Citizens Financial Group Inc (CFG) — Q2 2025 Earnings Call Transcript

Thank you, Denise. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our second 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 second 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'll hand over to Bruce.

Thanks, Kristin, and good morning, everyone. Thanks for joining our call today. We announced strong financial results today that exceeded expectations, notwithstanding tremendous uncertainty in the macro environment during the quarter. Highlights include strong NII growth of 3.3% sequential quarter, paced by NIM expansion of 5 basis points, and the resumption of net loan growth across consumer, private bank, and commercial. Good fee growth of 10%, which was paced by wealth, card, and mortgage, good expense discipline, with expenses broadly flat, resulting in 500 basis points of operating leverage and credit trends remaining favorable and continued meaningful share repurchases. It's worth noting that capital markets still managed to have a pretty good quarter, notwithstanding the uncertainty in the environment. Our diversity helped, as strength in equity underwriting and loan syndications offset weaker debt capital markets and a delay in the completion of several significant M&A deals. We expect that we will record over $30 million in fees on these deals in July and our pipelines remain strong, setting us up well for the second half. Our balance sheet remains rock solid across capital, liquidity, funding, and our credit reserve position. We continue to execute well on our strategic initiatives. The Private Bank had strong growth in loans and AUM with average deposits up nicely, but spot deposits impacted somewhat by the timing of inflows and outflows. We remain on track to hit all full year targets. The business is on track to deliver in excess of 5% accretion to Citizens bottom line and a 20% plus ROE in 2025. In addition, efforts across New York City Metro, Private Capital payments and BSO are all tracking well. We've commenced work on a project we are calling reimagining the bank, which will be led by Brendan and other top leaders. The objective is to redesign how we serve customers and run the bank, taking advantage of new technologies like GenAI and Agentic AI. This requires changes to our organizational model, our underlying technology, and data architecture, and imparting new skills to our colleague base. It will be multiyear in nature and ultimately serve as our next top program. Stay tuned for more details later in the year. With respect to the second half, we believe that economic conditions and markets are trending favorable, though further changes around tariffs continue to present a degree of uncertainty. Fortunately, the fundamentals to drive higher deal activity and a pickup in loan demand remain intact, and we feel well positioned to capture the opportunity and deliver good results. We remain comfortable with the full year guide for 2025 we gave back in January, and we're well positioned to sustain that momentum into the medium term. 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 mentioned, we delivered strong second quarter results with really good revenue performance and disciplined expense management, resulting in positive sequential operating leverage of about 5%. We saw lending begin to pick up during the quarter with net growth across commercial, consumer, and private bank, more than offsetting our noncore runoff. Referencing Slides 5 and 6, we delivered EPS of $0.92 for the second quarter, a $0.15 or 19% improvement over Q1. Net interest income for the quarter was up 3.3% and driven by margin expansion and interest-earning asset growth. Fees were up significantly linked quarter. Wealth and card fees were a record for the quarter and capital markets showed modest growth despite market uncertainty, which resulted in several meaningful M&A deals pushing into July. Mortgage also increased, largely due to an improvement in MSR valuation. Expenses were well managed, and net charge-offs came in as expected. With respect to our balance sheet, we continue to maintain robust capital, strong liquidity levels, and a healthy credit reserve. We ended the quarter with CET1 at 10.6% and also executed $200 million in stock buybacks during the quarter. And importantly, we are executing well against our key strategic initiatives, based by continued momentum in our private bank and private wealth build-out. The Private Bank continues to steadily grow its profitability, contributing $0.06 to EPS this quarter, up from $0.04 in the prior quarter, and we delivered our strongest quarter of loan growth so far, adding $1.2 billion in loans. Also, we continue to make good progress in New York Metro, and our top 10 program is on target and progressing well with work commencing on a multiyear transformational top program to reimagine how the bank operates. Next, I'll talk through the second quarter results in more detail, starting with net interest income on Slide 7. Net interest income increased 3.3% linked quarter, driven by continued expansion of our net interest margin and modestly higher interest-earning assets. As you can see from the NIM walk at the bottom of the slide, our margin improved 5 basis points to 2.95% and given the time-based benefits of noncore runoff and reduced drag from terminated swaps as well as favorable fixed asset repricing. In addition, we continue to optimize our funding and execute well on our down-rate deposit playbook as our interest-bearing deposit costs decreased by 2 basis points. Moving to Slide 8. Fees are up 10% linked quarter. Capital markets improved modestly, driven by higher equity underwriting and loan syndication fees. Bond underwriting fees were lower due to a tariff-driven pause in activity for part of the quarter. Similarly, M&A advisory fees were lower, with some sizable deals pushing into July, given the market uncertainty during the quarter. We expect that we will record over $30 million in fees on these deals in July. We continue to perform well in middle-market sponsored bookrunner deals, ranking third by deal volume in the second quarter. And our deal pipelines across M&A and DCM remain strong in terms of the number and value of transactions given pent-up demand. Our wealth business delivered a record quarter with increased transaction activity and higher advisory fees from continued positive momentum in fee-based AUM growth in private banks. Our card business also delivered a record quarter driven by a seasonal improvement in purchase volumes. Importantly, in consumer, we recently launched a new suite of Mastercard credit cards designed to address the distinct financial needs and preferences of our customers, which should help us accelerate growth in this business. Mortgage revenue growth reflects an improvement in MSR valuation as well as seasonal growth in production. Lastly, other income was a bit higher than usual this quarter as we had a few things break our way. This line can move around a little from quarter-to-quarter. On Slide 9, expenses are broadly stable linked quarter, helping to drive positive operating leverage of about 5% and improve our efficiency ratio to below 65%. Our latest TOP program is progressing well and is on target to deliver a $100 million pretax run rate benefit by the end of the year. We've undertaken an effort to develop a much broader program to use new technologies to better serve customers and run the bank. We'll give you more on that later in the year. On Slide 10, period-end loans were up 1%. This includes noncore portfolio runoff of roughly $700 million in the quarter. Excluding noncore, loans were up approximately 2% on a spot basis. The Private Bank delivered its strongest loan growth quarter so far with period-end loans up about $1.2 billion to $4.9 billion, Commercial loans were up slightly given some new money lending growth and a pickup in line utilization. We are past the peak in terms of client BSO exits, which is also creating less drag to growth. Core retail loans grew driven by home equity and mortgage. Next, on Slides 11 and 12. We continue to do a good job on deposits, improving the mix with an increase in noninterest-bearing to 22% of the book and lowering our overall deposit costs. Average deposits were up 1% driven by increases in lower cost categories across consumer and the private bank. We continue to focus on optimizing our deposit funding with a further reduction of higher cost treasury broker deposits this quarter and a decline in retail CDs. We delivered strong retail CD retention rates, even as we reduced yields. This was a meaningful 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 2 basis points this quarter, translating to a 54% cumulative down beta. And importantly, stable retail deposits are 67% of our total deposits, which compares to a peer average of about 55%. Moving to credit on Slide 13. Net charge-offs of 48 basis points are down from 51 basis points in the prior quarter after adjusting for the 7 basis point impact of the noncore education loan sale in Q1. Retail net charge-offs improved across both core and noncore, down about 10 basis points after adjusting for the noncore education loan sale. This was partly offset by a modest increase in commercial net charge-offs, primarily driven by an increase in C&I relating to several small idiosyncratic credits. Of note, nonaccrual loans continued to trend favorably and were down 4% linked quarter, reflecting the decline in C&I. Retail nonaccrual loans also decreased, with a reduction in other retail and continued runoff of the noncore auto portfolio. As we look across the portfolio, we believe that credit trends are showing signs of improvement and that nonaccrual loans for this cycle likely peaked in the third quarter of 2024, and net charge-offs peaked in the first quarter of 2025. Turning to the allowance for credit losses on Slide 14. The allowance was down slightly to 1.59% this quarter, as the portfolio mix continues to improve due to noncore runoffs, a reduction in the CRE portfolio, and lower loss content front book originations across C&I and retail real estate secured. The economic forecast supporting the allowance reflects a mild recession and macro impacts from tariffs, similar to last quarter. The general office balance of $2.7 billion continued to decline modestly in the second quarter, driven by paydowns and charge-offs. The reserve for the general office portfolio is $322 million, which represents 11.8% coverage. It's worth noting that this is the first quarter since the general office concerns began that our ACL coverage level declined. We allowed the reserve coverage to come down slightly, utilizing the reserve as we make progress with the workout backlog and the rest of the book remains stable. Note that the cumulative charge-offs plus the current reserve translates to a total expected loss rate of about 20% against the March 2023 general office loan balance, consistent with our view at the end of Q1. Moving to Slide 15. We have maintained excellent balance sheet strength; our CET1 ratio was 10.6%. 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 at a weighted average price of $39. And including dividends, we've returned a total of $385 million to shareholders in the second quarter. Our share repurchase program was also increased to $1.5 billion by the Board of Directors in June. Moving to Slide 16. We are well positioned to drive strong performance over the medium term with our overall 3-part strategy: a transformed consumer bank, a best positioned commercial bank among our regional peers, and our aspiration to build a premier bank-owned private bank and private wealth franchise. In support of these businesses, we've commenced work on a broad reimagining the bank initiative that will drive meaningful benefits by revisiting how we operate front to back and leveraging new technologies like AI to serve customers in new ways and run the bank better. This will become a multiyear transformational TOP program, and we will have more to say about this as the planning progresses later in the year. Moving to Slide 17, our Private Bank continued to make excellent progress. We delivered our strongest loan growth quarter so far, adding $1.2 billion of loans to end the second quarter at $4.9 billion. This reflects growth in commercial as line utilization has picked up, given increasing client activity, as well as growth in mortgage. Average deposits were up $966 million for the quarter and stable on a spot basis given a temporary surge in deposits at the end of the first quarter and some outflows at the end of Q2. We've seen good deposit-gathering momentum early in the third quarter, with deposit levels over $9.5 billion in mid-July. The overall mix continues to be very good, including Northern New Jersey, New York City, and Los Angeles. We ended the quarter with $6.5 billion in AUM, up $1.3 billion for the quarter. For the $0.06 contribution to EPS from the Private Bank in the second quarter, we are tracking well against our targeted 5%-plus accretion to Citizens' bottom line in 2025, and to deliver a 20% to 24% return on equity for the year and over the medium term. Moving to Slide 18, we provide our guide for the third quarter, which contemplates a 25 basis point rate cut in September. We expect net interest income to be up approximately 3% to 4%, driven by an improvement in net interest margin of approximately 5 basis points with interest-earning assets up slightly. This pickup in net interest margin is primarily attributable to the time-based benefits of noncore runoff, reduced drag from terminated swaps, and a benefit from fixed asset rate repricing. We expect noninterest income to be up low single digits led by rebounding activity in capital markets, which will be partially offset by reductions in mortgage and other income. We are projecting expenses to be up approximately 1% to 1.5%, reflecting continued private bank build-out and broadly strong fee revenues. We expect to deliver positive operating leverage for the second quarter in a row. Credit trends are expected to improve modestly from the second quarter charge-off level. And we should end the third quarter with CET1 stable, including share repurchases of roughly $75 million, which could be impacted by the amount of loan growth. 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. Looking out to the medium term, we see a clear path to achieving our 16% to 18% ROTCE target. Expanding our net interest margin is also an important driver, and we continue to project to be 3.05% to 3.10% in 4Q '25, and 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 and improving credit performance will drive ROTCE meaningfully higher through 2027. To wrap up, we delivered strong second quarter results that came in ahead of expectations, highlighted by growth in net interest margin, good fee performance, and positive operating leverage. We ended the quarter with strong capital, liquidity, and reserves, which puts us in an excellent position to support our clients and continue driving growth and progressing our strategic initiatives. With that, I'll hand it back over to Bruce.

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

Bruce, you saw nice loan growth in the quarter. Obviously, a decent amount of it was idiosyncratic given the gains that you're making in the private bank. So I know there's a lot of moving pieces with loan growth, runoff in CRE, strategic runoff. But maybe can you just talk about what you're seeing in terms of growth in sort of the private bank and then everything else? And how you're feeling about sentiment from borrowers for the remainder of the year?

Sure. I'll start, and then I'll pass it off to Brendan and Don for more specific color. But I'd say it felt a little like an inflection point that we finally saw all 3 of the businesses—commercial, consumer, private bank—have net loan growth. And at the enterprise level, we had loan growth that exceeded the kind of DSO and noncore rundown actions that we're taking. And when we look into the second half, I would say we're constructive on kind of the macro and the fact that there's been pent-up demand to put money to work in the sponsor space. We're starting to see kind of some new deal flow. We're starting to see a pickup in line utilization there and a little bit also on the pure corporate banking side. I think the private bank is finding its footing in terms of we have the operation up and running. Initial focus is attracting the relationships and gathering the deposits and the operating accounts, and I think it's been a little slower to see the loan demand pick up, but we're now starting to see that. So some of the growth in the quarter was line utilization on some of the PBC subscription lines we have, but also the individual consumer borrowing, particularly around mortgage, that's starting to pick up as well. And so we expect that now to continue clearly; a little drop in rates, if it happens in the second half, would be a bit of a tailwind there. And then in Consumer, we've been kind of just very steady. We have a great HELOC product. We lead the market in HELOC market share. That continues to be a product that is in demand as well as mortgage being another area where we see consistent modest growth but, nonetheless, it's growth. And then we launched a whole new card complex during the quarter, and we would expect to see balances in the card space pick up a bit. So I'd say we see growth continuing really across the complex. And the other net positive is some of the BSO is starting to wind down and become less of a headwind. So the noncore reductions are smaller as we go forward, and some of the work that's been done in commercial is smaller as we go forward. And so that will free up the overall net number to be a little bit more positive. So with that, why don't I go first to Brendan and then we'll go over to Don.

Sounds good. That was all well said, so maybe I'll just supplement that with a few numbers in the core retail business. In noncore, we were up about $400 million quarter-on-quarter, about $1.4 billion year-on-year. So we're seeing steady high-quality relationship-led growth. The HELOC progress that we're making has been substantial and with external numbers that are available on title recordings, it appears we've been #1 in the United States in originations in the last couple of quarters, and the credit quality has been very, very high—high 700 FICO, mid-60s CLTV. So we're very pleased with the yields above 7%. So we are not playing across the country; we're only playing in 14 or 15 states and are #1 nationally. And those all come with deep deposit relationships as well, given the structure of the product and our strategy. So we're very pleased with that. Chris mentioned, we're incredibly excited about the new credit card product launch. It will be mostly oriented around cross-selling into our retail customer base versus trying to be a national issuer. But we believe the products are very competitive. And in fact, we're seeing 30% of our early sales in our higher-end mass affluent oriented card that we're calling Summit Reserve, which is a metal Black Card and also comes with an annual fee. So it can reposition the profitability of the credit card business over time, and we expect balances as purchase activity to scale in the back half of the year, start to see some modest high-yielding growth there. So we feel like we're well positioned in consumer for that to continue and maybe accelerate a little bit on the yield side with card. In the private banking space, we're seeing really an unlock on growth across the board—$1.2 billion in growth linked quarter, with 31% of the balances being consumer. That's up a little bit from last quarter. We had a 95% growth rate linked quarter on originations on mortgage. So what we're hearing in the market is that our customers obviously were dealing with higher interest rates for a while as we launched the business. You all saw that those metrics are heavy deposit-led early on, and they're starting to adjust to the new normal of where interest rates are, and business activity is starting to flow through. So the relationship started with day-to-day operating deposits, and it's now moving into lending, which is great to see, and yields are strong—$6.55 on the private bank, which is 433 basis points over the deposit cost. So we still have margin in this business that is NIM accretive, which is driving, obviously, the ROE accretion at the top of the house. For us to deliver the rest of the year in private banking, we need an average of $1.1 billion a quarter versus the $1.2 billion we just did. So we feel pretty good that the story can continue, and the pipelines are strong and demand is really increasing. Hopefully, with volatility in the market, staying in the same zone we're in now or better. We feel really positive. And then on the noncore side, just as Bruce mentioned, the rundown is easing. Last year, we were running down about $1 billion a quarter; for the back half of the year, it will be about $0.5 billion a quarter. So still a little bit of headwinds there, but that's reducing, which should be net accretive and hopefully allow us to leverage all the front book activity we're seeing in the customer businesses to start to scale up. Don?

Yes. So I'll pick up where Brendan ended, which is we've been reducing our book ex CRE by about $1 billion a quarter on our BSO agenda, and we're basically almost done with that. So that's going to be a headwind that goes away. We'll continue to reduce CRE a little bit to the tune of $0.5 billion a quarter or so, but that will be a little bit of a drag. But what we're seeing is broad business optimism across the board. This quarter, it was really led by the private complex, which everybody knows we put a lot of resources, a lot of strategic emphasis on. So we saw a lot of great utilization in our subscription lines and our private credit lines, and that was probably about 75% of our loan growth in the quarter, with about 25% coming from C&I. But as I'm out talking to C&I customers, they're starting to see the uncertainty around the different policy questions abate. So you've got the budget bill passed, you've got the Middle East solved, you've got tariffs moving behind us, and they're beginning to invest in their businesses again. And we're seeing quite dynamic pipeline growth across core C&I. We're also, people remember, we—Bruce mentioned and John mentioned that New York Metro, we're 2.5–3 years into now, but we've also opened up in Florida and California in terms of middle market growth, and we're seeing very nice new business generation in those markets, which is generating not only loan growth but it's generating full wallet relationships, which we're really encouraged by. So very different from where I was 6 months ago. I'm very optimistic about what we see going forward. We'll see how quickly it materializes, but it seems like the environment is a good tailwind for the next couple of quarters.

Yes. I would just put one asterisk on what you said, Don, is like the worst-case outcomes on tariffs seem to be behind us. But it's still kind of out there as something to contend with. But I'd say most folks feel that we'll negotiate something that results in fairer trade; there'll be a higher tariff rate, but it's not something that is going to mock people off their peg.

And they're adjusting their business models to deal with it.

Correct. So let's hope that is the case as we go forward. But in any case, I think that has turned into something that's not as big a concern in terms of causing uncertainty. I also think that besides the tax bill getting through, the regulatory appointees getting confirmed and having—pushing that aggressive regulatory agenda will also be positive in the second half of the year. Okay. Ryan, anything else?

Yes. No, that was a great in-depth response. I just—I feel bad that John didn't get a chance to answer, so maybe I'll just throw one out there for him. And obviously, it's been great to see the NIM expansion, and you sort of reiterated all the NIM expectations over the medium term. I guess given the potential that we could have a more dovish Fed at some point in the not-so-distant future, maybe just talk about what steps you are taking, if at all, to sort of try to lock in the higher end of those margin expectations? And even if we're in a more dovish environment, can we see sort of the midpoint or higher in terms of the net interest margin.

Yes. I appreciate that, Ryan. And so I guess what I would talk about is that we have this range that we've talked about over the medium term of $325 million to $350 million. And in our materials, we talked a little bit about what rate environment that range would be consistent with. That rate environment, even with the Fed funds level that is frankly even below 3%, I'd say that something even in the neighborhood of $2.75, which would be a significant amount of dovishness and a significant amount of reductions from the Fed would still be consistent with the low end of that range of $325 million. And anything higher than that, what we messaged was something in the neighborhood of $350 million probably puts us in the middle of our range and at 337 NIM and anything that higher for longer gets us to the high end of that range. So we're feeling very increasingly confident in that range. And what we've been doing to try to quarter-over-quarter to protect that downside is opportunistically putting on hedges in a forward-starting way. And those hedges generally are well north of where we think the Fed will likely come out. So they'll be stable to providing protection against that lower end. So we did a little bit of hedging in the second quarter; a little bit in the first quarter, and we'll continue to opportunistically look for our spots given rate volatility, and that's playing out really as expected. And so feeling pretty good about that range.

Yes. I'll just add that you don't want to spend all your powder on the downward scenario. So we've left some of the out years a bit open because you could get in a situation where you have stagflation, and then you want to be able to participate and get the benefit of that in a higher rate environment. So that's kind of a judgment call, but I think we have a really good buy box discipline, so to speak. So we're waiting to see little spikes, and then we'll put some more on, but we're still kind of open to the possibilities that we could end up in a different scenario than what is the consensus scenario of the Fed kind of moving down.

I just wanted to ask about the right-hand side of the balance sheet in terms of the strategy for the second half of the year. Given everything that I've heard from Brendan and Don, it sounds like it's going to be a good second half for growth. And I've noticed, John, that you did have great NIB growth in the quarter. Total deposits were down a little bit. As we think about the second half of the year and potentially a growth year outlook, how are you thinking about sort of growth versus optimizing the mix? And/or is there sort of more to consider that's coming on the asset side that could help fund that growth?

Yes. I think it's a tale of both of those, Erika. But well, I'll start off with the deposit side. We're pretty pleased with our low-cost deposit trends. So the mix improved in the second quarter compared to the first quarter on DDA and low cost overall. And that—those contributions are driven predominantly by our idiosyncratic private bank growth that comes in at 36% of noninterest-bearing. So that's accretive to top of the house. But also the core retail deposit base has just been performing exceptionally well. Versus peers from all that we can tell. So there's very strong momentum there. And then we have really good seasonal factors that contribute on the commercial side in the second half, typically. So all of that lines up for what we believe to be stable to improving mix on the deposit side, while actually still being able to grow deposits to support our loan growth outlook.

And a stable LDR outlook too.

Stabilizing liquidity with very good LDR. A good point there. And then, of course, on the left side of the balance sheet, we are still rotating capital—maybe to a declining degree, but we've done a really nice job of rotating all of that capital out of noncore and deploying it into highly strategic opportunities in the front book across all 3 businesses, all 3 legs of the stool. So that's been really efficient, and that front book back book is extremely powerful and will continue for some time in the noncore space. And you heard Don talk about the fact that he's still rotating capital in C&I, although to a decreasing level such that we're seeing some of this growth fall to the bottom line.

Okay. I'm going to just briefly ask for a brief comment with color, so we don't show up too much on the clock. But Brendan, maybe anything to add on kind of strategies in the second half for consumer or private bank. And then I'll flip it to you also for a brief comment.

Yes. Just quickly to John's point, the benchmarks we see show that our low-cost deposits in the retail franchise are outperforming peer averages by over 300 basis points for the year so far, which is giving us a lot of optionality on how we manage our deposit strategy. So we generally have been flattish linked quarter on interest-bearing deposits, but we've actually grown retail core relationship deposits and at least a little bit of interest-bearing deposits on the Citizens Access side, which has given us a lot of ability to manage margin. And the total yield on the consumer business is down 3 basis points as a result. So all of that is giving us the ability to rotate to a higher quality deposit book, more relationship-led, and giving us some flexibility on the yield side. We've had a lot of CD maturities—$8 billion in Q1, $6 billion in Q2. We're retaining about 87% of that but the yields on that are down 120 basis points when we save those balances, and that's also allowing us to drive costs down. And we have large maturities coming due. It's a little bit less in the second half than the first half of the year, but we still have big maturities that we expect to continue to give us some cost value. And on the private bank side, I won't add a lot. We've got confidence in the outlook on growth—noninterest-bearing with 42% low cost you had in CEE. So the portfolio is of real high quality. We're starting to see the consumer side starting to gear up on some growth as well, and we just expect those trends to continue through the summer and into the fall. So we're pleased with that, and that should give us the ability to have idiosyncratic deposit growth.

And I'll be super brief. I'd say the two things I'm excited about on the deposit side is we are getting a nice win rate in our expansion markets, which is full wallet win rates. And then—we've had a couple of interesting wins on the payment side, another big merchant acquiring account and a couple of other embedded finance type of accounts, which is coming with some nice low-cost deposit growth. So it's changing our mix a little bit, and the liquidity team on the commercial side of the house has done a great job building a bunch of product functionality, which is away from just the core client functionality. So we see nice momentum on that front.

Yes. And just one more for you, Bruce. Just on the capital. Obviously, your large peers, the requirements have started to move down this year's stress test. Potentially more with other types of recalibration with Basel III endgame potentially getting finalized. Maybe the AOCI burden is just 1/3 near term than the 150 basis point adjustment that we have fully accounting for it today. I guess, like in terms of regional banks, CET1 and excess capital definition, how much of it can sort of ride with the momentum of the GSIB versus potentially being also upheld by the ratings agencies? I know one of your peers talked about that being a bit of a binding constraint for the regionals. And I'm wondering if you had any thoughts on that.

Yes, sure. So I would say it's good when you come through a turbulent period like we had in the banking industry through '23 and the first half to build capital and run a little conservatively. And so I think you've seen all the regionals building their capital. I think the rating agencies view collectively is that profitability took a bit of a dip and needs to be kind of restored. And then also, there was this overhang of commercial real estate office that needed to work itself through, and so hold more capital until we see the flex point where profitability has rebounded and you've got through the kind of workout phase and substantially through in credit appears to be in good shape. So I'm hopeful the rating agencies start to look more at the front mirror and don't hold on to that view for too long. But I think it's still there, and it's probably on investors' minds too, is let's just make sure that we're in a good environment and then potentially capital can come down a bit. So I don't think it's going to happen right away. I think we've been running a bit above our 10% to 10.5% CET1 range. Ultimately, I think we'll be able to bring it back into that range and still probably stay a bit on the conservative side. That's been our MO really since the IPO is to run a little conservative on capital. And there are some real benefits that come from that. If you have a fortress balance sheet, the industry is going to—the economy is going to go through cycles. That means the industry is going to go through cycles, and there are going to be opportunities with us when the West Coast banks fail, we were in a position to do a bit and ultimately to do the start-up of the private bank in a tough environment. So actually running with a little more conservatively in your capital structure proves to be a long-term benefit. So that's where I think it is, Erika.

I was hoping you could just elaborate a little bit on the reimagining the bank initiative. Maybe any color if there's kind of a point person running it and how it's different from the top initiatives that we've seen over the last several years?

Okay. I'll start, and I think I'll flip it to Brendan, who will be on point for this one. But if you go back in the annals of our TOP program, we've had about 10 TOP initiatives. About 5 years ago, it was a bigger, more complex program that kind of took a 2-year time frame and had more technology investment to deliver the benefits. And so a lot of times, when we focus on these annual TOP programs, we're going after faster wins that aren't as complex and across the enterprise and involve rolling out new technologies. But we paused and did a 2-year program, and I think we're at a flex point now in what's happening with new technologies that it's worth doing something similar for the next TOP program. And I think it's kind of broader; the TOP program may sound limiting, and when you say reimagining the bank, it's how you're serving your customers, what you can do for your customers, the efficiency of how you're running the bank, how you can just say things like I have all these people in the call centers, what are ways to deliver better outcomes and more cost-effectively? What would it take to ultimately drive? What has to happen from a technology standpoint, an organizational standpoint, etc.? So we're taking that step back now. We're talking with a lot of outside consultants, looking at scenarios across all industries, across the planet, in the banking industry—what is kind of the cutting edge right now in terms of how these technologies are being deployed that can be kind of a seismic shift in how your bank is operating. It sounds—I don't want to set expectations too high, but we are really at an exciting period now. So we basically set up Exco, like a mini Exco sponsorship group, which is going to be led by Brendan. We have a kind of day-to-day lead project team from some key people across the bank that will focus on this mainly as their job now for the next few quarters. And then we have some ideas on the silos that we can go attack. So we're kind of setting up the structure, and then we're going to unleash this very shortly. But with that set up, maybe, Brendan, you could add to that.

Yes. I guess my thoughts here would be after going through the IPO for 10 years and then through COVID, I think for Citizens, it's a natural reflection point on the next chapter for the bank. And kind of what got us here might need to shift a little bit on what's going to get us to the next phase. And so good to just pull way back and have a broad lens on that. And then to Bruce's point, you combine that with the market dynamics that things are changing very, very fast. The use cases on AI are becoming a little bit more real versus hopes and dreams. And how do we combine those two dynamics to simplify the business model and get really crisp on where we want to win and then really reimagine how the bank works to get things done in a win-win fashion, faster, cheaper for the bank, and better from a customer experience standpoint for our customers. So all things from operating metrics and artificial intelligence and cost to our people strategy and corporate real estate to simplifying our vendors and getting really, really focused. Everything is on the table. And so the work to be done over the next couple of months is just to hone that and get really focused on where we want to get to, as Bruce mentioned, we’ll hear from us as soon as we get more specific on what we're going to tackle. But it's been 5 or 6 years since we did the last really big TOP, and that's probably the right time line to move from the smaller programs back to a really large one.

And I would just also add, Matt, that we kept to some really good numbers in the medium term without this. And so we are aiming big on what the potential benefits can be, which could be quite beneficial to the overall financial metrics. Some of that is we would like to free up the capacity to do more investment in some of our growth initiatives. So you create that virtuous circle going. And so you create some self-funding for the things that you think are going to drive the future. So you're able to now accelerate the investment cycle and drive kind of top-line growth and efficiency growth. And clearly, you're not going to spend everything that you save; some of that will drop through, benefitting the margin and ultimately benefiting the shareholder. But then there are some longer-term considerations where you can free up some investing dollars to actually accelerate the build-out of things like the private bank. So we're pretty excited by it. I don't want to oversell it at this early stage, but stay tuned. We'll be talking more about it in the next couple of calls.

All right, that's helpful. And then just as you think about kind of some of the upfront costs for this, are you thinking you can self-fund it, like you've been able to offer in the past? Or anything that we should be mindful of in terms of notable items and things like that?

It—that's TBD, Matt. What we've decided to do now is if the—these are modest costs, and they tend to repeat with each TOP program, we're kind of not posting them separately and breaking them out. But if there were some big things that look more like an expenditure of capital and would affect the run rate, we can either call them out or we can notabilize them, but we haven't come across that bridge at this point.

Just two quick ones. So first, on the fee side, thanks for giving that color about the $30 million in the third quarter in capital markets. And we see the guide clearly. Just wondering if you could talk a little bit more just about that capital markets pipeline, what you're seeing underneath on the advisory side and other capital markets, and how you're feeling about the outlook there.

Sure. Let me just start, and I'll quickly flip it to Don. But what I would say is that a real positive is that we do have some diversity in the fees within capital markets. So we started to see both interestingly the equity markets start to come to life. And so we participated in some IPOs in the second quarter. Banks indicated low market stayed strong throughout the quarter. There was a pause in debt market deals early in the quarter. And then the overall macro uncertainty probably has the biggest impact on M&A and people's willingness to go forward with deals and close deals. So I think that right now, we have a huge tailwind because of the deals that pushed that could have closed in Q2 or were expected to that pushed into Q3. But beyond that, we're seeing that pipeline refill. We think the equity market continues a bit, syndicated loan market. And then the debt market should come back as well. So we might be firing on all cylinders, but I'll turn that over to Don.

Yes. I won't go all the way there because I'll get my budget change for the year. But we are seeing—remember that away from M&A, which is obviously advisory and actually working with a lot of our private companies for generational change transactions, which is what our core franchise is. There's a big, big pent-up kind of desire to transact. And it's only been recently where you're starting to see valuations come in line between buyers and sellers. And a couple of the big things we are going to complete in July had nice economic kickers to them, and we're selling these companies for really high valuations. The second thing I'd say is on the financing side of things, whether it be syndicated lending or the bond businesses or even some of the equity businesses. It's largely been a refinancing of capital structure kind of exercise, and we haven't really seen the new money engine kick in size yet, and it feels to me like that's happening as I'm looking at our pipelines, that we're starting to see the—and it's not just continuation funds from the private equity guys, which is the flavor of the month. But they're beginning to actually transact in a much more significant way. So you're seeing the whole private complex beginning to come forward and look to put capital to use, whether that is a third quarter event or a fourth quarter event, I'm not totally sure yet, but the pipelines feel pretty good. So I'm more optimistic than I've been in a while in terms of momentum across the diversified portfolio that Bruce mentioned in terms of cap markets.

Okay, great. And then just it's clear to see the mortgage overearning in the quarter, so that's clear in the forward guide. Just the other was a bunch of smattering of items. Was there anything notable sizable in there? Or what a better run rate is for that other fees?

I would just say there, Ken, that that other income line has got a collection of small things that you kind of have to take a view of the full year on that, that you're going to have some quarters where things run a little light in some quarters where they run a little heavier. And so I think that kind of evens out over the course of the year. So there's nothing really sizable and noteworthy to call out there. It just seemed like a few things broke our way unless things broke our way in the first quarter.

I wanted to start—so first on the Private Bank. So if we look at the $12 billion deposit target for the end of this year, I know the trends aren't linear, but just given what we saw in 2Q versus 1Q, what gives you confidence? It's roughly $3 billion or so growth for the second half. Can you talk about that?

Yes. Well, as John mentioned in his comments, mid-July, we're already up over $9.5 billion. And so the $8.7 million, if you look at the average deposit growth, was quite healthy, had some positive notes at the end of Q1 that flowed back out seasonally. And then we had some lumpy couple of days at the end of this quarter. So looking at the average balances is probably the right way to do it on the underlying momentum, and we're starting to see that ramp back up. So it is true. We'll need a strong summer and fall and a strong close of the year to get to those numbers, but we see the demand there. The platform is scaling. Our bankers are hitting their stride; they're getting used to the platform and used to the bank that we still see the white space as nobody has truly emerged to cover it. We're still seeing strong inflows. And so demand is high. It's going to be about execution. And the underlying pace I think needs to be in line to maybe slightly better than what we saw in the second quarter for us to get there. But we've got confidence that that's the case. We also have had some new teams that have gone in Southern California, as an example, that are just getting their feet under them. So we have some positivity there and very targeted. We've added a few folks in a handful of the markets. So there's a lot of dynamics going into that. It certainly is an ambitious target for us, but we do have confidence we can get there.

Okay. That's helpful. And then for my follow-up, so this commentary around reimagining the bank is really fascinating. When you talk to most banks and they talk about agentic AI, it tends to be call center and CRM focused. It seems that this is much broader. Are you guys—is this like everything on the table—client experience, cost saves, risk mitigation? Are you looking at everything? And then if you are, it's amazing if you could pay for that, not see an increase in expenses because if you look at the large banks, they need to spend first to start seeing the benefits. Could you unpack that a bit for us?

Yes. Everything is on the table, and we are bullish on long-term value creation from AI and Agentic AI. But there are some tried and true things in the pool program too that will self-fund part of the journey that aren't necessarily kind of the new modern technology-led initiatives like vendor simplification at a broader scale with much more of a strategic lens, taking a look at how the company is structured from a real estate standpoint. There's a lot of other more traditional things that we've hygiene cleaned up on the various top initiatives, and now we're going to take an even bigger step back. So it will be a myriad of things. And so our hope is—and this is what we're going to scope out through the summer period—that we can sequence all these investments in a way that is smart and logical and have some quick wins that can maybe supplement some of the ideas that take a longer time. But the reason we're having a much longer window in this TOP versus the other TOP is that some of these initiatives do take a little bit more time for the ship to come. And we want to take that medium-term, longer-term lens on this. So we're planting right seeds, not just to impact the next year or 2, but impact the next 3 to 5 years. So it's a big—I think a big difference in how we're approaching this program that allows us to be a lot more strategic.

Yes. And I would just add also that the pace of innovation in this space, particularly around Agentic, is really mind-boggling. So when you look back 6 months ago and where was this and how ready for purpose for some of these solutions to kind of where are they today? And I know Brendan, you just spent a day with a bunch of fintechs and start-ups to try to look at this and kick the tires a little harder, but it's quite dramatic. And so the big banks may be spending a lot of money and doing some kind of pioneer work—I think there will be kind of more ready-made turnkey solutions available that hopefully we can take advantage of.

Just want to ask a little bit around competitive dynamics. You have a couple of peers out there citing some intensifying competition. We've heard both a bit on the loan pricing side as well as on deposits. And so I just want to see if you can give us a little bit more color on what you're seeing there in terms of on the deposit side—your confidence in your data expectations? And are you seeing any of that pressure? And then on the loan pricing side, specifically as you see some acceleration in loan growth and your strategies there? Are you seeing some intensifying competition from banks and nonbanks?

Let's start with Don on commercial.

Yes. So John, yes, the answer is it's competitive out there. It's always competitive. But I think our secret sauce and what we're trying to do is stay focused on multiproduct relationships with midsized companies, and we've carved out a niche, and I think we've got an incredibly strong delivery model, which allows us not to just think about making loans or gathering deposits, but doing a multitude of things with our customers, and that's what we've tried to build over the last 10 years. And it's interesting; the teams that we've hired in Florida and California have said the same thing to me, which is, 'Wow, the way we're showing up as a company across product and industry expertise and core banking is so different than my old firm showed up,' and it's becoming the differentiator of trying to—being able to win business and win broad wallet relationships with people. I mean we're never going to make a lot of money lending money to a company. I mean it's about everything else we do with that company. So that's the way we try to make the market. And I've never been in a situation in my 41 years of doing this where I haven't had a ton of competition. And you just got to be day-to-day more focused and day-to-day better to create the kind of relationships that you want to bring onto the balance sheet and then also pass on the things where you're not going to make a lot of money where it's just a price gain. And that's what BSO has been about for us. So we're really trying to rotate capital to where we can build those enduring relationships. And not good so far, so good. And the whole if you look at private credit, which is what a lot of people like to talk about, we're now bankers to the private credit complex, and we've created an amazing business banking to private credit complex that actually is in a very equivalent way replacing our leverage finance kind of fee stream and our leverage finance earnings stream with a much more attractive earning asset on the private credit side of things. So trying to stay ahead of the trends and trying to stay smart about where the market is going and then having your delivery costs being reasonable, which is what Brendan is going to try to lead in terms of reimagining the bank is really the name of the game. How do you generate good earning assets and good deposit growth with a reasonable expense base?

Same thing is on my businesses. I'd say it is really intense. It's always been intense. I think it's largely been unchanged recently. There's a lot of competition out there. There's always some irrational folks pricing out there. We're spending a little bit more time on is if rates pull back, how do we play that? And do some competitors play it a little bit more irrationally on the deposit side and hold serve for a while to gain deposits and decorate margins or chase the market down really fast on lending. We'll see what happens. But right now, we're competing well in a really intense market. When it's relationship-led, to Don's point, you tend to have a little bit more flex in yield pricing on both sides—deposits and lending. If you've got truly the primary banking relationship, you don't have to be the very best. That helps a lot as we regrounded the franchise and deep relationship-based banking both in retail and private banking. And the one thing you can count on us on is being return-focused. So we're not going to chase the market down. If competitive dynamics get super intense, we'll make sure we're doing the right thing for capital allocation and the right returns. We're very committed to—on private as an example, having a 20% to 24% return profile. So we're going to stick to our guns there. Price loans and deposits that we believe is appropriate for market conditions, and then we'll have to compete and win on relationships, and we're doing that so far, and I don't expect that to change.

Just two quick items here. Just to add on top of that. One is spreads are holding in. We're holding our discipline on the commercial lending side of things, and returns in retail and consumer look good. On the deposit side, we've had this outlook of low to mid-50s cumulative beta over the medium term, and already through the end of the second quarter, we're at—which is better than median—better than average and a really strong performance so far this cycle. And we have all of the foundation and mindset is there to continue that performance over the medium term.

Maybe one more point. I think we've made this on other calls that we've had probably a little bit more levers than some of the other peers when you think about Citizens Access and now the private bank. So depending on how competitive dynamics flex across all the segments, we can capitalize where there's better ground.

Okay, great. And then, Bruce, just curious on your updated thoughts around the M&A backdrop. We've seen some—a resumption of deals. I mean the regional banks. Just wanted to get your thoughts there. And I know you've kind of implied that over time, if you get—you've got to work towards your results and then that will drive a multiple in your stock and everything. And just curious how you see citizens as being a potential player in the wave of consolidation that we could see.

Yes. So I think nothing's really changed there, notwithstanding a small deal that was announced last week. But our focus right now is driving this organic growth. We have a huge opportunity here to get our ROE back where we'd like it to be, to capture that white space that First Republic vacated and build up our private bank and private wealth business and really drive the growth in the New York City metro market that is sitting there in front of us to execute on. So I want to not get distracted and make sure that job one is to continue to drive great execution and drive the ROTCE higher. I have said, though, if there's a really attractive opportunity down the road, I have total confidence in this leadership team and our ability to integrate that and execute on that. But you'd have to be a pretty high bar to make sure that you had the financials, the strategic, and the cultural fit in order to go do something. But I think that's more kind of down the road than it is imminently.

Appreciate the call has gone on too long. Just a couple of quick follow-ups. One, in terms of the outlook for deposit costs, it feels like CDs still have some room to go. But then we saw the checking account rates move up quarter-over-quarter. So just wondering if we don't get any rate cuts, John, our deposit costs still trending lower through the second half of the year?

Yes. You may have heard from Brendan that we had a nice rotation in the CD book cost—CDs that are 120 to 150 basis points below where the maturity rates are. So there's a really nice front book back book there. It steps down a tiny bit in the third quarter, so down a touch, maybe in the neighborhood of $6 billion in maturities, but still a really nice tailwind for that front book back book, and there's still more in the fourth quarter. So I think we have got—we've got nice benefit to be able to have the opportunity on the deposit side. I think, as I mentioned earlier, keeping an eye on our deposit—our cumulative deposit beta where we performed quite well. We're at 54% for the end of the second quarter. That's better than average. And we feel very, very good about deposit cost for the rest of the year based on not only interest-bearing costs themselves, but also some opportunities to stabilize and improve the mix.

Got it. Just one quick one for you, Don. When we think about the lending outlook, I'm not sure if you addressed this, any sign—any uptick on the sponsor-led side anything about capital call line lending. Are you seeing any pickup there? And how much of that's kind of baked in for the back half?

Yes. We've seen about an 8% increase in capital call utilization in the second quarter. So that drove a little bit of our loan growth in general. And the trending I heard from the team yesterday is they continue to expect further growth in utilization as we get it. We're not adding a lot of new capital call lines, but we're just seeing utilization revert to normal, and we're about points below our long-term average utilization in our capital calls. So you've seen the deal announcements going on out there. Capital call lines get driven by not the deals we're doing, but obviously by the broad activity of the PE complex. And they're beginning to get more active. So we think there's some continued upside in utilization on that side of things. I think that's our last question.

Great. Before I leave, I just want to take the opportunity to thank John Woods for his contribution along our transformation journey. It's been great working with you, John. And anyway, we wish you well on your next chapter.

Thank you, Bruce.

Okay. And with that, let me thank everybody for dialing in today. We appreciate your interest and support. Have a great day.