Citizens Financial Group Inc (CFG) — Q4 2024 Earnings Call Transcript

Thank you, Ivy. Good morning, everyone, and thank you for joining us. I'm stepping in today for Kristin, who is out sick. First this morning, our Chairman and CEO, Bruce Van Saun and CFO, John Woods, will provide an overview of our fourth quarter and full-year 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 fourth quarter and full-year 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 two of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on page three of the presentation and the reconciliations in the appendix. And with that, I will hand it over to Bruce.

Okay, thanks, Thomas. Good morning, everyone, and thanks for joining our call today. We were pleased to finish the year with a strong quarter as our financial results reflect good sequential revenue growth led by NIM expansion and capital markets fees, positive operating leverage, favorable credit trends, and a robust balance sheet across capital, liquidity, and LDR. We are still seeing subdued loan demand, but we've more than compensated for that with 10 basis points of NIM expansion that drove sequential NII growth of 3%. Fees grew sequentially by 6%, paced by capital markets and mortgage. While expense growth was 3.5%, paced by hiring in the private bank, private wealth, and commercial middle market, we still delivered positive operating leverage of around 50 basis points. Our credit trends are looking favorable with NPAs down sequentially, criticized assets trending down, and no surprises in charge-offs as we work through our CRE office portfolio. Given these trends and the contraction in loan balances, we added $162 million to our provision against $189 million in charge-offs, and our ACL-to-loan ratio increased slightly to 1.62%. We currently expect that the credit trends should continue and that we should be able to see credit costs come down in 2025. We continue to repurchase shares in the quarter $225 million, bringing the full-year total to $1.05 billion. We repurchased 28 million shares in 2024, or 6% of the beginning of year balance. With respect to execution of our key initiatives, we made further progress across the private bank, our New York City metro strategy, serving private capital, and growing our payments business. BSO efforts saw a reduction in non-core loans of $4.2 billion in 2024 with a remaining balance of $6.9 billion. We are looking for opportunities to accelerate the rundown, so stay tuned on that. In addition, we made further progress in exiting low-returning relationships in C&I and in reducing overall CRE loans. Our TOP 9 program was executed well, delivering $150 million in annualized Q4 run rate benefits, and we've launched TOP 10 with a target benefit of $100 million. The private bank, private wealth progress is worth spotlighting. The business continues to ramp up nicely, growing the customer base and hitting all financial targets. We reached $7 billion in deposits, $3.1 billion in loans, and $4.7 billion in AUM, and we were profitable in the quarter. We are confident in our ability to meet or exceed our goal of having this business be 5% accretive to our bottom line in 2025. And we added a banking team to Southern California in Q4 and this morning we announced an additional wealth team in South Florida. For the full-year 2024, we hit most line items in our beginning of year guide, that's shown on slide 34 with the exception of balance sheet volume. That said, we were able to repurchase more shares given the lack of loan demand. Turning to our 2025 outlook, we expect solid growth in NII given further NIM expansion and a resumption of modest net loan growth. Fees should grow nicely, paced by capital markets and wealth. We have confidence in this revenue outlook, so we'll step up investments in OpEx and CapEx to support key growth initiatives. We anticipate attractive positive operating leverage for the full-year of around 1.5%. Credit costs are projected to improve year-on-year, and we expect to see reserve releases continue throughout the year. We will manage our CET 1 ratio above the high end of our 10% to 10.5% range, given ongoing uncertainty, but we expect to continue with regular share repurchases. We've included some slides on our medium-term outlook and how the drag from our legacy swap portfolio will dissipate with time. We remain confident in our ability to achieve our medium-term 16% to 18% ROTCE target. Exciting time for Citizens. 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've made steady progress and will continue to execute with the financial and operating discipline you've come to expect from us. I'd like to end my remarks by thanking our colleagues for rising to the occasion and delivering a great effort in 2024. We know we can count on you again this year. So with that, let me turn it over to John.

Thanks, Bruce. Good morning, everyone. As Bruce indicated, we delivered results in 2024 that aligned closely with our expectations at the start of the year. The third quarter marked our lowest point, while the fourth quarter showed a significant recovery, positioning us well for growth in 2025. On slide six, you can see that we reported underlying earnings per share of $3.24 for 2024, factoring in a $0.45 impact from non-core activities and a net investment of $0.05 in the private bank. Our full-year return on tangible common equity was 10.5%, or 12% when excluding these items. Although loan volumes fell short of expectations due to market conditions, net interest income was largely in line with our annual forecasts, decreasing by 9.7% while maintaining a full-year margin of 2.85%. Fees rose impressively by 9%, driven by growth in capital markets, card services, and wealth management, while we carefully managed expenses, which increased by just 1.5%, despite significant investments in the private bank and private wealth services. We effectively navigated a challenging credit landscape, ensuring robust reserve coverage while keeping credit losses aligned with our yearly expectations. The transformation of our deposit franchise since our IPO became evident in 2024, as we adapted to a highly competitive environment amid swiftly rising rates. Our deposit cost performance surpassed the peer average, showing a considerable enhancement compared to previous rate cycles. Following the latest Fed rate cuts, we proactively reduced deposit costs in the fourth quarter. Importantly, our financial stability has enabled us to successfully implement our strategic initiatives, creating momentum as we approach 2025. We seized the opportunity to expand the private bank, which raised $7 billion in deposits by year-end and, as anticipated, became profitable in the fourth quarter. We are also making steady advancements in our New York City metro operations. Our investments in our payments platform and enhancements to our commercial middle market presence complement our private bank success. I will highlight some key points from the fourth quarter financial results referencing slides five and seven before detailing further. We generated underlying net income of $412 million, earnings per share of $0.85, and return on tangible common equity of 10.7%. This includes a $0.10 negative impact from the non-core portfolio, which will gradually decline, providing a tailwind for overall performance in the future. As mentioned, the private bank added about $0.01 to earnings per share in the fourth quarter. Notably, we achieved positive sequential operating leverage in the fourth quarter with a significant rise in net interest income and fees, despite making critical investments in the private bank and private wealth while also adding commercial middle market bankers in key expansion areas. We concluded the year with a strong balance sheet, showcasing a CET1 ratio of 10.8%, or 9.1% when adjusted for the AOCI opt-out removal. Our pro forma Category 1 liquidity coverage ratio stood at 119%, and our allowance for credit losses coverage ratio increased to 1.62%, up from 1.61% in the previous quarter. We also executed $225 million in stock buybacks during the quarter. Next, I will delve into the fourth quarter results in greater detail, beginning with net interest income on slide eight. Net interest income increased by 3.1% compared to the previous quarter, largely attributed to a higher net interest margin and slightly reduced interest-earning assets. As illustrated on the slide's net interest margin breakdown, our margin rose by 10 basis points to 2.87%, benefiting from non-core runoff, fixed-rate asset repricing, and improved deposit and loan betas, partially offset by our net asset-sensitive position as rates declined. With the Fed reducing rates at year-end, we activated our down-rate strategy, cutting rates in advance and reducing high-cost deposit balances. Our cumulative interest-bearing deposit down beta was about 50% better than initially expected. Moving to slide nine, fees increased by 5.6% compared to the previous quarter, mainly driven by better performance in capital markets. Capital markets enjoyed strong loan syndication activity and a recovery in M&A, aided by seasonality and improvements in the overall environment. Conversely, debt underwriting decreased after a robust third quarter. Mortgage banking fees reflected higher mortgage servicing rights valuations, while overall operating results remained steady. The wealth management business experienced a solid quarter with good momentum and asset growth from the private bank, although this was counterbalanced by lower transactional sales activity. On slide 10, expenses increased by 3.5% from the previous quarter, mainly due to hiring in the private bank and private wealth expansion, as well as adding commercial middle market bankers to enhance our private bank presence in Southern California and Florida. Our TOP 9 program achieved a pre-tax run rate benefit of $150 million by year-end, exceeding our initial target of $135 million. Additionally, we have initiated our TOP 10 program, aimed at generating $100 million in run rate efficiencies by the end of 2025. On slide 11, average loans slipped slightly, with period-end loans down 1.7% from the prior quarter, influenced by the non-core portfolio runoff of approximately $900 million, a decrease in commercial loans due to paydowns in commercial and industrial and commercial real estate against a backdrop of low client demand and decreased line utilization. The private bank showed promising progression, with period-end loans increasing by about $1.1 billion to $3.1 billion at year-end. Next, on slides 12 and 13, we continued to perform well in deposit growth within a competitive environment. Period-end deposits remained largely stable compared to the previous quarter, with notable retail growth in the private bank offset by ongoing paydowns of higher-cost treasury and commercial deposits, primarily linked to the non-core loan reduction and proactive measures to optimize the liquidity value of deposits. The private bank consistently added customers, with period-end deposits climbing by approximately $1.4 billion to $7 billion by year-end. Our retail division excelled at raising deposits in low-cost categories this quarter, and we observed strong retention as our certificate of deposit portfolio turned over at lower rates. Furthermore, we increased non-interest-bearing deposits by about $940 million compared to the previous quarter, driven by the private bank and seasonal commercial flows. Combined, our non-interest-bearing and low-cost deposits reached 42% of total deposits in the fourth quarter. Overall, our deposit franchise continues to excel in a competitive landscape. Our interest-bearing deposit costs decreased by 31 basis points compared to the previous quarter, translating to a cumulative down beta of 50%. Moving to credit on slide 14, as anticipated, net charge-offs remained stable at 53 basis points, slightly down from 54 basis points in the previous quarter. A reduction in commercial and industrial charge-offs was counterbalanced by an uptick in commercial real estate, particularly within the general office portfolio. Retail charge-offs remained steady. Notably, non-accrual loans decreased slightly, reflecting a reduction in commercial loans due to the resolution of several general office loans. Criticized loans significantly declined in the fourth quarter, following relative stability in previous quarters. We continue to make progress in managing the general office portfolio, with limited new inflows to address. Regarding the allowance for credit losses on slide 15, our overall coverage ratio slightly increased to 1.62% compared to the previous quarter, primarily influenced by lower portfolio balances. While we maintain strong reserve coverage for key portfolios such as general office, our overall reserve declined slightly due to a stable macroeconomic outlook and an improved loan mix bolstered by the runoff of the non-core auto portfolio and new originations in retail, real estate secured, and commercial categories with lower loss profiles. The reserve for the $2.9 billion general office portfolio stands at $364 million, reflecting a coverage ratio of 12.4%, up from 12.1% in the third quarter as the portfolio continues to shrink. Note that the cumulative charge-offs combined with the current reserve indicate an expected loss rate of about 20% against the March 2023 loan balance when industry losses started. Moving to slide 16, our balance sheet remains robust. Our CET1 ratio improved to 10.8%, compared to 10.6% in the previous quarter. Adjusted for the AOCI opt-out removal, our CET1 ratio remained stable at 9.1%, despite the effects of higher long-term interest rates on AOCI during the quarter. Given our strong capital position, we repurchased $225 million in common shares, and including dividends, we returned a total of $413 million to shareholders in the fourth quarter. Over the full year, we repurchased $1.05 billion in common shares, equating to roughly $28.1 million or about 6% of our outstanding shares at the beginning of the year, at an average price of $37.35 per share. Moving to slide 17, we view our strategy in three areas: a transformed consumer bank, a well-positioned commercial bank among our regional peers, and our goal to build a premier bank-owned private bank and wealth management franchise. Slides 18 to 20 offer further updates on our positioning and achievements for your review. On slide 20, we have revised our private bank targets for 2025 based on our success thus far. We raised our deposit target from $11 billion to $12 billion and our assets under management target from $10 billion to $11 billion. We adjusted our loan target to $7 billion given the influence of elevated rates on borrowing demand. We are on track to meet or exceed our 5% accretion estimate to Citizens' bottom line in 2025. On slide 21, we highlight the substantial progress made in New York since we entered the market approximately three years ago with the acquisition of HSBC's East Coast branches and Investors Bank. We anticipate a Fed Funds rate of 4% and a 10-year treasury rate between 4.5% and 4.75%. We expect net interest income to rise by 3% to 5%, primarily driven by an increase in net interest margin to around 3% for the year. We project spot loan growth in the low single digits overall, with mid-single-digit growth excluding non-core. Loan growth will be affected by the runoff of non-core portfolios, paydowns, and more selective originations in commercial real estate, with mild demand for commercial loans early in 2025. We foresee commercial and industrial lending gaining traction in the latter half of the year as new funds begin to be utilized. Private banks should experience steady loan growth throughout the year. We expect average loans to decline by approximately 2% to 3%, and overall earning assets to decrease by roughly 1%, reflecting the impact of the mid-2024 drop and ongoing non-core runoff. Non-interest income is projected to rise by 8% to 10%, led by capital markets and wealth management. We anticipate expenses will increase by about 4%, backed by our confidence in revenue prospects and our intent to enhance investments in growth initiatives after a constrained 2024. Excluding the private bank and private wealth, the expense increase would be roughly 2.6%. We have provided a breakdown of our 2025 expense outlook on slide 23. Synthesizing the revenue and expense outlook, we expect to achieve positive operating leverage in 2025 of around 150 basis points. Our outlook for net charge-offs anticipates a decrease to approximately $650 million to $700 million, or in the high 40s basis point range. We will continue to navigate the general office portfolio. Given macro trends, the reassessment of our balance sheet, and expectations for modest portfolio growth, we are likely to see allowance for credit loss releases throughout the year. Finally, we expect to conclude the year with a strong CET1 ratio in the range of 10.5% to 10.75%, surpassing our medium-term operating range of 10% to 10.5% due to the ongoing uncertainty in the macroeconomic environment. As we observe market conditions and loan growth trends, we will strategically engage in share buybacks. It's noteworthy that loan growth fell short of expectations in 2024, but we managed to balance the effects of share repurchases with reduced pressure on deposit costs. We will apply the same strategy in 2025 if necessary. On slide 25, we present guidance for the first quarter. Please note that the first quarter usually experiences seasonal revenue fluctuations, particularly in capital markets fees, a lower number of days impacting net interest income, and taxes related to FICA resets and compensation payouts influencing expenses. We expect credit trends to improve, and we should finish the first quarter with a CET1 ratio between 10.5% and 10.75%, along with a substantial amount of share repurchases. In slides 27 to 28, as we look ahead to the medium term, we have a clear trajectory towards achieving our ROTCE target of 16% to 18%. Expanding our net interest margin is crucial for enhancing our ROTCE, which we project to be in the range of 3.25% to 3.5% by 2027. However, if the Fed maintains a higher Fed Funds rate at or above 4%, this will facilitate a net interest margin at the upper end of our target range or even higher. On slide 28, we provide a pathway to our target ROTCE of 16% to 18%. We have significant net interest income tailwinds owing to non-rate-dependent terminated swaps amortization and non-core runoff, expected to contribute about 300 to 400 basis points of ROTCE through 2027. We will also gain approximately 100 basis points from the net effects of other factors such as favorable fixed asset repricing, the runoff of legacy active swaps, and the counterbalancing effect from our naturally asset-sensitive balance sheet. This positions us within the 15% to 16% range. We anticipate generating solid returns from our legacy core business, along with the successful rollout of the private bank and other key initiatives I mentioned earlier, which should yield significant revenue growth, positive annual operating leverage, and an improved efficiency ratio, contributing an additional 200 to 300 basis points to ROTCE. We expect some relief from credit, considering we have been over-providing compared to a more normalized environment, with charge-offs declining to the low to mid-30s basis points, reflective of the improved portfolio mix, with fewer auto loans and a larger proportion of private bank loans and commercial and industrial lending. AOCI impacts currently contribute a ROTCE benefit, which we expect to normalize over time. This effect will be partially offset by share repurchases. In conclusion, we are confident in our ability to reach the 16% to 18% medium-term target. To summarize, we achieved a solid performance in 2024 that closely matched expectations. We notably improved our net interest margin, showcased better capital markets results, and kept expenses in check, returning to positive operating leverage in the fourth quarter. We concluded the year with a solid capital, liquidity, and credit standing that places us in a robust position to advance our strategic objectives. We are well-set for 2025 and remain confident in our capacity to meet our medium-term return targets of 16% to 18%. With that, I will hand it back to Bruce.

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

Good morning, guys. Thank you for taking the question. Let's see, John, maybe I wanted to start on sort of that medium-term margin outlook? Can you just sort of add some additional context on what gave you the confidence to bump up the top end of that medium-term range to basically the extra error between the 3.40% and the 3.50% at the top end of the range, please?

Yes, sure. I think the main reason for that is just the outlook on rates. I'd say that when you think about where we were last quarter and in prior quarters, you know, the Fed was landing in a terminal, you know, rate that was well below 4% when we put this together previously. Now, when you see the Fed, you see the bond market discounting something closer to 4%, we've basically widened the expectation of range that you could see at the upper end. So 3% would be sort of consistent with our floor of 3.25%. But 4%, given our asset-sensitive balance sheet, would be more consistent with a higher number than the 3.40%, we showed last quarter. And you may recall last quarter we said that, hey, a 3.50%-ish or a 3.75% Fed would be consistent with 3.40%. But now the Fed, you know, could land somewhere near 4%, and so that's the main reason why we, you know, we raised that. I think there are other reasons too. I mean, just getting, you see the confidence. We have a growing confidence based on our performance in the fourth quarter with a very solid 10 basis point increase in NIM. We've continued to opportunistically hedge to reduce the impact of rates falling into the future. So just a number of positive benefits that we were able to see that gave us the confidence to increase the upper end to 3.50%.

Got it. Perfect. Thank you for that. And then separately, I was hoping you could help to put in a little bit more context, sort of the higher fourth quarter costs and investments. I mean, I certainly understand them in light of what you're building with the private bank, but just maybe curious about where you stand such that you're confident that costs can hold more firm after that small additional lift that we would expect in the first quarter?

Yes. We included some details on slide 23 that you can review. In the fourth quarter, we've been consistently investing in the private bank, and due to its strong performance, we felt confident in continuing and possibly accelerating those investments through team advisor lift outs. We are also enhancing our capabilities in the commercial bank, particularly in Southern California and Florida. These factors contributed to our increased expenses in the fourth quarter. Bruce, would you like to add anything?

I'd also just add to that, Scott. For the full-year, we were still on our guide range of 1% to 1.5%. And so what I would say is that 2024, given some of the built-in revenue trajectory was a year where I think all banks, including ourselves, had to be very, very disciplined on expenses. When you start to see that revenue is improving, the revenue outlook is improving, which we saw that occurring in Q4, and we can see more visibility into revenue strength into next year than some of the things that you may be deferred that are really attractive investment cases, you start to lean in again a bit. So we started that process a bit in Q4. When you look at next year, we'll be guiding to about a 4%. But again, if you strip out the impact of private bank and private wealth, which we want to continue to, there's a great opportunity there to fill that void in the market. We want to keep disciplined investing into that, the rest of the bank is down at roughly 2.5%. And so the top program usually provides about a 1% benefit. So we're leaning in a little bit across some attractive investment opportunities across the rest of the bank, but still the overall numbers are kind of in a position where we should have quite a bit of confidence we can deliver positive operating leverage in 2025.

Perfect. All right. Thank you very much.

Sure.

Yes. Hi, good morning. I just wanted to think about some of the dynamics that are more strategic than mechanical on the margin improvement, John. Give us a sense in terms of how you're thinking about deposit growth and the mix of that deposit growth and also sort of what the repricing cadence looks like? And given that the neutral rate seems to be settling around 4%, does the pacing change? Is the beta fast first and then slow down as loan growth comes back?

Yes, a couple of comments related to that. I mean, I think strategic opportunities to grow deposits, you know, you see what we've been able to do with the private bank and we've raised our target there. You know, our performance in the last rate tightening cycle has been better than average and we've seen our opportunities to grow low cost actually be better than what we're seeing in a lot of our industry peers. So the core retail franchise is performing extremely well. The idiosyncratic opportunities in New York Metro and private bank are adding on top of that. And our commercial business is driving DDA growth as well. So from a strategic standpoint, the deposit franchise is an incredibly solid foundation as we head into this potential easing cycle. I mean, I think when you look at betas, we did outperform our own expectations in the fourth quarter with betas around 50%. When we were originally thinking around 40%, based on the rate outlook, we expect that betas can continue to increase. So we went with the earlier beta is we did get out of the gate pretty quickly and I think later, our opportunity to grow beta from here, we're going to end up seeing our betas get to low to mid-50%s, maybe by the time you get to a terminal 4%, so that you can do the math there on what the sequential betas look like, but feeling incredibly confident in the underpinning of the NIM trajectory given the deposit franchise.

Yes, maybe ask Brendan to comment a little bit about deposits.

Thank you for the question, Erika. I want to make a brief point about private deposits and then discuss core retail deposits. Our low-cost deposits are consistently around 40%, so despite strong growth, the quality of our deposit book has remained stable and beneficial to Citizens as a whole. While we anticipate a slight pullback, we expect the positive mix to continue being robust throughout 2025. This growth will enhance both the quantity and quality of our overall franchise, which is encouraging. Regarding the retail book, I've mentioned previously that the full-year performance was very impressive compared to our peers based on the benchmarks we monitor. We estimate that we are approximately 150 basis points better than the peer average in low-cost deposits, primarily driven by DDA. Our DDA book saw outflows stabilize around August and September, and we experienced modest growth in the latter half of Q4, including a significant increase during that period. The strength in this area remains solid. We believe we ranked first among regional banks in retail banking core DDA growth for the full year of 2024 and we anticipate continuing to outperform our peers in low-cost deposit performance. Additionally, we have successfully managed our CD book with lower yields and high retention. In Q4, around $5.5 billion in retail CDs turned over with a retention rate exceeding 90%. The new CDs are yielding approximately 100 basis points better. Looking ahead to the first half of the year, we have about $14 billion in retail CDs that will also roll over, providing us with additional capacity to lower those yields. We expect to retain most of these balances, mainly as deposits, with some flowing into our wealth business and managed money in AUM. This gives us considerable flexibility for managing deposit yields in the CD book during the first half of the year.

Great.

Great. That's helpful. And just secondly, just a quick follow-up, and I just wanted to ask a bigger question of Bruce. One, John, given all those elements and the fact that you're entering at 2.87% for the year and you have a 3% net interest margin guide for the full-year, does that mean the exit is somewhere between 3% to 3.10%? And if so, Bruce, that tees you up for a very strong year, not just mechanically but strategically. I think the question that I was getting this morning is where are we in terms of the investment horizon with regard to the private bank and the private wealth initiative? In other words, you're setting up for great NII growth in 2026 and investors are wondering if you're going to continue to front load some of the investment spend in the wealth and private bank initiative?

Yes. So just to your favorite question, exit rate on NIM, I would bump that up a little bit and say probably more like 3.05% to 3.10%. So that's that. Just in terms of how we think about the private bank, we've launched this back in the middle of ’23. And it's been a tremendous effort to get folks in place and support them appropriately and have them transition in customers. And it's been a really great success story, certainly not the finished article, more to do to get to White Glove Service, but feeling good about the trajectory that we're on. I want to just make it clear, though, that we're very committed to delivering our financial commitments on this business. We want to demonstrate that it is a profitable business that can deliver attractive returns and we're running it a bit differently than the way it ran at First Republic. So we have some guardrails around the kind of nature of the business we want to take on and the spreads we hope to achieve etc., etc. Over, you know, one thing that we wanted to deliver this year was to be profitable in the fourth quarter. We said we'd be profitable in the second half of the year. We got to that in August. We had enough headroom that we felt confident that we could add another team in Southern California. As you know, Erika, when you bring in these private banking teams, they show up and they're all expenses initially, and then over time they transition in customers, and then the lines cross and they become profitable. So we still delivered a profitable fourth quarter, about a $0.01 of EPS. And so when we look at next year, depending on how fast that business is growing if we're hitting our targets, there may be opportunities to add additional teams, while still delivering the profitability of the 5% accretive to the bottom line. And by the way, that translates, now we're starting to get up towards that 20% ROTCE target for the business already by the end of next year. So we're keeping those guardrails in place as we grow the business. But you know, it's, there's such a big opportunity there. There's some great people out there who want to join the platform that we have to be thinking about and how to fill the void in the market and really build a great franchise. So I think we have that balance right and you can expect us to be disciplined in how we approach that and I'd like to see if we're running faster than projected that we're going to be leaning in and adding some additional teams. The wealth teams typically are accretive right from the get-go. So those we can keep doing throughout the year. It's more kind of the private banking locations, PBOs, and additional teams that we just need to fit into the overall financial dynamic that we're trying to deliver.

Very helpful. Thank you.

Good morning. Just on the timing of the ROTCE targets that you laid out, medium term, is that implied for 2027 or just on the liquidity on that?

And which targets, the MTO, the…

Sorry, could you clarify the timing for the medium-term target of 16% to 18%?

Yes, well, I think the medium term to us is by 2027 and, you know, we'll be on an upwards arc through ‘25 and ‘26 in order to get to that destination. So I don't necessarily want to put a pin in it as to whether we could get there in ‘26. There's possible scenarios that that could happen, but certainly by ‘27 we feel quite confident that we'll be there, Matt.

Okay. And then you laid out the waterfall in terms of how you get there, and just to clarify, the operating leverage of 1.5% this year, obviously there's a nice improvement in that in the next couple of years to support that ROTCE level, right?

Yes. I think clearly as we continue to see the benefit of the kind of swap runoff and non-core runoff and the NIM lift, that really juices your positive operating leverage. And that, there's a big, you know, there's some contribution from that in ‘25, but it actually accelerates in ‘26. And so we would expect positive operating leverage to be even more in 2026.

Okay, thank you.

Okay.

Hey Bruce. Hi John. How are you?

Hi, good.

Bruce, can we take a step back for a moment? Obviously, we have a new administration coming in, and we're going to get a number of new heads of the different regulatory agencies. Maybe the most important change coming from the Vice Chair of safety and soundness at the Fed, with Barr stepping down about two weeks ago. When you look at it, how are you kind of thinking about what can change to the benefit for not just Citizens for the banking industry? What are you looking or hoping for that these new leaders can come in and really enable the banking industry to the Treasury Secretary nominee in his testimony get the banks more involved in the U.S. economy?

Yes. Well, I think we've started to make some headway already on that this year, Gerard, as some of the proposals that were a response to what happened in 2023 seem to be kind of overdone, overcooked in terms of, you know, changes to capital liquidity and funding frameworks that I think the industry pushed back and thought that they needed to be dialed back. And we were starting to make progress on that in any event. So I do think like putting that to bed and coming up with what are the final Basel III capital rules, what are we going to do with liquidity, what are we going to do with funding, and making sure that tailoring remains central to how the framework is set. That's kind of job one on the prudential side. I would say the other benefits could be just a refreshed look at supervision. There's a lot of folks who work really hard and we get really good advice and input from the supervisors, but sometimes things get overcooked a bit and you lose the forest for the trees. So just kind of making sure that, that is focused at the right level and trees is up to, have a little more flexibility in how we operate. That could be positive as well. And I'd say some of the pressure on fees that we've seen come out of the CFPB, they're not always net beneficial. They may make good headlines, but squeezing a balloon and you close down this and then the banks have to make a return, so they have to charge somewhere else. And so just having a, kind of, a more insightful view as to how to allow banks to operate with well-disclosed fees that actually benefit their customers, as opposed to constantly pushing on that. That would also be helpful. And then I'd say last thing, there's probably a need for more consolidation in the industry, particularly at the smaller end of the spectrum. And so kind of taking the sand out of the gears on that and allowing that to take place with more certainty, I think that would also benefit the industry. So I think a number of all that should allow banks to continue to have the capital to lean in, support economic growth. I think we've done a good job of that, and we want to continue to be able to do that.

Just quickly, in what you just said, Bruce, consolidation at the smaller end of the spectrum, how do you define smaller end? $10 billion in less asset-sized banks or something smaller?

Yes, I don't know where to draw that line, but certainly, you know, I'd say banks that are even in the $25 to $50 category just have a lot of investing to do to keep up with technology changes, business model going digital, cyber defenses, a lot of regulation. And so I just think there's a lot of great banks in that size category, but ultimately I think there'll be some, who feel that they can gain some benefits from scale. And so I think if the framework were more certain that you'd start to see consolidation all the way through from the very smallest banks, maybe up to those smaller regionals.

Great. And then as a follow-up question, can you guys, you give us very good detail on your commercial real estate portfolio and how you're working through the issues that the industry confronts on commercial real estate office in particular. Can you give us an update on using the baseball vernacular? What inning do you think we're in, in getting through this kind of pig in the python situation in commercial real estate and specifically office?

Yes, I'm going to start and turn it over to Don, but I'd say when we saw this happening, it kind of kicked off in the early part of ‘23 and we said this is a multi-year process to kind of work this out just based on the nature of the terms of the leases and kind of return to office dynamics, etc., that this was going to take a lot of play out. And so we've seen that consistently through the rest of ‘23 through ‘24. I think looking into ‘25 will still be in workout mode, but I think we're probably past the midpoint at this point, so maybe middle innings of the game and hopefully you know we see that start to really drop off as we exit ‘25. But I'll leave it over to Don.

Yes, Gerard, I think that's right. I'll channel my Bob Uecker, since we're memorializing him and you're analogizing baseball. But I think the good news on the real estate side, as Bruce said, we still have kind of ‘25 to work through. We are seeing almost no incremental deterioration based on the entirety of the portfolio over the last year or so. So everything like we've identified as problematic, needing to go through the workout cycle, estimation of losses is pretty much playing out as we expected. And we are getting toward the back end, as Bruce said, in ‘25. The good news is across the board in the real estate complex is liquidity is really coming back. And we're seeing, you know, this not necessarily in the office portfolio, but in the rest of the real estate portfolio. And that can ripple over as we get into later portions of ’25. So we're seeing the CMBS market very active, we're seeing the life companies very active, we're getting taken out of criticized assets at par, you know, in the non-office space, but in the multifamily space. So there are a lot of kind of encouraging signs that we're seeing across the board. And I think as John said in his remarks, we're seeing no new migration into our workout team. So there's a lot to be a little bit more optimistic about. We've got a ways to go to work out. And interestingly, a lot of the sponsors think that there's some, you know, brightness at the end of the tunnel. So they're dribbling in cash to keep the properties alive, because they think there might be an opportunity down the road. So it's elongating the workout cycle a little bit more than past cycles. But I think we feel like we have a really good handle on it and it's trending reasonably consistent with lower expectations.

And John, you have a stat. So the overall criticized assets came down sharply in the fourth quarter led by the drop in CRE.

Exactly, yes, criticized levels down significantly. And overall, actually overall criticized is down 17% led by a reduction in general office, so that's great news.

That was in the order of like 30%.

Yes, exactly, we got that. And Don mentioned inflows to outflows have really flipped around rather than inflows exceeding outflows. That's flipped around in the fourth quarter significantly. So inflows slow to a trickle and then upgrades outpace all of that in the fourth quarter. So turning the corner in the game back to the imagery was nice to see in 4Q.

Appreciate all the color. Thank you.

Sure.

Hi. Good morning. I wanted to ask about the belly of the curve. How much of an impact does that have on both the asset and the liability side of the balance sheet? So I'm thinking from an asset side it gives you some more benefit from fixed asset repricing, but on the liability side maybe it makes it a little bit harder to drop those CD rates further. Is that something you guys are focusing on? You know, does it, is there a risk that if the belly of the curve keeps moving higher, could that weigh on some of those deposit betas from here?

Yes, I'll go ahead. I appreciate the question. I'll comment on that. I mean, I'd broadly just make the point that we're asset sensitive, and we're basically asset sensitive across all of the key rates across the curve for the most part. When you look at the belly of the curve, that's actually driving our fixed asset repricing and when you see our net interest margin progression through time, that's consistently a positive. And so on a net basis, if the belly of the curve is rising, we're net beneficiaries of that. You know, on the funding side, when you think about CDs, you know, that out of the gate that's typically in a less than a one-year term, that can turn over. But net-net, our asset repricing would overcome even if the belly of the curve was consistently higher, that would be a net positive for us through time. And you can see that in our net interest margin. We've built in the curve that we see basically out the window through the medium term progression. And the fixed-rate asset repricing is 15 to 20 basis points. You know, by the time you get to 2027 and that's consistently building through ‘25 into ‘26 and ‘27. So that's a net positive. I think the only place that our funding comes into play on the belly is maybe in the senior debt space. And we're really well positioned there. We're north of 4% of our WA. And so that's not a huge driver for us. But again, the asset sensitivity, higher rates basically is a net positive for us.

Yes, I'm just thinking with you guys were actually ahead of the curve when the Fed was cutting rates and you were able to drop those deposit rates sooner. So I'm just thinking now that there's not as many rate cuts in the forward curve and the belly of the curve is higher, whether that's weighing on deposit costs at all?

Yes, as I mentioned, we expect deposit betas to increase to the low to mid-50s from the current 50%. This projection is based on forecasts that include rate cuts in the second and fourth quarters. However, if there are no cuts in 2025, our deposit betas may stabilize, but this would still be beneficial for us given our net floating position. The increases in loan yields would compensate for potentially lower deposit betas due to our asset sensitivity. Additionally, our asset sensitivity is expected to grow in 2025, 2026, and 2027. Overall, a higher interest rate environment is advantageous for our net interest margin because loan yields will offset the effects on deposit betas, as we remain asset sensitive.

Got it. Perfect. Thank you. And if I can just ask a follow-up on loan growth. You're looking for mid-single-digit spot loan growth, excluding non-core loans. Can you talk about the catalyst there? And also like where do you see loan growth coming from? Is it sponsors? Is it traditional middle market? Is it both?

I will begin, and then John can provide additional details. We have been disciplined in ensuring that our loan capital deployment generates good returns. We have not rushed into any actions; rather, we have optimized our balance sheet and exited several relationships. In the commercial sector, we are working to gradually reduce our commercial real estate book and have a non-core setup to manage asset reductions. We are looking for a catalyst to resume loan growth, which we desire. The private bank is expected to contribute around $1 billion each quarter to meet year-end targets. This growth is specific to us, as we have a startup business that is performing well, bringing in both loans and deposits. Without this growth, our current loan growth would decrease from mid-single digits to low-single digits. Therefore, we do not expect a strong rebound in loan growth just yet. We anticipate a subdued environment continuing through the first half of the year, with an improvement expected in the second half for the commercial sector. We noticed a significant drop in line utilization in the fourth quarter, especially in subscription lines. There was no substantial new funding from private equity during that time, and we do not foresee an immediate increase in 2025 just because the calendar changed. However, we expect that to eventually happen, leading to benefits such as higher capital markets fees and loan growth. We are being cautious about how much we factor this into our forward forecasts. In the consumer sector, we have a few areas that continue to grow, such as mortgage, e-lock, and our card business, but the growth is moderate. Overall, we see some areas declining, steady performance in private banking, a resurgence in commercial in the second half, and a lower, steady growth rate in consumer. John, do you have anything to add?

No, I just had another point or two to emphasize. I agree with that. We said mid-single-digits, ex-non-core. If you think about a three legs of the stool, you hit all three. But if you private bank on its trajectory really is a huge driver, and is the largest driver getting us to that mid-single-digits. But if you look at it excluding the private bank and excluding non-core, we would be in a low-single-digits trajectory as Bruce mentioned. And when the consumer legacy is half of that and the other half of it is in commercial. Consumer legacy, you mentioned, Bruce, and in commercial, subscription and M&A activities likely to pick up.

In expansion markets and middle market.

Exactly. So we've got expansion markets contributing as we see in 2025. The other important part is subscription line utilization is about as low as we've ever seen it. It's in the low-40s, typically in the mid-50s. And so we see some of that partial, we see some of that coming back, not all the way back. Fund finance, you know, that we've been successful at in the past will contribute, as well as asset-backed. And then, you know, I mean, I would just say that, you know, all of that put together keeps us in a good spot. And as we mentioned earlier, to the extent that this doesn't happen, as we mentioned earlier, we've been able to navigate a lower loan growth environment in ’24 quite well. We would run that playbook back, and you'd see more buybacks out of us with a stock price that's attractive as we see it below intrinsic value. And we'd at the margin likely deliver even better deposit performance, if that were to be the case. So I think we've got some nice optionality in 2025 to stay on our trajectory.

Yes, I just want to emphasize that our net interest income guidance remains unchanged, as you observed in the fourth quarter, and is primarily driven by net interest margin expansion. It does not rely heavily on volume growth to achieve this. Additionally, as John mentioned, if volume growth does not materialize, we have alternative strategies such as share repurchases, which would allow us to be more selective with our deposit pricing. Overall, we remain confident in our net interest income guidance for the coming year.

That's really helpful. Appreciate the detail on here. Thank you.

Okay, is that it? I guess that's it for the questions. We've got a lot of banks reporting today, so I hope everybody got a good night's sleep last night and makes it through the day. So thanks again for dialing in today. We appreciate your interest and support. Have a great day. Take care.