Citizens Financial Group Inc (CFG) — Q3 2022 Earnings Call Transcript

Thank you, Alan. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our third 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 third quarter earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. With that, I will hand over to Bruce.

Thanks, Kristin. Good morning, everyone. Thanks for joining our call today. We delivered another very strong quarterly result in Q3. Rising rates positively impacted our net interest income and net interest margin. Fees and expenses were broadly stable and credit performance remains excellent. We grew average loans 2% and deposits 1% as our liquidity and funding position remains strong and our CET1 ratio of 9.8% is above the midpoint of our 9.5% to 10% target range. Our TCE to total asset ratio sits at 6.1%. Performance metrics include a net interest margin of 3.25% and that's up 21 basis points. We had positive sequential operating leverage of 6%. We hit an efficiency ratio below 55%, and our return on tangible common equity was around 18%. We built our credit reserves by $49 million with our ACL at 1.41%, and that's above the 1.3% day 1 CECL reserve adjusted for the Investors acquisition. Beyond these impressive financial results, we've continued to make good progress in executing our strategic initiatives. In Consumer, we launched Citizens Private Client, which will help drive wealth opportunities. We migrated our national digital bank to a modern cloud-based platform. We continue to grow share with Citizens Pay, and we're executing well on our expansion into the New York City Metro region. In Commercial, we've successfully integrated recent acquisitions like JMP and DH Capital into our coverage and product model. Our M&A pipelines are at record levels, and our geographic and industry vertical build-out is delivering strong results in terms of market share gains. Enterprise-wide, we're successfully ramping up our TOP 7 program, while building out TOP 8. Stay tuned on that. Our NextGen Tech program has really been the standout initiative that has been a game changer for us. These programs demonstrate our mindset of continuous improvement, finding ways to run the bank more efficiently so we can deliver positive operating leverage and self-fund investments for our future. We're also doing some interesting things in DSG such as developing a carbon offset program for clients as well as investing in a virtual power agreement that delivers clean energy, and we have more interesting innovation in the pipeline. As we look forward to Q4 in 2023, we feel that we are well positioned to deliver strong results and to keep growing and enhancing our franchise value. We are well prepared for challenges that may materialize in the macro environment with a really strong balance sheet position and a highly prudent credit risk appetite. But we also plan to keep playing disciplined offense with continuing investments in our growth initiatives. The current environment gives us a great opportunity to prove our mettle and deliver responsible, sustainable growth. One aspect that we emphasize in today's presentation is our confidence in the quality of our deposit base, but we've been able to transform over time. We've had good deposit stability over the past couple of quarters, as some peers are seeing outflows, and our deposit betas are back in line with the pack. We're seeing very strong loan betas and expect these to remain above deposit betas through 2024, assuming the current forward curve. As a result, our NIM will continue to rise more gradually as time goes on. We've also layered in sizable net interest rate hedges to protect NIM and ROTCE through 2024 if the Fed reverses and brings down short-term rates. Moving off of the zero bound for short rates has unlocked the value of our deposit franchise and significantly benefited our ROTCE. With a clearer macro outlook and less market volatility, we feel the value of our commercial bank build-out will also manifest, benefiting further our ROTCE. So very exciting time for Citizens. And with that, I'll stop and turn it over to John to cover the financials in more detail. John?

Thanks, Bruce, and good morning, everyone. First, I'll start with our headlines for the quarter, referencing Slide 5. We reported underlying net income of $669 million and EPS of $1.30. Our underlying ROTCE for the quarter was 17.9%. Net interest income was up 11% linked quarter, driven by a 21 basis point improvement in margin to 3.25% and 2% growth in average interest-earning assets. Average loans are up 2% linked quarter, with 3% growth in commercial. Fees were fairly stable, down 2% linked quarter as our client hedging business returned to more historical levels following an exceptional first half of the year, and mortgage results softened a bit. Capital markets fees and service charges were stable. We remain highly disciplined on expenses, which are up 1% linked quarter. Overall, we delivered underlying positive operating leverage of 6% linked quarter, and our underlying efficiency ratio improved to 54.9%. We recorded a provision for credit losses of $123 million and a reserve build of $49 million this quarter, which reflects an increased risk of recession, partly offset by improvement in portfolio mix. Our ACL ratio stands at 1.41%, up from 1.37% at the end of the second quarter and compares with a pro forma day 1 CECL reserve of approximately 1.3%. Our tangible book value per share is down 8.6% linked quarter, driven by the impact of higher long-term rates on AOCI. We continue to have a very strong capital position with our CET1 ratio at 9.8%, just above the midpoint of our target range. Next, I'll provide further details related to third quarter results. On Slide 6, net interest income was up 11%, given higher net interest margin and 2% growth in interest-earning assets. The net interest margin was 3.25%, up 21 basis points. As you can see on the new block in the bottom left-hand side of the slide, the healthy increase in asset yields outpaced funding costs, reflecting the asset sensitivity of our balance sheet. Moving to Slide 7. With the current expectation for the Fed to raise rates further, we are confident that we will continue to realize meaningful benefits from rising rates as the forward curve plays out. Our asset sensitivity has driven a significant improvement in NII year-to-date, and those benefits will continue to accumulate into the fourth quarter and compound into 2023. Our overall asset sensitivity increased to approximately 3.3% at the end of the third quarter, up from 2.6% for the second quarter, primarily driven by the impact of variable rate loan originations. Our asset sensitivity will allow us to have further upside as the forward curve continues to evolve. We expect cumulative loan betas to exceed positive betas through the rate cycle. Our interest-bearing deposit beta is tracking well within our expectations, and the ultimate outcome will depend upon the pace and level of Fed rate hikes from here. So far in this cycle, with Fed funds increasing 225 basis points since 4Q '21, our cumulative interest-bearing deposit beta is well controlled at 18% through the end of the third quarter. On a sequential basis, our deposit beta was 26%. We began the rate cycle with a strong liquidity and funding profile, including significant improvements through our deposit mix and capabilities. We will continue to optimize our deposit base and to invest in our capabilities to attract durable customer deposits. We continue to execute our hedging strategy to manage a more predictable and stable outlook for NII as we benefit from the higher rate environment. You'll find a summary of our hedge position in the appendix on Slide 23. In the third quarter, we did an additional $10 billion of hedges with a focus on extending our protection out through 2024 and beyond, primarily through forward starting swaps. We expect our NIM to rise to 3.5% or better by the end of 2023 and for our overall hedge position to provide a NIM floor of about 3.25% through the fourth quarter of 2024 if we see rates come down by 200 basis points across the forward curve before it could move higher with further hedge actions. Moving on to Slide 8. We posted good fee results despite headwinds from continued market volatility and higher rates. These were fairly stable, down 2% linked quarter as our client hedging business returned to more historical levels following an exceptional first half of the year. Car fees were strong again this quarter, while capital markets and service charges were stable. Focusing on capital markets, market volatility continued to impact the bond and equity markets. M&A advisory fees picked up nicely, but this was offset by lower loan syndication revenue amid increased economic uncertainty and market volatility. We continue to see good strength in our M&A pipeline to continue to build with strong pinch activity and a growing backlog. While current market volatility may constrain the ability for deals to close, capital markets fees should see some seasonal improvement in the fourth quarter, particularly in M&A advisory even more broadly if markets settle down. Mortgage fees were softer as the higher rate environment weighed on production volumes, which more than offset the fact that production margins improved modestly this quarter but still remain below historical levels. We are seeing signs of the industry reducing capacity, which should benefit margins over time and servicing operating fees were stable. Wealth fees are $5 million lower linked quarter given the impact of lower market levels on AUM. And in other income, we saw a seasonal benefit from our tax-advantaged investments and an increase in leasing revenue. On Slide 9, expenses were well controlled, up 1% linked quarter. Our TOP 7 efficiency program is continuing to make good progress and is on track to deliver over $115 million of pretax run rate benefits by the end of the year. Average loans on Slide 10 were up 2% linked quarter driven by 3% growth in commercial with growth in C&I and CRE, given modestly higher loan utilization and slower paydowns. Retail loans increased 1% with growth in mortgage and home equity offsetting planned runoff in auto. Period-end loans were broadly stable linked quarter given higher-than-usual end-of-quarter C&I line paydowns, which were generally redrawn after the quarter end. On Slide 11, average deposits were up $1.3 billion or 1% linked quarter, with growth coming from retail term deposits and Citizens Access savings, and commercial banking deposits were broadly stable. Deposit costs remain well controlled. Our interest-bearing deposit costs were up 38 basis points, which translates to an 18% cumulative beta. We feel good about how we are optimizing deposit costs in this rate environment, and our performance to date reflects the investments needed to strengthen our deposit franchise since the IPO. Overall, liquidity improved as we reduced our FHLB advances by $2.3 billion and increased our cash position at quarter end. Moving on to Slide 12. We saw good credit results again this quarter across the retail and commercial portfolios. Net charge-offs were 19 basis points, up 6 basis points linked quarter, but still very low relative to historical levels. Nonperforming loans were broadly stable at 55 basis points of total loans. Given the higher risk of recession, we are watching our loan portfolio very carefully for early signs of stress, in particular, pre-office, leveraged loans, and selected nonprofit sectors. At this point, we aren't seeing significant issues emerge. Also, the leading indicators for consumer continue to be stable and favorable to pre-pandemic levels. Personal disposable income has declined from stimulus-driven highs but remains above the pre-pandemic 2019 average. Spending for travel and restaurants remains steady and above pre-pandemic levels, while credit card and home equity line utilization are still well below pre-pandemic levels. And retail delinquencies continue to remain favorable to historical levels. Turning to Slide 13. I'll walk through the drivers of the allowance this quarter. We continue to see very good credit performance across the retail and commercial portfolios. While we aren't seeing stress in the portfolio at this point, we increased our allowance by $49 million to take into account an increased risk of recession, partly offset by improvement in portfolio mix. Our overall coverage ratio stands at 1.41%, which is a modest increase from the second quarter. If you recall, when we adopted CECL at the beginning of 2020, our coverage ratio was 1.47%. However, given the Investors acquisition and some shifts in the portfolio mix, we estimate our pro forma day 1 CECL allowance to be approximately 1.3%. The current reserve level contemplates a shallow recession and incorporates the risk of added stress on certain portfolios including those subject to higher risk, term inflation, supply chain issues, and return to office trends. Moving to Slide 14. We maintained excellent balance sheet strength. Our CET1 ratio increased to 9.8%, which is slightly above the midpoint of our target range. This, combined with our strong earnings outlook, puts us in a position to resume share repurchases in the fourth quarter. Tangible book value per share and the tangible common equity ratios were both reduced by the impact of higher long-term rates on AOCI. We have increased our hold-to-maturity portfolio for about 30% of total loans at quarter end, which has helped to mitigate the impact of rising rates. Our fundamental priorities for deploying capital have not changed, and you can expect us to remain extremely disciplined in how we manage capital allocation. Shifting gears a bit. On Slides 15 and 16, you'll see some examples of the progress we made against the key strategic initiatives and what's on tap for our businesses in the near term. Since we closed the Investors acquisition in April, we've been executing against a phased approach to the integration. In the second quarter, we began originating mortgages on our systems. And since then, we have completed the conversion of mortgage servicing. We also successfully completed the conversion of more than 10,000 Investors' wealth clients, representing about $1.6 billion in assets to our platform. We have a lot more to do, but I'm pleased to say that we are on track to complete the deposit and branch conversions in mid-first quarter 2023. We have included a high-level integration timeline in the appendix on Slide 22. Importantly, we remain on target to achieve our planned $130 million of run-rate net expense synergies by the end of 2023, of which approximately 70% will be achieved by the end of 2022. We also continue to expect that the integration costs will come in below our initial estimates. In the last three years, we have launched a collection of new banking products and features that make it easier to bank with us. Last week, we announced the next step in that evolution with CitizensPlus, which provides financial rewards, banking features, and tailored advice that grows with customers from everyday banking to personalized wealth management. This includes Citizens Private Client, our new expanded wealth management offering, which will launch by the end of the year. We are fully committed to driving momentum in our wealth business. And as part of the launch, we are hiring more than 200 new financial advisors and relationship managers. We continue to make meaningful strides forward with our national digital strategy and tech modernization. Earlier this year, we migrated Citizens Access to a fully cloud-native platform, and we launched a national storefront adding mortgage and education refinances to the portal. Over the next year or so, we plan to expand our national storefront, adding card and checking first and then Wealth and Citizens Pay. As we add products to the platform, we have an exciting opportunity to build relationships across a growing national customer base. Our vision is to migrate our core branch deposits to this modern platform over time, which will be a key change in efficiency and flexibility in terms of implementing upgrades and enhancements. We are also growing our innovative Citizens Pay offering, which is currently at about 160 merchant partners and expanding across targeted verticals. Moving to the commercial business on Slide 16. Over the past eight years, we've invested heavily in talent and product capabilities in M&A, corporate finance, bond and equity underwriting, FX and commodities, and so on. Despite the challenging environment, we remain near the top of the league tables, consistently ranking in the top 10 as a middle market and sponsor book runner and helping corporates and private equity sponsors access capital through the public markets. We have also integrated our cash management and global market solutions with our coverage. We are excited about the potential synergies from our recent acquisitions as we target growth in key verticals. The JMP acquisition gets us much deeper into the growing healthcare, technology, and financial services sectors, expands our equity underwriting, and adds research capabilities. DH Capital expands our capabilities in the Internet infrastructure, communication sectors, software, and next-generation IT services. These businesses are exceptionally well positioned for when markets reopen. Moving to Slide 17, I'll walk through the outlook for the fourth quarter. We expect NII to be up roughly 3%, driven by the benefit of higher rates with a margin rising to the 3.3% to 3.35% range. Average loans are expected to be stable to up modestly as commercial growth is partially offset by order rundown. These are expected to be stable to up modestly. Noninterest expense is expected to be stable. Net charge-offs are expected to be approximately 20 basis points to 22 basis points. We expect our CET1 ratio to land near the upper end of our target range of 9.5% to 10%. And our tax rate should come in at approximately 22%. With respect to the full year, we continue to track well and expect to beat our full year 2022 guidance across key P&L categories and performance measures. We expect to deliver positive operating leverage for full year 2022 in excess of 5%, with fourth quarter sequential positive operating leverage of about 3%. We also expect to deliver a full year efficiency ratio of about 57%, with the fourth quarter coming in under 54%. And we expect to deliver a full year ROTCE in excess of 16%, with the fourth quarter well above both Q3 and our medium-term target range of 14% to 16%. To sum up, on Slide 18, we delivered a strong quarter amid a dynamic environment, and we are optimistic about the outlook for the fourth quarter and into 2023. We expect to continue to see significant benefits in our net interest income from the higher rate environment. Our diverse fee business is driving solid results, and our capital markets business, in particular, is well positioned for when markets stabilize. Our commitment to operating efficiency remains a hallmark. We are well prepared for a slowdown in the environment with a strong capital, liquidity, and funding position, and we are being prudent with respect to our credit risk appetite and loan growth. At the same time, we are playing some offense, executing well on strategic initiatives in each of our businesses that will deliver medium-term growth and outperformance. With that, I'll hand it back over to Bruce.

Okay. Thank you, John. Alan, why don't we open it up for some Q&A?

If you could expand a little on your thoughts regarding NII dynamics into next year? I thought the 3.50 year-end '23 margin expectation was definitely a highlight. And I think just generally, your comments about loan betas overwhelming deposit betas suggest some confidence that your NII should continue to grow after the Fed stops tightening. But I just would love to hear your thoughts on the puts and takes and the additional color you might be willing to add.

Yes, sure. Let’s break it down into two overall categories. You've got the net interest margin dynamic, which is a big driver, and we're messaging that. We expect our net interest margin to continue to rise. I think loan betas in the last cycle for us were up near 60%. So this cycle, we're doing some more hedging. You might see our loan betas dropping a little bit. The nice part about that is that it provides downside protection. So you're going to see loan betas in the mid- to low to mid-50s compared to a deposit beta that we previously messaged, which was around 35%. Rates have gone up 100 basis points since then. You might see our deposit betas getting into the upper 30s or thereabouts given cumulatively what's going on with rates in the last couple of months. So you take that dynamic and see cumulative loan betas exceeding deposit betas and that drives NIMs higher. We're also remixing on the loan side into more variable. You're seeing the strength of the multi-year investments on the deposit side paying off. And let's not forget the other aspects of the balance sheet where you've got securities book, which is funded primarily by DDA and some wholesale. So you can see the front book, back book dynamics really taking hold where you've got securities yields on the front book in the fourth quarter somewhere between 4.50% and 5% with a 2% runoff. That's pretty powerful when you've got a strong DDA underpinning what's going on in the securities book. So those are some of the net interest margin dynamics. On the other side, you see our opportunity for continued loan growth rotating into more of a variable rate approach, solid opportunities in home equity and other aspects on the retail side. But commercial is where we're feeling optimistic, and that's going to drive loan growth into '23. It will be economic environment dependent. But nevertheless, the underpinning of rising NIMs gives us the confidence to continue to see that NII improving into '23.

All right. That's perfect color. And I guess just with rates having moved so much, just curious about your thoughts on sort of the Citizens Access products. What kind of trends are you observing about the stickiness of those customers? How much are loyal? How much are sort of shopping for rates? And are your tactics at all changing with regards to that product?

Yes, thanks. We're seeing some decent growth in Citizens Access. The digital native customer still exists out there, and it's waking up a little bit as rates have gone up. It's been a very, very effective strategy for us. The customers are loyal to Citizens. We're seeing good augmentation from those customers, a very real brand engaged customer base. Our balance growth is coming from both sides, new customer acquisition and existing customers bringing us more as we brought rates up. Most importantly, it serves to have an isolated deposit-raising strategy to protect the core bank from needing to bring in rate-sensitive customers. We're really relationship focused in our core franchise, and the combination of the health of our deposit franchise improvement led by DDA and the privacy of our customers has been really showing up well. Our deposit betas in consumer are dramatically different than they were in the last cycle. It's really for both of those points: the turnaround and the health of the customer franchise and the core bank, and then the effective strategy of using Citizens Access both to drive national growth and also to have a much more targeted and isolated way to grow interest-bearing deposits. It doesn't make us reprice our whole book. We're really pleased with how it's playing out. Citizens Access is right where we thought it would be, and it's being executed really well.

Then the strategic aspects of Citizens Access that over time is just another benefit of that platform.

Correct. I think that's what, obviously, we've messaged on these calls before. But the integration of our Citizens Access deposit platform with all of our national lending businesses to make our national platform much more integrated and customer strategic. John mentioned the launch of our new app and our cloud-based migration. We are making sizable progress on bringing together all of our national capabilities to deepen those relationships as well as just sort of the deposit angle that we launched with a couple of years back.

My first question is for you, Bruce. You have teased that your TOP 8 is underway. And as we think about how much you've improved the bank, and John has certainly helped balance sheet and Brendan and Don have helped balance sheet positioning, what is your vision for what TOP 8 could accomplish? So we're looking at a bank clearly outperforming the market today, outperforming expectations. It feels like a lot of the big rates of change have been accomplished in the previous 7 plans. So that’s sort of the genesis of the question. What do you envision TOP 8 to accomplish?

Yes. Well, Erika, I think when we ended up hitting the TOP 2 and TOP 3, we were getting questions as to how much re-architecture and reengineering of how you're running the bank is left. Are you now picking the fruit that's really high in the tree? Yes, it was getting higher in the tree. But what we've been able to do is exhibit this mindset of continuous improvement. We're not going to be satisfied with how we're running the bank, and we're going to look at all aspects in terms of how we're staffed, organized, our vendor relationships, and other kinds of efficiency, new technology deployment to deliver more efficiencies. Over time, that's just become part of our DNA here. We're not going to rest and say, well, we just had another successful result with TOP 7. We can't take a breather because we have investments that we want to fund in our future. The business initiatives that we list on a couple of the slides in Consumer and Commercial require net investment in CapEx and OpEx. To fund those things, having these TOP programs and finding efficiencies to self-finance those investments and keep the overall rate of expense growth modest is the equation that we've used to drive ROTCE from the 5% when we started at the IPO to 18% levels today. So I think you're going to continue to see us pursue that mindset of continuous improvement, and don't be surprised when we have a successful announcement and execution of TOP 8 that there might be even more TOP programs down the road after that.

Got it. And just a few cleanup questions. Thank you so much for giving us a lot of color on the ACL. I'm wondering what the weighted average unemployment rate you assume in the 1.41 ACL is today. And just, John, a quick cleanup question to Scott's line of questioning. As we think about the NII dynamics into next year, what are you assuming about deposit growth and deposit mix shift?

Yes. I'll just take the first one; we're using some fairly conservative assumptions when we set the ACL. I would characterize it as a moderate recession rather than a short recession. The unemployment levels get up over 6% is kind of where we've modeled it. We think we're being fairly conservative, but we reassess that each quarter. So John, I'll hand the deposit question over to you.

Yes, sure. I think some of the trends that you'll likely see into the fourth quarter continue into '23. But I'd say a couple of items I'd highlight are starting with the customer value proposition that you're seeing us continue to invest in. It's been multi-years to build this deposit platform. In both Consumer and Commercial, those investments are coming to fruition and demonstrating themselves that we're continuing to invest. You're seeing just core deposit growth coming from that. You've heard Brendan and us talk about CitizensPlus as an example of the core growth that we think can give us some unique ability to take some share into '23. Citizens Access and the retail CD arena is a place where we have taken that down close to zero, and so that will come back a bit in that category. Let’s not forget New York Metro. We've entered New York Metro, and we're starting to see really nice uptake once we converted HSBC. We're going to convert ISBC in the first quarter of '23. We suspect that we're going to start to see some lift coming out of that. Broadly speaking in commercial, the product and coverage investments that we've been making over the years will offset what we're building in. What I've just described will offset our expectations for some DDA migration as rates rise. That's built into our outlook and built into the NIM guide.

Some really good detail on credit back in the appendix, Page 24 for retail and 25 on commercial. Obviously, you guys have improved the mix in both areas over the last few years. But are there any signs of weakness within certain customer groups that you could point to? And then like what leading indicators might you suggest that we watch and that you pay attention to?

Yes, I'll start and then maybe turn it over to my colleagues for some additional color. But Matt, I think what continues to be very positive is that the expectation that things will normalize back to pre-COVID levels continues to be deferred. We're only seeing very slow migration in terms of consumer charge-offs and NPAs, and delinquencies still kind of better than pre-pandemic period. I would highlight there that our focus on very high-quality borrowers in these portfolios, super prime and high prime, those folks are still doing pretty well through the current environment and have a lot of liquidity. We feel really good about where things sit in Consumer. Similarly, in Commercial, over time we've migrated to lend to bigger companies, so mid-corporate space companies with revenues in excess of 500. They tend to be more diversified and better credits. We see very solid performance metrics across all metrics, NPAs and charge-offs, etc. On that side, you've got to think of the usual suspects if you think the economy is weakening: commercial real estate, leveraged lending, and certain sectors in the non-profit space, which we've heightened our monitoring in those areas, but we don't see any smoke at this point. Let me turn it to Don for additional color.

Yes, I think you hit it. We've actually activated our downturn playbook, which involves incremental stressing, portfolio management, and conversations with clients. There's a couple of pieces of good news just supporting the lack of deterioration in credit. One is we think management teams going through the pandemic got incredibly focused on efficiency in their business, cut costs, automated, built liquidity, repaired balance sheets, and did a lot of things that were prudent from a risk standpoint. So there's a little bit of a buffer, we think, in the portfolio against what could be deterioration if we go into a deep recession. I’d say the thing we're most focused on is the real estate office portfolio given back to work. We've got fully leased office buildings, and those leases are running for a couple of years in the future, but we've got lease rolls that we're focused on regarding whether they're going to renew or not. I think I was in New York City yesterday, people are back in the office...

And the other thing is that the high percentage of our office property is A caliber...

Yes, and a lot of it's suburban. It's in the right places. A lot of it's in areas that are in the Southern tier and things like that. We don't have a lot of San Francisco, for example, where there's likely to be a lot of distress. MSAs are important in the real estate business. We don't see a lot of severe stress in the leverage book. We're feeling pretty good. All the early stats—the crit-class ratios, nonperforming loans, and watch assets—seem to be in good shape right now, but we're monitoring closely. We're incredibly disciplined on new originations. We're really not taking on any new clients right now. We are getting very focused on returns. We're commanding a higher level of pricing given the current market environment. So we're watching the front book very carefully.

Yes. I'd say the health of the consumer is still very, very resilient. Having said that, we're doing a lot of similar things that Don is mentioning, kind of putting in a proactive approach to a potential downturn. We're making investments in collections to be ready for an inevitable tick in the wrong direction. We're tightening some credit on the margins. We're being incredibly disciplined on where we're lending right now to ensure that returns are right, and we have real customer relationships within our risk profile. With that, what we're seeing today, the consumer still has 20% plus excess liquidity in deposits as a general statement, and charge-offs remain 50% to 60% of the rates seen pre-COVID. We're not seeing significant signs of that reinflating. If you look at overall U.S. data, the bottom decile or two of the country are starting to show that the excess deposits are burning off, leading to living paycheck to paycheck. We don't over-index on that segment and instead index much higher. Therefore, we're not seeing a lot of pain that is potentially occurring at the very bottom of the segment flowing through anything in our book. We're seeing very early signs that we're potentially at the early days of a normalization. Credit card customers that pay in full each month were about 32% of our portfolio pre-COVID; now, it's 41%. It peaked at 42%. It's down a tiny bit, but it's still significantly better than pre-COVID levels. We're starting to see small signs of normalization, but I wouldn't say it's accelerating at all. It's still very resilient and significantly healthier than pre-COVID levels.

Just wanted to follow up one on credit. I think if I heard you correctly, your ACL assumes a 6% unemployment rate. I'm trying to understand, absent that unemployment rate expectations going materially higher, what would drive additional reserve build over the coming quarters? Is it the CRE market? Is it home prices? I'm trying to get to the idea of unemployment at 3.5% and 6% seems a long way away. If that doesn't go much higher, what else would drive those reserves materially higher relative to where we ended the quarter?

Yes, I'll go ahead and start there. First, I'd like to just make sure we're reminded that we've got 141 basis points against the portfolio right now. When you pro forma adjust that for Investors and some other things, you get a day 1 of about 130. So we're 11 basis points over day 1, covering a lot. We're covering the environment that Bruce described earlier. I think you could—in he mentioned a few pockets of areas we're watching very closely. We're watching the CRE office space and a few sectors on the C&I side, but we're not seeing any early signs of deterioration here. That could change quickly, and we're keeping a close eye on it. The areas of concern that we were focused on during the pandemic got mostly cleaned out and have improved over time. Those are areas we'd focus on if things change.

I would add that we're feeling pretty good. If you look at a scenario that says we have a moderate recession and it doesn't get any worse, the need to actually keep building may lessen from what it was this quarter. I think there was a reassessment, but the Fed must stay at higher rates, which probably increases the probability of recession a bit. That was reflected in the increase before basis points. To see even greater conviction that we're likely to hit a recession or the Fed will go higher with rates, which will have more collateral damage for building on the macro outlook. The other factors that contribute to the higher provision are loan growth. So if we roll into loan growth and also, as John indicated, view shifts on certain sector risks, we have overlays for the issues we mentioned earlier, for commercial real estate offices, that we think are sufficient. But our view on that could change over time. We think we’re sitting at a pretty good spot now. We'll have to wait and see what happens with the macro forecast in certain sectors and the amount of loan growth that comes through those. That'll determine whether we have to keep building the reserve and how much. Concerns about building in the way we did during the pandemic where numbers can kind of runaway are absent.

That's good color. And just one question, Bruce, on the New York strategy. Once you complete the Investors integration in the first quarter next year, give us a sense of are you adding new bankers? What capabilities are you adding to the franchise, given how huge that market can be in terms of market share gains for the next few years?

Sure. I'll start, and then maybe I'll ask Don and Brendan to talk about their businesses. But the theory has been that we bring a thoughtful approach to how we bank these markets. We really understand neighborhoods. We understand individuals and tailor advice to their situations based on their life journey and residence. On the corporate side, we want to be in a thought leadership position being a trusted advisor to companies as they negotiate challenges and seek growth. We've been able to stake that ground successfully in various major cities where we compete—Boston, Philadelphia, Pittsburgh, and so on. Even though New York is a crowded marketplace, we think our style can be successful there too. It's going to take some time. We've bought some solid foundational assets. We need to bring our additional culture and approach along with our broader product set to do more for customers. We're betting on ourselves, and everything is tracking exactly as expected with green shoots indicating we’re onto something good. With that, let me go to Brendan first. Talk about consumer and small business aspects and kind of where you're making investments and the view of the future.

We're incredibly pleased with our start in New York City post the HSBC acquisition. As John mentioned, we've already started some integration with Investors on mortgage and wealth in New Jersey and some borrowers in New York. We're hiring—financial advisors, mortgage loan officers, and business bankers. We’re restacking the retail organization and reallocating talent across the board. It’s paying dividends. The New York market is the most productive market out of any we have so far. Early signs are incredibly good; we're getting a lot of customers coming back from some large banks, including HSBC customers that enjoy the location and people. We are starting to see growth. Typically, when you do a branch deposit deal, you'd see some deposit runoff to the tune of 10% to 20% in the first year. We're seeing the opposite; the underlying retail deposit base is net growing in New York right away with no attrition post day 1. There's still a long way to build share, but early signs are very positive.

I would point at three things. One is our ability to deliver a much broader product set into the existing Investors franchise, so greatly expanded treasury services capabilities, for example, the ability to hedge directly for clients, and that’s well underway as we pick up very good bankers from the investor side. Our workforce quadruples overnight with this acquisition. Second, we benefit from all the visibility that Brendan is doing with branches and advertising in New York City. The name recognition helps us greatly; we don’t have to explain what Citizens is to potential new clients. We’re also hiring; we announced a new Market Head for New York City Metro who came from JPMorgan. So we’ve got a new leader in place in New York.