Citizens Financial Group Inc (CFG) — Q1 2026 Earnings Call Transcript

Thanks, Ivy. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, Aunoy Banerjee, will provide an overview of our first quarter results. Brendan Coughlin, President; and Ted Swimmer, 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 it over to Bruce.

Okay. Thanks, Kristin, and good morning, everyone. Thanks for joining our call today. We're pleased to start the year off strong, notwithstanding geopolitical tensions and uncertainty in the macro environment. We delivered good financial performance in a seasonally soft quarter with year-over-year EPS growth of 47%, positive operating leverage of 7% and NIM expansion of 24 basis points. Our balance sheet position continues to be robust with CET1 at 10.5% and our allowance for loan losses at 1.52%. Credit trends continue to be favorable across our portfolios, and we continue our loan mix shift towards deeper relationships with lower credit risk. Execution on our strategic initiatives continues to track well. The Private Bank and Wealth business showed further growth in customers, balance sheet and profitability, now accounting for roughly 10% of our pretax income while delivering an ROE in excess of 25%. During the quarter, we opened 3 more PBOs, bringing the total to 9. Reimagine the bank is off to a solid start, and we reaffirm our $450 million P&L target by the end of 2028. We estimate about $100 million in 2026 exit run rate benefits at this point. Our positioning with private capital continues to be excellent. We anticipate a strong year for private equity sponsor activity, which should provide a balance sheet and fee opportunities for us. We've reviewed all of our lending to private credit vehicles at a granular level and we feel good about our credit exposure. The New York City Metro initiative also continues to show further progress. We are growing across retail, small business and middle market. We are in the process of analyzing Citizens' existing branch footprint for net new investment and optimization with New York City likely to see growth in branches in coming years. We should have more details to share with you on this midyear. We're also focused on an initiative we call One Citizens, which is systematically finding ways to work across the enterprise to deliver valuable solutions to our customers. Now that we have stood up the private bank and continued the build-out of our corporate bank, we have the capacity to provide both personal and corporate services to successful business owners, investors and entrepreneurs. We will report more on this as the year progresses, but we're already gaining real traction. As we look ahead to the second quarter and the full year, we remain cautiously optimistic that we'll be able to navigate through external challenges and still deliver the strong results we projected coming into this year. So far, markets have behaved rationally despite the war, with equity markets holding in and credit spreads only slightly wider. We intend to stay on our investment plan for the year unless the macro takes a meaningful turn for the worse. We're pleased with the regulatory changes we see coming from Washington, D.C., and we look forward to the upcoming CCAR stress test results, which we're hopeful will give a more accurate result for citizens than what we've seen in the past. So to sum up, a good start, well positioned with a great strategy and a great team and optimistic for a strong 2026. With that, I'll turn it over to Aunoy for the financial details.

Thanks, Bruce. Good morning, everyone. As Bruce mentioned, Citizens has started the year well. Referencing Slides 3 and 4, we delivered EPS of $1.13 for the first quarter with ROTCE of 12.2%. Results were paced by strong NII, reflecting both continued net interest margin expansion and solid loan growth. We also deferred our best-ever first quarter fee result, led by strong performance in our commercial bank. With solid revenue performance and expense discipline, we drove more than 700 basis points of positive operating leverage year-over-year notwithstanding continued investment in the private bank and our other strategic priorities, along with ramping up our commercial bank program. The Private Bank continued to grow its profitability, contributing $0.11 to EPS, up from $0.10 in the prior quarter as the business delivered another very strong quarter of deposit growth. Now let me walk through the first quarter results in more detail, starting with net interest income on Slide 5. Net interest income was up 1.6% linked quarter, driven by the benefit of an expanded net interest margin and higher interest-earning assets, including strong loan growth which more than offset the day count impact of about $22 million. As you see from the NIM back at the bottom of the slide, our margin improved 7 basis points to 3.14%, driven primarily by the benefits of the reduced drag from terminated swaps and non-core runoff with a 5 basis point combined impact. The fixed-rate asset repricing benefit was 1 basis point. And lastly, the net impact of 1 basis point related to improved funding cost and mix, largely offset by lower acetyls. We continue to do a good job optimizing deposits in a competitive environment. Our interest-bearing deposit costs were down 16 basis points and total deposit costs were down 12 basis points. The cumulative interest-bearing deposit beta improved to 50% as we benefited from the repricing after the last rate cut. Even with the Fed now expected to hold steady in '26, we are still projecting a high 40s beta for the cycle. Moving to Slide 6. Noninterest income is up 11% year-over-year but down 2% linked quarter. As I mentioned, this was our strongest first quarter fee result ever, notwithstanding heightened geopolitical tensions and an increase in market volatility. Capital markets performance demonstrated the strength and diversity of the franchise with fees up 34% year-over-year and down 4% compared with the strong fourth quarter. M&A delivered a good result in the quarter with our pipeline strong and continues to build. Bond underwriting was up nicely from the prior quarter. Our equity underwriting performance was stable linked quarter and up significantly year-over-year. Loan syndications were lower given the market volatility. We continue to maintain strong market share ranking fourth in the middle market sponsors book runner deals by volume. This is for both the first quarter and over the last 12 months. Our deal pipelines across M&A, debt and equity capital markets continue to build notwithstanding the unsettled environment. Our Global Markets business was up $10 million linked quarter with increased client hedging activity in interest rate products and energy-related commodities. Our wealth business continues to build with progress in the private bank and strength in our retail network. Wealth fees are up 2% linked quarter and 23% year-over-year. These results reflect higher advisory fees with continued positive momentum in fee-based AUM growth year-over-year. The fourth quarter results reflect positive net inflows partially offset by market impacts on AUM. Mortgage was down 19% linked quarter given a lower MSR valuation, partially offset by slightly higher production and servicing fees. On Slide 7, expenses were managed tightly, up 2.6% linked quarter, largely reflecting the usual seasonality in salaries and benefits as well as about $6 million of implementation costs to ramp up the reimagine the bank program. On Slide 8, average and period-end loans were up 1% linked quarter. We saw solid loan growth across each of the businesses. Commercial loans, excluding the private bank, were up 1% on a spot basis. This was driven by net new money originations at higher commercial line utilization. This was partially offset by CRE paydowns. We continue to reduce commercial banking CRE balances, which were down about 4% this quarter and 16% year-over-year. The Private Bank delivered good loan growth again this quarter with period-end loans up about $600 million, driven by growth in multifamily and residential mortgage. Growth in retail loans ex non-core on a spot basis was about $300 million, led by real estate secured categories. This was offset by non-core auto portfolio runoff of roughly $500 million for the quarter. Next, on Slides 9 and 10, we continue to do a good job on deposits, with average deposits up 1% or $1.5 billion quarter-on-quarter, primarily driven by the growth in the Private Bank, which reached $16.6 billion at the end of the quarter. This was partially offset by seasonal impacts in commercial. Year-over-year, average balances are up $8.6 billion or 5%, reflecting combined growth in the private bank and commercial of $11.2 billion, partially offset by roughly $2 billion of reduction in higher-cost treasury brokered deposits. On a spot basis, noninterest-bearing balances are up $1.3 billion or 3% quarter-on-quarter and up $4.1 billion or 11% year-over-year, improving the overall mix to 23% of the book. Our total noninterest-bearing and low-cost deposit mix was steady at 43%, and our consumer deposits are 64% of our total deposits. This compares to a peer average of about 56%. Moving to Slide 11. Credit continues to trend favorably with net charge-offs coming in at 39 basis points, down from 43 basis points in the prior quarter. Nonaccrual loans are down modestly linked quarter, reflecting a decrease in commercial, largely driven by C&I, which was partially offset by an increase in market. Turning to Slide 12. The allowance was essentially stable this quarter with ACL coverage ratios of 1.52%. This reflects the continued improvement in our portfolio mix with non-core runoff, the reduction in CRE and strong originations of lower loss content C&I, residential real estate secured and private loans. The economic forecast supporting the allowance contemplates a mild recession with a slight deterioration compared with the last quarter, reflecting the potential impact of higher energy prices. As we look broadly across the portfolio, the credit outlook remains positive though we continue to carefully monitor the macroeconomic environment. Moving to Slide 13. We maintained excellent balance sheet strength, ending the quarter with CET1 at 10.5%. We returned about $500 million to shareholders in the first quarter with $198 million in common dividends and $300 million of share repurchases. Moving to Slide 14. The private bank continues to make excellent progress. The Private Bank delivered strong deposit growth again, ending the quarter at $16.6 billion. Importantly, the overall deposit mix and cost continues to be very attractive. We also delivered solid loan growth in the quarter, adding about $600 million of loans at a healthy spread of 4% over deposit costs to end the quarter at $7.7 billion of loans. We ended the quarter with $10.1 billion of total client assets with modest net inflows partially offset by market impacts. We have more runway here as we plan to continue adding top quality teams in key geographies. We opened offices in Malmo Park and Laurel Village in the first quarter, and we expect to open at least 2 more offices this year in Weston Beach, Florida and Greenwich, Connecticut. Moving to Slide 15. Our reimagine the bank program is off to a great start. The objective is to position Citizens for long-term success by embracing a host of new innovative technologies across the bank and simplifying our business model, which will reshape our customer experience and drive a meaningful improvement in productivity and efficiency. The program is well underway with work commencing on several key work streams. For example, on the technology front, we are leveraging AI to assist in writing code and expect to have material productivity improvements in software development, cutting down cycle times. We are also using AI to improve our interactions with customers, which we expect will materially cut call volumes and improve the overall customer experience. We expect to exit 2026 with an annualized run rate of about $100 million of pretax benefit. Now moving to Slide 16. We provide our outlook for the second quarter. We expect net interest income to be up in the range of 3% to 4%, driven by continued expansion in net interest margin and earning asset growth. Noninterest income is expected to be up 3% to 5%, led by capital markets with some risk if market volatility moves higher. Other fee categories such as FX and derivatives, wealth and card should also provide lift for the quarter. We are projecting expenses to be stable to up 1% and incorporating a step-up in implementation costs associated with reimagine the bank and continued investment in other key business initiatives. We expect expense saves from reimagine the bank to benefit second half expenses. The charge-off level is expected to be stable to down slightly. And we should end the second quarter with CET1 in the range of 10.5% to 10.6%, including share repurchases of about $225 million. In addition, our full-year outlook remains broadly in line with the guide we provided in January, which contemplated a pickup in business activity over the course of the year. Looking out further, we see a clear path to achieving our 16% to 18% ROTCE target by the end of pending our net interest margin is an important driver, and we continue to project NIM to be in the range of 3.22% to 3.28% in 4Q '26. And in the range of 3.30% to 3.50% in 4Q '27. Slide 17 provides incremental details on our net interest margin progression to the end of '27. This combined with the impact of successful execution of our strategic initiatives and normalizing credit should drive ROI to our target range. To wrap up, we're off to a good start with results highlighted by strong growth, net interest income and good fee results in a seasonally soft quarter. Our balance sheet is strong and continue to drive forward our strategic initiatives with strong momentum in growing the private bank and in our reimagine the bank program. With that, I will hand it back over to Bruce.

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

Maybe I was hoping you could start by speaking to kind of the capital markets dynamics. Obviously, I see the numbers in the first quarter, but curious how you thought the first quarter actually performed given that you had sort of the interplay between one, the environment played out a lot differently than we all figured it might. But two, I know you all had some deals that were pushed from the fourth quarter into the first quarter. So maybe just sort of results versus expectations then if you could speak to the forward look, things like pipelines, confidence and pull-through, et cetera.

Yes. It's Bruce. I'll start and then pass it to Ted for more details. Overall, we are satisfied with the performance of our capital markets franchise, especially considering the increased volatility and uncertainty, particularly in March when the war began. We have strong diversification across our services in capital markets, including M&A, bond underwriting, equity underwriting, and syndicated loans. This diversity contributed to a solid quarter. There was some momentum from March that has carried over into April, and with a more positive market outlook, we are beginning to see that reflected in our results. We are optimistic about our pipelines and believe that the strength of our franchise will drive people to engage in transactions. However, fluctuations in external volatility might cause some to delay their plans for the right market conditions. That said, we are maintaining our projections for the year and feel good about the activity and the strength of our pipeline. Ted, over to you.

Building on what Bruce mentioned, we deferred a few transactions from March to April due to overall market volatility. However, during that period, we continued to sign new transactions. What’s particularly exciting is that, thanks to our investments in Corporate Finance and industry specialization, we are handling more complex transactions now than we ever have before, and we are optimistic about our pipeline. Additionally, the deals postponed in March are now returning to the market, and we are launching several transactions that are gaining traction in April. We remain very optimistic about our pipeline, especially regarding M&A, and we actually observed an increase in new mandates during this turbulent time, particularly in the M&A sector.

Yes. And I'd just close by saying it was a record first quarter for us in capital markets fees, that shouldn't go unnoted.

Okay. Perfect. That's very helpful. And then I was hoping you all would maybe speak to the private credit portfolio as well. I know there's a lot of good detail in the appendix. Just curious sort of not only for an update on credit quality dynamics, but also given your build-out of the team over many years, I know it's been a focus area and just sort of your appetite to continue to grow the portfolio given certain current industry circumstances?

Yes, I'll start again and flip to Ted. But I would say we've been very disciplined in terms of the kind of counterparties that we select. Usually, they're often a private equity sponsor that's migrated to a broader kind of business model that picks up private credit, and they're moving to be more of an alternative asset manager. And so we've helped them grow and get into this business and provide leverage to many of those names. So client selection is always key and then making sure we have the right structures in place so that we're structurally protected from any issues that could arise in the portfolios. And so we've gone through and looked at kind of our exposure and kind of the broad portfolio, looking at all the underlying factors who has liquidity gates for retail investors, who's got software exposure at the end of the day. I feel very, very confident that we're structurally well protected from a credit loss standpoint. And I think even though this is in the headlines and there's concerns about private credit, the asset class, if you want to call it that, is here to stay, and they provide a certain amount of leverage and deal structures that exceeds what banks have historically been willing to play, and there's certainly a lot of institutional demand. Private credit managers are continuing to raise new money. So I think we'll just grow selectively with the market as we have in the past, but we don't see this turning around and being something that starts to shrink. It's just going to grow. And I think every player in the market will be more selective, and we'll continue to be selective, but we would expect this to be an area that we stay committed to. Ted?

I want to build on what Bruce mentioned. In several discussions we've had with private credit recently, despite the current noise, we haven't noticed a decline in interest. In fact, many of the conversations and upcoming deals are generating inbound inquiries from the private credit sector. While there is less interest in technology and software investments right now, overall, the majority of their portfolios are still very active, and there's significant demand present.

Maybe to start on NII. I know you broadly reiterated the guide for the year, including the NII guide and the exit NIM. But you have noted that Citizens SKU is slightly asset sensitive. In a scenario where rates stay higher for longer, we don't get any rate cuts until the end of the year. Where do you think the NII and NIM is trending? And what's the most likely outcome here?

We are optimistic about our capacity to achieve the NII and NIM that we outlined at the start of the year. However, as you mentioned, the environment will influence that due to the Fed's pause. A slightly higher rate situation that we entered the year with, considering our asset sensitivity, is somewhat beneficial for us. Additionally, we had anticipated a 10-year yield between 425 and 450, which we are currently within. If rates rise further and the yield curve steepens, that could also be a positive factor for our outlook, although I wouldn’t consider it a major shift. These factors provide us with additional confidence that we can meet or slightly exceed our targets. Aunoy, feel free to share any additional insights.

Yes. I think Manan, to Bruce's point, we are very confident on getting to the NIM and the NII outlook that we gave. I think on the NIM side of it, as you saw from our walk in 1Q, a lot of the benefit is coming from the terminated swaps and the non-core runoffs, which is not rate dependent, and that's another 12 basis points for the rest of the year. The front bank book bank dynamic, as Bruce suggested, would be helpful in this environment. So we remain confident of getting there. And as you saw, we have some good loan, but we have good correction and pipeline on that. So we feel confident of getting there.

Perfect. And then maybe to pivot over to capital given the new proposals that we got a few weeks ago, if you could give us your initial thoughts on what the magnitude of the benefit is for risk-weighted assets given your specific business mix? And maybe if you have any thoughts on whether citizens would adopt the ERPA.

It's still early days, and we are currently in a comment period. However, based on our current observations, we could see a reduction of around 10% in risk-weighted assets, which would translate to an improvement of over 100 basis points, possibly around 110 basis points in CET1. If the AOCI phase-in were to begin today, it would mitigate that impact, but as it rolls out over time, some of the initial drag will lessen. We anticipate at least a net gain of 30 basis points, and possibly as much as 50, even with AOCI in consideration. We will need to monitor how the rate curve develops moving forward. Overall, it's a favorable issue to address, although it's early to determine our plans. We must take into account various factors including stakeholder expectations, market conditions, rating agencies, and regulatory concerns. Additionally, regarding the ERBA, there is a slight improvement compared to the revised standard approach, though it requires significant effort to implement. A key difference between the two methods is the lower risk weights for investment-grade credit under the ERBA. We’ll need to see if these differences will be incorporated into the revised standard approach, which may influence our decision on whether to adopt the ERBA.

Yes, as Bruce mentioned, we are actively addressing the advocacy issues he pointed out. We are also assessing the necessary work related to ERBA, comparing it to the current standards. With the introduction of new technology, there could be significant changes. There's still a lot to accomplish, but we believe we are heading in the right direction, and we feel optimistic about it.

So Bruce, you've had 4 straight quarters of sequential loan growth. If I look at the drivers of growth, clearly, private capital call, private credit have all been contributors. So maybe you could just talk about your confidence in loan growth here and what you see as the key drivers. And then second, I know you referenced higher utilization. What's driving that? I know you're expecting to see more of this.

Yes, I'd say that the really impressive thing, Ryan, is that we're getting the growth in each of the 3 main business areas. So private bank being kind of that start-up phase is growing their book nicely and consistently. And I think that leans a little bit more on the consumer side and multifamily side, that should continue. We had actually low line utilization with their client base, which should bounce back. And so we see private bank contributing. I think in commercial as well, we have the growth in NBFI, but also starting to see a little deal activity pick up across the corporate book, and we have our expansion to not forget. So we brought banking teams into Florida and California and beefed up our New York Metro team. So that's contributing a bit. And then in the consumer bank, we've been kind of a rock star on HELOCs and consistent growth in mortgage. So it's nice to see it's pretty broad-based. And then some of the drags of the things that we've had in the past, such as kind of the rundown of non-core, some of the commercial BSO thin relationship exits, and things like that, the CRE kind of getting back to par where we want to be on commercial CRE after the investors acquisition, all that is starting to abate a little bit, which allows the inherent growth to shine through. I think I'll ask maybe go to Brendan first for some color on Consumer and Private Bank. And then Ted, I'll ask you for some color on commercial.

Yes. Thanks, Bruce. Thanks, Ryan. Adding on Bruce, just give you a little more color and data on the retail side of the business. We're up about 4% year-on-year on core loans, heavily driven by HELOC and mortgage Bruce mentioned, you just got the league tables in from 2025. We're the #1 originator in the United States at home equity lending with an incredibly strong risk profile, low LTVs, strong FICO scores, all depository relationship customers. So we're very proud about that, and we expect that to continue. Mortgage originations in this rate environment have obviously been challenged, but prepay speeds slowed too. So we're seeing net positive growth in mortgage and the balance sheet rotating into higher relationship-based lending fueled by the private bank and the retail bank. With our launch of a new credit card product, we're seeing a 50%-plus growth in new credit card originations. It takes a little bit of time for that to translate into the balance sheet as pain activity gets through, but we should see some modest script in credit card as we hit the back half of the year too. So broadly in retail, we expect the growth rate that we're seeing to project forward with a lot of confidence and the mixing of the balance is to get strong with higher return and deeper relationships. The private banking side, we've generally been in the range of about $1 billion in net growth each quarter. We were a little bit lighter than that this quarter with some lower utilization rates on the private equity side. But we expect that to be temporal. And the underlying origination activity is quite strong. We're very confident we'll end the year in the range that we gave of $11 billion to $13 billion, which projects back to about that $1 billion in that growth per quarter returning in the private bank. So both retail and private banking, I would just broadly describe as continued steady momentum with what you've seen over the last few quarters. Ted?

Thank you, Brendan and Bruce. In the middle market, we've observed an increase in utilization over the past three months. Our customers seem to be growing more comfortable with the economy and are spending more on capital expenditures, leading to a slight rise in demand. Additionally, our expansions in Florida, New York, and California are starting to yield success with increased loan demand and a growing customer base, resulting in higher growth in those areas. On the mid-corporate side, we've reorganized the division to focus more on industry rather than geography, which has opened up new opportunities for us. This was a significant area of focus for us in the first quarter, contributing to substantial growth. NDFI continues to grow at around 5% per year, with solid opportunities in the capital call line, securitization business, and lending to direct funds, which we expect will maintain that growth rate. However, we haven't seen much change in the private equity sector. The sponsor business remains relatively flat year-over-year, so most of our growth has come from the traditional mid-corporate and middle market segments.

Got it. And maybe just as my follow-up, Bruce. In the slides, you highlighted some of the things that you're doing with reimagine the bank, including corporate and the LLMs and a handful of things. I guess, given the pace of change we're seeing in the markets in areas like AI, are there opportunities to accelerate any of these initiatives or adjust the timing given, again, just the rapid pace of change that we're seeing?

I'll begin and hand it over to Brendan who is overseeing that program. Ryan, you made an excellent point regarding the remarkable adoption and innovation we're witnessing in AI. It's truly significant. When we established the program, we took a systematic approach to assess our current practices and envision how we want to evolve them, leveraging existing technology while acknowledging that, over the next two to three years, we'll encounter much more innovation and opportunities to adopt even better tools. This could lead to greater benefits, acceleration, or even new work streams we haven't yet imagined. The program is dynamic and will evolve, as we continue to explore new possibilities. One important takeaway is that we have a track record of effectively integrating innovation into our bank's operations to realize genuine financial advantages. We are committed to avoiding projects that don't yield tangible results. So, Brendan?

Yes. Thanks, Ryan. Your question is principally AI, but one point on the non-AI front, you saw from us in the quarter that the reimagine the bank initiative was principally self-funded by quick wins that were non-AI based. And so we've already got over $30 million in projected vendor savings for the year in the box with an expectation that, that number goes up. We've closed corporate facilities, smaller facilities that's driving savings. So that has offset the investment already. So you're seeing real tangible impact in the program already this early in the year. On the AI front, to say two things. One is, you're right to point out the risk of speed of execution also is the speed of obsolescence as we put these in place, the idea that the best answer could be different in a quarter is very much front of our mind. So we're architecting all the things that we're building to be even more nimble than you might expect from a tech standpoint in the past. So as new models come up, we can easily plug and play and make sure we're taking advantage of the latest and greatest. So this is very much front of our mind. We very much have real AI use cases in market today. In the call center, as an example, we've told you we expect to get 50% of the calls answered by AI by the end of the period. It's already in pilot. In fact, we expect inside of this calendar year, by the end of the year, we should have 25% of our calls answered by non-humans with the expectation that will ramp in 2027% to 50%. That really should hit in the summer and into the early fall. So this is very real. This isn't a back-loaded program all coming in 2028. And on the tech space, as an example, we've deployed AI tools to our engineers. We're already seeing a very material productivity improvement and leverage we're getting on our capital investment and deployment ranging from 30% improvement in productivity to in some tests we've done, it's been a 5 to 10 times improvement in productivity. So now we're working on scaling it and engineering it for real scale. So we are moving very, very fast. We're keeping up with the pace, and it's live and in production, and our confidence is building.

Just a few follow-up questions for me, please. So, given everything that you've said about a record first quarter in cap markets and very full pipelines, picking up new mandates while some of these deals were pushed into closing in the second quarter or launching in the second quarter, it sounds like we should still subscribe to the 6% to 8% fee outlook growth for '26?

Yes. We're not coming off any of those ranges the full year guide at this point, Erika.

Perfect. And then my follow-up question is, thank you for the expansive answer on NIM and NII relative to the current forward curve. I guess this is a 2-part question. First is, I think, Aunoy, you talked about the noninterest-bearing growth in a seasonally tough quarter for that, maybe where that noninterest-bearing growth is coming from? And to that end, if we do have a scenario where we have no rate cuts, can Citizens keep deposit costs stable in light of more robust growth from you guys on both the consumer and corporate.

Erika, it's Aunoy here. We were quite pleased with our deposit performance this quarter. And as we saw actually good noninterest-bearing deposit growth. Obviously, we have a couple of strategic initiatives. One is being the private bank where you saw the good DDA growth; that the DDA percentage in the private bank is 30%. So we continue to see that coming. And as you saw the balanced growth, we are seeing the DDAs grow along with it. So that's the one thing that's really driving the DDA growth. But even as Brendan mentioned, even on the consumer side, there is a lot of growth that we are seeing in the low-cost NTT as we really build the relationships with our clients. So we are seeing a lot of good traction there. And to your second question about where we go deposits from here. Obviously, deposit volume is going to depend on the overall economy, how the GDP goes, how the loan formation goes in the economy. But with some of the strategic initiatives, we believe that we can maintain in the competitive range about where deposits are going to go from here. And as you saw, our deposit betas are at 50% this quarter and we expect it to be in the high 40s, which is in line with the competition. With that, maybe, Brendan, I'll pass it on to you to see if you have any comments.

I'll add a little color on each consumer and private, but out of the $118 billion or so of deposits that sit in the consumer bank, 52% of them are what we call low cost, which is either DDA or checking with interest. And in the retail bank checking with interest is sort of a sub-10 basis point type of cost. So for all intents and purposes, it's very similar to DDA. The COVID period of all those operating balances reducing is firmly behind us, and we're now seeing net growth. So we're up 130 basis points year-over-year in our low-cost deposit categories. That's versus a peer average of about 50 basis points. So we are very firmly in the top quartile in terms of low-cost growth for the consumer bank, and we project that to continue with confidence in the outlook, which will really help control interest-bearing. Total cost of deposits when you include the interest-bearing side. And then no pointed this up. But in the private bank, we ended the quarter with very strong spot numbers. It's actually 40% DDA over 50% when you add in the checking with interest in the private bank itself as well. So we're expecting that to be in that sort of range in the same range that we've seen in the past. So we're getting this really strong growth in the private bank without breaking the quality metrics and this far in, that's a real positive to see. And broadly, we expect that to continue looking forward.

Can you provide more insight into the mix of loan growth in the private bank? Specifically, how is the momentum on the mortgage side compared to the commercial capital call loans? Additionally, could you share the new money yields you're seeing on loans in the private bank, particularly for mortgages and other types of lending including capital calls?

Yes. On the loan side, the longer-term trend has been fairly balanced among mortgage, multifamily, commercial real estate, and private equity capital call lines. This quarter, the utilization rates on the private equity lines decreased slightly, which temporarily affected the quarter-over-quarter growth, primarily driven by mortgage and multifamily commercial real estate, evenly distributed between those categories. Both of these asset classes, where we leverage the balance sheet, benefit from strong relationship-based banking, resulting in high net returns from our customers. Our overall loan yields compared to deposit costs show a net spread of over 400 to 425 basis points, which has remained stable since our launch. Therefore, the growth we're observing is fundamentally relationship-driven, and even when considering asset yields minus deposit costs, it positively contributes to our net interest margin. As a result, the overall return profile of the business remains in the mid-20s with strong balance sheet profitability, and we foresee no changes to this trajectory.

Got it. And then on the capital front, Bruce, maybe if you could kind of I think you talked about your capital allocation priorities from organic versus buyback and then maybe on the M&A interest side. I know you've been historically uninterested in whole bank M&A. Just curious if that's changed for any reason at this point.

I appreciate your question. Our capital and priorities remain stable and unchanged. We aim to maintain a strong dividend for our stock and to increase it as our earnings grow, which is a goal for this year. Our second priority is to ensure we have capital to support our clients and the bank's growth, with a focus on organic growth. In addition, we are open to selective acquisitions. For instance, in the first quarter, we acquired a small but high-quality M&A boutique to enhance our services in specific industry sectors. Sometimes, it is quicker to acquire an M&A boutique rather than hire new talent, as it requires less capital. We are also exploring opportunities in the payments space to boost our growth modestly, although these will typically be smaller initiatives. Any remaining capital will primarily be directed toward buying back our stock, which I believe remains an attractive option. In the first quarter, we repurchased $300 million worth of stock, and we plan to buy $225 million more in the second quarter. As we continue to see growth in our overall results and earnings, we will have ample flexibility for organic bank growth and stock buybacks.

Back on capital, you mentioned the stress tests coming up and the potential to get some relief there. your buffer is 4.5%, it seems like you could see some pretty significant relief this time around. And if you do, does that at all come into play with how you think about the 10.5% level for CET1, especially in the context of seeing some of the larger banks moving their CET1 ratios lower recently?

Yes. So what I would say on that is that we've managed the capital kind of where we think it's appropriate given the environment and stakeholder expectations. And so we've been at the high side of our range of 10% to 10.5% or slightly over the 10.5% for the last several quarters. The SCB has not really been a binding constraint. And I've said in the past, it's to me more of a scarlet letter; I can't believe that we're getting that high of an SCB, which is completely outsized relative to peers. I do think that the Fed is now kind of taking a hard look at why are there some of these inaccuracies that take place. And so we'll see the models aren't really going into this round, but there's other things that I think the progression coming out of where we were in '23 to the strong balance sheet and jump-off point we have today, higher revenue levels. And then the scenario was particularly severe in the last cycle that is better this cycle. So we would expect to see the notional equivalent SCB, even though it won't go into effect, we would expect to see that hopefully quite a bit lower and more in line with peers even before we see some of the model changes like the model changes of not picking up this benefit of swaps was really a big miss. But even without fixing things like that, I think we'll see improvement. So I would say we'll wait and see like how the environment shapes up. Right now, we're in a war with a lot of uncertainty, and profitability is still increasing. So I think carrying a little extra capital through the course of 2026 makes sense. But certainly, there'll be opportunities to reassess that if we get a positive outcome to the war and the market conditions improve and we continue to deliver a higher level of earnings it might be possible to start to ratchet that down, but probably that would be a '27 event and not something that you'd see us do in '26.

Okay. And then just switching to the Private Bank. You had some great deposit growth this quarter, and you mentioned some of the spread details on that incremental business, which sounded great. I was just curious what the rough cost of those deposits were in terms of the growth coming in this quarter? And if you could just give an update on the talent pipeline in that business, that would be great.

Yes. The deposit cost, looking at now to carts 220-ish basis points. the total deposit cost when you blend in the interest-bearing plus checking is probably somewhere in that same ballpark.

Yes. So it's going to be somewhere that's going to be lower than our commercial deposit funding costs but higher than pure retail is one way to think about that.

And remember, the interest-bearing side is mostly still front book. So you've got a heavy piece of DDA and then the interest-bearing side is front book. So the poly is somewhat barbelled. Over time, we can smooth that out as the business builds.

Yes. And the other thing that I would say is we opened 3 PBO offices this quarter, and we have 2 more geared up on this quarter and 1 later in the year. that will bring us up to 9%. That brings us to 11 by the end of the year. So that's an important part of the deposit gathering strategy to have an ability to go out to successful people and walk what we call two-legged customers in addition to some of the corporate relationships that we have, and we get billboard value from having those new locations opened. I would say over the next 3 to 4 years, we could see that PBO count get up to 25% to 30%. If you recall, I think First Republic had maybe 80%. I don't think we're going to go near there. But I think we can get into the key markets and kind of have 25 to 30, which will also kind of keep that deposit machine cranking along. In terms of talent, the main needs we've taken the business from about 150 people at launch up to close to 600 today, including all the support dedicated support people. I think the plan for this year is to kind of continue to build out Florida is one of the things on the PB side, but then continue with the wealth lift-outs. And so we have a pretty good pipeline on private wealth lift-outs. None of them hit in the first quarter. We hopefully will catch up here where we want to be in the second quarter, but that's also a real focal point to make sure that we have the wealth professionals co-located with our private bankers so we can deliver kind of total solutions to the customer.

The only thing I would add is that our talent pipeline is very strong and we are successfully attracting talent to this platform. We have held ourselves back a bit over the past few years for two main reasons. One is our commitment to the market to achieve the profitability and results we promised, and the other is ensuring the platform is ready. We've invested significantly to integrate all of our products and deliver the service effectively. Our NPS has improved from 70 to 76, and growth is very strong. We’re confident in the foundation of the platform, so we’re beginning to consider how to proactively bring in talent selectively. It’s important to us to maintain a high standard; on the banking side, we're focused solely on bringing in top talent. That's our approach.

On the deposit side, I would just add that we are also bringing good quality deposits; the lendability of these deposits are good. So just so that we can use it in the broader franchise.

Just two quick follow-ups. Maybe, Bruce, in your prepared remarks, you talked about looking at New York branch strategy, I guess you plan to open more branches in New York. Just talk to us, is that more private bank related? Or do you see an opportunity to just open more branches in New York and just the size of kind of what you're thinking there?

Yes, I'll begin and then pass it to Brendan. I previously mentioned that we see a solid opportunity to strengthen our presence. While some peer banks believe that our market is quite saturated and suggest seeking growth in other areas, that's not our approach. We intend to focus on markets where we are already recognized, making investments in our branch system to optimize locations and the balance between in-store and standalone branches. Our goal is to increase the growth rate of deposits within our existing footprint, avoiding the high costs of advertising in unfamiliar regions. Our intention is to enhance our branch network with additional investment, leading to a projected growth in deposits by about 200 to 300 basis points above the usual GDP growth rate. Over ten years, this could translate to an additional $20 billion to $30 billion in deposits, which are crucial for a strong bank. So, this initiative is significant for us. We will share more details around mid-year. New York is a key area for us, having successfully integrated two franchises that previously needed attention. We have deployed our top talent there and brought our banking model into a competitive market with great results. It's currently our fastest-growing area in terms of households and deposits, though we still have room to grow further. As part of our larger strategy, we plan to open more retail branches in Manhattan and nearby areas, which we're enthusiastic about. We anticipate adding one or two private bank locations in Manhattan, for instance. However, our primary focus will be on optimizing our retail strategy. Brendan, do you have anything to add?

I guess a sign of an incredibly aligned leadership team you took almost every word out of my mouth. The only thing I would add is just give you a note on New York and then on the rest of the markets. But in a world post-COVID, there are a lot of questions on the future of retail branches and the importance of them, but it's still very much truth, if you want outsized operating leverage in retail banking, you need 4% plus share of branch density and despite all of our incredible successes in New York, we're still at sort of, call it, 2.25%, 2.5% branch density. So we do think we can build on our momentum by densifying a little bit. And we'll do that thoughtfully over time. As Bruce mentioned, we'll give you more details as we get towards the middle part of the year. We also have some self-funding dynamics that still exist in the rest of the franchise. We still have a lot of in-store branches that we'll be able to reposition a bit to traditional branches in the non-New York parts of the footprint that will free up some expense and capital to densify in New York. So we'll bring everybody through the plan here in short order. But really, as Bruce pointed out, the goal is to drive sustainable market share gains and outsized deposit growth in retail to fund the rest of the franchise.

That's good color. And just a quick follow-up, Bruce, for you on the capital plans. Like we should benefit Citizens once that gets mark-to-market. When we look at the benefit from the capital proposals, it's something we've begun to think about do you think the tangible common equity ratio then becomes something that you're more mindful for in a world where the RWA density is coming down?

Yes. That's a really thoughtful question. So I do think while that's not a regulatory ratio, it is something that bank investors have focused on over time. And so as I said, we're going to have to triage when this good news comes in, you have to triage as to what our market expectations, what are regulatory expectations, what are rating agencies' expectations. But yes, I think that could happen. I think that TCE ratio could be something that analysts and investors move up in prominence.

You guys have done a good job of expanding the commercial banking business. You talked about it on the call already. Can you share with us when you go into a new market like Florida or California, now clearly, you're building your national brand, but it's I don't think it's yet at Bank of America level in terms of recognition. So how do you balance when you go into these markets that could provide growth on the commercial side, how do you balance the risk with growth? And then second, are you leading with your balance sheet? Or are you building out treasury products first and then lending to those customers? How do you guys approach that?

Let me start and I'll flip right to Ted. But I would say we have tried to lever an expanded presence in these new markets where we brought a private banking operation or private wealth operations and then kind of magnify that by also bringing in kind of the corporate banking teams. And what we aspire to is to bring very experienced, high-quality bankers onto the platform who kind of have a growth ambition and who are good team players. And so one of the reasons that we're successful overall in the corporate bank is we worked very collaboratively with a coverage banker who has product partners that they work together to come up with good ideas. We call it thought leadership. But at every touch point with the client, we're showing up. We understand your business. We want to get to know you. We have some ideas about how you can be more successful. And that really resonates with customers. So I think there's always room for market participants who do that well. So it's really a combination of the visibility of already being in the market. And now we have like 400 people in California, over 400 people. And that works together to raise our visibility and our presence then staying committed to really high-quality people and staying committed to that one Citizens collaborative model where we can deliver solutions to the customer. Ted?

Yes. The Citizens model that we’ve implemented across our bank has really helped us stand out as we expand into new regions. In response to your question, we don’t primarily start with treasury or credit; instead, we prioritize ideas for our customers. We focus on identifying where we can set ourselves apart from our competitors based on the specific customers we aim to attract. This could involve an industry where we have specialized knowledge or connections with a private equity group. Our goal is to unify all aspects of the bank to create a unique customer experience that they wouldn't find elsewhere. With our private banking division and its extensive relationships, we can engage with customers in ways that go beyond simply presenting a balance sheet. Combining private banking with our other services has been central to our strategy as we develop in these markets.

I would say that the companies in the regions and industries we are targeting are very open to welcoming a new player with a strong approach, especially since some of the larger players are not performing well in serving middle market and mid-corporate companies. It seems like we are encountering a favorable environment as we enter these markets.

Very helpful. I appreciate it. And then pivoting over to AI, Brendan touched on it a moment ago, Bruce, and maybe it's for Brendan as well. When do you think we get to the point where you folks and your peers probably as well, are able to go out and tell investors, we just spent x millions of dollars on AI, and this is bottom line impact. Earnings per share improved 2% or the ROTCE number went up 50 basis points because of the X millions of dollars we just spent on AI. Do you think we can never get to something like that down the road? Or is that just too optimistic?

Yes. I think it's going to be hard. It's going to be a very dynamic process, and there's a lot of cross currents that go through the P&L. I think we'll try to do that with reimagine the bank. We're not kind of detailing any notable items for what the cost is of restructuring and investment and consultants and all of that. But I think we will certainly delineate it so that you understand what we're expanding. And so just within that program when we get to the $450 million run rate, that's going to be a very good return on what it took to stand that up. So that might be one way that you can kind of get a sniff of how much are they spending and what benefits are resulting. But I do think it's a dynamic process and a lot of things, there will be a lot of cross currents in the economy and other things. And so you might not have the cleanliness of connection that you're talking about that you're aspiring to.

Just one here on expenses. So the first quarter and then the second quarter guide kind of get us to that 4.5-ish, 5% year-over-year cost growth I know a lot of the reimagine the bank benefit comes in the second half as long as well as some of the spending. So can you just help us understand the cadence of expense growth as we kind of see that benefit. And as you balance performance-related and investments against that as we move through the second half? And should we just be kind of thinking about that 4.5% overall guide that you gave us in January?

Yes, we are maintaining the 4.5% target. The first quarter typically includes expenses related to FICA and payroll for bonuses, while the second quarter is when we tend to hire new employees, especially after bonuses are paid. This period is significant for net additions. When we factor in the one-time costs associated with reimagining the bank in the first half of the year, we expect expenses to peak during this time. Merit increases will also occur in the early part of the second quarter. So, we anticipate expenses will be higher in the first half, followed by less spending on advertisements in the second half, during which some benefits from reimagining the bank will start to materialize, potentially leading to a decrease in expenses. We will provide updated guidance as we approach the second quarter and share our expectations for the third quarter. For now, we remain committed to the 4.5% target for the year, and the expense growth is more concentrated in the first half before stabilizing or even declining slightly later on. Additionally, we are pleased with our expense management in the first quarter, which aligns with the seasonal trends mentioned. We see positive outcomes from vendor savings and property closures, contributing to improved results. We also have a strong focus on return objectives in the private banking sector. Notably, we achieved 700 basis points of positive operating leverage this quarter, exceeding our 500 basis point goal for the year.

Bruce, you expressed confidence getting into the 16% to 18% range for the ROTCE by the end of next year. I guess, number one, what could make it perhaps a little sooner to get into the range and maybe the factors that might push it out a little bit?

Yes. I think it's hard to pull it forward a whole lot. We have some of the time-based benefits of those legacy swaps running off, which is a driver of kind of moving higher in NII and overall kind of revenue. But if we got into kind of piece dividend from the resolution of the geopolitical war. And then there's a lot of activity in the capital markets. I think we're as well positioned as anyone certainly amongst our peers, maybe better positioned to really capture that upside if that happens. So I think that's one driver that can maybe hope to get us there a little faster. And I'd say, in the private bank, they're on a steady as she goes by design kind of trajectory. If we did start to see more revenues, maybe we could force feed a little more investment there. And we talked a little bit about the potential for pull forward of RTB benefits if some of the new technologies kick in. So there is a case to make that potentially in a perfect scenario, you can pull it in a little bit, but I'm not promising that. And I'm really just focused on making sure we hit that by kind of the end of '27. And then I guess the converse is true, too. If the kind of environment stays volatile and the war doesn't get resolved quickly and energy prices go up and the economy slows down a bit, there's possibilities that, that could extend a little bit. But a lot of this is actually baked in. So to get kind of from 12% to 15% is really these time-based benefits and some of the trajectory we see on the NIM and then kind of getting all the way there is execution of some of the rest of the initiatives, the normalization of credit cost back to the mid-30s. We had a 39 basis point this quarter. I think we're firmly on that trajectory, again, absent something happening in the economy. And then we'll just continue to buy back our stock fairly aggressively as well.

So I wanted to ask about loan pricing, commercial loan growth has been increasing nicely across the industry. So I was curious about how loan spreads are holding up in a competitive environment.

Yes. Let me begin, and then I'll hand it over to Ted. We experienced diversified loan growth, including in the mid-corporate sector, where we were slightly aligned with subscription lines. As for the spreads, they have decreased as rates declined, but we remain competitive. Regarding loan growth, as Ted pointed out, this is not just about credit relationships; it's a more comprehensive approach. We evaluate the returns of loans in a holistic manner, considering additional factors like deposit relationships or other business activities, including fees. There is a strict process in Ted's division to ensure we are looking beyond just the spreads.

To elaborate on what Aunoy Banerjee mentioned, in the early part of the first quarter, we observed more activity on the institutional side of the market. On the bond side, there was some tightening of spreads, which have since widened again with developments in March. When it comes to Citizens, we take a holistic approach to our relationships. We assess when we make a loan by considering the ancillary business involved, which we have successfully integrated by the end of last year. We now have a strong discipline ensuring that we do not stretch loans in situations where we do not achieve an overall suitable return for our customers. Consequently, we haven't experienced a significant decline in spreads in the last quarter.

Okay. All right. I think that gets to the end of the question queue. So I really appreciate your interest in citizens. Thanks for dialing in today. Have a great day.