenge is in the purchase market and on the supply side of generating more affordable housing. And if you look at the U.S. homeowner right now and then apply what's our role as a lender, 74% of the country has interest rates under 5% on their mortgage. And so you'd have to believe a whole lot to have a massive refi pickup. Here, with rates having a six handle on it now and the long-term rates relatively stable, you'd have to really assume a very, very different rate outlook for there to be a huge boomlet of refi activity. And so then your attention turns – and our mix is 17%, 18% of our business is refi right now. It's predominantly purchase volume. And so to unlock that, Interest rates will help a little bit, but really it's got to be the supply side and the affordability of housing and access to new housing that would drive the solve for the issue that Washington's talking about. Bruce mentioned all the other fee categories. The other thing I would just mention is I think from a lender standpoint, we're incredibly well positioned with our HELOC business given that dynamic of 74% of the country has rates below 5%. And if you don't believe, mortgage rates will drop below that anytime soon. We've got a boomlet of HELOC activity where the country has the most equity in the history of the U.S. built up on consumers' personal balance sheets, and they can tap it. And we've been number one for three or four quarters in a row, including against all the G-SIBs nationally. HELOC lending, both on balance sheet growth as well as new originations. And we're really only originating in 15 states. So we've got an incredible competitive advantage there to drive loan growth and high-quality, massive, fluent, affluent homeowner home growth with high credit and low CLTVs. So we're looking at this very holistically in terms of where we can compete to win. And our mortgage business is well-positioned. We think it's in the same size now as our peers. So even though we've recontoured the business, we haven't given up In the off event that rates do crater, we still are positioned well to capture it in line with peers. It's just structured a little bit differently than it was for us a couple years back.

Appreciate all the color, guys. Thank you.

Sure. I think we have time for one more quick question.

Thank you. That does come from Ken Oosten. Your line is open.

I think we may have lost Ken.

Okay.

Sorry we missed you, Ken, but do dial in and talk to Kristen or Chris later. So I guess that's it, and thanks, everybody, for dialing in today. We certainly appreciate your interest and support. Have a good day. Take care.

Thank you. That does conclude today's conference call. We appreciate your participation, and you may disconnect. Thank you.