Citizens Financial Group Inc (CFG) — Q1 2025 Earnings Call Transcript

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

Thank you, Kristin, and good morning, everyone. Thanks for joining our call today. We announced financial results today that were in line with our expectations. Highlights include: NIM expansion of 3 basis points to 2.90%; core loan growth of 1%; resilience in our fee categories despite some softness in capital markets, given market uncertainty; and credit trends remaining favorable, along with continued share repurchases. Our balance sheet remains very strong with CET1 ratio of 10.6%, LDR of 77.5%, virtually no Federal Home Loan Bank borrowings and a strong credit allowance position. During the quarter, we entered into an agreement to sell $1.9 billion in purchased student loans, which reside in non-core, $200 million of the portfolio was sold in Q1 with the balance to be settled ratably over the next three quarters. We will use the proceeds to pay down high-cost funding, purchase low-risk-weight securities and repurchase shares. The transaction will be accretive to NIM, EPS, and ROTCE. We had already included the impact in our full year guide. During the quarter, we also issued $750 million in senior debt, further bolstering our funding base. We executed well on our strategic initiatives during the quarter, the Private Bank continued to see excellent growth, reaching $8.7 billion in deposits and $5.2 billion in AUM. We added Private Wealth teams in Florida and Southern California during the quarter, and another one today in New Jersey. Our New York City Metro, private capital, and payments initiatives also saw continued progress. As we look forward, there has clearly been an increase in uncertainty in the macro-environment given the policy decisions and rollout emanating from Washington. This has caused many market participants to hit pause on investments or deal activity. On a positive note, our corporate and consumer borrowers are generally in good shape and are in position to weather these challenges. The basis for our full year guide had anticipated some choppiness in the first half of the year tied to the rollout of tariffs and downsizing of the federal government. Our view held that as the lower tax, deregulation and pro-energy agenda kicked in later in the year, we would see a pickup in loan demand and deal activity in the second half. So, with respect to an update to our full year guide, at this point, we reaffirm our EPS estimate, though there could well be some puts and takes. Events in the Q2 will help clarify whether the second half outlook will solidify as we had planned. On our guide slide in our presentation, we call out some risks that affect both us and the industry at large, given the environment, and we also show some potential offsets to the full year guide. The main risk associated with continued economic uncertainty and a slowing economy, include a pushout in capital markets fees, slower loan growth, and higher credit provision. Potential offsets to these possible impacts include even better performance on funding costs, greater share repurchases, and further efforts on cost transformation. It's worth noting that there is a significant amount of pent-up demand around M&A activity. We are working on a record number and dollar value of transactions, and are hopeful that they get done as uncertainty subsides. So, while it's still early to make a call as to how the environment plays out, we remain focused on pulling the levers we can to offset any macro headwinds as we did in 2024 in meeting our initial year guide. And as we look to the medium-term, we remain confident in our NIM trajectory, which powers our ROTCE improvement, and in our ability to execute on our key strategic initiatives like the Private Bank. In short, we feel good about our positioning overall from a strategic business and financial standpoint. We will stay focused on execution and the things we can control as we continue our efforts towards building a distinctive great bank. With that, let me turn it over to John.

Thanks, Bruce, and good morning, everyone. As Bruce indicated, we delivered first quarter results, which were broadly in line with our expectations and reflected typical seasonal impacts. Referencing Slides 5 and 6, we delivered EPS of $0.77 for the first quarter with ROTCE of 9.6%. Net interest income came in at the better end of our expectations for the quarter as we performed well on our margin, which continued to benefit from the time-based decline of non-core and terminated swaps, along with strong deposit cost performance. Fees were up nicely year-over-year, and linked-quarter performance reflects the impact of seasonality and market uncertainty on capital markets. Wealth fees were a record for the quarter as we continue to build out the Private Bank. Expenses were managed tightly, including the usual seasonality in salaries and benefits. Credit came in as we expected, and we maintained a strong reserve coverage level. During the quarter, we entered into an agreement to sell approximately $1.9 billion of non-core education loans. This acceleration in non-core runoff will be accretive to NIM, EPS and ROTCE, with the redeployment of the freed-up capital and liquidity as the sale settles over the course of the year. We continue to execute well against our strategic initiatives. Notably, the Private Bank continues to steadily grow its profitability, contributing $0.04 to EPS and finishing the first quarter with $8.7 billion of deposits. Also, we continue to make good progress in New York Metro, and our TOP 10 program is well underway. We ended the quarter in a very strong balance sheet position with CET1 at 10.64% or 9.1% adjusted for the AOCI opt-out removal, a pro-forma Category I LCR of 122%, and an ACL coverage ratio of 1.61%. This includes a robust 12.3% coverage for general office. We also executed $200 million in stock buybacks during the quarter, taking advantage of our strong capital position. Next, I'll talk through the first quarter results in more detail, starting with net interest income on Slide 7. Net interest income decreased 1.5% linked-quarter, driven by the day count impact of about $28 million and slightly lower interest-earning assets, which was partially offset by the benefit of higher net interest margin. As you can see from the NIM walk at the bottom of the slide, our margin was up 3 basis points to 2.9%, driven primarily by the time-based benefits of non-core runoff and reduced drag from terminated swaps and the benefit of improved deposit costs, partially offset by the net impact of rate-driven impacts on the balance sheet. We continue to execute our down-rate playbook in the deposit portfolio. Our interest-bearing deposit costs decreased 18 basis points while maintaining the mix of non-interest-bearing deposits at 21%, stable with the prior quarter. Our cumulative interest-bearing deposit down-beta improved to 53% in the first quarter. Moving to Slide 8, noninterest income is down 3.5% linked-quarter, with seasonal impacts in capital markets and card fees. Capital markets saw lower M&A and loan syndication activity given seasonality and the impact of uncertain market conditions pushing M&A deals out. Debt and equity underwriting improved coming off a slower fourth quarter. Even in a quarter impacted by seasonality and market volatility, we managed to perform well in middle-market-sponsored bookrunner deals, ranking number three by volume. Our deal pipelines across M&A and DCM remained very strong despite market uncertainty. In fact, our M&A pipeline is at all-time highs in terms of number and value of transactions given pent-up demand. We are hopeful these deals get done as market uncertainty subsides. The wealth business delivered a solid quarter with increased annuity sales activity. We also continued to see positive momentum in fee-based AUM growth from the Private Bank. Our global markets business was up slightly this quarter with increased client hedging activity in FX and energy-related commodities. On Slide 9, expenses were managed tightly, up 1.7% linked-quarter, primarily reflecting seasonality in salaries and benefits. Our latest TOP program is underway, and this gives us the capacity to self-fund our growth initiatives. On Slide 10, period-end and average loans were down slightly. This reflects the non-core transaction of $1.9 billion as well as auto runoff of $700 million. Excluding non-core, loans were up approximately 1% on a period-end basis. The Private Bank continued to make good progress with period-end loans up about $550 million to $3.7 billion at the end of the quarter. Commercial loans were up slightly with a modest increase in line utilization as some of our corporate banking clients drew down on their lines to finance inventory builds ahead of tariffs. We also saw a modest increase in capital call line usage given M&A activity in our sponsor base. And core retail loans grew slightly, driven by home equity and mortgage. Next, on Slides 11 and 12, we continue to do a good job on deposits, growing on a spot basis, primarily in low-cost categories in what is typically a seasonally down quarter. Period-end deposits were up approximately $3 billion or 2%, driven primarily by low-cost growth in the Private Bank and Consumer, partially offset by a seasonal decrease in Commercial. The Private Bank continues to add customers and grow nicely, with period-end deposits increasing by about $1.7 billion to $8.7 billion at the end of the first quarter. Our retail franchise grew deposits in low-cost categories this quarter, and we continue to maintain strong CD retention rates even as we reduced yields. Stable retail deposits are 68% of our total deposits, which compares to a peer average of about 55%. This was a big driver of our improving deposit costs this quarter as our deposit franchise continues to perform well in a competitive environment. Our interest-bearing deposit costs are down 18 basis points linked-quarter, translating to a 53% cumulative down-beta. We continue to maintain a robust level of liquidity with a pro-forma LCR of 122%, significantly above the Category I Bank requirement. Moving to credit on Slide 13. Net charge-offs of 58 basis points for the quarter included a 7-basis-point impact from the non-core transaction. Excluding this impact, net charge-offs were 51 basis points, which was down modestly from 53 basis points in the prior quarter, in line with our expectations. Commercial charge-offs were down modestly, driven by a sequential decline in general office. Retail charge-offs were broadly stable, excluding the impact of the non-core transaction. Of note, non-accrual loans were down 5% linked-quarter, reflecting a decline in commercial as we continue to work out general office loans. Retail non-accrual loans also decreased as a result of the non-core transaction and continued runoff of the auto portfolio. Turning to the allowance for credit losses on Slide 14. The allowance was relatively stable at 1.61% this quarter as portfolio mix continues to improve due to back-book runoff and lower loss-content, front-book originations, offset by a slightly more conservative loss forecast. The economic forecast supporting the allowance reflects a mild recession similar to last quarter and macro impacts from tariffs. The reserve for the $2.86 billion general office portfolio is $351 million, which represents a coverage of 12.3%, broadly stable with the prior quarter. Note that the cumulative charge-offs plus the current reserve translates to an expected loss rate of about 20% against the March 2023 loan balance when industry losses commenced. Moving to Slide 15, we have maintained excellent balance sheet strength. Our CET1 ratio is 10.64%. Adjusting for the AOCI opt-out removal, our CET1 ratio was stable at 9.1%. Given our strong capital position, we repurchased $200 million in common shares, and including dividends, we returned a total of $386 million to shareholders in the first quarter. Turning to Slide 16, we provide some details on the non-core portfolio. As I mentioned earlier, we took the opportunity to accelerate the rundown of the portfolio with an agreement to sell approximately $1.9 billion of education loans. We recognized a $25 million charge-off associated with this portfolio that was covered by a pre-existing allowance. $200 million of the sale settled in the first quarter with the remainder scheduled to settle ratably each quarter through 2025. We expect to use the proceeds to pay down high-cost funding, invest in low-risk investment securities, and repurchase shares. With this redeployment, the transaction will be accretive to NIM, EPS and ROTCE. Moving to Slide 17, we are well-positioned to drive strong performance over the medium term with our overall three-part strategy: a transformed consumer bank, the best-positioned commercial bank among our regional peers, and our aspiration to build the premier bank-owned private bank and private wealth franchise. We continue to make excellent progress on the Private Bank. We delivered our strongest deposit growth quarter so far, adding $1.7 billion of deposits to end the first quarter at $8.7 billion, and the mix continues to be very attractive with slightly over 40% in noninterest-bearing. We also ended the quarter with $3.7 billion in loans and $5.2 billion in AUM. With a $0.04 contribution from the business in the first quarter, we are tracking well against our 5% accretion estimate to Citizen's bottom line in 2025 and to deliver a 20% to 24% return on equity. Moving to Slide 18, we provide our guide for the second quarter. We expect net interest income to be up approximately 3%, driven by an improvement in net interest margin of approximately 5 basis points and day count. This pickup in net interest margin is primarily attributable to the time-based benefits of non-core runoff and reduced drag from terminated swaps. Noninterest income is expected to be up mid- to high-single-digits, led by capital markets, with some risk if market uncertainty persists. FX and derivatives and wealth should also provide a lift for the quarter. We are projecting expenses to be broadly stable. Credit trends are expected to improve slightly from the first quarter charge-off level, excluding the non-core transaction. And we should end the second quarter with CET1 in the range of 10.5% to 10.75%, including share repurchases of approximately $200 million, which could increase depending on loan growth. Currently, our full year outlook remains broadly in line with the guide we provided in January, which contemplated a pickup in business activity in the second half of the year. However, if the current challenges in the external environment persists, there could be select risks that impact us as well as the broader industry. Persistent market volatility could impact capital markets revenue and anticipated loan growth in the second half of the year. While the assumptions incorporated in our current reserve are conservative and our corporate and consumer borrowers are broadly in good shape, a heightened likelihood of a deeper recession could lead to higher provision. However, if these risks arise, we have potential offsets we can leverage. Lower loan growth could facilitate additional share repurchases as well as the opportunity to further lower deposit costs as we continue executing our deposit pricing playbook. We would also take the opportunity to manage expenses down through streamlining our operations and further cost transformation. Looking out in the medium-term, we see a clear path to achieving our 16% to 18% ROTCE target. Expanding our net interest margin is an important driver, and we project to be 3.05% to 3.10% in 4Q '25, 3.15% to 3.30% in 4Q '26, and in the 3.25% to 3.50% range in 2027. Slide 21 in our appendix provides some incremental details on our net interest margin progression to 2027. This, combined with the impact of successful execution of our strategic initiatives, should drive ROTCE meaningfully higher by 2027. To wrap up, we delivered Q1 results that were in line with our expectations, highlighted by growth in net interest margin. While the market uncertainty has impacted capital markets revenues, deal backlogs are at all-time highs. We accelerated the runoff of non-core with the education loan sale, which will be accretive to NIM, EPS and ROTCE. We ended the quarter with strong capital, liquidity and reserves, which puts us in an excellent position to support our clients while navigating market uncertainty. And we continue to drive forward our strategic initiatives, with the Private Bank progression particularly noteworthy. With that, I'll hand it back over to Bruce.

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

Good morning. Hi,

Good morning.

Regarding the growth on the balance sheet, could you provide more details about loan demand and what you're observing in the current environment? Are there any trends in line utilization? Are you noticing a decline in the pipeline, and is there any pre-tariff inventory buildup that may have contributed to recent growth, which could be more of a pull-forward effect rather than reflecting ongoing expectations? Any insights you can share would be appreciated. Thank you.

I will begin and others will add their input. Starting with commercial, we have observed increases in line utilization, which rose a few percentage points at the end of the first quarter compared to the fourth quarter. This change was influenced by several factors. While we believe tariffs play a role, mergers and acquisitions, along with working capital considerations, are also contributing. This is evident in both our corporate banking and sponsor segments, as well as in the subscription line area within commercial. We are noticing positive trends in this area. Additionally, considering the anticipated rise in business activity during the second half of the year, we expect this trend to persist if uncertainty decreases. On the consumer side, we are experiencing strong demand in the residential and HELOC sectors. Given the current interest rate environment, HELOC has particularly stood out as a success for us. Lastly, the Private Bank continues to show growth. Therefore, we see all three segments contributing to our loan growth outlook. I will pause here to allow for any further commentary.

Yeah. I would affirm what John said. It's Don. I think as we talk to customers, we're hearing a little bit of expansion desire. They've gone a little bit to the sidelines right now, just given what's going on with the uncertainty in the environment. The other thing, John, that's been going on really powerfully in the first quarter is we've gotten disintermediated by the bond markets. We had an extremely strong bond quarter, and some of that came off of our balance sheet as clients accessed particularly the high-yield market. I think that probably is going to reverse, given where rates are right now. So that will be a tailwind behind us in terms of loan growth. I don't know how much of it is tariffs in terms of the line draws. I think it's just general working capital build. People are running their businesses really tightly. So, I don't think we've seen the tariff impact yet, and that could be a tailwind also. And then, we'll have to see on the capital call lines, that's a pretty big part of our balance sheet, not huge, but it's about a $10 billion exposure overall, of which, about half is drawn, and that's running at relatively low utilization. So, to the extent we get some of the deal activity kicking in, particularly in the second half, that should grow nicely.

On the consumer side, if we set aside our non-core rundown, which decreased by about $1 billion from the previous quarter, the underlying business shows decent growth at 1% year-over-year, primarily driven by residential and secured lending. The portfolio is composed of 75% secured loans, and we are seeing very high credit quality with strong FICOs and relatively low loan-to-value ratios. Our Home Equity Lines of Credit are up 9% year-over-year, and we believe we are among the leaders in net growth compared to our peers, thanks to innovative investments in analytics and customer experience which have given us a competitive edge. We plan to leverage this advantage due to the high-quality nature of our customers and anticipate maintaining this growth throughout the year. In mortgages, despite high interest rates, the portfolio growth is reasonable at 3% year-over-year. The customer quality remains high with very low prepayment speeds due to minimal refinancing activity, resulting in net positive growth. The other segments, student loans and credit cards, have remained flat, with student loans affected by higher rates and the credit card segment being intentionally managed as we prepare to launch new products mid-year. We expect to see higher growth returns in the second half of the year, contingent upon economic conditions. Overall, we are optimistic about the underlying loan demand for the latter half of the year. In the Private Bank, we grew approximately $500 million from the previous quarter. There is strong demand from this customer base, and we are seeing a shift towards consumer lending, which now constitutes 30% of the book compared to the low-20% range a year ago. This is a positive indicator. We expect steady growth and balance in the portfolio, along with an increase in demand. Our mortgage originations in the Private Bank are now double what they were at the same time last year, despite similar interest rates, indicating robust activity. We anticipate acceleration in growth rates for the Private Bank in the second half of the year.

Thank you for the detailed information. I have a quick follow-up question regarding capital. I understand you're currently at approximately 10.6% CET1 and you’re expecting around $200 million for buybacks, similar to last quarter. However, I recall both Bruce and John mentioning that in the event of weaker loan growth and a softer macro environment, there could be higher buybacks. Could you clarify how you would approach this? If we do encounter weaker loan growth in a declining economy, would you potentially take a more cautious stance and conserve more capital instead of increasing buybacks? I’d appreciate your insights on that trade-off. Thank you.

Yeah. I'm going to start there. I mean, we're committed to that range that we articulated at 10.50% to 10.75%. If there's less RWA, then, we would feel that, opportunistically, a willingness to step up on the buyback side of things. And the reason for that is a couple-fold. I think the starting point on capital is very strong, both before and after AOCI. So, you look at our AOCI haircut, we're still north of 9%, which is quite a good number. We would also have to look at what the uncertainty would hold. And if you look at our reserve position that we've already set aside, we actually have a recessionary scenario already contemplated in our provision and loan loss reserve situation. So, from that standpoint, I think that we could see a number of scenarios throughout 2025 that would be consistent with continuing to be able to upside buybacks in the face of lower loan growth.

Yeah. And what I would add to that is if you go back to 2024, we also had a pickup in growth that would build over the course of the year. When that didn't happen, we basically used the freed-up capital to buy back our shares and we thought our shares were very attractive. And I'd say given kind of the crack in bank stock prices since the macro uncertainty and the rollout of the tariffs, we still feel that the stock is cheap relative to inherent value. And so, it presents a real opportunity to offset any impact that would hit in the P&L from slower loan growth if that happened through buying back our stock and buying it back at very attractive pricing.

Yeah. And just hasten to add, as we keep growing our tangible book value per share, the earn-backs on buying back stock at these levels is well under a year. And so, it's pretty attractive and so we would feel good for all those reasons stated.

Great. Okay. Thank you.

Thanks. Good morning. Guys, I wonder if you could talk through that push and pull on the capital markets outlook and the fee guide. So, I guess, first of all, the record pipeline, what's your level of confidence in terms of closing those transactions? And I guess, secondly, if that capital markets embedded expectation doesn't pull through, how do we understand like the comp ratio offset and the magnitude of flex that you can have to keep PPNR close to in line? Thanks.

Yeah. So, I'll start and then maybe John or Don can follow on. But again, I think the exciting aspect of this from our standpoint is that we've, over time, built out really strong capital markets capability and a very broad M&A capability that covers middle-market companies through mid-corporate and specializes in industry verticals that we think are going to be active. And so, the fact that there's pent-up demand from sponsors to do deals, there's industry sectors that are very active, for example, data centers, where we have a really strong group of folks focusing there. I'd say it's heartening to see that we've got record numbers of engagements. Our people are working very actively, and on a probability assessment, none of these deals have dropped, and I think we're just waiting to see some of this uncertainty subside. So, we still feel optimistic that things will settle down here a little bit and that we should be able to pull that through. What I would say if that is not the case and then things do push out a bit, there's other things to consider. One is that we're broadly diversified. So, we've had the ability to if one area doesn't fire on all cylinders like if M&A is soft, and oftentimes our financing, our syndicated loan capability, our debt underwriting will pick up and provide an offset. And then, the FX and interest rate derivatives and commodities hedging risk management business also is seeing an uptick in activity, and depending on the circumstances that could provide an offset. So, the first line of defense is kind of diversity within the fees that could help offset any push out on M&A volumes. And then, secondly, there's obviously incentive compensation that would drop if the deals don't deliver. And then, just broader looking at the expense base, we're constantly working on ways to streamline our businesses and perfect how we're running the bank to make it more efficiently. So, I'd say that would be the broad playbook, but maybe for color on the revenues, Don, you might want to add anything there?

Yeah. No, I just echo a couple of things that Bruce just said. One is, I'm really encouraged by the diversity of the franchise and the people that we continue to add. Actually, we're continuing to hire really strong talent into some of our industry teams. So, that provides an ability to continue to transact in the market. I also want to remind people that a significant part of our M&A business in particular is mid-sized companies coming out of our core franchise. And they continue to have a really strong desire to sell and transact and a lot of those go into private equity. And the other thing I'd say is that the financing markets are generally pretty attractive, so we can get these things financed and they're not $10 billion deals. They're $100 million, $200 million, $300 million deals. So, they're eminently executable. One of the things that's been interesting is and you would ask the question of why are these things pushing, part of it's due to the de-staffing of the FTC and the SEC. So, it's just taking longer to get these transactions done. And I think the most important thing that Bruce said is we have not lost one mandate out of the pipeline. So, it's not as if these transactions are going away, they're just taking a little bit longer to execute. So, I'm super confident that we're going to be able to get these things across the finish line, whether it's the second quarter or the third quarter, we'll have to see, and if some of it will be volatility, but there's very little tariff dependency in any of these underlying deals. So, the big picture is we should generate the revenue and hopefully my bonuses aren't going to go down by year-end, but Bruce still do that to me as you have done in the past if that does happen.

John, anything to add?

I want to emphasize the point about diversity, particularly regarding expenses. In a situation like this, you'll see the direct offset you mentioned related to incentives, and we will also closely examine some discretionary expenses we discussed earlier. More generally, we believe that the story for net interest income has several positive factors contributing to our confidence in the guidance for 2025.

Thanks for all that.

Okay, Ken.

Good morning. Given the current volatility in interest rates, which seem to change daily, could you discuss what the ideal interest rate environment is for Citizens and the yield curve? Additionally, what kind of rate environment could potentially jeopardize the NIM outlook? Are there plans to reduce some of the asset sensitivity?

Yeah, good questions there. I mean, out the window, our asset sensitivity is plus or minus 1% to a plus or minus 100 basis point change in a gradual shift in the yield curves up or down over the next 12 months. So, we are slightly asset sensitive.

Close to neutral.

We are nearing a neutral position based on how the numbers are turning out. The trajectory of our net interest margin is largely independent of interest rates. The time-based benefits are the key drivers of our net margin both in the short term and over time. For instance, in the first quarter, we experienced about 5 basis points of time-based benefits. Due to slight asset sensitivity and seasonally lower deposits, we achieved 3 basis points of net interest margin growth in that quarter. Looking ahead to the second quarter, we anticipate another 5 basis points of time-based benefit alongside improved balance sheet trends. This momentum is expected to continue not only through 2025 but also into 2026 and 2027. In our presentation, we illustrate that by the fourth quarter of 2027, the cumulative time-based benefit will amount to 35 basis points. Adding this to the 2.90% we reported in the first quarter places us at the lower end of our expected range without factoring in interest rates. From there, we anticipate reaching a range of 3.25% to 3.50%. Additionally, fixed asset repricing, which relates more to long-term rates, shows that we have a turnover in the balance sheet due to the low-rate environment we experienced during the pandemic, contributing 15 to 20 basis points. Now, we can consider rates. We are well hedged with swaps through mid-2027, so we would perform slightly better if rates increase. A terminal rate around 3.50% would align well with our middle range, while rates at 4% would fit the upper end of about 3.50%. We can even manage with as low as 3% on Fed funds and maintain the low end of our range at 3.25%. Thus, we are comfortable with a broad spectrum of rate scenarios. We are well positioned, leaning towards improved performance over the next couple of years if rates rise. When considering inflation and stagflation scenarios, we have strategically positioned our balance sheet. Overall, it's important to keep in mind the numerous non-rate-related advantages that will support our recovery in net interest margin.

That's great. Thanks, John. If I could follow up on Ken's question, you mentioned the factors at play in this uncertain environment, but could you provide an update on the positive operating leverage for the full year compared to January's forecast of 1.50%? I understand there's a lot of uncertainty, but I'm curious about your thoughts on it.

We are reaffirming our outlook and believe that achieving around 1.50% is very attainable. A significant factor contributing to this is the net interest margin, which we expect to increase to between 3.05% and 3.10% by the end of the year. This suggests a year-over-year rise of about 15 basis points in net interest margin, which is quite substantial for our net interest income. Consequently, the projected 3% to 5% net interest income will play a major role in enhancing our positive operating leverage, and we are confident about this outlook. Additionally, we have previously discussed the variety within our capital markets and fee lines, noting that our pipelines are steady enough to meet our guidance, with options available if different scenarios arise.

So, I would add to that, in 2024, most banks, including ourselves, were very tight on expenses, and in 2025, we're inflating a little bit. So, the guide was for roughly 4% expense growth and that reflects the fact that there's lots of great things for us to invest in as we build out the franchise here. So, things like making sure we're adding to the Private Bank, we're adding private wealth teams, we're opening Private Bank offices, we're investing in AI and various projects, data analytics capability. There's our payments capability. So, there's things that we want to keep investing in to position us for that medium-term growth outlook that, in a tougher environment, we can throttle some of those things a little bit. But our preference is to not do that to keep investing and keep building. So, just kind of putting that in context, there are some levers to pull, preferences to keep going, make those investments for the future, but we can pull back a little bit if need be.

The other structural benefit that we do have as well on the Private Bank, keep in mind that the majority of that cost base was compensation guarantees. And so, as the team is productive and we have confidence in hitting our revenue outlook, that revenue is gobbling up existing expenses and compensation not necessarily adding to it. So, it's a natural operating leverage right there versus last year, which we have a lot of confidence to deliver the revenue outlook. So, that should be a structural advantage for us, too.

Thank you.

Hi, good morning. I mean, you have...

Good morning, Erika.

Thank you. You've alluded to this and how you've responded to all the questions, particularly the PPNR one, but as you know, the net interest income outlook is quite important. And as I pull up the slide from last quarter, it's set up 3% to 5%. So, if I think about affirming the exit NIM on Slide 21 and then the balance sheet seems to be fairly in line, at least average earning assets were in line this quarter. Unless we think that the balance sheet will shrink, it seems like that up 3% to 5% is still broadly in line, right, in terms of what you're affirming. So, just wanted to confirm that in terms of the full year look.

Yes, that's correct, Erika. It's John. The 3% to 5% range looks good. When considering net interest margin alone, we would reach the upper end of that range. However, we previously indicated in our guidance back in January that interest-earning assets might decline by about 1%, which positioned us in the middle of the range. There's some flexibility to consider. The relative value in the securities portfolio and the deposit flows, which are actually coming in slightly better than anticipated, provide another opportunity regarding interest-earning assets in the securities book that we will keep an eye on throughout the year. Overall, net interest margin trends are aligning with our expectations, and we feel optimistic about it, with additional strategies to explore in the securities portfolio if the relative value remains attractive and if deposit flows continue as they have. That’s how we view the 3% to 5% range.

Thank you. I have a two-part question regarding the reserve. First, what unemployment rate is your reserve anticipating? Second, John, could you explain the factors unique to Citizens concerning the non-core runoff? As we consider the possibility of a worsening unemployment baseline and the company's approach to the downside scenario, how does the $1.9 billion student loan sale relate to the runoff portfolio? Additionally, you've been addressing parts of the commercial real estate portfolio for some time now. Can you clarify these two factors as we evaluate the provision moving forward in light of the uncertain economic situation and the specific optimization of your loan mix?

Yes, I will address both topics, and others may add their insights as well. We have various scenarios applied to different segments of our portfolio. Our baseline scenario anticipates an unemployment rate of 5.1%, which affects a significant portion of our portfolio, particularly in commercial and industrial lending as well as retail. However, for the commercial real estate portfolio, that 5.1% rate is associated with a decline in GDP, indicating a mild recession. Therefore, much of our portfolio reflects this mild recession. In contrast, the commercial real estate book incorporates a more moderate to severe recession assumption, which raises the unemployment rate expectation above 5.1%. For instance, our general office portfolio reflects a severe recession scenario with an unemployment rate of 9.3% and a GDP decline of 4.4%. This illustrates that our overall unemployment assumption is indeed higher than 5.1%. This is why we believe that the uncertainty and concerns regarding a recession in 2025 are largely factored into our allowance. We will continue to monitor the situation and are tracking charge-off trends as they align with our expectations, which gives us confidence in our credit outlook.

John, you might know the number off the top of your head, but Erika, we are at about 1.61% for the allowance to loans, while the day one CECL was 1.42%.

On an adjusted basis.

If you adjust it down first for the investors deal and then for the actions we're taking in non-core, what is that number?

1.25% to 1.30%.

Approximately 1.25%. We believe that over time we have enhanced our focus on where we want to provide loans, specifically to strong relationships. In commercial lending, we have been shifting toward higher-quality segments, resulting in 80% of our commercial and industrial portfolio being equivalent to investment-grade. In the retail segment, 95% of our portfolio comprises super prime and high prime loans, with 78% of that being secured. Among homeowners, two-thirds of our borrowers are homeowners, who typically have better credit profiles. We have additional statistics available on Pages 24, 25, and 26. For our commercial real estate portfolio, we have already addressed much of the challenges, and we believe we are well-prepared for various scenarios that may arise throughout the year.

Regarding your question about the non-core rundown, I believe there are some connections to be made here. The balance sheet is flexible, and you can think of non-core alongside the Private Bank. We are allocating significant liquidity and capital to the non-core area while simultaneously growing in the Private Bank and commercial sectors. For the Private Bank, our year-end target for loans aligns with the accelerated rundown in non-core expected in 2025. Essentially, we are reducing exposure to lower-value assets in the non-core space while increasing our focus on high-value, customer-friendly risk-weighted assets in the Private Bank, commercial, and core retail divisions. Overall, everything is functioning very well and perhaps even more efficiently than we anticipated due to our strategic transactions.

When we set up non-core, that was roughly broad numbers $10 billion running down in the consumer runoff portfolio and $10 billion running up in the Private Bank. And by the way, the credit quality in the Private Bank, I mean, the group that came over from First Republic had virtually no credit losses, and so far, we've had no credit losses in that book. So, you can't say that will always be the case, but it's very, very high credit quality. So that alone is going to average down the net charge-off ratio through the cycle to something in the low- to mid-30s from something that had been kind of higher 30s to low 40s. So, Brendan, do you want to add anything here?

Yeah, just a couple of quick stats maybe just to build on your points. On private banking, we have zero customers that are in delinquency or criticized right now. So, to John's point, we're replacing non-core rundown with that quality of asset. The other thing to make note of on non-core, which is seasoned now and then rundown with no new originations coming through with auto, as the portfolio gets more seasoned, you have the dynamic of you drive the car up a lot and immediately reprice this down and you're upside down a little bit on LTV until paydowns happen. The portfolio is a couple of years seasoned now. So, we feel pretty good that we've got our arms around lost content. It shouldn't be hypersensitive to unemployment unless there's a really significant event in the market. So that should be stable and we feel good about the quality there. And just on the retail book to everybody's point, 79% of it on the core side is residential secured. On the home equity book 99% is below 80% CLTV. On the mortgage book 51% CLTV. So, there's very, very little loss content there unless there's a significant housing market correction, which obviously we're not seeing high chance of that. And then, when you unpack the unsecured book, while over time, we'd like to have more exposure to credit card, right now we're undersized on credit card and that's a good thing if there's an unemployment spike. And on the student book, 98% is co-signed by the parent on in-school and 40% of our student loan refinancing book is with folks with advanced degrees, which are less sensitive to spikes in unemployment. So, when you net all that together, I feel like on a relative basis, we should be in a very strong spot if there's a blip in unemployment.

Very thorough. Thank you.

Good morning. A couple of follow-ups on fee revenue categories. The service charges were quite strong year-over-year and you mentioned cash management, which I think is pretty straightforward and then also overdraft. Just elaborate on the overdraft? Is it increased frequency? And why you think that is? Were there some pricing changes or what drove that component?

Most of the service charge numbers in cash management and business banking are experiencing significant growth, thanks to recent technology investments we've made in the consumer business aimed at fostering more engaged customers. This trend is also reflected in our positive low-cost deposit figures. The increases we are observing are mainly due to robust fee generation rather than any punitive actions, which is a very encouraging sign. Our overdraft segment has been gradually declining over the last decade but has now stabilized. We haven't adjusted any pricing. While the mass market population is generally returning to living paycheck to paycheck, their overall situation appears stable. Spending habits continue to be strong and consistent, with no indications of economic stress that could lead to an increase in overdraft fees. We anticipate this will remain within a certain range. We hope that growth will stem from positive fee generation through the advice and services we offer, especially in cash management, while overdraft fees stay consistent. There has been a legal case regarding overdraft, and both the House and Senate have agreed to eliminate a regulatory rule from the CFPB. Thus, any potential risk we anticipated for the latter half of the year seems minimal as it heads to the President for signature. Overall, overdraft activity remains stable, without significant growth or decline.

Okay, that's helpful. And then, in credit card, you were down obviously versus 4Q on seasonal trends, but also down a little bit year-over-year. I know you're trying to grow it. Is that just the cost of rewards and upfront sign-ons, or what's driving that drop on a year-over-year basis? Thanks.

We recently paused some of our previous credit card expansion activities for a short time while we launched new products in May and June. We are very excited about a few new offerings that will be released in late spring and into summer. Customer spending trends have been fairly stable recently, and we anticipate a return to growth. About 18 months ago, some of the growth in credit and debit card fees was related to the Mastercard agreement we implemented, which positively impacted our fee growth as we increased spending activity and expanded our card portfolio in the second half of the year. We expect this area to continue to grow modestly.

Thank you.

Hi, Bruce. Hi, John.

Hi.

Hey, Gerard.

Can you discuss the advantages and disadvantages of selling the entire non-core loan portfolio, especially in light of the sale of the non-core student loans you mentioned?

Yeah, I'll take that. John, you can chime in. But I think that there's relatively high predictability in terms of the runoff of auto, which is basically what's left. And should we want to accelerate that sale, there's going to be a liquidity cost that has to be paid. So, our view is since this is short-duration paper, it runs off predictably, it runs off fast. The duration of the paper is roughly two years that we're better off preserving the capital and not incurring that liquidity cost if you will.

We have a strong capital position and liquidity, so there’s no need to speed up the process beyond what we’re already doing. By the end of this year, in the fourth quarter of 2025, we expect the total amount to be down to $2.6 billion. Of that, around $1.7 billion is in an auto collateralized structure, which means it can't be sold and will simply decrease on its own. This will bring us to under $1 billion by the end of the year, marking significant progress in reducing our non-core assets. We believe the transaction we completed acted as a catalyst for this change.

That was the longer-lived asset with the bigger tail. So, to move that out really helps accelerate the whole rundown.

And who knows, maybe in the future there could be a cleanup, but it will be something that really wouldn't have much of an impact given that it's in such a low profile by the end of the year anyway.

Great. Thank you. And then, as a follow-up, obviously, your credit, you've got it under control and you talk very thoroughly about the office commercial real estate portfolio and the challenges there. I noticed in the C&I portfolio and I know the numbers are not large and it could be the law of low numbers that one or two loans going non-accrual will push the number up, but in Slide 28, you do give us that breakdown of non-accruals. Can you give us some color on the C&I portfolio? The uptick again wasn't material in nominal levels, but what are you guys seeing in C&I, especially in view of your outlook of the uncertainty we're all confronting with this economy?

To begin, the allowance you see on slide 28 reflects our more cautious approach regarding certain areas where we believe it is prudent to allocate additional reserves.

That's the non-accrual though. I think that you're talking about the 0.57% going up to the 0.65%.

Right. I understand it's small, but I'm just curious.

Yes, Gerard, I'll just jump in. We're seeing no macro deterioration in C&I. I go back to what I've said for a couple of years now as people really tighten their belts during COVID, both from a debt standpoint and an efficiency standpoint, and that's going to help them go through any kind of uncertainty that we have. So, we see no broad trends of deterioration at all in our C&I book.

I believe they are well-positioned to be resilient and adaptable to the current environment. The larger question concerns how aggressive they want to be, as economic factors may limit further growth in their businesses, potentially impacting loan demand or deal activity. However, I don't see this as a significant credit risk. In fact, the sectors we lend to have minimal exposure to those most affected by tariffs. Overall, we believe this issue is more about the level of activity from the customer base rather than concerns about credit deterioration.

Great. Thank you, guys.

Hey, good morning. Just two very quick follow-up questions. John, maybe for you. Not sure if I missed, when we look at your fee income guidance, you talked about the capital markets pipeline. What are we assuming for capital markets just from a fee revenue standpoint for second quarter and for the full year, if you don't mind sharing that?

Yes, we view it as a driver, and I'd like to revisit the points about diversification that we mentioned earlier. In the capital markets, M&A is definitely part of our narrative, but we also have loan syndications and some equity capital markets opportunities. As Bruce mentioned earlier, client hedging is contributing to our performance in the second quarter as well as for the full year. Additionally, on the consumer side, we're anticipating that card services and wealth management will also contribute in the second quarter and into 2025, although we haven't provided detailed breakdowns of these contributions separately from fees for the second quarter or for 2025.

Yeah. It's a material driver to the 8% to 10% growth we had for the year in the original year guide and then in the second quarter lift that we have. And I would say the kind of level of the capital markets activity to me is why we had a little bit wider range in the second quarter fee guides. So, we still think we'll see a nice bounce off of Q1 levels, but we'll have to wait and see how that plays out. But I think the broader point John just made about diversity and when one thing is a little soft, we have enough levers that I think we're pretty confident that we'll be able to find offsets at capital markets is a bit sluggish.

Got it. As a follow-up, regarding the margin outlook at the end of the year and for 2026, can you remind us what the Fed funds rate is that supports that? I understand the time sensitivity of what the net interest margin does, but what is the Fed funds rate? If we see a 100 basis points cut in the Fed funds rate between now and year-end, could that pose any downside risk to the outlook for 2025 and 2026?

I would say that we are well hedged. Looking ahead, we initially mentioned two cuts in January, but there might be a third cut happening late in the fourth quarter. Additionally, we are nearly neutral regarding asset sensitivity. Therefore, the range of 3.05% to 3.10% feels solid and manageable. The terminal rate of approximately 3.50% projected for 2026 and 2027 aligns with our target net interest margin of 3.25% to 3.50%. You can see this outlook on the slide at the back. Also, for 2026, I'd like to add that we are confident about net interest margin growth in 2025, which could suggest an increase of around 15 basis points year-over-year. In 2026, we anticipate strong tailwinds from accelerating trends, with many of the time-based benefits starting to materialize then, which is something to monitor closely.

Thank you.

Hi, good morning. Just a couple of quick follow-up questions. One was, on loan growth, can you talk about how much of the loan growth over the past year has come from NDFI loans and how you're thinking about the credit risk of that portfolio?

I'll begin, and Don may want to add. Like many of our peers, we have some exposure in the NBFI space. This is part of our involvement in the private credit and private capital sectors, which we manage quite effectively. I want to emphasize that our credit exposure in the areas we operate is very low. If you consider our interactions with business credit intermediaries or in the private equity arena, the credit profile has consistently remained low over time.

Yeah, I agree with that. And the growth hasn't been massive in terms of actually adding exposure. We've seen a little bit of growth due to higher utilization. So, you see that coming through in the numbers a little bit, but we very much like the structures that we have in place, both for the private equity complex and the private credit complex, and they're both kind of investment-grade-like in terms of their credit profile. So, very low losses, very strong structures, ABS kind of structures, particularly in private credit, and we feel very good about those exposures. And the other important thing is back to everything we're doing in the NBFI space, it's about a broad relationship. So, we're doing multiple different things with each of the people that we're lending to. So, it's not as if we're going out there and building a loan book. We're doing M&A with a lot of these complexes. We're actually distributing some of the private credit funds into our Private Bank and Wealth Management areas now. So, there's a lot of different relationship orientation and we're very selective in terms of the underlying clients that we'll actually bank.

Yeah. I would just add two other points of color. One is that the definitions for this category are changing a little bit. And so, some exposures that might not have been considered NBFI are now getting pushed into that a little bit. So, it's hard to do long period of time straight apples-to-apples comparisons, but I think once we get through the reclassification process, then going forward, have more continuity in those forecasts. The other thing is that where we are growing somewhat is in the Private Bank. And so that's a little bit of a different kind of complementary perspective to some of the bigger funds that Don's folks are covering. So, Brendan, I don't know if you want to add that, but we're making capacity there for kind of PE and VC funds where we know those firms extremely well and we want to be the bank to the fund complex and the partners if those firms. And so that's really good business. That was always really good business at First Republic, and we're growing that business here.

The credit structures, as Don mentioned, are well designed with very low risk. We have one-year subscription lines, which allows us to act quickly if we notice any concerns. Additionally, in the Private Bank, we won't extend credit unless we have a relationship with their cash management operations. This establishes a strong connection with the firm, ensuring rigorous underwriting and continuous oversight of cash flows within our banking community. Therefore, we are confident in our exposure.

Very helpful. And then, as my follow-up, just on the non-core loan sale in the first quarter, how should we think about the benefit to NIM from that sale? I know the year-end NIM guide is relatively unchanged. So, I was wondering if there's some offsets there, if there's a higher probability that you can hit the higher end of that guide?

Yeah. We had anticipated that we would have an opportunity to accelerate in 2025. So that was included in the January guide broadly. So, the 3.05% to 3.10% is already incorporated this sale. So...

You may recall that on the first quarter call, I hinted that we were working on acceleration. So, we were pretty far down the track that we would get something done. So, when we had the guide, we had assumed that. So, it's not that dramatic of a lift to NIM, but we'll pick up basis points here and there. It all adds up and builds our path towards hitting those year-end numbers, those fourth quarter numbers.

Perfect. Thank you.

Okay. All right. Well, I think that brings us to the end of the call. Thanks again everyone for dialing in today. We appreciate your continued interest and support. Have a great day.