Citizens Financial Group Inc (CFG) — Q1 2024 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 first quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color. We will be referencing our first quarter 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 you, Bruce.

Thank you, Kristin. Good morning, everyone. Thanks for joining our call today. We were pleased to start the year with a solid quarter. We continue to play strong defense through an uncertain environment with a CET1 ratio of 10.6%, our LDR at 81%, our allowance for loan loss ratio of 161%, and general office reserves now at 10.6%. On the P&L, we are still seeing a modest decline in NII though our NIM was stable at 2.91%. Fees increased by 3% sequentially, led by capital markets and cards, and expenses were flat. Our credit trends are in line with expectations. We repurchased $300 million of shares during the quarter as we free up capital from our non-core rundown. Our guidance for Q2 and the full year remains consistent with our expectations at the outset of the year. Our strategic initiatives are making good progress. The Private Bank is off to a good start, reaching $2.4 billion in deposits at quarter end. We expect momentum to accelerate further over the course of the year. We are also focused on building out private wealth management through further investment in Clarfeld plus several imminent team lift-outs. Our New York City Metro initiative continues to perform well with the fastest growth of any of our regions and really strong net promoter scores. Our focus in the commercial bank on serving the middle-market, private capital, and key growth verticals has put us in a great position to benefit from a pickup in deal activity, which we expect to build further over the course of the year. And our TOP 9 program is being executed well, allowing us to self-fund our growth investments while keeping the overall expense growth rate muted. While there are still many uncertainties in the external environment, we feel we are in a good position to navigate the challenges that may arise, and we maintain a positive outlook for Citizens over the balance of the year as well as the medium term. Over the past decade, we have undertaken a major transformation of Citizens. Our Consumer and Commercial Banking segments are positioned for success, and we aim to build the premier bank-owned private bank and wealth franchise. Our balance sheet has been repositioned with an exceptionally strong capital, liquidity, and funding profile, and we are deploying our loan capital more selectively to achieve better risk-adjusted returns. Our expense base has been tightly managed, with AI offering the potential for further breakthroughs. Much has been accomplished with more to do, clearly, exciting times for Citizens. With that, let me turn it over to John.

Thanks, Bruce, and good morning, everyone. As Bruce mentioned, the year is off to a good start. First quarter results were solid against the backdrop of a more constructive macro environment, which supported an improvement in capital markets, stability in our margin, and credit performance that continues to play out largely as expected. We continue to maintain a strong balance sheet with capital levels at the top of our peer group, excellent liquidity, and a healthy credit reserve position. Importantly, this positions us to execute well against our multi-year strategic initiatives, including the build-out of our private bank. Let me start with some highlights of our first quarter financial results, referencing slides 3 to 6 before I discuss the details. We generated underlying net income of $395 million for the first quarter and EPS of $0.79. This includes a negative $0.03 impact from the private bank, which is a significant improvement from the $0.11 impact last quarter as we start to see revenues pick up and we progress to our expected breakeven in the second half of 2024. It also improved the impact of the non-core portfolio, which contributed a $0.13 negative impact. While our non-core portfolio is currently a sizable drag on results, it is steadily running off, creating a tailwind for performance going forward. Our notable items this quarter were $0.14, which primarily consists of an adjustment to the FDIC special assessment and TOP, along with other efficiency-related expenses. Excluding these notable items, our underlying ROCE for the quarter was 10.6%. Playing through defense remains at the top of our priority list, and we ended the quarter with a very strong balance sheet position with CET1 at 10.6% or 8.9%, adjusted for the AOCI opt-out removal. We also made meaningful improvements to our funding and liquidity profile in the first quarter. Our pro forma LCR strengthened to 120%, which is well in excess of the large bank category 1 requirement of 100%, and our period-end LDR improved to 81% from 82% in the prior quarter. On the funding front, we reduced our period-end FHLB borrowings by about $1.8 billion linked quarter to a modest $2 billion. We also increased our structural funding base with a very successful $1.25 billion senior issuance and another $1.5 billion auto collateralized issuance during the quarter. Additionally, we expect to have another $1 billion of auto-backed issuance expected to settle this week. This is our fourth issuance, and it was executed at our tightest credit spreads to date. In addition, we expect to be a more programmatic issuer of senior unsecured debt going forward. Credit trends have been performing in line with our expectations, with NCOs coming in at 50 basis points for the first quarter. Our ACL coverage ratio of 1.61% is up 2 basis points from year-end. This includes a 10.6% coverage for general office, up slightly from 10.2% in the prior quarter. We are well positioned for the medium term, with expected tailwinds to NIM that support a range of 3.25% to 3.4%. Regarding strategic initiatives, the Private Bank is doing very well. We continue to make inroads in the New York Metro area and our latest top program is progressing nicely. Additionally, we are poised to benefit from an improving capital markets environment, with our investments in the business and synergies from our acquisitions positioning us to capitalize as activity levels continue to pick up. Next, I’ll talk through the first quarter results in more detail, starting with net interest income on Slide 7. As expected, NII is down 3% linked quarter, reflecting a stable margin on a 2% decrease in average interest-earning assets given lower loan balances and day-count. As you can see from the NIM walk at the bottom of the slide, our margin was flat at 2.91% as the combined benefit of higher asset yields and non-core runoff and day-count were offset by higher funding costs and the impact of swaps. Our cumulative interest-bearing deposit beta remains in the low 50s at 52%. Although we continue to see deposit migration, the rate of migration is slowing. Overall, our deposit franchise has performed well, with our beta generally impacting the peers. Moving to Slide 8, our fees were up 3% linked quarter due to a notable improvement in capital markets and good card results. The improvement in capital markets reflects a nice pickup in M&A activity and strong bond underwriting results. Our Capital Markets business consistently holds one of the top three middle market sponsor book renter positions, and this quarter, we achieved the number one spot. Our deal pipelines remain strong, and we continue to see positive early momentum in capital markets this quarter, with strong refinancing activity continuing in the bond market. In card, we had a nice increase, primarily driven by the benefit of a strategic conversion of our debit and credit cards to Mastercard. Our client hedging business was down a bit this quarter due to lower activity in commodities and FX. The decline in mortgage banking fees was driven by a lower benefit from the MSR valuation net of hedging and a modest decline in servicing P&L, partially offset by higher production fees as margin improved while lot volumes were stable. On Slide 9, we did a nice job managing our underlying expenses, which were stable. We will continue to execute on our TOP program, which gives us the capacity to self-fund our growth initiatives. On Slide 10, period-end and average loans are down 2% linked quarter. This was driven by non-core portfolio runoff and a decline in commercial loans, given paydowns and generally lower client loan demand, alongside our highly selective approach to lending in this environment and the exits of lower-returning credit-only relationships. Commercial line utilization continued to decline this quarter as clients remain cautious, and M&A activity was limited in the face of an uncertain market environment. Next, on Slides 11 and 12, we continue to do well in deposits. Year-on-year period-end deposits were up $4.2 billion, driven by growth in retail and the private bank. Period-end deposits were down slightly linked quarter, given expected seasonal impacts in commercial, largely offset by growth in the private bank and retail branch deposits. Our interest-bearing deposit costs were well controlled, up 6 basis points, which translates to a 52% cumulative beta. Our deposit franchise is highly diversified across product mix and channels. About 68% of our deposits are granular, stable consumer deposits, and approximately 70% of our overall deposits are insured or secured. This attractive deposit base has allowed us to efficiently and cost-effectively manage our deposits in the higher rate environment. With the Fed holding steady, we saw the migration of deposits to higher-cost categories continue to moderate. With the contribution of attractive deposits from the private bank, non-interest-bearing deposits are holding steady at about 21% of total deposits. Moving on to credit on Slide 13. Net charge-offs were 50 basis points, up 4 basis points linked quarter. This includes increased commercial charge-offs related to pre-general office, which were in line with our expectations. In retail, we saw a modest seasonal improvement. Non-accrual loans increased 8% linked quarter, driven by the general office. The continued runoff of the auto portfolio drove a modest decline in retail, while other retail categories were stable. Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.61%, which is a 2 basis point increase from the fourth quarter, reflecting broadly stable reserves with lower loan balances given non-core runoff and commercial balance sheet optimization. The reserve for the $3.4 billion general office portfolio represents 10.6% coverage, up slightly from 10.2% in the fourth quarter. On the bottom left side of the page, you can see some of the key assumptions driving the general office reserve coverage level. We feel these assumptions represent a severe scenario that is much worse than we’ve seen in historical downturns, so we feel the current coverage is very strong. Moving to Slide 15, we have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.6%, and if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio would be 8.9%. Both our CET1 and TCE ratios have consistently been among the top of our peers, and you can see on Slide 16 where we stand currently relative to peers in the fourth quarter. Given our strong capital position, we resumed common share repurchases, and including dividends, we returned a total of $497 million to shareholders in the first quarter. On the next few pages, I’ll update you on a few of our key initiatives we have underway across the bank, including our private bank. First, on Slide 17, we have a strong transformed consumer bank with a robust and capable deposit franchise, a diverse lending business where we are prioritizing relationship-based lending, and a meaningful revenue opportunity as we scale our wealth business. Importantly, we continue to make great progress taking deposit share, with retail deposits up 20% year-on-year as we continue building our customer base in New York Metro. Slide 18. Let me update you on our progress in building a premier private bank, seizing the opportunity to fill the void left in the wake of the bank failures last year. Our buildout is going very well and gaining momentum. We are growing our client base and now have about $2.4 billion of attractive deposits with roughly 30% non-interest-bearing. Additionally, we are just over $1 billion in loans and $0.5 billion in investments and continue to grow. We just opened our newest private banking office in Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities, with our Clarfeld Wealth Management business as the centerpiece of that effort. Next, on Slide 19, we have built a formidable full-service commercial bank, which consistently excels. Our multiyear investments in talent, capabilities, and industry expertise put us in a prime position to provide lifecycle services to middle-market, mid-corporate, and sponsor clients in high-growth sectors of the U.S. economy. In particular, we are uniquely positioned to serve the private capital ecosystem. We consistently stand at the top of the sponsored lead tables, and we are well-positioned to take advantage of a more constructive capital markets environment. We are excited to start seeing the synergies from our acquisitions materializing in our results this quarter. Moving to Slide 20, we provide guidance for the second quarter. We expect NII to decrease about 2%. Non-interest income should be up approximately 3% to 4%. We expect non-interest expense to be stable to down slightly. Net charge-offs are expected to be about 50 basis points, and the ACL should continue to benefit from the non-core runoff. Our CET1 is expected to come in at about 10.5% with approximately $200 million of share repurchases currently planned. We are broadly reaffirming our full-year 2024 guidance. We expect NII to land within the range of down 6% to 9%, consistent with our January guidance, with margin coming in a little better than expected, offsetting the impact of lower loan demand. The other components of PPNR are also tracking to our January guidance. In addition, NCOs are trending in line with our expectations of approximately 50 basis points for the year. Our target CET1 ratio for 2024 is approximately 10.5%, and the level of share repurchases will be dependent on our view of the external environment and loan growth. Given the changing rate outlook, I wanted to update you on how the swaps and our non-core portfolio are expected to impact NII and NIM as we look out further in 2024 and beyond. We’ve included Slide 25 in the appendix, which shows the expected swaps and non-core impact through 2027. By Q4 2024, we expect higher swap expenses to be partly offset by the NII benefit from the non-core rundown. Looking out further, we expect a significant NII tailwind and NIM benefit from the impact of non-core and swaps over the medium term given runoff and lower rates. This will be partially offset by the impact of the asset-sensitive core balance sheet, resulting in a medium-term NIM range of 3.25% to 3.4%. To wrap up, we delivered a solid quarter, featuring stable NIM, strong fee performance led by capital markets and cards, tight expense management, and in-line credit performance. We have a series of unique initiatives that are progressing well. Our consumer bank has been transformed. Our commercial bank is exceptionally well-positioned, and we aim to build the premier bank-owned private bank and wealth franchise. We enjoy a strong capital, liquidity, and funding profile that allows us to support our customers while continuing to invest in our strategic initiatives. Given several tailwinds, combined with continued strong execution, we are confident in our ability to hit our medium-term 16% to 18% return target. With that, I’ll hand it back to Bruce.

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

Hey, good morning Bruce. Good morning, John.

Good morning.

Good morning.

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

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

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

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

Let me start and then flip to Don. But I’d say there are no real surprises here, Ryan. We can basically see all the office maturities. We’ve got kind of bespoke careful handling on all of the significant exposures that we have, and we’ve been working with the borrowers to ensure that we can have a win-win situation. If we have one quarter where the charge-offs tick up $20 million and the next quarter they go down $15 million, you’re going to see some modest variation around that line. But basically, to use a colloquialism, the pig is going through the python. It’s going to take a few more quarters for that to fully work its way through. But we’re not seeing any surprises, which is the good thing about this. So Don, with that, maybe you could pick up.

No, I think that’s exactly right. We’ve taken our general office from about $4.2 billion to $3.4 billion. It’s actually coming down nicely, and the charge-offs have been modest. Most of the charge-offs are where we’re selling out of properties and doing AB loan structures and deciding to move on. We’ve had quite a few paydowns as well. So it’s not all doom and gloom. I’d go back to what Bruce said; it’s name by name, property by property. We’ve got our workout teams fully involved. It’s kind of playing out exactly as we expected it to. If I took myself back 1.5 years ago and looked at the office portfolio, there was a lot of uncertainty. I think there’s more certainty now. I’ve got a significant amount of absorption capacity just in my P&L for any losses that are materializing, and our reserve levels for the portfolio are well above where the severity of losses to date have been. We feel like we’re going to work through this, as we said, over the next few quarters and begin to peak at the loss levels.

Yes. And I just – maybe, John, you can add to this, but in terms of where do we go from here – you can see that the coverage ratio on office remains high, and it’s gone from 10.2 reserves to 10.6, but that rate of increase is slowing. We’ve been taking the full charge-off through the P&L while holding the reserve at high levels. At some point, we’ll be able to start drawing down on that reserve. I don’t want to make that call on when, but it could be later this year or early next year. We will eventually get to a point where we can start drawing down those reserves, which will be good for P&L.

Yes, I agree with all that. I’d just add a point or two. What’s built into the 10 you’ll see it in some of our slide materials is an expectation of a 71% decline in property values. That drives this 10.6% reserve for remaining losses.

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

Exactly. I’d also point out that just given what we put behind us, implies another 6% of losses that we put behind us. We have 10.6 in the reserve. We’ve charged off about 6. So, you’re up over 16% in terms of coverage, we feel pretty good about it, and that’s where we think the losses are going to play out. As Bruce mentioned, we’ll see charge-offs themselves possibly peak later this year or early next. But we think we’ve got the reserves covered.

Okay, next question.

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

Yes. I mean, we’ve been saying for a while that things have been decelerating. I’d say our deposit performance this quarter has been excellent in terms of what we were expecting coming into the year. Overall, deposit levels look good. DDA flows and migration from low cost to high cost have decelerated overall. We can point to, if you look at where we are, we were at around 21% of DDA at the end of last year at 12/31 and that flattened out. We were at 21% at 03/31. So DDA for us is stabilizing. The low cost to high cost migration is again decelerating, and we believe that will continue until you see the first cut out of the Fed, which is historically what we would expect. But it’s getting to the point where it’s having a diminishing impact on net interest margin. The contribution that our deposit franchise is delivering for net interest margin trends is excellent. We’re feeling very good about the trajectory, with the DDA stability throughout the rest of 2024, which supports the net interest margin quite nicely.

Yes. Maybe, Brendan, you can add some color.

Yes. Sure. We’ve been discussing for a couple of years how since so much of our deposit book comes from consumers, we believe that we’ve transformed the book to be pure, like, or better. I would just reiterate that, that’s what we’re seeing. We were modestly up linked quarter on overall deposits in the consumer book, and from benchmarking we believe we were number one in our peer set linked order on DDA. So on a relative basis, we still have a lot of confidence that we’re outperforming peers, which demonstrates the franchise quality we’ve built. When you look at the customer level, customer deposits have actually been quite stable around $31,000 per customer. The remixing, as John pointed out, is slowing considerably. This indicates that the COVID burn down is beginning to really run its course. There may be a little bit more, but we feel pretty good that we’re nearing the end of that behavioral cycle. We observe overall deposits on an inflation-adjusted basis returning to pre-COVID levels. So I think we’re kind of nearing the operating floors here for consumer. Given the strength of low-cost deposits relative to peers, the implication for managing interest-bearing deposits is substantial. I believe we peaked in the consumer segment in Q1 in our cost of funds. $3 billion in CD rollover occurred in March alone, priced around 5%. We retained 75% of those as they flipped over at materially lower prices, between 3% and 4%. So you can see the tailwinds building that could potentially lead to a reduction in the cost of funds in the consumer segment. We’ll see how it plays out where rates are at, but I believe we’ve more or less peaked here in Q1, driven by the strength of our low-cost performance. We don't need to chase high interest-bearing costs as a result of that. I feel very good about where we’re at.

Alright, good. Thank you very much for the color.

Good morning. One just on additional color on the loan growth commentary. I know you said it could come in throughout the low end of your initial expectation for the year, and you have cited weaker line utilization at this point. Where do you see some weakness in what pockets and where do you see some ultimate strengthening there in terms of timing? And then separately, a similar question around your deposit growth expectation. I think for the full year, you had projected around up 1% to 2%. Any additional color you can provide on how you’re feeling around that guidance at this point?

Yes, I’ll start off on loans and others can add. What we’re seeing is that utilization coming in a little lower in the first quarter than was originally expected. Nevertheless, we see that in the second half, interest around putting some working capital to work and commercial activity should start picking up, driving the reversal of that utilization trend as we get into the second half. On the retail side, we’re still seeing good opportunities in relationship mortgages and HELOC, primarily driven by activity in the subscription line space. All in, it is playing out about as expected, meaning we might be a little lighter on loans, but we expected that would be the case. The pickup in the second half will emanate from the commercial business and private bank. Maybe any other color?

That’s well said, Don. Any color?

Yes, no, I’ll – I think it’s across the board on the commercial side. Part of it is due to the booming bond markets. We’re seeing many customers access the bond markets rather than draw down existing lines. There’s a positive to it as well, not for loan levels, but customers are running with lower leverage levels because they’ve been concerned about the economy. We’re seeing a more positive view of the overall economy across wide swaths of our client base. This indicates that they’re going to become more active in areas like plant construction, working capital, growth, and M&A, which should drive some bounce back in the back half of the year.

Anything from you, Brendan?

Yes. The only thing I would add is maybe just strategically that there’s a lot of involvements under the cover. As we run down auto by essentially $1 billion, other non-core lending is getting replaced with high-relationship and high-returning asset growth, whether it’s on the HELOC side or the private bank. The headline numbers you see around our loan growth require digging into the transformative use of capital we’re performing on a handful of areas that have more durable, sticky revenue sources creating more cross-sell over time. Overall, we’re pleased with how that’s progressing.

On deposits, we saw DDA flatten out for the first time in many quarters. That’s really good to see. We also saw low cost flatten out. Last quarter, we stood at 42% in low cost, we’re at 42% this quarter. The deposit trends from a mix perspective have been favorable. The quantity of deposits at the end of the quarter came in higher than expected. That’s driven by strong execution and our strategic initiatives contributing, as we mentioned earlier, in New York Metro and the Private Bank, along with diligent operational management that Brendan and Don have engaged in for several years, investing in the franchise. All these investments are paying off, and we expect to see deposit growth supporting our loan growth in the second half of 2024.

Yes, I would highlight that – just one last quick piece of color is that I am pleased to see the Private Bank consistently achieving $1 billion-plus in deposit growth for two quarters now; we think that’s sustainable and could even accelerate. The ship has landed, and we’re off to a great start, and we expect that to continue and even accelerate.

Got it. Alright. Thanks, Bruce. And then on the capital front, I did see the resumption in buybacks, the $300 million in repurchases this quarter. With CET1 here at around 10.6 or 8.9% when you dial in the AACI scenario, how do you view the likelihood of incremental buybacks from here? In terms of a pace of buybacks, do you think that could be reasonable given where you’re sitting right now on CET1? Thanks.

Yes. I think this capital position that we’ve generated and have maintained is really creating a lot of flexibility. When you think about our capital waterfall, our top priority is to put capital to work that is supportive of our customers and clients, remaining accretive to our cost of capital over time. That’s our focus. It cushions against uncertainties. There have been numerous macro factors to consider, and being at a very strong capital level enables us to support our clients, cushioning the downside if uncertainties materialize. Other potential uses of capital include supporting our dividend, of course, at the top of the list. If we’re left with elevated capital levels afterward, then we’re able to provide it back to shareholders, which we executed in the first quarter and plan to do in the second quarter. The flexibility will continue into the second half. So as we monitor loan demand and the macro, that will influence the trajectory of buybacks in the second half.

Yes. I would also refer back to an earlier comment that we have a front-loaded plan for this year due to reduced loan growth. In fact, if there’s loan contraction earlier in the year, it leads to a rebound in loan growth in the second half. This would imply accessing capital to support loan growth; hence, could reduce share repurchases. We mentioned the $300 million in the first quarter. John noted $200 in the second quarter. We’ll see where we go in the second half. If loan growth doesn't materialize, we might continue repurchasing stock.

Alright. Thanks, Bruce. Appreciate it.

Okay, thanks.

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

Well, what I would say on that is the broad credit quality is still very good. If you look at our C&I book, it’s in really good shape. Companies weathered the pandemic, leaned their business models, and locked in lower-cost financing. They’re doing more of that now early in the year. We don’t see hotspots even with a higher-for-longer scenario in C&I. Similarly, in consumer, we’re still in very good shape. The consumer is benefiting from strong liquidity levels and a robust labor market. We haven’t seen adverse migrations in delinquencies or NPAs. That’s the bulk of the loan portfolio. If you look at commercial real estate and the general office, that’s a relatively small percentage of the overall loan book. While there are some trends to note, we are monitoring reports that return to the office is picking up. So, maybe there’s a counter trend in the office that offsets the burden of higher rates. But I think at the margin, it’s not going to change that charge-off number materially.

Peter, I’ll just add that we made no assumptions in our forecast that we’re going to benefit from lower rates. We didn’t know; that’s our credit policy. We don’t go out on the future curve. We run all our scenarios based on where rates are today. We have a peak-ish kind of rate environment. If it lasts another couple of quarters or even another year, I don’t think it will make a material difference to our forecasted charge-offs.

The only point I would add on consumer is that our delinquency levels are actually down year-over-year, led mostly by residential, but we’re seeing really no signs of stress on the book. As Bruce pointed out, I feel really good that even in a higher-for-longer scenario, unless there’s a big economic shock, we’re in really good shape.

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

It’s really hard to forecast that. I think they will peak early next year or late this year probably, but it depends on how much we extend, how the negotiations go, and how much capital is injected into some of these transactions, along with working through the book loan by loan. I don’t have the crystal ball on that. But I’ll reiterate that I’m confident the progress is unfolding as we expected.

Okay, next question.

Hi. Good morning, guys. Just a question on the fee side; it’s really nice to see the capital markets improvement as you would have been thinking, as we are seeing more broadly. I am just wondering a couple of line items went well, while a couple of others went backward. Just wondering how you are thinking about the fee progression, the drivers, and what’s your pipeline look like relative to the better start point here for the first quarter capital markets?

Yes, I will start off, and Bruce can jump in here. The drivers – the big three for us, capital markets, card fees, and wealth trust and investment services, are all trending well, and we expect to be significant contributors in 2024. Each of those businesses have received significant strategic investment over the years and even more recently. It’s encouraging to see that the investments made in capital markets come to fruition. We had a strong quarter in the first quarter, ranking number one in the lead tables on the sponsor side—a significant rebound from the fourth quarter. Early in the second quarter, activity has continued, and we feel very good about the trends for 2Q and the full year. In the card business, we have made a strategic conversion to Mastercard, and that’s driving positive developments. In the wealth business, all the advisor hires and the Clarfeld acquisition from a number of years ago are all coming together, driving those flows throughout 2024. We feel quite good about the trajectory for fees.

To your point, Ken, there were those three strong areas, and then we had a little bit of weakness in some other areas, service charges, mortgage, global markets, FX, and interest rate lines were below our expectations. The good news is there is nothing structural that we worry about. We anticipate seeing rebounds over the rest of the year, which will enhance our overall growth, strengthening our confidence that we will maintain strong fee performance for the year.

Okay, great. And just one more follow-up on the NII and the swaps, looking at your Pages 25 and 26 from the deck. It’s clear that you state all the increases made to the swap book are incorporated in the guidance. So, that first quarter to fourth quarter, $35 million cumulative NII impact is inclusive of everything that is both active now and will prospectively still come on as the year progresses?

Yes, it is. What that $35 million indicates is composed of about $50 million, primarily driven from active swaps that are outstanding. I think that grows to about $30 billion by 4Q. That’s incorporated into that number, offset by the positive benefit from non-core of about $15 million to $20 million. That yields the $35 million drag. But when you look out for the rest of the year, broadly, NIM trends are coming in a little better, incorporating all of our swap activity. The number on Page 25 reflects just the receive-fixed swaps. We have pay-fixed swaps in the securities portfolio that offset this, along with factors from the core balance sheet. Overall, NIM trends appear stronger as we look forward to later years, with many of those tailwinds actually baked in, indicating good performance going forward.

Yes, okay, and I – yes, go ahead, Bruce.

I’d just like to add that coming into the year, many were concerned about the step-up in forward starting swaps in Q2 and then more in Q3. The guidance we’re providing and our confidence in the NIM outlook incorporate that. We can manage it, as higher rates are beneficial for the core balance sheet, and the addition of pay-fixed swaps also supports performance. We are able to sustain that step-up in the swap book while maintaining confidence in the NIM outlook for the year.

Yes, that’s great, Bruce. So, broadly reaffirming your guidance of down 6 to 9, given the first quarter we have and the outlook for the second quarter, what would be the biggest swing factors within that range?

To me, it’s clearly volume that’s key to the range. Do we see that strong growth in the private bank accelerating that could yield strong deposits and attractive deposit funding, and what they’re making on their loans is highly valuable. That’s accretive to both the front book and back book. Do we see the growth in commercial we expect come in, provided that we’re engaging with clients and seeing progress in the sponsor community? There has been a lot of pull forward in refinancing, but we’re anticipating some new money deals in the second half. Volume factors will significantly impact where we yield in that range, and we remain confident that those developments will take shape.

I agree with all of that. Even with some lighter loan demand, we still see that range as valid. It may land at a higher end versus the lower end. But I think that constitutes a swing factor. The other components of the balance sheet are playing out well. Our outlook for deposit mix and funding mix underpins the net interest margin. The pay-fixed swaps that we added last quarter are robustly enhancing the yield on securities, and observing a strong increase in securities yields helps balance the impact. Additionally, our core balance sheet is contributing well, as we experience front book and back book effects on loans and securities.

You said we could come in at the higher end, I think you meant the better end.

Yes, that’s correct.

Good morning. Most of my questions have been answered, but I am curious when you talk about kind of this medium-term net interest margin. What are your thoughts on the size of the balance sheet? And I guess, specifically, do you think the overall balance sheet will grow, or is there remixing? Clearly, you are running off the non-core book on the private bank. But do you envision kind of net balance sheet growth as you look out over the next few years? Thank you.

Yes. I would say that we do expect the balance sheet to grow. We have a balance sheet optimization program turning over a portion of the portfolio. But when you look at the initiatives we’re implementing, you’ll see interest-earning assets growing in the second half of the year. We’re optimistic about our growth expectations.

Yes, I would say the flex point will be in the middle of the year when we’ve executed much of the heavy lifting on repositioning. We’ll start to see private bank growth in our commercial bank as discussed take off. We expect to record net growth in the second half of the year, and looking further to 2025 and 2027, we expect strong growth rates. We plan to focus on select areas, concentrating on primary relationships, allowing us to revert back to nominal GDP growth. That also supports the positive operating leverage delivery, which enhances our target for return on equity.

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

Yes. I would say right now, we have a very full plate in terms of the things we’re investing in organically to encourage growth initiatives. I would not characterize it as looking at inorganic opportunities for now. I want to focus on great execution. The payout from these initiatives is significant when carried out successfully, and they are largely trending positively. Team lift-outs are what we’re hinting at because, while we’re establishing the private bank and Clarfeld as part of a private wealth complex, we must greatly scale our private wealth capabilities. Hence, we’re engaging in discussions with teams. Expect to see us build that part of the business out.

I would say the interest in Citizens from a wealth management perspective has never been higher. We’re in talks with some of the very best wealth managers across the big brands in the United States. We will be selective, of course, but the interest in what we’re doing here is unique. We expect to onboard top talent, positively impacting our wealth strategy. Even though we prioritize return metrics like those from M&A deals, lift-outs or engagements with the private bank have a minimal impact on our capital. That’s why our breakeven for the private bank is projected for the second half of this year, mainly managing the expense guarantees versus getting revenue throughput.

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

Yes. I think it’s caution regarding the economy and rates. Most of our companies have had good years, but they still express caution. We’re not losing business to private credit. Interestingly, it’s coming the other way; there have been opportunities to take loans from private credit and shift them over into the bank syndicated lending market, refinancing those loans to secure lower-cost financing. That has played a significant role in the first quarter and continues into the second quarter.

That’s correct. The private credit market is most active in the leveraged buyout sector, which isn’t a large portion of our balance sheet. They serve as sources of distribution for us. Thus, we did a couple of deals in the first quarter where we distributed into the private credit market, which doesn’t impact our balance sheet but supports our fee lines.

Okay, great. Thank you for taking my questions.

Hey. Good morning, guys. Earlier, you mentioned that the flows were a major driving swing factor of that NII guide. I know you mentioned expecting a little less loan growth this year. But you mentioned possibly hitting the better end of that NII range. If for whatever reason, net loan growth doesn’t materialize in the back half, and C&I growth only fills in for the runoff you’re expecting? Can you still hit that NII guide for the year?

Yes. I would say we're still confident in the range. If things break our way, we could be at the better side of that range. If they don’t, we could be at the lower end of that range. I’d still use that as the guardrails. You’d have to see significant deviation from expectations to fall outside of that range.

Yes, great. Just to reiterate that, we've been saying we have an expectation we’ll come in at the better end of the range for net interest margin based on trends we are seeing and performance in the first quarter. You’d notice us being at the upper end of that range, maybe a tad better with net interest margin offsetting the lighter loan demand trending.

Got it. Thanks, guys.

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