Citizens Financial Group Inc (CFG) — Q3 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 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'll 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. And with that, I will hand over to Bruce.

Thanks, Kristin, and good morning, everyone. Thanks for joining our call today. We continue to execute well through an uncertain environment. We've made good progress on our strategic initiatives, our balance sheet remains strong across capital, liquidity, funding and loan reserves and our profitability has stabilized and is poised to move higher. Let me start with an update on our initiatives. First, the private bank delivered another terrific quarter. We reached $5.6 billion in deposits, up from $4 billion in Q2, and our assets under management reached $4.1 billion. During the quarter, we opened two new private bank offices in the San Francisco Bay Area, and we added a new private banking team to cover Southern California. We reached breakeven in August and September and expect to be profitable in Q4 with good momentum entering 2025. Next, our commercial bank continues to demonstrate its capacity to serve private capital well. For the quarter, we were number two in the league tables for sponsor leveraged loan arrangements and we remain number one over the past 12 months. We continue to add quality talent to our coverage and our capital markets teams. Our New York City Metro initiative continues to show nice growth. We had 5% year-on-year growth in households and 7% growth in deposits. We look forward to being a key sponsor of the upcoming New York City Marathon as we continue to raise our brand profile in the market. We've executed well on TOP 9, achieving a Q4 run rate benefit of $135 million and we're finalizing the details of TOP 10, which should have a $100 million plus run rate benefit by the end of 2025. Our BSO actions continue to proceed as planned. Non-core reduced by $1 billion in the quarter and we continue to use the liquidity generated to pay down higher cost funding like brokered CDs. We continue to execute actions in commercial to exit lending-only relationships and we're focused on our medium-term plan to reduce CRE exposure. With respect to our balance sheet, our CET1 ratio is at 10.6%. Adjusting for AOCI puts us at 9.2%. We repurchased $325 million in stock during the quarter. Our spot LDR was 80.8%, and our Federal Home Loan Bank advances remained low at well under $1 billion. We are not seeing much loan demand, but we remain hopeful this should start to pick up in coming quarters. Our P&L was impacted by the drag from forward starting swaps, which commenced in July as well as some fees that pushed out to Q4. Nonetheless, we did a good job managing expenses and credit is performing broadly as expected. Our Q4 guide shows a nice rebound in both NII and fees, leading to positive operating leverage in the quarter. We expect credit to remain broadly stable and we will continue to repurchase shares. For the full year, we will hit most of our beginning of year guide with the exception of balance sheet volume impacting NII and a modestly higher ACL build. We continue to have strong confidence in our medium-term outlook and we've added to the materials in the appendix to show more detail on our NIM progression. Lots of uncertainty in the environment remains, but we feel good about our capacity to manage through that and continue to execute on our broad strategy. Our strategy rests on a transformed consumer bank, the best positioned super regional commercial bank and the aspiration to have the premier bank-owned private bank. We will continue to execute with the financial and operating discipline that you've come to expect from us. With that, let me turn it over to John.

Thanks, Bruce, and good morning, everyone. As Bruce mentioned, the third quarter saw continued strong execution of our initiatives. Importantly, we believe the third quarter represents a trough in earnings as NIM tailwinds, strengthening fees, and continued expense discipline will result in positive operating leverage prospectively. We continue to maintain a strong balance sheet with excellent liquidity and capital levels and a healthy credit reserve. This positions us well to continue to execute on our strategic initiatives, which should help drive strong momentum in 2025 and performance over the medium-term. First, I'll start with some highlights of the third quarter financial results, referencing Slides 5 and 6. We generated underlying net income of $392 million for the third quarter, EPS of $0.79 and ROTCE of 9.7%. This includes a negative $0.11 impact from the non-core portfolio, which will continue to steadily run off, creating a tailwind for overall performance going forward. The private bank is making strong progress towards profitability, reaching breakeven mid-third quarter and we expect it to start being accretive to earnings in the fourth quarter. Our capital position remained strong with CET1 at 10.6% at September 30 and/or 9.2% adjusted for the AOCI opt-out removal and we executed $325 million in stock buybacks during the quarter. We also maintained a strong funding and liquidity profile. Our pro-forma LCR is 122%, which is well in excess of the large bank Category 1 requirement of 100% and our period end LDR is 80.8%. Our ACL coverage ratio of 1.61% is down 2 basis points from the prior quarter, given an improved macroeconomic outlook and ongoing front book activity driving a mix shift, which lowered expected loss content in the loan portfolio. We increased our general office reserve to 12.1%, up from 11.1% in the prior quarter. Now I'll talk through the third quarter results in more detail, starting with net interest income on Slide 7. NII is down 2.9% linked quarter, primarily reflecting lower NIM and slightly lower interest earning assets. With respect to NIM, our margin was down 10 basis points to 2.77%, largely reflecting the impact from the increase in hedge costs as forward starting swaps kicked in during the quarter. Other NIM impacts were largely offsetting. Moving to Slide 8. Our fees were down 2.7% linked quarter with seasonality in capital markets and solid card and wealth results. On the heels of a very strong second quarter, our capital markets fees decreased 30% as deal activity slowed given seasonal trends and some M&A deals pushed into the fourth quarter. Year-on-year, however, capital markets fees were up 40%, led by bond underwriting and M&A advisory fees. Our client hedging revenue was down slightly as some clients delayed their interest rate hedging plans, given the potential for a faster pace of rate cuts after the Fed eased aggressively in September. Mortgage banking fees are down modestly given the decline in MSR results net of hedging. This was offset by securities gains we took in making adjustments to the investment portfolio. Our wealth fees were up slightly given growth in AUM from the private bank, which was somewhat offset by lower transactional sales activity. We continue to focus on building out our wealth business in both our branch-based financial advisory activity as well as in private wealth, where we are adding teams in our private bank office geographies. Total assets under management now approximate $30 billion. On Slide 9, we did a nice job on expenses, which were down 1.3% linked quarter notwithstanding continued investment in our strategic initiatives. Our TOP 9 program is on target to deliver a $135 million pre-tax run rate benefit by the end of the year. We are planning to launch our TOP 10 program, which will target more than $100 million in run rate efficiencies by the end of 2025. We will provide more details for you on our next earnings call. On Slide 10. Period-end loans are broadly stable and average loans are down 1% linked quarter, reflecting limited loan demand as well as continued balance sheet optimization. We continue to run down the non-core portfolio to the tune of about $1 billion in the quarter. The core loan portfolio was up about $800 million with solid contributions from the private bank and growth in retail mortgage and home equity. On a period-end basis, the private bank is making good progress with loans up about $630 million to $2 billion. Excluding the private bank, retail loans were up about $750 million, reflecting growth in mortgage and home equity, while commercial loans were down about $580 million, reflecting paydowns driven by corporates continuing to issue in the debt markets, exits of lower returning credit-only relationships and generally lower client loan demand. Next on Slides 11 and 12, we continue to do a good job on deposits in a very competitive and dynamic environment. Average deposits are broadly stable with period-end deposits down 1%, driven by the paydown of higher cost treasury deposits tied primarily to non-core rundown. This was partially offset by $1.6 billion of attractive growth in private bank deposits. Our interest-bearing deposit costs were up 4 basis points linked quarter. However, total deposit costs were up only 2 basis points, while total cost of funds was stable. DDA balances were effectively flat linked quarter with growth in the private bank being offset by lower commercial. We anticipate that migration of lower to higher cost categories will drop off now that the Fed has commenced the cutting cycle. Overall, our deposit franchise continues to perform well in a very competitive environment. Our estimates indicate we ended the upgrade cycle with a terminal interest-bearing deposit beta better than the peer average. Our deposit franchise is highly diversified across product mix and channels. About 70% of our deposits are granular, stable consumer deposits and roughly 68% of our overall deposits are insured or secured. Moving to credit on Slide 13. The net charge-offs rose 2 basis points to 54 basis points, primarily reflecting seasonal impacts in auto. A decline in commercial real estate charge-offs was offset by the resolution of several non-performing credits in C&I. Non-accrual loans increased 10% linked quarter, primarily reflecting an increase in CRE general office, as we proceed with workout actions on a handful of loans. We believe we are near the peak of NPAs as criticized classified loans have been broadly stable for four quarters and loans and workout get resolved. Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.61%, which is a 2 basis point decline from the prior quarter, reflecting an improving macroeconomic outlook and better loan mix given the runoff of the non-core auto portfolio and lower loss content originations in the retail, real estate secured, and commercial categories. The general office portfolio was down $150 million to $3.2 billion at the end of the third quarter and our reserve of $382 million represents 12.1% coverage, up from 11.1% in the second quarter. On the right side of the page, you can see some of the key assumptions driving the general office reserve coverage level. While rate cuts may be beneficial at the margin, we continue to expect this sector to be challenged. We believe our current reserve represents a severe scenario that is much worse than we've seen in historical downturns. So we feel the current coverage is very strong. Additionally, since the second quarter of 2023, we have absorbed $364 million of cumulative losses in the general office portfolio. When you add these cumulative losses to the reserve outstanding, this represents an almost 20% loss rate based on the March 2023 balance of $4.1 billion. Over the past six quarters, we have continued to work down exposure to general office, with the portfolio down roughly $1 billion over the last 18 months to $3.2 billion at September 30, given paydowns of about $600 million in addition to the charge-offs I just mentioned. Moving to Slides 15 and 16. We have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.6%, which compares with 10.7% in the prior quarter. If you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio increased from 9% to 9.2%. Both CET1 and TCE ratios have consistently been above the average of our peers. Given our strong capital position, we repurchased $325 million in common shares and including dividends, we returned a total of $516 million to shareholders in the third quarter. Moving to Slide 17. Our strategy is built on a transformed consumer bank that best positions commercial bank among our regional peers and our aspiration to build a premier bank-owned private bank and wealth franchise. First, we have a strong transformed consumer bank with substantial wealth revenue potential that is set to drive further deposit growth while efficiently managing costs and we are well positioned to continue gaining market share in the important New York metro market. Next, we believe we have built a leading commercial bank among super-regional banks. We are focused on serving sponsors and middle-market companies and high-growth sectors of the economy. Our investments over the years in capital markets capabilities and coverage of the private capital space have positioned us well to take advantage when market activity picks up. With the Fed beginning to ease and fears of a recession subsiding, the movement in our commercial client base is decidedly more positive, which has us optimistic that we'll see a strong finish to the year and good momentum into 2025. We are pleased to report that for the third quarter in a row, our capital markets business sits at the top of middle-market lead tables, holding the number one sponsor middle-market book runner position on a trailing 12-month basis. Moving to the private bank. I'm pleased to report that the effort is going very well and continues to gain momentum. We are growing our client base and now have about $5.6 billion of attractive deposits. This is a $1.6 billion increase from the prior quarter with roughly 34% non-interest bearing. Also, we are now at $2 billion of loans and continuing to grow. We recently announced the addition of a top private banking team in Southern California and we have plans to add new offices in the Bay Area, which adds to the offices we've already opened in San Francisco and Mill Valley, California, Palm Beach, and Boston. You should expect to see us opportunistically adding talent to bolster our banking and wealth capabilities. Notably, our private bank revenue rose 64% to $49.7 million in the third quarter breaking even by mid-quarter. We are on track for the private bank to start contributing to earnings in the fourth quarter and add meaningfully to EPS next year. Moving to Slide 18. We provide a guide for the fourth quarter. This outlook contemplates a 25 basis point rate cut in each of November and December. We expect NII to be up about 1.5% to 2.5%, driven primarily by a 5 basis point improvement in net interest margin, reflecting the benefit of swaps given lower rates, deposit repricing, non-core runoff, and favorable front book back book dynamics, partially offset by lower asset yields. Spot loans should be up slightly paced by private bank and commercial sponsor activity. Non-interest income should be up mid- to high-single-digits reflecting expected seasonal strength in capital markets. Our deal pipelines are robust and we expect to see a strong finish to the year. We also expect modest improvements across other key categories. Non-interest expense is projected to be up about 2%, and we expect to achieve positive operating leverage. Net charge-offs are expected to be broadly stable, while the ACL should continue to benefit from non-core runoff and improving loan mix. Our CET1 ratio is expected to be broadly stable with about $200 million to $250 million of share repurchases. I called your attention to an updated slide in the appendix on our medium-term NIM walk, which projects us to be in the 3.25% to 3.4% range in 2027. To wrap up, we delivered a solid quarter in a dynamic environment with strong results in capital markets, wealth, and card and credit performance that continues to play out largely as expected. We are playing strong defense maintaining a robust capital and reserve position, a high level of liquidity and a more structural long-term funding profile, as we prepare for potential regulatory changes and any challenges the environment may bring. Importantly, we are also playing offense as we pursue our unique multi-year strategic initiatives, which will drive improving performance over the medium-term. We remain confident in our ability to hit our medium-term 16% to 18% return target. With that, I'll hand back over to Bruce.

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

I wanted to start off with a couple of questions both related to the margin progression and that medium-term walk to which you alluded on Slide 23, as we kind of start to march upward. Maybe first, in the immediate term, can you sort of walk through the puts and takes that allow for the 5 basis points or so of margin expansion into the fourth quarter? And then, I guess, more importantly, as we sort of start the journey upward and think about that next year or so, it looks like that 18 basis points of time-based benefits is largely programmatic, which all else equal would get us to like a 2.95. But of course, the wild cards are like the timing of the ebbs and flows of the swaps and the rate-based impact. So maybe if you could sort of help, I guess, narrow the cone on the moving parts as we think about the next few quarters, please?

Yes, certainly. Thanks for your question, Scott. To begin with the fourth quarter, there are several factors contributing positively. First, I want to mention non-core, which is adding about 2 basis points each quarter. That's our starting point. The second significant factor is the management of our active balance sheet, including fixed asset repricing and the ongoing dynamics between our front and back book. This will remain important every quarter going forward. Another key point in the balance sheet transition as we approach the fourth quarter relates to deposit migration. We have been experiencing negative deposit migration throughout the cycle, but that trend has been gradually improving. Recent trends observed in late third quarter and early fourth quarter suggest that this may shift to a neutral or possibly slightly positive position as we enter the fourth quarter. This change is quite important as it would reduce the headwind we've experienced in the past.

Just on the color on that let me just jump in here, John. But we have the private bank continuing to generate very attractive deposits and they've been growing well over $1 billion in $1.5 billion range the last two quarters. So that will be positively benefiting that mix. And then typically, seasonally, in the fourth quarter, we'll see an uptick in both commercial and consumer in terms of demand deposits. So we're counting on that as part of the equation.

Absolutely. To elaborate on that, we are slightly asset sensitive in the other significant category, but the trends we've discussed regarding non-core aspects of our balance sheet are more significant. It's important to remember that the receipt swaps, which have been a challenge, will turn into a benefit and help mitigate our asset sensitivity moving forward. They will contribute positively in the fourth quarter. Additionally, we are being very proactive in managing down betas, applying all the insights from previous cycles. Our deposit betas during rising rates are better than the peer average, and we are channeling that energy into managing betas as rates decline, particularly on the consumer side. On the commercial side, most of our deposits are fully beta tied. We feel optimistic about managing the transition into a downgrade cycle. When you consider all these factors, we are confident we will achieve that 5 basis points. As I mentioned earlier, the trends from late Q3 and early Q4 align well with that trajectory. So that's where we stand for Q4.

Yes, the one other thing is to the fourth quarter lift and then would add to that target as well.

I guess just to drill down on the net interest income coming in weaker than kind of your thought maybe a month ago. Was that a bigger Fed cut and a little bit less loan growth? And kind of and then all the positive trends that you said is what we should expect from here? Or was there something else thrown out there, too?

Yes, I would say we are somewhat asset sensitive. So around 50, maybe slightly more than we anticipated. The deposit trends in the third quarter and the rate of low-cost migration decreased during the quarter, but it might have been a bit slower than we expected. By the end of the quarter, we were where we anticipated, but the average migration for the quarter was somewhat higher than we had thought. However, as I noted, this is now changing. Looking at trends from late September to early October, there was a noticeable shift when the Fed implemented the 50 basis point reduction. We are truly observing a transition in low-cost migration towards a more neutral or slightly positive position. This is really what we can expect as we move into the fourth quarter.

We anticipated slightly more loan growth, particularly in the private bank, but it was not as high as we expected. I believe this is mainly due to timing. As rates decrease, we expect continued improvement in our commercial bank as well. We hoped for a quicker recovery in line utilization, especially on the sponsor side, and we are beginning to observe that. Therefore, we project that in the fourth quarter, we should start to see modest growth in our spot loans, even taking into account the non-core rundown.

Bruce, you mentioned the dynamics of loan growth. Could you elaborate on your confidence regarding the inflection in demand that should lead to modest growth in the fourth quarter? What do you see as the primary catalyst? Is it the rate cut or expected clarity around the election? Additionally, how do you envision the acceleration in overall loan growth as you look towards 2025?

Let me begin, and then I'll hand it over to Don and Brendan to discuss their segments and outlooks. We're not expecting any major changes in the fourth quarter. I believe our guidance is conservative and doesn't rely on significant growth in loan activity. However, we are starting to see some progress. We've noted our highest quarterly increase in the private bank, and the pipeline looks promising. I anticipate this trend will continue. As interest rates decrease, people seem more inclined to engage and borrow. A similar trend is evident in the commercial bank, where there's considerable interest in private equity as some are starting to realize exits and invest again. We can gauge this by the increased discussions we're having with clients, but we haven’t seen a major shift yet. I expect this trend to gradually increase. Now, I'll let Don start, and then Brendan can follow.

Yes. I think you mentioned it, Bruce. The leading area is subscription lines, where we observed significant growth towards the end of the quarter and this trend is continuing into the fourth quarter. This growth isn't due to any actions on our part, but rather activity in the private equity sector that is increasing, which has led to a noticeable rise in utilization in that business. We haven't observed similar growth in commercial and industrial yet, but discussions with our primary C&I clients, especially in the middle market, suggest that with the economy stabilizing and rates decreasing, there is an overall boost in confidence about the business climate improving in 2025. This should translate to higher working capital usage and increased investments in their operations. Additionally, one of the factors affecting our core loan growth has been the refinancing activity in the public securities markets. We've noticed assets on our balance sheet being refinanced, which benefits our fee income but has put some pressure on our core asset levels. However, we believe much of this is behind us now, so we expect to see net growth in our core lending portfolio as we move into 2025.

I'll briefly discuss consumer banking and then private banking. On the consumer side, the reduction in non-core assets is becoming a net positive. Last year, we were experiencing a runoff of about $1.2 billion to $1.3 billion per quarter, and now that figure has decreased to around $800 million to $900 million. The decline is slowing down, and we expect this trend to continue. In our growth portfolios, we are observing solid growth in mortgage and home equity. With rates slightly decreasing, we anticipate a modest increase in mortgage originations. However, a significant portion of the country is locked into approximately 3% mortgage rates, which positions our HELOC business exceptionally well. We excel in national HELOC originations in the super prime market, and we expect continued growth in this area. This product will likely serve as a key resource for U.S. consumers as the economy stabilizes, allowing consumers to borrow against the record equity accumulated in their homes over the past five to six years. We foresee this trend persisting. Additionally, we might see a slight tailwind for student loans as the high rates initially sidelined many borrowers. With the federal government resuming a pause on payments and rates decreasing, we expect more individuals in their late 20s and early 30s with good credit to consider restructuring their student loans. We are optimistic about a modest uptick in this segment as we move into next year. Regarding private banking, the situation is similar. Reduced rates should encourage more customers to utilize credit. Currently, we are seeing significant cash transactions in both residential and business sectors, with promising feedback. As rates decline, clients may feel more inclined to use credit solutions instead of relying on cash for investment properties or business growth, particularly among our high net worth and ultra-high net worth clients. We are confident that the current rate dynamics will create a strong underlying demand. Additionally, we have made significant strides in the deposit space and are focused on optimizing operations. The goal is to earn the customer's full banking relationship by excelling in day-to-day banking, and as we address their borrowing needs, we expect to gain a larger share of their wallet. This anticipated growth in private banking will be bolstered by the current rate environment.

And then a quick second one on credit. Can you just talk about the confidence that I believe you indicated that you've seen, you believe NPAs are peaking here this quarter? Maybe your confidence there, what gives you that? And then also on the confidence in the broadly stable charge-offs with the third quarter as you look at fourth quarter. I know your auto delinquencies were up pretty sharply year-over-year. So that would be beyond the seasonality. So I'm interested in what drove that and then thoughts on the reserve going forward?

Yes. I'll start, and then others can jump in as they wish. The main challenge we've been managing is the general office portfolio, which is a process that began in 2023 and will continue through 2024 and into a significant part of 2025. We feel confident in our understanding of this issue. We have substantial reserves in place and our top team is engaged with borrowers to find mutually agreeable solutions. However, the timing of recognizing charge-offs and when a loan may go non-performing can fluctuate and is not always within our control. For instance, if a borrower puts a property up for sale, we must take specific actions regarding non-performing asset recognition or charge-off recognition. In this quarter, we experienced lower levels of commercial real estate charge-offs and encountered a slight increase in commercial real estate non-performing assets. Nonetheless, the population of problem loans we are overseeing remains steady. Importantly, criticized and classified loans across the commercial sector have shown stability for four consecutive quarters. That's the key point. I'll see if Don wants to provide additional insights on commercial real estate and then Brendan can address any concerns regarding delinquencies.

I think that's exactly right, Bruce. I think that we've seen like zero surprises in our credit book for the last four quarters, and it's playing out exactly as we thought it was going to play out. And as Bruce said, we'll have charge-offs going through the general office portfolio for the next several quarters, but it's pretty much playing out as we expected. We had a little bit of a blip in C&I charge-off this quarter, which was things that have been in the workout teams for literally five, six, seven years, and they just happened to resolve this quarter. So I don't worry a lot about NPA moves, what I focus on is the class levels and the fact that those have been stable. The other thing we're seeing in the general real estate area is not in general office, but in general real estate. There's a lot of liquidity coming back into the marketplace. So it's accelerating our ability to move down the overall exposures in the book, which you know is a strategic matter or something that I want to do. And we're seeing nothing in the C&I book and broadly that is disturbing to us at all, that's quite healthy from an overall credit standpoint.

Yes. Consumer behavior has largely returned to normal, and pre-COVID, our net charge-offs were between 50 and 55 basis points. That's our current situation as well. Although there are some fluctuations, I'm not particularly concerned about anything in the portfolio. Regarding the auto sector, I have a few points to share. Last quarter's charge-offs were unusually low, influenced by seasonal factors, but we also experienced a strong recovery in used car values. This quarter's results are more about returning to normal trends. Additionally, it's challenging to interpret published delinquency statistics even though they are relatively stable. When new originations stop, it takes about 12 to 18 months for the vintage curve to normalize and for delinquency rates to stabilize. With no new loans being originated, we are missing the denominator effect of new accounts that typically show no delinquencies. Analyzing all these factors, there's nothing concerning in the auto portfolio; it's performing as we anticipated and in line with our pricing expectations.

My first question is for you, John. In the 10-Q, you reported $30 billion of notional received fixed peso for swaps for both the third and fourth quarters, and $30.9 billion for 2025. Slide 24 indicates lower notionals. Can you provide an update on whether those swaps have been terminated? Also, can you confirm the accounting for the swaps, specifically that the losses are crystallized and will be reflected in your net interest income for the entire duration of the swap? As a follow-up, you mentioned aiming for a 3% net interest margin by the fourth quarter of 2025. How many rate cuts would you need to achieve that 3% target?

Yes, I'll take those. During the third quarter, there was a time when the yield curve was anticipating seven or eight rate cuts through the second quarter of next year, which was a strong expectation of the pace of Fed rate cuts. We had about $4 billion in short-term receive-fixed swaps maturing in May 2025. We decided to terminate these $4 billion swaps in the third quarter, taking advantage of the situation with the anticipated seven or eight cuts. Given that these swaps were short-term and primarily provided protection against lower rates through May, we believed it was a good risk-reward decision to secure those benefits. Now, with fewer expected cuts through May, moving away from those swaps was a positive outcome for us, as they fulfilled their purpose of providing protection. Accounting-wise, we will amortize the impact over the remaining life of the swaps through May. This will result in a lower and more favorable impact compared to if we had retained the swaps. That was the rationale for their termination. Regarding the second question on how many cuts are needed to reach a 3% net interest margin, our position is slightly asset-sensitive, which means the net interest margin remains stable across different rate environments into 2025 due to the swap portfolio, without a significant decline until mid-2026. The forward curve suggests reaching around 350 by the end of 2025, but we would still achieve that 3% even in rate environments below that level.

And my follow-up question is two-fold. First, could you explain the more favorable impact? I think I was thinking that as I amortize that impact of the terminated swap, it would just be the difference between the SOFR and received fixed rate through May 2025. So John, maybe give us some insight on what the more favorable treatment would be? And then just secondly, I just wanted to follow-up. I think that there are a lot of questions over being able to achieve that NIM expansion for next quarter, which you've explained well. I just wanted to sort of nail down what kind of deposit beta you are assuming in that 2.82% number for next quarter?

Yes. So again, when you terminate the swap, you basically terminate based upon the forward curve that's assumed at the time. And so the forward curve at that. And then on the NIM expansion into the fourth quarter, highly proactive focus on this is going to get our deposit beta to be up to around nearing 40% by the end of the quarter. You've got all of the 100% beta stuff in commercial leading the way, but we're being highly proactive in consumer as well and just really taking all the learnings over the cycle over the last many years and applying that to how we continue to be able to drive solid deposit growth at a really attractive cost of funds. So that's the number that's baked in about 40% deposit beta in 4Q.

I wanted to follow up on the deposit beta question. Can you provide more details on your current spot deposit rates now that we are a month past the Fed rate cut, and how you foresee the deposit beta evolving as we continue through the Fed rate cut cycle? As more rate cuts occur, does it become easier or more challenging to reduce your deposit rates moving forward?

I believe if you calculate the numbers, considering the forward curve, we anticipate two more Fed cuts in the fourth quarter. This projection is based on data following the non-farm payrolls from a week or so ago, which suggests the two cuts. Using that curve, if you apply a 40% beta to estimate the average SOFR rate for the fourth quarter compared to the third quarter, you can determine the reduction in net interest-bearing deposit costs. What was the second part of your question? The longer the down cycle continues, the more we can reduce deposit costs. Generally, we've indicated that our down cycle betas will be around 50% to 55%. By the end of the fourth quarter, we anticipate being around 40%, gradually moving towards that 50% to 55% range during the upcoming cutting cycle over the next few years. You can expect that gradual improvement to unfold.

Yes. But there was acceleration in the up cycle towards the later part of the cycle, which I think you mirror that on the downside.

That's what I was getting to. That's really helpful. And then maybe just on the front book back book, I think you noted the 200 basis point to 300 basis point spread benefit. Can you talk about what balances we should apply that to? What are the fixed rate securities and loans coming due over the next year or so? And is there any room to use some of the excess capital for any securities positioning from here?

Yes. I mean I think that's a good metric to use that this will be growing over time. So when you see when you see the activity and loan growth picking up over time, you're going to see this being a contributor over the next couple of years. I'd say that the what turns over in the back book quarterly basis in resi mortgage, call it around $750 million a quarter and that's a similar number for securities as well. When you talk about what turns over those are the balances that you would apply it to is the front book, back book, but that will continue to contribute and build on itself over the next couple of years. That's not in our plans. We actively manage the securities portfolio on an ongoing basis, but we don't have a large single repositioning.

And I would also just point to Slide 23 and some of the built-in momentum that we have to raise NIM, so the need to expend capital to shift the timing on that NIM walk is not something that we need to avail ourselves of.

Okay. Great. Well, thanks again, folks for dialing in today. We appreciate your interest and support in Citizens. Have a good day.