Kristin Silberberg:

Thank you, Alan. Good morning, everyone, and thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Saun and CFO, John Woods will provide an overview of our second quarter results. Brendan Coughlin, Head of Consumer Banking and Don McCree, Head of Commercial Banking are also here to provide additional colour. We will be referencing our second quarter earnings presentation located on our investor relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. With that, I will hand over to you Bruce.

John Woods:

Thanks, Bruce. And good morning, everyone. As Bruce mentioned, second quarter results were very solid in a number of key areas, starting with the excellent fee performance driven by strong capital markets fees and record results in Wealth and Card. Also, we managed our deposit portfolio quite well, with stable balances and lower interest bearing costs in a competitive environment which positively impacted NII and NIM. Rounding out quarterly results, expenses and credit came in largely as expected. With respect to balance sheet strength, we continue to maintain a healthy credit reserve position and capital and liquidity levels near the top of our peer group. And importantly, we are executing well against our various multi-year strategic initiatives, including the buildout of our private bank. I'll summarize further highlights of the second quarter financial results, referencing Slides 3 to 6. We generated underlying net income of $408 million for the second quarter, EPS of $0.82, and ROTCE of 11.1%. Maintaining a strong balance sheet position is a top priority, and we ended the second quarter with CET1 at 10.7% or about 9% adjusted for the AOCI opt-out removal. We also maintained our strong funding and liquidity profile in the second quarter. Our pro forma LCR is 119%, which is well in excess of the large bank Category 1 requirement of 100%. And our period end LDR improved to 80.4%. On the funding front, we've reduced our period end FHLB borrowings by about $1.5 billion linked quarter to $553 million. We continued our programmatic approach to increasing our structural funding base with a successful $750 million senior debt issuance during the second quarter, and we added about another $1 billion of auto-backed borrowings. That was our fourth issuance, essentially completing our auto program, and it was executed at our tightest credit spreads to date. We also refinanced preferred stock in the second quarter by issuing $400 million of new preferred and redeeming $300 million of higher-coupon floating rate preferred on July 8. Credit losses of approximately $180 million were in line with our expectations. The NCO rate rose a little to 52 basis points reflecting loan balances coming in a little lower than expected. Our ACL coverage ratio of 1.63% is up 2 basis points from the prior quarter. This includes an 11.1% coverage for General Office, up from 10.6% in the prior quarter. Regarding our strategic initiatives, the private bank is doing very well, having generated $4 billion of deposits and $3.6 billion of AUM through the second quarter. Also, our investments over the years in the private capital and capital market space are playing out nicely, as demonstrated this quarter. Finally, we are excited about our top of house initiatives, including the ongoing benefits from BSO and TOP, as well as growing contributions expected from data and technology-related initiatives, such as generative AI and cloud migration. Next, I'll talk through the second quarter results in more detail, starting with net interest income on Slide 7. As expected, NII is down 2% linked quarter, reflecting lower net interest margin and loan balances. With respect to NIM, as you can see in the walk at the bottom of our slide, our margin was down 4 basis points to 2.87%, reflecting a 6 basis point increase in swap expense due to the 60 basis point decline in average receive rate in the quarter. This is partly offset by a net increase in NIM of 2 basis points from all other sources, including higher asset yields, non-core runoff, and good deposit cost performance, with interest bearing deposit costs down 3 basis points. Overall, our deposit franchise continues to perform well in a very competitive environment with our interest-bearing deposit data at 51%, which was down from 52% in Q1. Moving to Slide 8, our fees were up 7% linked quarter given strong results in capital markets and record card and wealth results. Our capital markets business improved 14% linked quarter with higher bond underwriting and loan syndication fees given strong refinancing activity. M&A advisory fees were down slightly off a strong first quarter. However, our deal pipelines remain strong and we expect to see positive momentum in the second half of 2024. It's great to see our capital markets business holding the number one middle market sponsor book runner position for the second quarter in a row. This reflects the benefit of the investments we've made in our capabilities since the IPO and demonstrates the diversification of the business. Card fees were a record, primarily given the full quarter benefit of the first quarter transition to a new debit card platform as well as seasonally higher purchase volume. We delivered record results in Wealth driven by increased sales activity, as well as higher asset management fees given the constructive market environment and contribution from the private bank which will continue to grow given the AUM increase in the second quarter from our wealth team hires. Mortgage banking fees are up modestly with a benefit from the MSR valuation net of hedging and an improvement in servicing P&L. Production fees were down slightly given a decline in margins. On Slide 9, underlying expenses were down slightly as we saw the normal seasonal benefit in compensation and we did a nice job managing our expenses while continuing to invest in our strategic initiatives. Our TOP 9 program is progressing well and we continue to expect to deliver a $135 million pre-tax run rate benefit by the end of the year. We have commenced work on our TOP 10 program and will provide more details later this year. On Slide 10, period end and average loans are down 1% linked quarter as we continue to optimize our balance sheet and prioritize relationship-based lending. The linked quarter decline was driven by the runoff of our Non-Core portfolio of $1.1 billion. Core loans were broadly stable with a slight reduction in commercial balances, largely offset by an increase in retail. The decrease in commercial loans reflects paydowns and exits of lower return in credit only relationships, lower client loan demand, and corpus continuing to issue in the debt markets. Next, on Slides 11 and 12, we continue to do an excellent job on deposits in an extremely competitive environment. Period-end deposits are broadly stable linked quarter as seasonally lower retail deposits was offset by strong growth in the private bank. We continue to see a slowing rate of migration from demand and lower-cost deposits to higher-cost interest bearing accounts with the Fed holding steady, as well as the benefit of deposit market share gains with the private bank. As a result, non-interest bearing deposits are stable at about 21% of total deposits. Our deposit franchise is highly diversified across product mix and channels. About 69% of our deposits are granular, stable consumer deposits, and approximately 70% of our overall deposits are insured or secured. This attractive deposit base has allowed us to efficiently and cost-effectively manage our funding costs in the higher rate environment. Our interest bearing deposit costs were down 3 basis points linked quarter given proactive management of our pricing strategy. Moving to credit on Slide 13. Net charge-offs were 52 basis points, up 2 basis points linked quarter reflecting broadly stable charge-offs and lower average loans. The commercial charge-offs in the quarter were largely driven by CRE General Office and the fact that C&I recoveries were higher in 1Q versus 2Q. This increase in commercial was largely offset by a decrease in retail, primarily due to seasonal trends in auto and runoff. Non-accrual loans increased 4% linked quarter, driven by increases in CRE General Office and multifamily, which has been reflected in the reserve level for the quarter. Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.63%, which is a 2 basis point increase from the first quarter, reflecting broadly stable reserves and lower loan balances given non-core runoff and commercial paydowns and balance sheet optimization. Our reserve of $369 million for the $3.3 billion General Office portfolio represents 11.1% coverage, up from 10.6% in the first quarter. Additionally, since the second quarter of 2023, we have absorbed $319 million of cumulative losses in the General Office portfolio. When you add these cumulative losses to the reserves outstanding, this represents roughly a 17% loss rate based on the March 2023 balance of $4.1 billion. Over the past six quarters, the General Office portfolio was down roughly $900 million to $3.3 billion at June 30, given paydowns of about $500 million and the charge-offs I just mentioned. The loss experienced so far has been concentrated in the central business district properties with approximately 2 times the loss rate of suburban properties. Suburban exposure is 70% of our total at this point. On the bottom left of the page, you can see some of the key assumptions driving the General Office reserve coverage level, which we believe represents a severe scenario that is much worse than we've seen in historical downturns, so we feel the current coverage is very strong. Moving to Slide 15, we have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.7%, up 10 basis points from 1Q. And if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio would be 9%. Both our CET1 and TCE ratios have consistently been among the top of our peers. You can see on Slide 16 where our CET1 stands currently relative to peers. Given our strong capital position, we repurchased another $200 million in common shares and including dividends, we returned a total of $394 million to shareholders in the second quarter. Moving to Slide 17, our strategy is built on a transformed consumer bank, the best positioned commercial bank amongst our regional peers, and our aspiration to build the premier bank-owned private bank and wealth franchise. First, we have a strong transformed consumer bank with a robust and capable deposit franchise grounded in primary relationships and high-quality customer growth. Notably, the transformation of our consumer deposit franchise is the chief reason that our deposit performance has dramatically improved from the last upgrade cycle. We are much more nimble in our deposit raising capabilities now with more levers to pull and better analytical tools. And where our beta performance lagged our regional peers last time, so far this cycle we are better than peer median. We also have a differentiated lending platform where we are prioritizing building durable relationships with our customers and we are focused on scaling our Wealth business. Importantly, we continue to make great progress improving digital engagement with our customers and increasing deposit shares we build our customer base, particularly in New York Metro. Next, we believe we have built the leading commercial bank amongst the super-regional banks. We are focusing on serving sponsors and middle market companies in the high growth sectors of the economy and we have full set of product and advisory capabilities to deliver to our clients. In particular, we are uniquely positioned to serve the private capital ecosystem which appears poised for a strong recovery after one of the slowest dealmaking periods in decades. We are starting to see a more constructive capital markets environment develop and our consistent position near the top of the middle market and sponsor league tables gives us confidence that we have a right to win as activity picks up. Finally, we're building a premier private bank, and that is going very well and gaining momentum. We're growing our client base and now have about $4 billion of attractive deposits, a $1.6 billion increase from the prior quarter, with roughly 30% non-interest bearing. Also, we are now at $1.4 billion of loans and continuing to grow. We recently opened private banking offices in Mill Valley, California and Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Citizens Wealth Management business as the center piece of that effort. We added two exceptional asset management teams in the second quarter, one from San Francisco and the other from Boston, bringing the total private bank AUM to $3.6 billion, well on our way to hit our $10 billion target by the end of 2025. Importantly, our private bank revenue increased 68% to about $30 million in the second quarter, and we are on track to break even on the bottom line later this year. Moving to Slide 18, we provide the guide for the third quarter. This outlook contemplates a 25 basis point rate cut in each of September and December. We expect NII to be down 1% to 2%, driven by one last step up in swap costs this cycle. Noninterest income should be up slightly, reflecting seasonally lower capital markets, more than offset by a pickup across other categories. We expect non-interest expense to be stable. Net charge-offs are expected to be down modestly, and the ACL should continue to benefit from non-core runoff. Our CET1 ratio is expected to come in about 10.5% with approximately $250 million to $300 million of share reports currently planned. With respect to the full year 2024 guide we provided in January, we feel good about the overall level of PPNR. Revenues are tracking broadly in line with some puts and takes. NII is expected to come in at the upper end of the down 6% to 9% range, reflecting lower loan balances, with NIM trending modestly better. Fee should come in modestly above the range of 6% to 9% originally expected. You should expect us to continue to do well on expenses, which will be broadly in line with the January guide. We expect NII and net interest margin to rebound in the fourth quarter given swap costs that peaked in the third quarter with a return to positive operating leverage in the fourth quarter. In addition, net charge-offs are trending in line with our January expectations. We continue to expect to end the year with a target CET1 ratio of approximately 10.5% and the level of share repurchases will be dependent on our view of the external environment and loan growth. To wrap up, we delivered a strong quarter with good momentum in capital markets, record results in wealth and card, and credit performance that continues to play out largely as expected. Our capital levels are strong, near the top of our peer group, and we are maintaining robust liquidity and funding. Our unique multi-year strategic initiatives, including the buildout of our private bank are progressing well, and our consumer and commercial banking businesses are well positioned to drive strong performance over the medium term. Given these tailwinds, combined with strong execution and tight expense management, we remain confident in our ability to hit our medium-term 16% to 18% return target. And with that, I'll hand it back over to Bruce. Bruce Van Saun Thank you, John. Alan, let's open it up for Q&A.

Peter Winter:

Good morning. Can you provide an update on the loan outlook in the second half of the year and maybe just talk about customer sentiment and what it's going to take to kind of move them off the sidelines?

Don McCree:

Yes, John, I'll jump in on that. It’s Don. I think one of the interesting things we've seen, and this goes to capital markets also, is a real pick up in new money activity over the last six to eight weeks as the interest rate cycle appears to be abating and the economy seems to be okay. So that's driving growth in subscription lines. That's driving a little bit more bullishness among our core C&I customers and it's certainly driving opportunistic activity among the PE firms. So, I think we'll see some decent growth in the second half of the year. Exact timing, I'm not exactly sure, but we did see at the end of the second quarter the beginnings of some pretty significant draws on our subscription loans.

Peter Winter:

That's a great color. Thank you. And just on a separate question, the stress capital buffer came in higher than I was expecting. I'm sure it's higher than what you were expecting. Are there any plans to kind of reassess any of the businesses to help drive a lower [SCB] (ph)? Bruce, you mentioned some plans over the medium term to reduce the CRE exposure.

Peter Winter:

Got it. Thanks, Bruce.

Operator:

Your next question comes from the line of Erika Najarian with UBS. Your line is now open.

John Woods:

Yes, sure, Erika. I guess what I'll start off with is that, at the beginning of the year, we did indicate that we thought the exit NIM would be in that neighborhood of 2.85% or so. I'd say that as we've gotten into the middle part of the year, we expect that to come in a little better. So I think I did mention that at conference earlier last quarter and I think we can confirm that those trends continue to be looking good that we're going to end up a little better than what we expected. And broadly, what we said at the time was that, we saw loans coming in a little lower and pushed out a little bit more than we had originally expected, but that was getting offset, in part from better net interest margin trends, we were pleased to be able to print a very strong interest-bearing deposit costs number that was down 3 basis points this quarter. I think it's very likely that our interest-bearing deposit costs have peaked in the first quarter, that we had some nice opportunity to kind of price our rollovers of CDs in the second quarter, and that was a tailwind. I think there'll be some variability there, but I think 1Q is probably the peak, and that will provide a nice tailwind as you get into the second half of the year. I mean, broadly, the trends when you get into the fourth quarter are along the following lines. Every quarter, we're generating a couple of basis points of positive benefit from all other sources outside of swaps. And so given the third quarters, the last time that we'll see a step up in swap costs, really that the rest of the bank will be able to drive net interest margin rising off of that NIM trough in 3Q into 4Q. And the big drivers would be, there's a number of them. I mean, we've got non-core, which continues to run off and is providing about 2 basis points a quarter of net interest margin all by itself. You've got asset yields around 5 basis points or so, ex-swaps, given the front book, back book dynamic that we're seeing, which is in that 200 basis point to 300 basis point range from the standpoint of what's happening with securities and loans. And then, you have the initiatives with the private bank, which is accretive across the board, which is contributing. So all of those things I think you'll see contribute. And I'd say that getting that first Fed cut in late September would be also helpful. It's not necessary for us to stay on track for having a really strong rebound in 4Q, but it does help, I'd say, address the higher for longer pressures that -- pricing pressures on deposits that will continue to bump along until that first cut comes out from the Fed. So let me stop there and see if that addresses the number of the points that you made.

John Woods:

Yes, it's a good question. I'd say, I think there might be two different answers here. One is, in the second half of 2024, we have a -- at the balance sheet date here at June 30, we have a significant amount of excess liquidity. And so, you could see us deploy some of that into lending through the second half. And that's very powerful in terms of the ability to drive net interest margin. And so, we're pleased to be able to do that, given how strong our balance sheet position is at June 30. But I'd say when you zoom out and think about the median term, we without a doubt have opportunity to grow the balance sheet over time in line with business growth adjusted for the balance sheet optimization initiatives that we have in place, but that powerful combination of net interest margin reflating into that, call it, what do we say, 3.25% to 3.40% range plus the opportunity to grow the balance sheet over the medium term is really one of the -- is the primary and majority driver of our ROTCE targets over the medium term. So, I think maybe a little bit of transition in 2H where we'll probably deploy some liquidity, but then growing into 2025 and 2026 and beyond.

Erika Najarian:

Well said, guys. Thank you.

Kristin Silberberg:

Alen, maybe we can come back to Ryan. Let's move on to the next question and we'll circle back to Ryan. Operator Yes, one moment please. [Operator Instructions] We'll go next to Scott Siefers with Piper Sandler. Your line is now open.

John Woods:

I'll start off with the broader picture and maybe let Don tell us a little bit more about the capital markets pipeline outlook. But more broadly, I mean we're really pleased with our performance in the second quarter and printing another number one middle market sponsor position on the table. It's nice to see the second quarter in a row. 3Q is the typical seasonal period where it's a little down for capital markets and we expect that that may play out as it's done in prior years. But I think the floor in that seasonally down period is actually higher this year than it's been in prior years. So that's something to keep in mind, that given all of the investments, we actually sure will be down off a great 2Q, but the floor is probably higher than prior years, number one. Number two, the diversification not only within capital markets but outside of capital markets and all the investments we've been making in wealth. We had those two significant asset management teams that we brought on board plus all of our organic investments inside the private bank and broadly is really driving wealth fees. So here to see wealth fees be a bigger contributor in the third quarter. And just as you see the rate environment moving around, we're seeing opportunities in helping our customer hedge the exposure to rates. And so, we expect to see some benefit there. And just a number of other categories, including service charges and ability for possibly some mortgage banking opportunities, as rates seem to be stabilizing and down. So there's just a number of other categories, given the diversification of the platform, that will allow us to stay on track here as you head into the third quarter.

Don McCree:

Yes, so it's interesting. The characteristics of the market are very favorable right now. There's enormous amounts of liquidity. And that drove really the first half of the year, which was primarily like a refinancing market. So if you look at transactions done in the core capital markets being syndicated lending and bonds, it was about 85% refinancing of existing exposures that were on people's balance sheet and extending maturities and the like. What we didn't see and what we're beginning to see is new money activity led by the private equity team. So as we move into a more favorable interest rate environment, a decent economic environment, we're starting to see the pipelines really grow on the PE side of the business. And frankly, that's where the big underwritings are, and that's where the profitability drives. M&A is hanging in there pretty well. Remember, we are primarily a middle market investment bank, so we do the mid-sized deals, $100 million valuation to $1 billion valuation, $100 million capital raise to $1 billion capital raise. So those have actually been more resilient than the really big ticket M&A deals, which are getting government scrutiny and getting held up in regulatory approval. So those seem to be moving along reasonably well. The place we haven't seen a lot, we've seen actually more than we saw last year, is in the IPO side of the business. There are a lot of IPOs that are kind of prepped and ready, but people aren't pulling the trigger and going to market. And some of that's been the aftermarket performance of the IPOs that have happened so far. But if we can continue to get the broadening of the equity markets and the high rise of the equity markets, you could see some of that begin to come. And then we have a pretty decent pipeline in the convert side and the follow on side. So it's broad-based. It's pretty encouraging. And I think the backdrop is very favorable for a good second half and a great 2025, frankly. And we think we've got all the pieces we need to take advantage of the markets.

Bruce Van Saun:

I'll just add one more thing, as we're beginning to see, it's interesting because the private banking teams never had a capital market business at their prior employer. And so we're starting to see some crossover activity among the private banking clients here coming on board into capital markets. I don't know if that's a second half thing, but I think that's a brand new opportunity from a client base that was never really resident at Citizens before.

Bruce Van Saun:

Yes, I would say -- I'll start and let John add color, but I'd say that office, there's still a lot of uncertainty in that space. Just what we're seeing in terms of valuations, cap rates, the path of future interest rates. And so, I think we've played it conservatively with having a big reserve and then just kind of letting the charge-offs run through, while maintaining the reserve. I think you'd have to get to a point where you started to see things solidify a little bit and start to move in the right direction, so to speak. And I don't really see that happening actually for certainly this year. It will happen maybe sometime in next year. So we're kind of prepared for a slog here on office that we've got our arms around the properties. We know what the maturity schedules are. We've got good people working with the borrowers to deliver good outcomes. I don't expect we'll see any big surprises, but we'll continue to, I think, just work our way through it. At the point where we hit a kind of feel better moment when things start to look like they're moving in the right direction, that's when we'll be able to start to draw down on the reserve and we'll reap a nice benefit when that happens. John?

Bruce Van Saun:

That's a good way through repayments and some of it is through [indiscernible] Nonetheless, it is coming down.

Bruce Van Saun:

I’ll just elevate too, to the second part of your question is that, away from that, away from the General Office, we're still feeling good about what we're seeing in the consumer metrics, in commercial C&I and we run our reserve calculations based on scenarios. And clearly, the risk of recession seems to be less than it was a couple of quarters ago. And so, our need to keep adding to reserves for rest of the book would seem to be abating somewhat. So that's why when we say we'll continue to see -- we're calling out a slightly lower charge-off number in Q3, and then we have the trend of being able to draw down on those reserves, which I think will accelerate in coming quarters.

Operator:

Your next question comes from the line of Ken Usdin with Jefferies. One moment please while we open your line Mr. Usdin. Your line is open, go ahead.

John Woods:

Yes. Thanks, Ken, for the question. Just talking about TOP, it's been emblematic of who we are, as you know, for a number of years. The top line program is going to generate, call it, $135 million or so of run rate benefits when you get to the end of this year in 2024, the underpinnings of that program, we often have vendor contributions. That's a big driver. We launched the data and analytics contribution this year, which will continue into future years. We've had a really interesting ability to invest in our [fraud] (ph) program and a number of other opportunities, including branch rationalization that have underpinned a really strong TOP program this year. And that, of course, is the way over time, we have been able to invest in entrepreneurial and innovative initiatives, while not needing to cover that and to sell fund, those kinds of things. The TOP 10 program we're working on. And we're feeling good about the early opportunities. I think we have launched some analysis in the generative AI space, and we're live on a couple of use cases. And I think we're going to see an ability to broaden out there pretty nicely in terms of underpinning the next TOP program. There's a half a dozen of other areas, expanding data and analytics. What we're doing in our technology space, which converging our platforms with our ability to converge our mainframes and so I do think that we feel very good about the ongoing ability to make investments and self-fund those investments to the TOP program in -- as you get into the end of 2024 and into 2025 and maybe I'll just stop there and see if there's anything else I would like to add.

John Woods:

We're feeling pretty good about where we stand in the capital space. I mean, I think we basically think that around 1.25% is fine. We end up with -- we probably have more CET1, so when you look at the overall Tier 1 stack, we've got higher quality capital given the fact that we have more CET1 driving our overall Tier 1. 1.25% is fine, it’s probably -- we probably won't go much below that and a range of 1.25% to 1.50% of RWAs is probably where we'll operate. We have a number of issues out there that are coming into the ability to -- into call periods and into 2025. And so there could be some opportunities to refinance, just like we did this year, there are some very interesting refinance opportunities to lower our preferred coupon that we're paying on the preferred capital. So that's something we'll keep an eye on as we go forward into 2025.

John Woods:

Yes. I mean, for 2024, I think the answer to that is yes, with growing RWAs. As I mentioned, we have excess liquidity at June 30 and you could see the overall balance sheet being basically in the same zone as where we are today, but the ability to basically deploy some excess liquidity into lending in the second half is really the plan. So we would see RWAs and loans growing from June 30 to the end of the year.

John Woods:

Yes, agreed. We're going to see deposit growth and loan growth. It's just that given the excess securities that we have on balance sheet overall interest-earning assets are about where they will be maybe just a little bit higher.

Operator:

Your next question will come from the line of Manan Gosalia with Morgan Stanley. Your line is now open.

John Woods:

Sure. Yes. And I'd say broadly that the majority of the increase in 4Q is really coming from net interest margin rebounding. So just allowing all of those positive tailwinds from net interest margin across the whole platform from noncore, the front book, back book dynamics and all of those drivers is the majority of the increase in NII for 4Q. However, there is a meaningful contribution expected from loan growth as well, and we talked about loan growth earlier in the call and how all three businesses, Private Bank, consumer and commercial are all expected to contribute to that in terms of how that plays out for the second half. When it comes to just that net interest margin number, as I mentioned, noncore front book, back book -- you also have increase in deposits that you just heard Bruce talk about that increase -- that's a better funding mix where we'll have more deposits and less wholesale funding as you get into the second half. Your other question about that deposit pricing and the rate cut. I think we're somewhat well balanced around whether the Fed cuts or not. We tend to have some offsetting forces there where we have some asset sensitivity and a net floating position that benefits with rates being a little higher, but then that often the higher for longer impact on deposit migration tends to keep us close to neutral. And so, whether we get a cut or not, I think we're feeling pretty good about the fourth quarter NII being a nice rebound and a meaningful increase versus 3Q. And then the last part I'll throw out there is, again, all the initiatives and how -- for example, balance sheet optimization and Private Bank are all accretive to net interest margin on a quarterly basis.

Manan Gosalia:

That's really helpful. And then as a follow-up on the commercial middle market side, you outlined several positive drivers for lines picking up in the back half. Does that come with higher utilization? Or do you need to see lower rates for utilization to pick up? And maybe how does the uncertainty around the election? How is that factoring into your conversations with clients?

Manan Gosalia:

Great. Thank you.

John Pancari:

Good morning.

John Pancari:

Bruce, I think you talked about the expectation, the medium-term plan to shrink the CRE exposure incrementally from here. Just wanted to get an idea of where you think that could settle out? I mean, right now, your commercial real estate loans are about 130% of your risk-based capital plus reserves, where do you think it goes from that perspective post this expected runoff.

John Pancari:

Right. Okay. Thank you. That's helpful. And related to that, my second one is on the private banking side. First, on the deposit side, the $4 billion in deposits, I know 81% of that is commercial, 36% of that is DDA. How much of those deposits are deposits with venture capital and private equity firms are related to that industry.

Bruce Van Saun:

With both deposits and loans...

John Pancari:

Okay. Thank you. Then one last one. If you could just maybe update us on the likelihood of additional team hires on the private banking side. And then the Wealth AUM going up to about $3.6 billion there. I know you acknowledged that might be a tougher slog and -- but it looks like towards the end of the quarter that you had that big jump in AUM. Just curious if you could give a little bit of color around what's driving that recent upturn.

Brendan Coughlin:

Yes, you nailed [indiscernible] what you said. I would just say on the wealth side, we'll be very selective on the banking expansion until not only we make have confidence in hitting the financials, but also it's still built, and we're very pleased with how the build is going and we're attracting clients. The market is still quite disrupted both on the client side as well as the talent side. We're going to be very thoughtful and make sure that we're only attracting the highest of quality teams. We're being very selective on that. On the Wealth side, I would just say, look, for really the first time in our history, I think our right to win in private Wealth is at an all-time high. And there's a lot of inbounds we're getting from some of the highest quality advisers in the market. We're also being very selective there. I'd remind you all that we have long been on hunt for scale here, and we've looked at a lot of acquisitions. We've obviously done one or two over the years, but the economics have been a little out of reach with 10 plus your paybacks on tangible book value when you're buying RIAs, given the multiples that some of the private equity firms are paying. So the economics of the talent acquisition are significantly more attractive to us. Obviously, with de minimis tangible book value hit. And to Bruce's point, there's not really a large J-curve in the short term. So we're very pleased with the inbounds and talent that we're getting. We expect to continue to selectively add top end market, wealth talent to really round out the bankers that we hired. So we're looking forward to a strong second half of the year there.

Operator:

Your next question will come from the line of Gerard Cassidy with RBC. Your line is now open. Go ahead.

John Woods:

Yes. I'll go ahead and start off, Gerard. I mean, I think that earlier -- what's evolved over the last year or so has been our outlook with respect to valuations and NOI and what the rent rollovers would actually entail and at what speed we would see deterioration. So of course, our reserve levels are higher now than they were a year ago. Every quarter, we endeavor to put a ring fence around our exposures and give it our best attempt at forecasting what we think the evolution will be in valuations and NOI. I'd say that this quarter, we've done that again. And we feel like we've leaned in with this 11.1%, which really -- when you look at the property valuations steep to trough, that 72% has grown over the last year. And those have been the main drivers for why after charging off, we still end up with this reserve of 11.1%. But I'd say that there's still a lot of uncertainty left, but I think the variability, we're hopeful that the variability in this will start to decline as we continue to work through our maturities and have conversations with our borrowers and extract additional collateral and work through paydowns where we can -- this will be a multi-quarter event and it will take into 2025 [indiscernible]

Gerard Cassidy:

Can we -- is it fair to say that the second derivative of the rate of deterioration that you guys are seeing, is it slowing in the office or…

Gerard Cassidy:

Okay. It’s yes. Okay, good. Thank you. Okay, and then as a follow-up, you guys talked a lot about private equity in your Slide 17, you show some great numbers. Obviously, number one in the sponsor business and your capital markets business is benefiting from that. So the question I have is, and it's not on the capital call or subscription lines, but it seems over the years for banks to win in this capital markets business with sponsors, you have to use your balance sheet to win this business. You've got to lend money to the sponsors. So can you share with us your exposure to, I guess, one of the line items and one of the regulatory reports is non-depository financial lenders that you lending to them. Can you share with us your exposure there? How you manage that risk? Because it seems like banking initial has been derisked, but maybe it's in the private credit side and the indirect exposure for the industry could come through that channel. Can you give us some color there, Bruce, or Don?

Gerard Cassidy:

Thank you.

Matt O’Connor:

Thank you. Good morning. Can you guys talk about how you think deposits will reprice down. I guess, the first kind of, call it, two or three Fed cuts versus and more sustained reduction?

Matt O’Connor:

Okay. And then thoughts on does deposit growth pick up a bit for, I guess, the industry and you've got some specific initiatives, obviously, but do you see some pickup in kind of broader deposit trends as well with some Fed cuts?

Bruce Van Saun:

Yes. I would just add some color there, the uptick in private bank deposits in the quarter was $1.6 billion. And so you can see that we've really got a cadence and a rhythm in terms of kind of growing the book there and the private bank and bringing in the customer base. So we would expect to have again, something that most other banks don't have to drive deposit growth and having that unique business opportunity. And then there's generally some seasonality that's favorable in the consumer business and the commercial business. So I think the outlook for deposit growth in the second half is pretty solid.

Matt O’Connor:

Okay. Thank you.

Operator:

That concludes today's conference call. Thank you for your participation. You may now disconnect.

Kristin Silberberg:

Thank you, Alan. Good morning, everyone and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our first quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color. We will be referencing our first quarter earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it’s important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. With that, I will hand over to you, Bruce.

John Woods:

Thanks, Bruce and good morning, everyone. As Bruce mentioned, the year is off to a good start. First quarter results were solid against the backdrop of a more constructive macro environment, which supported an improvement in capital markets, stability in our margin and credit performance that continues to play out largely as expected. We continue to maintain a strong balance sheet with capital levels either top of our peer group, excellent liquidity and a healthy credit reserve position. Importantly, this positions us to execute well against our multiyear strategic initiatives, including the build-out of our private bank. Let me start with some highlights of our first quarter financial results, referencing slides 3 to 6 before I discuss the details. We generated underlying net income of $395 million for the first quarter and EPS of $0.79. This includes a negative $0.03 impact from the private bank, which is a significant improvement from the $0.11 impact last quarter as we start to see revenues pick up and we progress to our expected breakeven in 2H ‘24. It also improved the impact of the non-core portfolio, which contributed a $0.13 negative impact. While our non-core portfolio is currently a sizable drag to results, it is steadily running off, creating a tailwind for performance going forward. Our notable items this quarter were $0.14, which primarily consists of an adjustment to the FDIC special assessment and TOP and other efficiency-related expenses. Excluding these notable items, our underlying ROCE for the quarter was 10.6%. Playing through defense remains at the top of our priority list, and we ended the quarter with a very strong balance sheet position with CET1 at 10.6% or 8.9% adjusted for the AOCI opt-out removal. We also continue to make meaningful improvements to our funding and liquidity profile in the first quarter. Our pro forma LCR strengthened to 120%, which is well in excess of the large bank category 1 requirement of 100% and our period-end LDR improved to 81% from 82% in the prior quarter. On the funding front, we reduced our period-end FHLB borrowings by about $1.8 billion linked quarter to a modest $2 billion. We also increased our structural funding base with a very successful $1.25 billion senior issuance and another $1.5 billion auto collateralized issuance during the quarter. And we have another $1 billion of auto backed issuance expected to settle this week. This is our fourth issuance, and it was executed at our tightest credit spreads to date. In addition, we expect to be a more programmatic issuer of senior unsecured debt going forward. Credit trends have been performing in line with our expectations, with NCOs coming in at 50 basis points for the first quarter. Our ACL coverage ratio of 1.61% is up 2 basis points from year-end. This includes a 10.6% coverage for general office, up slightly from 10.2% in the prior quarter. We are well positioned for the medium term with expected tailwinds to NIM that support a range of 3.25% to 3.4%. Regarding strategic initiatives, the Private Bank is doing very well. We continue to make inroads in the New York Metro and our latest top program is progressing nicely. In addition, we are poised to benefit from an improving capital markets environment with our investments in the business and synergies from our acquisitions positioning us to capitalize as activity levels continue to pick up. Next, I’ll talk through the first quarter results in more detail, starting with net interest income on Slide 7. As expected, NII is down 3% linked quarter, reflecting a stable margin on a 2% decrease in average interest-earning assets given lower loan balances and day-count. As you can see from the NIM walk at the bottom of the slide, our margin was flat at 2.91% as the combined benefit of higher asset yields and non-core runoff and day count were offset by higher funding costs and the impact of swaps. As expected, our cumulative interest-bearing deposit beta remains in the low 50s at 52%. And although we continue to see deposit migration, the rate of migration is slowing. Overall, our deposit franchise has performed well with our beta generally impact the peers. Moving to Slide 8. Our fees were up 3% linked quarter given a notable improvement in capital markets and good card results. The improvement in capital markets reflects a nice pickup in M&A activity and strong bond underwriting results. Our Capital Markets business consistently holds the top 3 middle market sponsor book renter position and this quarter, we achieved the #1 spot. Our deal pipelines remain strong, and we continue to see positive early momentum in capital markets this quarter with strong refinancing activity continuing in the bond market. In card, we had a nice increase, primarily driven by the benefit of a strategic conversion of our debit and credit cards to Mastercard. Our client hedging business was down a bit this quarter with lower activity in commodities and FX. The decline in mortgage banking fees was driven by a lower benefit from the MSR valuation net of hedging and a modest decline in servicing P&L, partially offset by higher production fees as margin improved while lot volumes were stable. On Slide 9, we did a nice job managing our underlying expenses, which were stable. We will continue to execute on our TOP program, which gives us the capacity to self-fund our growth initiatives. On Slide 10, period end and average loans are down 2% linked quarter. This was driven by non-core portfolio runoff and a decline in commercial loans, given paydowns and generally lower client loan demand, our highly selective approach to lending in this environment, along with exits of lower returning credit-only relationships. Commercial line utilization continued to decline this quarter as clients remain cautious and M&A activity was limited in the face of an uncertain market environment. Next, on Slides 11 and 12, we continue to do well in deposits. Year-on-year period-end deposits were up $4.2 billion driven by growth in retail and the private bank. Period end deposits were down slightly linked quarter given expected seasonal impacts in commercial largely offset by growth in the private bank and retail branch deposits. Our interest-bearing deposit costs were well controlled, up 6 basis points, which translates to a 52% cumulative beta. Our deposit franchise is highly diversified across product mix and channels. About 68% of our deposits are granular, stable consumer deposits and approximately 70% of our overall deposits are insured or secured. This attractive deposit base has allowed us to efficiently and cost effectively manage our deposits in the higher rate environment. With the Fed holding steady, we saw the migration of deposits to higher cost categories continue to moderate. And with the contribution of attractive deposits from the private bank, non-interest-bearing deposits are holding steady at about 21% of total deposits. Moving on to credit on Slide 13. Net charge-offs were 50 basis points, up 4 basis points linked quarter. This includes increased commercial charge-offs related to pre general office, which were in line with our expectations. In retail, we saw a modest seasonal improvement. Non-accrual loans increased 8% linked quarter driven by general office. The continued runoff of the auto portfolio drove a modest decline in retail, while other retail categories were stable. Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.61%, which is a 2 basis point increase from the fourth quarter, reflecting broadly stable reserves with lower loan balances given non-core runoff and commercial balance sheet optimization. The reserve for the $3.4 billion general office portfolio represents 10.6% coverage, up slightly from 10.2% in the fourth quarter. On the bottom left side of the page, you can see some of the key assumptions driving the general office reserve coverage level. We feel these assumptions represent a severe scenario that is much worse than we’ve seen in historical downturns, so we feel the current coverage is very strong. Moving to Slide 15. We have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.6% and if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio would be 8.9%. Both our CET1 and TCE ratios have consistently been among the top of our peers, and you can see on Slide 16, where we stand currently relative to peers in the fourth quarter. Given our strong capital position, we resumed common share repurchases and including dividends, we returned a total of $497 million to shareholders in the first quarter. On the next few pages, I’ll update you on a few of our key initiatives we have underway across the bank, including our private bank. First, on Slide 17, we have a strong transformed consumer bank with a robust and capable deposit franchise, a diverse lending business where we are prioritizing relationship-based lending and a meaningful revenue opportunity as we scale our wealth business. Importantly, we continue to make great progress taking deposit share with retail deposits up 20% year-on-year as we continue building our customer base in New York Metro. Slide 18. Let me update you on our progress in building a premier private bank, taking the opportunity to fill the void left in the wake of the bank failures last year. Our build net is going very well and gaining momentum. We are growing our client base and now have about $2.4 billion of attractive deposits with roughly 30% non-interest-bearing. Also, we are now at just over $1 billion of loans and $0.5 billion of investments and continuing to grow. We just opened our newest private banking office in Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Clarfeld Wealth Management business as the centerpiece of that effort. Next, on Slide 19, we have built a formidable full-service commercial bank, which consistently punches above its weight. Our multiyear investments in talent, capabilities and industry expertise put us in an enviable position to provide life cycle services to middle market, mid-corporate and sponsor clients in high-growth sectors of the U.S. economy. In particular, we are uniquely positioned to serve the private capital ecosystem. As evidenced by our consistent standing at the top of the sponsored lead tables, we are well positioned to take advantage of a more constructive capital markets environment and we are excited to start seeing the synergies from our acquisitions coming through in our results this quarter. Moving to Slide 20, we provide the guidance for the second quarter. We expect NII to decrease about 2%. Non-interest income should be up approximately 3% to 4%. We expect non-interest expense to be stable to down slightly. Net charge-offs are expected to be about 50 basis points and the ACL should continue to benefit from the non-core runoff. Our CET1 is expected to come in at about 10.5% with approximately $200 million of share repurchases currently planned. We are broadly reaffirming our full year 2024 guide. We expect NII to land within the range of down 6% to 9%, consistent with our January guidance, with margin coming in a little better than expected, offsetting the impact of lower loan demand. The other components of PPNR are also tracking to our January guidance. In addition, NCOs are trending in line with our expectations of approximately 50 basis points for the year. Our target CET1 ratio for 2024 is approximately 10.5%, and the level of share repurchases will be dependent on our view of the external environment and loan growth. Given the changing rate outlook, I wanted to update you on how the swaps and our non-core portfolio are expected to impact NII and NIM as we look out further in 2024 and beyond. We’ve included Slide 25 in the appendix, which shows the expected swaps and non-core impact through 2027. By 4Q 2024, we expect higher swap expense to be partly offset by the NII benefit from the non-core rundown. Looking out further, we expect a significant NII tailwind and NIM benefit from the impact of non-core and swaps over the medium term given runoff and lower rates. This will be partially offset by the impact of the asset-sensitive core balance sheet, resulting in a medium-term NIM range of 3.25% to 3.4%. To wrap up, we delivered a solid quarter, featuring stable NIM, strong fee performance led by capital markets and cards, tight expense management and in-line credit performance. We have a series of unique initiatives that are progressing well. Our consumer bank has been transformed. Our commercial bank is exceptionally well positioned and we aim to build the premier bank-owned private bank and wealth franchise. We enjoy a strong capital liquidity and funding profile that allows us to support our customers while continuing to invest in our strategic initiatives. Given several tailwinds, combined with continued strong execution, we are confident in our ability to hit our medium-term 16% to 18% return target. With that, I’ll hand it back over to Bruce.

Operator:

[Operator Instructions] Our first question will come from the line of Ryan Nash with Goldman Sachs. Your line is open.

Bruce Van Saun:

Good morning.

Ryan Nash:

Maybe to start off with some of the guidance, you broadly reiterated – can you maybe just flesh out how some of the expectations have changed, particularly around NII, John? I think you noted you still expect to be in the range. But what are the main drivers to get you there and what would it take to be better than the low end? And just as a follow-up on the margin, you held it flat and it sounds like it could be a little bit better. How have the expectations change relative to the 280 to 285 and the 285 you were expecting at the end of the year? Thank you.

Bruce Van Saun:

Yes, I would just add one thing, Brian, it’s Bruce. The fact that the loan demand is a little light is, I think, okay, given there’s a kind of loop to what we’re doing on the deposit side. So we’re not going to chase loan growth. And if, therefore, there’s a little shrinkage in the balance sheet, we can run off our higher cost source of either FHLB funding or broker deposit funding. So we’re taking full advantage of that, which is helping bolster the NIM. The other thing is with less loan growth, you end up freeing more capital. And so that gives us the wherewithal to step up and continue to repurchase stock. And I think our stock is great value here. So we’re all in on that.

Bruce Van Saun:

Let me start and then flip to Don. But I’d say there’s no real surprises here, Ryan. So we can basically see all the office maturities. We’ve got kind of bespoke careful handling on all of the significant exposures that we have, and we’ve been working with the borrowers just to make sure that we can have a win-win situation. So we can come through getting the best return on our loans and borrowers can stay with their properties through a tough environment. And I think that’s all going well. So if you have one quarter where the charge-offs tick up $20 million or the next quarter, they go down $15 million, you’re going to kind of see some modest variation around that line, but basically to use a colloquialism, the pig is going through the python. And it’s going to take a few more quarters for that to fully work its way through. But we’re not seeing any surprises, which is the good thing about this. And so Don, with that, maybe you could pick up.

Bruce Van Saun:

Yes. And I just – maybe, John, you can add to this, but in terms of where do we go from here – you can see that the coverage ratio on office remains high, and it’s gone from 10.2 reserves to 10.6, but that rate of increase is slowing and so we’ve been taking the full charge off through the P&L and holding the reserve at high levels. At some point, we’ll be able to start drawing down on that reserve. I don’t want to make the call on that. But just take note that, that build is starting to slow. And so I don’t know if it’s maybe later this year or beginning of next year. But we will eventually get to a point where we can start drawing down on those reserves, which will be good for P&L.

Bruce Van Saun:

Which is more severe than anything we’ve seen historically, including the great financial recession by a wide margin.

Bruce Van Saun:

Okay, next question.

Scott Siefers:

Good morning, everyone. Thanks for taking the questions. John, maybe just a thought on how much longer negative deposit migration continues. I think the prevailing wisdom is it’s slowing, but just curious to hear your updated thoughts on kind of when and why we might trough.

Bruce Van Saun:

New York Metro offers another opportunity.

Bruce Van Saun:

Yes. Maybe, Brandon, you can add some color.

Scott Siefers:

Alright, good. Thank you very much for the color.

John Pancari:

Good morning. One just on additional color on the loan growth commentary, I know you said it could come in throughout the low end of your initial expectation for the year and you have cited weaker line utilization at this point, where – if you can maybe elaborate a little bit where you see some weakness in what pockets and where do you see some ultimate strengthening there in terms of timing? And then separately, a similar question around your deposit growth expectation, I think for the full year, you had figured out at around up 1% to 2%. Any additional color you can provide and how you’re feeling around that guidance at this point?

Bruce Van Saun:

That’s well said, Don, any color.

Bruce Van Saun:

Anything from you, Brendan.

John Woods:

And then on the – you had a question about deposits. On the deposit side of things in the first quarter. as I mentioned before, we saw DDA flatten out for the first time in many quarters. So that is really good to see. We also saw low cost flatten out. So overall, we were at 42% last quarter in low cost, we’re at 42% this quarter and low cost plus DDA. So the deposit trends from a mix perspective have been favorable. And from a quantity level of deposits at the end of the quarter came in higher than expected. That’s driven by just strong execution and our strategic initiatives contributing as we mentioned earlier, New York Metro and Private Bank along with the blocking and tackling that Brendan and Don have been at for a number of years to invest in the franchise. And so all of those investments are paying off, and we do expect to see deposit growth supporting our loan growth in the second half of ‘24.

John Pancari:

Got it. Alright. Thanks, Bruce. And then on the capital front, I did to see the resumption in buybacks, the $300 million in repurchases this quarter. With CET1 here at around 10.6 or 8.9% when you dial in the AACI scenario, how do you look at the likelihood of incremental buybacks from here. In terms of a pace of buybacks, do you think that that could be reasonable given where you’re sitting right now on CET1. Thanks.

Bruce Van Saun:

Yes. And I would also just go back to an earlier comment that we have I’d say, a front-loaded plan this year because there’s less loan growth. In fact, there’s loan contraction earlier in the year that then turns around and we start to see loan growth in the second half of the year, that would, by definition, mean we need capital to support the loan growth and there’ll be less capacity for share repurchases. But anyway, we gave the – you saw the 300 number in the first quarter, John mentioned 200 in the second quarter. And then we’ll see where we get to in the second half. If the loan growth fully doesn’t materialize, we can actually just turn around and keep repurchasing the stock.

Bruce Van Saun:

Okay, thanks.

Peter Winter:

Thanks. Good morning. You guys have maintained the net charge-off guidance for the year, but if we assume no rate cuts this year, could it lead to higher net charge-offs than forecasting just given kind of no relief on debt service coverage ratios or loans coming up for renewal at higher rates?

Peter Winter:

Got it. And then…

Brendan Coughlin:

The only point I would add on consumer is that our delinquency levels are actually net down year-over-year. Q1 over Q1, led mostly by resi, but we’re seeing really no signs of stress on the book. As Bruce pointed out, so I feel really good and even in a higher for longer that unless there’s a big economic shock that we’re in really good shape.

Don McCree:

I – it’s really hard to forecast that. I think they will be early next year or late this year probably, but it depends how much we extend, how the negotiations go, how much capital is put into some of these transactions and working through the book loan by loan. It’s – I don’t have the crystal ball, I say exactly when the peak is. But I’ll go back to what I said before is we’re comfortable how it’s kind of progressing is progressing according to our expectations.

Operator:

Your next question will come from the line of Ken Usdin with Jefferies. Your line is now open.

John Woods:

Yes, I will start off and Bruce can jump in here. But I mean the drivers – I mean you look at the big three for us, capital markets, card fees and wealth trust and investment services are all, they are trending well, and we expect to be significant contributors in 2024. So, each of those businesses have had significant strategic investment over the years and even more recently. So, it’s really nice to see that the investments made in the capital markets business come to fruition. We had a good strong quarter in the first quarter, number one in the lead tables on the sponsor side, big rebound from the fourth quarter. And early in the second quarter, the activity – the pace of activity has continued, and we feel very good about the trends there, not only for 2Q, but for the full year. In the card business, we have made a strategic conversion to Mastercard, and that’s driving a number of positive developments there. And in the wealth business, as you know, all of the advisor hires the Clarfeld acquisition from a number of years ago are all coming together along with the private bank to drive those flows throughout 2024. So, we are feeling quite good about the trajectory for fees.

Ken Usdin:

Okay. Great. And just one more follow-up on the NII and the swaps and just looking at your Pages 25 and 26 from the deck. And it’s pretty clear that you are saying the increases you have made to the swap book are all incorporated in the guidance. So, that first quarter to fourth quarter, $35 million cumulative net interest income impact, is that inclusive of everything that is both like active as of now and then will prospectively still come on as the year progresses?

Ken Usdin:

Yes. Okay. And I – yes, go ahead Bruce.

Ken Usdin:

Yes. That’s great, Bruce. And if I can just bring that all together, so you broadly affirmed your broader guidance of down 6 to down 9, and we kind of know the first quarter and have the second quarter outlook. So, what would be the biggest swing factors within that range based on all these points that you are making about the NIM coming in better and now knowing more of this detail about how the swaps will work.

John Woods:

Yes, I agree with all of that. I would say that even with a little bit of lighter loan demand, we still think that range is good. Maybe it comes out at a higher end versus the lower end. But I mean I think that’s a swing factor. All the other components of the balance sheet are playing out well. Our outlook for deposit mix and funding mix is underpinning the net interest margin. I would hasten to add that those pay-fixed swaps that we added last quarter in 1Q and also in 4Q, have really driven really nice uptake in the securities yield. You see the securities yields up almost 40 basis points in the first quarter, and that’s offsetting – that’s a huge component of our balance sheet, and that’s a big driver. And then I should also make clear that the core balance sheet is contributing as well where we are seeing front book, back book on the loans side that is in the range of 300 basis points in the first quarter. And you are getting front book back on the securities book of around 200 basis points. So, there are good dynamics in the core balance sheet and all of the swaps were baked in.

John Woods:

Yes.

Operator:

Your next question will come from the line of Matt O’Connor with Deutsche Bank. Your line is now open.

John Woods:

Yes. I would say that, we do expect the balance sheet to grow. It’s – I think we do have a balance sheet optimization program that’s turning over a certain portion of the portfolio. But when you look at the grand total of the initiatives that we are putting in place, I think you see interest-earning assets will be growing in the second half of the year. And as you get out over the medium-term, so I think that we have the opportunity to optimize and grow. And that’s our expectation.

Matt O’Connor:

Got it. Thank you.

Unidentified Analyst:

Hi. Good morning. This is Thomas Detry [ph] calling on behalf of Gerard. Circling back to capital deployment quickly, you guys were pretty busy in 2023 in terms of strategic actions. Can you update us on how you are thinking about further investment opportunities for the franchise and how you guys prioritize organic growth versus team lift outs or even outright M&A?

Brendan Coughlin:

Maybe two quick points, one is that I would just say the interest in Citizens from a wealth management perspective is at a high, like we have never seen before. So, we are talking to some of the very best wealth managers across all the big brands in the United States. And so we are going to be very selective. But the interest in what we are doing here is quite unique and distinctive. So, we expect to board some top talent and really give a boost to our wealth strategy. But the point around capital that you mentioned, though, just to – even though we are mentally potentially thinking about the return metrics like we would an M&A deal. Keep in mind that a lift out or what we do with the private bank really is a very de minimis impact on capital. And so that’s why when you look – when we talk about the breakeven of the private bank being second half of this year, it’s really just eating through the expense guarantees and getting the revenue throughput. So, it has a very de minimis impact on capital. And the same will be true on wealth lift-outs where the teams we bring on board, it will be much more of a expense guarantee mindset and getting them through their revenue curve versus having any real material impact on our capital.

Bruce Van Saun:

Yes. I think it’s just a general caution about what’s going to happen in the economy, what’s going to happen with rates. And I think most of our companies have had good years, but they are still expressing caution. So, we are actually not losing business to private credit. It’s interesting. We are actually – it’s coming the other way because there has been opportunities to take loans that are out with private credit and move them over to the bank syndicated lending market, refinance those and kind of lock in lower cost financing. So, that’s been a big part of the story here in the first quarter, and it’s continuing into the second quarter. Don?

Unidentified Analyst:

Okay. Great. Thank you for taking my questions.

Dave Rochester:

Hey. Good morning guys. Earlier, you mentioned that the flows were a major driving swing factor of that NII guide. I know you mentioned expecting a little less loan growth this year. But you mentioned possibly hitting the better end of that NII range. If for whatever reason, net loan growth doesn’t materialize in the back half and C&I growth only ends up filling in for the run-off that you are expecting? Can you still hit that NII guide for the year?

John Woods:

Yes. Great. And just to reiterate that point, what we have been saying is that we have an expectation that will come in at the better end of the range for net interest margin based on the trends that we are seeing and the performance we were able to generate in the first quarter. So, you would see us being at the upper end of that range, maybe a tad better. On net interest margin, that’s offsetting the fact that there is some lighter loan demand that we are also seeing that. You put those together, and we are right down the middle there in terms of that range, and we have got back to the point Bruce just made. And that’s our base case now that we are updating. And there could be puts and takes to that depending upon the volume point that Bruce made earlier.

Operator:

Your next question comes from the line of David Konrad with KBW. Your line is now open.

John Woods:

Yes. I mean really what’s going on, as you have hit it. I would say, just broadly, I would try to make the point that all the swaps are incorporated into the NIM guide. And when you look at the underlying fundamentals of the loan book, the front book, back book is driving an increase in loan yields ex swaps. So, that’s the first point. As it relates to when you pull the swaps together from an accounting standpoint, why there is a negative impact from a swap standpoint, is that there was a mix shift. We had the swap notional didn’t change much, but we had some maturities at higher receives being replaced by some forward starters coming in at lower receives. And that overall – that net receive rate fell in the quarter, and that’s why you ended up with that negative impact just on that line itself. But again, overall, net interest margin was flat for the quarter. And when you put it all together with all the components, we had quite a strong net interest margin performance even incorporating that swap drag.

John Woods:

Yes. I mean I think we have gotten to the point where we had the liquidity build late last year. And that’s basically largely done. And so where you see the securities book right now as a percentage of our overall interest earning assets is about where we will be over time. As we grow loans, we will probably grow securities and cash on a similar mix basis from a volume standpoint, but the percentage of cash and securities to overall interest-earning assets at the end of the first quarter is about where we will be for the rest of the year. And I would hasten to add that when you look at that, that’s reflected of our deposit franchise and being primarily consumer and having a much higher proportion of insured secured deposits than most peers. And then if you crank it all through the way the Fed looks at standardized Category 1 banks, our LCR incorporating all of that at 03/31 was 120%, which is incredibly strong from a liquidity standpoint. And that’s played through based upon the balance sheet mix overall, including cash and securities.

Operator:

Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

John Woods:

Yes. I would say on the securities side, I would say there is a couple of objectives being addressed, and it’s the interplay between capital and liquidity and interest favors management. So, what we did over the last couple of quarters is we have added $7 billion of pay-fixed swaps that has paid off quite nicely because of our view that rates were likely not to be down, whatever, however many cuts we thought they were at the beginning of the year, five, six, seven cuts, we thought that was probably a little overcooked. And so we put on those pay-fixed swaps in part related to that. But in part related to the multiyear objective to reduce the duration of the securities book given how it will likely be treated from a capital standpoint. And so both of those objectives came into play when we shortened the duration of the securities book, which right now is about 3.8 years. We are likely to continue to shorten the duration book of that securities book over time and get down to something closer to 3 years [ph] or thereabouts. And so that’s really the driver there. But you got to look at the overall balance sheet and from an overall balance sheet standpoint, it made sense to add a little asset sensitivity in the fourth quarter and the first quarter. And we had at 03/31, we remain an asset-sensitive balance sheet. When it comes to adding downside protection in the out years, we do note that we have a significant drop off of receive-fixed swaps when you get out into 2026 and ‘27. And I think entry points matter. So, if rates continue to stay elevated, and we think there is value there. We want to be careful that we don’t give up our upside that the C&I loan book provides us and we will do that when the entry points are attractive in terms of that trade and locking it in. And in general, that would be consistent with something that would be north of 4% of a receive rate out into ‘26 and ‘27, and we will be opportunistic as the rate environment plays out in terms of how we continue to protect the balance sheet over the medium-term.

Don McCree:

I think it’s pretty much run its course at this point. We have had a little bit of a shift in the book, but it’s really slowed down. I think the clients have been pretty opportunistic in terms of taking advantage of higher rates. So, I would say our book and our mix is pretty stable right now, and we expect it to stay here.

Manan Gosalia:

Great. Thank you.

Bruce Van Saun:

Okay. Well, thanks everyone for dialing in today. We appreciate your interest and support for Citizens. Have a great day.

Kristin Silberberg:

Thank you, Keeley. 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 fourth quarter and full year 2023 results. Brendan Coughlin, Head of Consumer Banking, and Don McCree, Head of Commercial Banking, are also here to provide additional color. We will be referencing our fourth quarter and full year earnings presentation located on our investor relations website. After the presentation, we will be happy to take questions. Our comments today will include forward looking statements which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation, and the reconciliations in the appendix. And with that, I will hand over to Bruce.

John Woods:

Thanks, Bruce, and good morning, everyone. I'll start out with some commentary on 2023. We demonstrated excellent balance sheet strength while delivering solid financial performance. We were resilient through a turbulent environment, benefiting from near top of peer group capital levels and strong liquidity based on stable consumer insured deposits and diversified wholesale funding sources. This strength allowed us to execute well against our multi-year strategic initiatives while opportunistically building out the private bank. On Slide 6, you can see that we delivered underlying EPS at $3.88, which included a $0.51 drag from non-core, and an $0.11 investment in the private bank. Full year ROTCE was 13.5% after incorporating these items. Before I discuss the details of the fourth quarter results, here are some highlights referencing slides 4, 5, and 7. On the slides you can see we generated underlying net income of $426 million for the fourth quarter and EPS of $0.85. This includes $0.06 for our continued investment in the startup of the private bank and a $0.15 negative impact from the non-core portfolio. We had a significant increase in the impacts from notable items this quarter included on Slide 4. The largest driver was the FDIC special assessment, followed by elevated top and severance related expenses attributable to meaningful headcount reduction. Our underlying ROTCE for the quarter was 11.8%. Our legacy core bank delivered a solid underlying ROTCE of 14.8%. Currently, the private bank startup investment is dilutive to results, but relatively quickly this will become increasingly accretive. The private bank is off to a very good start, raising about $1.2 billion of deposits through the end of the year, of which more than 30% are non-interest bearing. While our non-core portfolio is currently a sizable drag to results, it continues to run off, further bolstering our overall performance going forward. We ended the year with a very strong balance sheet position with CET1 at 10.6% or 9% adjusted for the AOCI opt-out removal and an ACL coverage ratio of 1.59%, up from 1.55% in third quarter. This includes a robust 10.2% coverage for general office, up from 9.5% in the prior quarter. We continued to build liquidity during the fourth quarter, achieving our planned liquidity profile. Our pro forma Category 1 bank LCR rose to 117% from 109% in the prior quarter. We also reduced our period end flood borrowings by $3.3 billion quarter-over-quarter to $3.8 billion, and our period-end LDR improved linked quarter to 82% from 84%. Regarding strategic initiatives, as previously mentioned, the private bank is off to a great start and TOP continues to contribute. In addition, New York Metro is tracking well, and we are poised to capitalize on the growing private capital opportunity. Next, I'll talk through the fourth quarter results in more detail, turning to Slide 8 and starting with net interest income. As expected, NII is down 2% linked quarter, primarily reflecting a lower net interest margin, partially offset by a 2% increase in average interest earning assets. As you can see from the NIM walk at the bottom of the slide, the combined benefit of higher asset yields and non-core runoff were more than offset by higher funding costs and swaps, the net impact of which reduced NIM by 3 basis points to the 3% level. The additional 9 basis point decline to 2.91% was due to the impact of our liquidity build which was neutral to NII. Our cumulative interest-bearing deposit beta increased a modest 3 basis points to 51%, as the Fed has paused and we see continued but slowing deposit migration. We expect this moderating trend to continue until the Fed eventually cuts rates. Overall, our deposit franchise has performed well with our beta generally in the pack with peers. This is a significant improvement compared to prior cycles when our beta experience was at the higher end of peers. Moving to Slide 9. Fees were up 2% linked quarter given improvement in capital markets and a record performance from wealth. These results were partially offset by lower mortgage banking fees. The improvement in capital markets reflects increased activity with the decline in long rates in November driving a nice pickup in bond underwriting. Equities improved with strength in the back half of the quarter as the environment became more favorable. M&A advisory fees benefited from seasonality and an improvement in the environment given the better macro and rates outlook, although several transactions pushed to Q1. We see capital markets momentum picking up in Q1 as markets are positive and our deal pipelines are strong. The wealth business delivered a record quarter with higher sales activity and good momentum in AUM growth. The decline in mortgage banking fees was driven by lower production fees as high mortgage rates continued to weigh on lot volumes. The servicing operating P&L improved modestly while the MSR valuation, net of hedging, was lower. On Slide 10, we did well on expenses which were down slightly linked quarter even while including the impact of the continued private bank startup investment. Our reported expense of $1.61 billion increased $319 million, including notable items totaling $323 million, namely the industrywide FDIC special assessment of $225 million, and the impact of taking cost reduction actions to adjust our expense base heading into 2024. I'll discuss that in more detail in a few minutes. On Slide 11, average loans are down 2% and period end loans are down 3% linked quarter. This was driven by non-core portfolio runoff and a decline in commercial loans which were partly offset by some modest core growth in mortgage and home equity. Average core loans are down 1%, largely driven by generally lower loan demand in commercial, along with exits of lower returning relationships and our highly selective approach to new lending in this environment. Average commercial [line] (ph) utilization continued to decline this quarter as clients remain cautious and M&A activity muted in the face of an uncertain market environment. Next on slides 12 and 13, we continued to do well on deposits. Period end deposits were broadly stable linked quarter with an increase in consumer driven by the private bank offset by lower commercial. The decline in commercial deposits was driven by a proactive effort to optimize the liquidity value of deposits, running off approximately $3.5 billion of higher cost financial institution and municipal deposits during the fourth quarter. Absent this BSO effect, deposits would have been up by about 1.5% this quarter. Our interest-bearing deposit costs are up 19 basis points, which translates to 51% cumulative beta. Our deposit franchise is highly diversified across product mix and channels with 67% of our deposits in consumer and about 71% insured or secure. This has allowed us to efficiently and cost effectively manage our deposits in the higher rate environment. With the Fed holding steady, we saw continued migration of deposits to higher cost categories with noninterest bearing now representing about 21% of total deposits. This is slightly below pre-pandemic levels, and we expect the pace of migration to continue to moderate from here, although this will be dependent on the path of rates and customer behavior. Moving on to credit on Slide 14. Net charge-offs were 46 basis points, up 6 basis points linked quarter. We were pleased to see that commercial charge offs were stable linked quarter, and we also saw a modest decline in criticized loans, as we continued to work through the general office portfolio. We saw continued normalization of charge offs in the retail portfolio along with seasonal impacts. Turning to the allowance for credit losses on Slide 15. Our overall coverage ratio stands at 1.59%, which is a 4 basis point increase from the third quarter, primarily reflecting the denominator effect from lower portfolio balances. We increased the reserve for the $3.6 billion general office portfolio to $370 million which represents a coverage of 10.2%, up from 9.5% in the third quarter, as we made modest adjustments to modeled loss drivers. We have already taken $148 million in charge-offs on this portfolio, which is about 4% of loans. On the bottom left side of the page, you can see some of the key assumptions driving the general office reserve coverage level. We feel these assumptions represent an adverse scenario that is much worse than we've seen in historical downturns, so we feel the current coverage is very strong. Moving to Slide 16, we have maintained excellent balance sheet strength. Our CET1 ratio increased to 10.6% and if you were to adjust for the AOCI opt out removal under the current regulatory proposal, our CET1 ratio would be about 9%. Also, our tangible common equity ratio improved to 6.7% at the end of the year. Both our CET1 and TCE ratios have consistently been in the top quartile of our peers, and you can see on Slide 36 in the appendix where we stand currently relative to peers in the third quarter. We returned a total of $198 million to shareholders through dividends in the fourth quarter. We paused our share repurchases in the fourth quarter in light of the FDIC special assessment. Having exceeded our target capital level for year end, we expect to resume repurchases in the first quarter. Nonetheless, we plan to maintain strong capital and liquidity levels that fortify our balance sheet against macro uncertainties and position us to quickly transition to any new regulatory rules that may impact banks of our size. On the next few pages, I'll update you on a few of our key initiatives we have underway across the bank, including our private bank and our ongoing balance sheet optimization program. First, on Slide 17, the buildout of the private bank is going very well and clearly gathering momentum. Following our formal launch in the fourth quarter, our bankers have raised more than $1.2 billion of attractive deposits, with roughly 75% of that from commercial clients. This is a coast-to-coast team with a presence in some of our key markets like New York, Boston and places where we'd like to do more, like Florida and California. We have plans to open a few private banking centers in these geographies, and we are opportunistically adding talent to bolster our banking and wealth capabilities, with our Clarfeld Wealth Management Business as the centerpiece of that effort. Moving to Slide 18, you are all well aware of our efforts in New York Metro. That's going really well, and we are hitting our targets there. And on the commercial side, as I mentioned before, we are starting to see momentum building in capital markets. This should translate into a meaningful opportunity for us as the substantial capital backing private equity gets put to work. Next on Slide 19, we continue to be disciplined on expenses. It's important to remember that a key to Citizens’ success since our IPO has been our continuous effort to find new efficiencies and then reinvest those benefits back into our businesses so we can serve customers better. We've effectively executed our TOP 8 program, achieving a pretax run rate benefit of about $115 million at the end of 2023. And we've launched TOP 9 with a goal of an exit run rate of about $135 million of pretax benefits by the end of 2024. The new TOP program is focused on efficiency opportunities from further automation and the use of AI to better serve our customers. We are executing on opportunities to simplify our organization and save more on third party spend as well. Last year, we exited the auto business, and we also exited the wholesale mortgage business in the fourth quarter. We are also adjusting our expense base through further meaningful actions. In the fourth quarter, we reduced our headcount by about 650, or approximately 3.5%, and we have also taken a hard look at our space needs and are rationalizing some of our corporate and back-office facilities. Given all this work, we are targeting to limit our underlying expense growth in 2024 to roughly 1% to 1.5%, with a net decrease in legacy Citizens expenses of 1.3% to 1.5%, being offset by investments in the private bank. Playing prudent defense is at the top of our priority list given the challenging year we saw with the turmoil that began back in March and the uncertain macro outlook. So, we are reworking both sides of the balance sheet through our balance sheet optimization efforts. Slide 20 provides an update on our efforts to remix the loan portfolio through our non-core strategy and optimization on the commercial side with a focus on relationship based lending and attractive risk adjusted returns. On the left side of the page, you'll see the relatively rapid rundown of the remaining $11 billion non-core portfolio, which is comprised of our shorter duration indirect auto portfolio and purchased consumer loans. This portfolio is expected to decline by about $6.4 billion from where we were at the end of the year to about $4.7 billion at the end of 2025. And as this runs down, we plan to redeploy the majority of remaining cash paydowns to a reduction in wholesale funding, with the remainder used to support organic relationship-based loan growth in the core portfolio. The capital recaptured through reduction in non-core RWA will be primarily reallocated to support attractive growth in retail and commercial lending through the private bank. In the broader consumer portfolio, we are targeting growth in the home equity, card and mortgage, which offer the greatest relationship potential. Moving to the right side of the page, we are also working on the commercial portfolio, exiting lower return credit only relationships and focusing on selective C&I lending with multi-product relationship opportunities. We are leading more deals in our front book, improving spreads while also improving the overall return profile of the book. In the appendix, we have included more information covering the broad contours of our BSO program, including how we are managing our high-quality deposit book, remixing our wholesale funding, managing our securities portfolio and positioning our capital base against the backdrop of a changing macro and regulatory environment. Moving to Slide 21, I will take you through our full year 2024 outlook, which contemplates the early January forward curve and a Fed Funds rate of 4.25% by the end of the year. We expect NII to be down 6% to 9%, with changes in our swaps book contributing to about half of that decline, and average loans down roughly 2% to 3%. However, we expect spot loan growth of 3% to 5%, with private bank growing over the course of the year and commercial activity picking up in the second half. On the deposit side, we expect spot growth of 1.2% -- I'm sorry, 1% to 2% and well controlled deposit costs with a terminal beta in the low 50s, before rate cuts are anticipated to begin in May. We expect our net interest margin to trough around the middle of the year and average in the 2.8% to 2.85% range for the full year, and we expect to exit the year around 2.85%. We've included Slide 23, which shows the expected swaps and non-core impact through 2027. In 2024, we expect higher swap expense to be partly offset by the NII benefit from the non-core rundown. You'll find a summary of our hedge position in the appendix on Slide 38, which demonstrates how the 2024 headwind, which is incorporated in our 2024 NII guide, reverses to a substantial NII tailwind in 2025 and beyond, as the current forward curve is realized. For example, there is an expected improvement in NII contribution from swaps in 2025 year-over-year of approximately $371 million with continued meaningful benefits in 2026 and 2027. Non-interest income is expected to be up in the 6% to 9% range depending upon market environment, led by a nice rebound in capital markets. We expect expenses to be up about 1% to 1.5%. Excluding the private bank, this would be down 1.3% to 1.5%. We have provided a walk showing the components of our 2024 expense outlook on Slide 22 to provide more context. NCOs are expected to average about 50 basis points for the year as we continue to work through the general office portfolio and expect further normalization in retail. Given macro trends, our remixing of the balance sheet through commercial BSO and the non-core strategy and expectations for modest portfolio growth, we will likely see ACR releases over the course of the year. We plan to resume share repurchases in the first quarter in the $300 million range with more over the course of the year depending upon market conditions and loan growth. Taking that into account, we still expect to end the year with a strong CET1 ratio of about 10.5%, which is at the upper end of our target range. Putting it all together, we expect to return to sequential positive operating leverage in the second half of the year with PPNR troughing in the second quarter 2024. Moving to slides 24 and 25, as Bruce mentioned, we are well positioned to deliver attractive returns. As we look out over the medium term, we have a clear path to achieve a 16% to 18% ROTCE. We expect to generate solid returns from our legacy core business with a substantial NII tailwind given swap portfolio runoff. We expect to deliver positive operating leverage with strong expense discipline and we are well positioned to grow fees meaningfully given the investments we've made in our capabilities over the past few years. We also expect a meaningful contribution from the private bank as it matures and a tailwind from the runoff of the non-core portfolio as we redeploy that capital and liquidity. We will continue to operate with a prudent risk appetite and focus on returning a meaningful amount of capital to shareholders through our repurchase program and targeting a dividend payout of 35% to 40%. Over the medium term, we expect our CET1 ratio to remain within a target range of 10% to 10.5%, about 50 basis points higher than our prior target range, given continued uncertainty in the macro environment. On Slide 26, we provide the guide for the first quarter. Note that the first quarter has seasonal impacts due to lower day count impact on revenue as well as taxes on compensation payouts impacting expenses. To wrap up, we demonstrated the resilience of the franchise and maintained strong discipline in 2023 as we worked to position the bank to continue to deliver attractive returns to shareholders over the medium term. We delivered solid results this quarter and we ended the year with a strong capital, liquidity and funding position that puts us in an excellent position to drive forward with our strategic priorities and take advantage of opportunities that may arise. We are continuing to optimize the balance sheet and we are focused on allocating capital where we can drive deeper relationship business and improve performance over the medium term. With that, I'll hand it back over to Bruce.

Operator:

Thank you, Mr. Van Saun. We are now ready for the Q&A portion of the call. [Operator Instructions] Your first question will come from the line of Peter Winter with D.A. Davidson. Your line is now open.

Bruce Van Saun:

Good morning.

John Woods:

Yeah, I'll just start off and others can add. But I mean I think those are the two drivers, as you mentioned. When we look out into primarily the second half of 2024, we are seeing an expectation that commercial activity will pick up. Loan utilization is flattening out here, we expect early in the year. And then so that'll be part of the driver. We also have had some BSO activity in late ‘23 and early ‘24 that we expect to moderate in the second half of the year as well. So you're going to see a number of nice tailwinds on the commercial side. And then on the consumer side of things, we are seeing opportunities with good relationship business in the mortgage space and in HELOC, which has been a very nice and consistent driver for us. But those are the main drivers. Then, of course, broadly, the private bank, which has gotten off to a great start on the deposit side of things in late ‘23, we're going to see some of that loan opportunity pick up in ‘24. So those are the big, I would say, components of seeing that spot loan growth.

Brendan Coughlin:

Yeah, sure. Well, I would start by -- just a quick comment on Q4 for the private bank. Obviously, strong deposit print and I think demonstrating that the strength of the strategy can be very diversified and led by wealth and deposits and not necessarily requiring low interest lending to dislodge the relationship. So we're really excited about the print and the start by the team. Having said that, we do expect lending to pick up steam in 2024. Given the interest rate environment, mortgages are obviously challenged on the retail side. So the lending has been more heavily led by commercial lending, which has skewed in the private equity and venture space, which we're really comfortable with the risk appetite and the profile of that business. And it's been critical to start to dislodge personal private banking relationships from the ecosystem of private equity and venture. So we're off to a really good start. I suspect, given the forward curves, that the first half of the year will continue to be led by commercial principally and private equity and venture lending. Over time, we expect the loan book to be much more balanced and have more retail lending, home equity lending, mortgage lending coming in at scale as the rate environment dictates opportunities there. We also expect to lean into partner loan programs to help connect the corporate side of private equity venture with private banking and personal banking. So you'll start to see an asset diversification over time, but the first half of the year, we would expect it to still be more heavily weighted on the corporate side.

Don McCree:

Yeah. I think if you look back at the fourth quarter, the things that dampened our loan growth a little bit were it's about 50% utilization, 50% BSO with a little bit of bond execution sprinkled in there. So people that were carrying slightly higher balances on the commercial side, a lot of them went to the bond market when rates kind of backed off in the last six weeks of the year. And that's continued into this year. So I think the particular area that we're excited about as we get into the back end of 2024 is the private equity space. I mean, that group of clients has been basically dormant for almost two years. There's lots of conversations going on. We're hearing from most of those customers that they expect to get a lot more active and that'll drive utilization on our capital call lines, which is at an all-time low right now. So, I think that's what the real driver is.

Peter Winter:

Yes, just a quick follow-up. That's helpful. But on just the fee income, you talked about up to 6% to 9%. You did mention, the pipeline is strong for the capital markets, but just if you could give some color on the puts and takes on the fee income side.

John Woods:

Yeah, just kind of the main drivers of that. It's basically a continuation of some of the trends we're seeing in the fourth quarter of 2023, where capital markets is starting to pick up again, pipelines are incredibly strong. And I think that the lead driver seems to be M&A advisory. That's picked up in 4Q, not only due to seasonal factors, but just in terms of a more constructive backdrop. We're also seeing, as you get in -- out into ‘24, pick up and underwriting, both on the bond side and on the equity side, and so -- and solid contributions from global markets as well. But -- so those are some of the drivers as we see them beginning in Q4, continuing in Q1 with excellent pipelines and playing out over the rest of ‘24.

Brendan Coughlin:

We do, and we spent a year of slow and steady progression continuing to get all-time highs in the wealth management business. But given the private bank investment, 2024 is going to be a really important year. We're out in the market looking to attract a lot of talent. We've made a number of key hires in Q4, both on the leadership side as well as at the advisor side. And so getting the ecosystem of the bankers that we hired in the summer, connected with top and market wealth managers is critical for us. We're rebranding the platform to Citizen private wealth management to connect the private banking and wealth side together hand in glove. And so we do expect steady and significant growth out of wealth over time really connected into the private banking ecosystem. So we're pleased with the momentum, but there's a lot more to come and we hope if we execute well on the private banking initiative.

Peter Winter:

And just on mortgage banking.

John Woods:

Yeah, just to wrap it all that up, in ‘24 we do expect volumes to improve as well as margins. So that's another tailwind if we get into next year in terms of the production business.

Peter Winter:

Thanks a lot.

Matt O’Connor:

Good morning. Can you guys elaborate a bit on the expense cuts that you did this quarter in terms of where they're coming from? And obviously you're leaning in on the private bank, but kind of ex that, have you made sure you're not cutting too much during these initiatives and the ones that you've had in prior years?

Matt O’Connor:

Okay, that's helpful. And then just separately, the deposit growth that you've had from the private bank, have you disclosed what that rate is? I think a third of them are not expiring, but what's the blended rate? And I guess are you using promotions, whether it's rate or other stuff to help grow those? Thanks.

Bruce Van Saun:

Yeah, I would -- there's a Slide 11, Matt, that lays out a pie chart of the character of the deposits, but DDA and then checking with interest, which are very low costs, roughly 40%, very little term, and most of that in kind of liquid savings and money market with no promotions that are outside the norm of what we're offering to the core franchise.

Operator:

Your next question comes from the line of John Pancari with Evercore. Your line is now open.

Bruce Van Saun:

Hi.

Bruce Van Saun:

Yeah. So I'll start and then John can then give some more color. So I think that the kind of push that we've seen higher over the course of ’23, that could continue a little bit higher into ‘24. So going from 46, say, to 50 is kind of twofold for the most part. One is that CRE general office is, we're watching the maturity wall and we're on top of all these credits very carefully and we're working them out. And as I said in my opening remarks, a lot of this is fairly predictable. So kind of we can look ahead six months, nine months, we can kind of anticipate where we might have to do some restructurings and where we might take charge-offs. And so I think we have good visibility into that. It's a long process on CRE General Office. I think we'll have this with us all through ‘24 and likely into ‘25 as well. But again, the important thing is, I think we're well-reserved for it, and it's baked into that charge-off run rate. The second area is really just continued normalization on the consumer side, which has been extremely slow and gradual, but we're still slightly better than where we were pre-COVID. And so that will just gently push up as we go forward. And so that would be the other driver. I'd say the good news is that in C&I, we're not really seeing any kind of hotspots and so we feel that we have a pretty good outlook for broad C&I through 2024. On the question of the ACL is, this year we've been consistently building each quarter. And if you get to the scenario where there's likely a soft landing or a very shallow recession, we've put away enough reserves that I think we will be able to start to draw that down. And so time will tell on that, but you can already see that we've been starting to kind of reduce the amount of kind of reserve bill from absolute provision over charge-offs in this quarter. It was flat. It was $171 million over $171 million. And so even if charge-offs can pick up a little bit, I think it's likely that you could see the need for provision building from having provisions exceed charge-offs reduce as we go through the year. I don't know, John, if you want to add any color to that.

John Pancari:

Great. All right. Thank you for that. And then separately, on the capital front, you indicated that you expect to resume buybacks in the first quarter of ‘24. And maybe if you could help us possibly quantify the pace of buybacks that's fair to assume. Could you be back at that $200 million quarterly rate or how should we think about that? Thanks.

John Woods:

Yeah, and I just would reiterate our capital priorities are a strong dividend, and if we have opportunities to put capital to work, serving clients and driving great really strong risk-adjusted returns. That's our preference. And when that moderates a bit, that's when you see us give it back in the form of buybacks. And so we're in an extremely strong position to be able to have the opportunity to trade.

John Woods:

That's it.

Operator:

We'll go next to the line of Ebrahim Poonawala with Bank of America. Your line is open.

Bruce Van Saun:

Good morning.

Bruce Van Saun:

Yeah, good question. I would say the orientation right now is for backing our organic initiatives. So we've mentioned the private bank and we need to continue to invest there to get that off the ground and make it a big success. And we've been investing in the New York marketplace and certainly to get your brand awareness up is expensive proposition, but we're doing that and that is showing very good results. There are certain businesses like payments that are, I think, going through a lot of change and that change always presents opportunities. And so making sure that we're investing to position ourselves to deliver for clients and continue to gain share and grow that business, those are the things that kind of come top of mind that we're very focused on. I think in terms of acquisitions and our fee-based capabilities, we've made significant investments over time in commercial. And so our M&A size and scale is at quite a good level. So we could be selective there. Don't see anything imminent, but there's possibilities that if there's an industry vertical that makes sense, maybe we could do something there. And then wealth, we've been looking at trying to buy some things. We bought Clarfeld, which turned out to be a fantastic acquisition, but I think the orientation the rest of this year is to really go the lift-out route and to bring teams onto the platform. And so we're hard at work on that to try to scale up Citizens' private wealth. So I would say the franchise is in good shape. There's a lot of initiatives in place that will, I think, have us outperform from a growth standpoint relative to our peers. So I think we can sit back and be selective in terms of deploying capital inorganically.

Bruce Van Saun:

Yeah, I mean there's always opportunities to look to flex your expense base down. I think we've been pretty hard at it here to get to this level. And I'd say the strategic initiatives offer you some flexibility, but again, if you're looking at the medium term and the longer term to try to scrape to come up with $0.03 to $0.05 or something of that magnitude, if that puts at jeopardy your trajectory on things like private bank, it wouldn't appear to be a really advisable decision to take. So we will always look at that. You know you can trust us to do that. But at this point, we're trying to manage for both near-term delivery but also with an eye towards the medium term and really getting that ROTCE back into the kind of targeted range.

Operator:

Thank you. And your next question will come from the line of Scott Siefers with Piper Sandler. Your line is open.

Bruce Van Saun:

Good morning.

John Woods:

Yeah, I mean, I would say that we're very close to neutral one way or the other, really up or down. And -- but I'd say that I think what's important to the outlook is we have deposit migration continuing to moderate every quarter. And it continued this quarter. We expect it to continue next quarter. But, our outlook is until you get that first cut, it still doesn't completely go away. So we have an expectation the first cut comes in the second quarter and we get down to around 4.25%. I think that's still holding around. We're looking out the window today in the neighborhood of what the forward curve might indicate. I would say that if there's a slight bias, if the cuts came in a little fewer this year, that would probably be okay. But nevertheless, that first cut is key. And a general normalization in an orderly fashion over time is what we think is very good for our balance sheet. Again, staying around neutral with maybe a slight benefit if rates come in a tiny bit higher in ‘24.

John Woods:

Yeah.

John Woods:

Yeah, I’d say we're basically -- we've achieved our objectives with respect to our liquidity bill. This is the headline there. And it’s -- we believe a very strong kind of position being around 117% of the requirements for Category 1 banks. I think that matches our objectives and therefore going forward you will not see liquidity being a headwind to net interest.

Scott Siefers:

Perfect. Thank you very much.

Ken Usdin:

Hey, thanks. Good morning, guys. One follow-up. You mentioned the PPNR bottoming in the second quarter. I'm just wondering, do you expect NII to bottom coincident with that, or would there be a slight timing disconnect based on how the swaps work through?

Bruce Van Saun:

But in Q3, Ken, then you'd have other things kicking in, like fee growth strong, long growth starting to kick in. And so even though the swap is incremental, forward starting swaps, then I think we'd have to look at the whole dynamic around what we expect to see in the business performance that would allow us to absorb that.

Ken Usdin:

Well, I'm sorry, John. Can you just clarify that again? I didn't want to speak over it.

Ken Usdin:

Okay, got it. And then just looking out at the longer term guidance you gave just talking about the 3.25%, 3.40% medium term NIM range, it seems like that most of that can be gotten from the three buckets that you show, just getting curing from the fourth quarter level. And I see that you put in a 3.25% end of ‘25 Fed Funds rate. So I'm just wondering how you expect deposit costs and just beta to traject, and I know there's a lot of moving parts in there too because of the growth that you're expecting as well, and mix changes, but just can you maybe just start by just talking about if you're getting to the low 50s on the way up, just how that expects to act and influences that medium-term NIM range? Thanks.

Ken Usdin:

Got it. Okay. Thank you.

Erika Najarian:

Hi. Good morning. I just had one follow-up question. Putting all your answers together, John and Bruce, about the outlook for 2024 and the underlying dynamics of net interest income, it seems to me that if we put together what you just said to Ken about deposit betas in Slide 23, that despite the exit rate of your net interest margin forecasted to be 2.85% in the fourth quarter, based on everything that you've told us, it seems like you'll see a three handle in terms of that underlying NIM that Bruce discussed in 2025. Is that a good bridge to thinking about where you're exiting in ‘24 and then that medium-term range that you gave us?

Erika Najarian:

Perfect. Thank you.

Gerard Cassidy:

Hi, Bruce.

Gerard Cassidy:

Bruce, you guys have done a great job from when you went public to where you are today in transforming this company. So I'm curious on your medium term outlook for ROTCE, on the improvement you highlight that the private bank you're targeting at 20% to 24% ROTCE. Can you share with us the mix of how you get there, meaning what percentage of revenue do you think you need to reach from fees versus net interest income? And then also what kind of pre-tax margin do you think you'll need to get to that 20% to 24% target?

Bruce Van Saun:

John, you're answering at the comprehensive company on that MTO page. I think, Gerard, is focused more specifically on the private bank mix. But there, I would say, it will build over time, the fee percentage, as we kind of get the wealth cross-sell. But we should at least be at kind of where we are today in 75%-25%, and then I think there's kind of upside from that over time. And I do think the spread on the private bank assets is very significant today, given the high percentage of low-cost deposits in there. We haven't really seen the loans come on in size yet, but generally capital call lines tend to be priced with a nice return. And I think some of the other business lending and HELOCs and things that will maintain our price discipline and achieve a good spread there as well. So I think if you looked at kind of mature private banking models to have a 20% to 25% return on equity is realistic. I don't know, Brendan, if you want to add to that at all?

Gerard Cassidy:

Very good. And then following up, Bruce, maybe some thoughts from your perspective on what we might see in this Basel III endgame. Obviously, there's a lot of talk about scaling it back and maybe it's going to be a delayed implementation because of all the changes. There's a big focus, as you know, as we all know, on the operating risk in the capital markets businesses. But for the regional banks, it seems like it's more that numerator including the unrealized bond losses than the available for sale portfolio. But any thoughts for Citizens, how you might benefit from a scale back of what was initially proposed and what will be the final proposal?

John Woods:

Yeah, and maybe just add -- just a quick add to that is that even if the Basel III endgame had gone through as initially proposed, a very modest impact from an RWA standpoint on us. And as it relates to AOCI, as we mentioned earlier, we're expecting that likely survives. But in our case, we're at 9% by deducting the AOCI opt-in, and that's an incredibly strong number. So we sort of think about what's going on there is really behind us and really in the run rate, if you will, when it comes to that.

Gerard Cassidy:

Absolutely. In fact, Bruce, you bring up a good point in your guidance on the median term for the total company, legacy, core, ROTCE of 15% to 17% percent. You guys point out significant share repurchases. Should we interpret that to be a combined dividend payout and buyback ratio of 100% percent of earnings, then once we get the final rules and we're all set to go? Is that a fair number to [put] (ph) for you guys because you are well-capitalized?

John Woods:

Yeah, and I think we had a 95% capital return with performance in ‘23, so it's in that 75% to 100% range over time.

Operator:

And your next question comes from the line of Manan Gosalia with Morgan Stanley. Your line is now open.

Bruce Van Saun:

Brendan, you want to take that?

Manan Gosalia:

Great, thank you. And then just to follow up on credit, given the move lower in long end rates, can you talk about anything you're seeing in the non-office CRE portfolio, like maybe in multifamily? How do things like the debt service coverage ratios look today versus a couple of months ago, and how do you expect that to trend given where the forward curve is right now?

John Woods:

Yeah, I would just hasten and add that it's very different than general office. I mean the capital markets are still active in the context of buying and selling multifamily properties and that will just provide further tailwind to that activity.

John Woods:

Yeah, there's liquidity there. Buyers and sellers are still transacting. So it's just a very different night and day situation compared to general office, and certainly rates which won't have much of an impact maybe on the general office, will very much have a positive impact on the multifamily construct that was already okay to begin with.

Manan Gosalia:

Great. Thank you.

Bruce Van Saun:

Okay. Great, Keeley. Thanks again, everyone, for dialing in today. We appreciate your interest and support. Have a great rest of the week. Thank you.

Kristin Silberberg:

Thank you, Greg. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our third quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color. We will be referencing our third quarter earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. And with that, I will hand over to Bruce.

John Woods :

Thanks, Bruce, and good morning, everyone. Let me start with the headlines for the third quarter, referencing Slides 5 and 6. For the third quarter, we generated underlying net income of $448 million and EPS of $0.89, this includes the Private Bank start-up investment of $0.05 and a negative $0.14 impact from the Non-Core portfolio. Our underlying ROTCE for the quarter was 12.5%. On Slide 5, you'll see that we provided a schedule separating out our Non-Core runoff portfolio and the start-up investment in our new Private Bank from our legacy core results, so you can see how those impact our performance. Our legacy core bank delivered a solid underwriting ROTCE of 15.3%. Currently, the Private Bank startup investment is a drag to results, but relatively quickly, this will become increasingly accretive, 5% EPS benefit in 2025. Similarly, while Non-Core is currently a sizable drag to revenues, it will run off quickly, further bolstering our overall performance and partially mitigating the expected impact of forward starting swaps. Back to Slide 6. Total net interest income was down 4% linked quarter, and our margin was 3.03%, down 14 basis points, both in line with expectations. Deposits were up slightly in the quarter, reflecting the ongoing resilience of the franchise. We continued our balance sheet optimization efforts, further strengthening liquidity during the quarter given the uncertain geopolitical environment and in preparation for potential changes to liquidity regulations, increasing cash and securities by about $4 billion. In addition, the Non-Core portfolio declined by $1.4 billion, ending the quarter at $12.3 billion. While we await clarity on new liquidity rules for Category 4 banks, it is worth pointing out that we currently exceed the current LCR requirements for both Category 1 and 3 banks. Our period-end LDR improved to 84%, while our credit metrics remained solid with net charge-offs of 40 basis points, stable linked quarter. We recorded a provision for credit losses of $172 million and a reserve build of $19 million this quarter, increasing our ACL coverage to 1.55%, up from 1.52% at the end of the second quarter with the increase primarily directed to raising the General Office portfolio reserves from 8% in 2Q to 9.5% at the end of 3Q. We repurchased $250 million of common shares in the third quarter and delivered a strong CET1 ratio of 10.4%, up from 10.3% in the second quarter. And our tangible book value per share decreased 3% linked quarter, reflecting AOCI impacts associated with higher rates. Turning to Slide 7 on net interest income. Linked-quarter results were down 4% as expected, primarily reflecting a lower net interest margin, which was down 14 basis points to 3.03%. As you can see from the walk at the bottom of the slide, the decrease in margin was driven by deposit repricing, which includes mix shift from lower cost to higher interest-bearing categories, noninterest-bearing deposit migration as well as the mix impact of the liquidity build I mentioned earlier. These factors were mitigated by positive impacts from asset repricing and rundown of the Non-Core portfolio. Our cumulative interest-bearing deposit beta is 48% through 3Q and which has been rising in response to the rate cycle and competitive environment. Our deposit franchise has performed well with deposit betas generally in the back of peers. This is a significant improvement compared to prior cycles when our beta experience was at the higher end of peers. Our sensitivity to rising rates at the end of the third quarter is roughly neutral, down slightly versus the prior quarter. Moving to Slide 8. Fees were down 3% linked quarter, driven primarily by lower capital markets and card fees, partly offset by the increase in mortgage banking fees. The Capital Markets fees outlook was positive early in September, but with market volatility and higher long rates picking up to the end of the month, we saw a number of M&A deals pushed into the fourth quarter, resulting in lower linked quarter M&A advisory fees as well as lower bond underwriting. While we continue to see good strength in our deal pipeline, uncertainty continues around the timing of these deals closing given the level of market volatility. Card fees were slightly lower, reflecting lower balance transfer fees. The increase in mortgage banking fees was driven by higher MSR valuation, the servicing P&L provides a diversifying benefit, which in the quarter more than offset the decline in production as higher mortgage rates weighed on lock volumes. On Slide 9, we did well on expenses, keeping them broadly stable linked quarter, excluding the $35 million Private Bank start-up investment. On Slide 10, average loans are down 2% and period end loans are down 1% linked quarter. The Non-Core portfolio runoff of $1.4 billion drove the overall decline, partly offset by some modest core growth in mortgage and home equity. Average core loans are down 1%, largely driven by generally lower loan demand in commercial, along with exits of lower returning relationships and our highly selective approach to new lending in this environment. Period-end core loans are stable. Average commercial line utilization was down slightly this quarter as clients look to deleverage given the environment and higher rates. We saw less M&A financing activity in the face of an uncertain economic environment. Next, to Slide 11 and 12. We continue to do well on deposits. Period-end deposits were up $530 million linked quarter, with growth led by commercial and consumer deposits broadly stable. Our interest bearing deposit costs were up 39 basis points, which translates to a 48% cumulative beta. Our deposit franchise is highly diversified across product mix and channels, and with 67% of our deposits in consumer and about 70% insurers secured. This has allowed us to efficiently and cost effectively manage our deposits in this rising rate environment. As rates rose in the third quarter, we saw continued migration of lower-cost deposits to higher-yielding categories with noninterest-bearing now representing about 22% of total deposits. This is back to pre-pandemic levels and we would expect the decline to moderate from here, although this will be dependent upon the path of rates and consumer behavior. Moving to credit on Slide 13. Net charge-offs were 40 basis points stable linked quarter with a decrease in commercial, offset by a slight increase in retail driven by auto, which normalized following a very low second quarter result. Non-accrual loans increased 9% linked quarter to 87 basis points of total loans, reflecting an increase in General Office. We feel the rate of increase in non-accruals is decelerating after a jump in Q2. Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.55%, which is a 3 basis point increase from the second quarter, which reflects a reserve build of $19 million as well as the denominator effect from the rundown of the Non-Core portfolio. We increased our General Office coverage to 9.5% from 8% in the second quarter. You can see some of the key assumptions driving the General Office reserve coverage level, which we feel represent a fairly adverse scenario that is much worse than we've seen in historical downturns. As mentioned, we built our reserve for the General Office portfolio to $354 million this quarter, which represents coverage of 9.5% against the $3.7 billion portfolio. We have already taken $100 million in charge offs in this portfolio, which is about 2.5% of loans. In setting the General Office reserve, we are factoring in a very severe peak to trough decline in office values of about 68% with remaining 18% to 20% default rate and a loss severity of about 50%. So we feel the current coverage of 9.5% is very strong. It's worth noting that the financial impact of further deterioration beyond our outlook would be manageable given our strong reserve and capital position. We have a very experienced CRE team who are focused on managing the portfolio on a loan by loan basis and engaging in ongoing discussions with sponsors to work through the property and borrower specific elements to de-risk the portfolio and ultimately minimize losses. I should also note that about 99.2% of CRE General Office is in current pay status. Moving to Slide 15. We have maintained excellent balance sheet strength. Our CET1 ratio increased to 10.4% as we look to grow capital given the dynamic macro environment and new capital rules proposed by the bank regulators. We returned a total of $450 million to shareholders through dividends and share repurchases. We plan to maintain strong and growing capital and liquidity to levels that fortify our balance sheet against macro uncertainties and position us to quickly transition to any new regulatory rules that may impact banks of our size. Turning to Slide 16 and 17. I'll update you on a few of our key initiatives we have underway across the bank, so that we can deliver growth and strong returns for our shareholders. First, on Slide 16, we've included just a few of the business initiatives we are pursuing to drive improving performance over the medium term. On the commercial side, we highlight how we are positioned to support the significant growth in private capital. Although deal activity has been relatively muted recently, many sponsors have meaningful amounts of capital to deploy. So there is a tremendous amount of pent-up demand for M&A and capital markets activity given the right market conditions. We have been serving the sponsor community with distinctive capabilities for the last 10 years and we've established ourselves at the top of the middle market sponsor lead tables. And our new private bankers will significantly expand our sponsor relationships, and we stand ready to leverage our capabilities in this space when sponsor activity picks up. We also think there is a tremendous opportunity in the payment space, and we've been investing in our Treasury Solutions business developing integrated payments platforms and expanding our client hedging capabilities. On the consumer side, our entry into New York Metro is going very well with some early success attracting new customers to the bank and growing deposits about 9x faster than in our legacy branches, as we leverage our full customer service capabilities to drive some of the highest customer acquisition and sales rates in our network. The build-out of the Private Bank is also going very well. These bankers have hit the ground running and have already brought in around $500 million in deposits and investment balances through a soft launch in the back half of Q3. This is a coast-to-coast team with a presence in some of our key markets like New York, Boston and places where we'd like to do more like Florida and California. We plan to open a few Private Banking centers in these geographies and build appropriate scale in our wealth business with our Clarfeld legacy Wealth business as the centerpiece of that effort. Turning to Slide 17 on the top left side is our balance sheet optimization program, which is progressing well. The chart illustrates the relatively rapid rundown of the Non-Core portfolio, which is comprised of our $9 billion shorter-duration indirect auto portfolio and purchased consumer loans. This portfolio is expected to decline by about $7.6 billion from where we are now to about $4.7 billion at the end of 2025, and as this run found, we plan to redeploy the majority of cash paydowns to building core bank liquidity with the remainder used to support organic relationship-based loan growth in the core portfolio. The capital recaptured through reduction in Non-Core RWA will be reallocated to support the growth of the Private Bank. In summary, this strategy strengthens liquidity has already been a source of about $3 billion of term funding ABS issuance this year. It builds capital by reducing RWAs and it's accretive to NIM, EPS and ROTCE. Next to our TOP program on the right side of the slide. Our latest program is well underway and on target to deliver a $115 million pretax run rate benefit by year-end. Our TOP programs are essential to improving returns over the medium term and we are ready to launch on top 9, looking for efficiency opportunities driven by further automation and the use of AI to better serve our customers. We are looking at ways to simplify our organization and save more in third-party spend as well. In light of pressure on revenue given the rate environment, we are targeting to keep 2024 underlying expenses flat. On the technology front, we have a very extensive agenda with a multiyear next-gen tech cloud migration, targeting the exit of all of our data centers by 2025 and the program to converge our core deposit system onto a cloud-based modern banking platform. We've come a long way in modernizing our platform since the IPO. And on the ESG front, we recently announced a $50 billion sustainable finance target, which we plan to achieve by 2030 and commitment to achieve carbon neutrality by 2035. And we are working diligently to help our clients prepare for and finance their own transitions to a lower carbon economy. Moving to the outlook for the fourth quarter on Slide 18. Our outlook incorporates the Private Bank and assumes that the Federal rate steady through the end of the year. We expect NII to be down approximately 2% next quarter, given the impact from noninterest-bearing and low-cost deposits migrating to higher cost categories, albeit at a decelerating rate, more than offsetting the benefit of higher asset yields, Non-Core runoff and day count. Based on the forward curve, we expect the cumulative deposit beta at the end of 2023 to be approximately 50% and to rise to a terminal level of low 50s percent before the first rate cut. Noninterest income is expected to be up 3% to 4% with a seasonal pickup in capital markets depending on the market environment. Noninterest expense should be broadly stable, which includes the Private Bank and excludes the anticipated FDIC special assessment. Net charge-offs are expected to rise to approximately mid-40s basis points as we continue to work through the General Office portfolio and expected further normalization. We feel good about our reserve coverage around the current level and the ACL level will continue to benefit from loan runoff. Our CET1 is expected to increase to approximately 10.5%, with the opportunity to engage in a modest level of share repurchases, the execution of which will depend upon our ongoing assessment of the external environment. Beyond the 4Q '23 guidance, as I mentioned earlier, we are targeting flat 2024 underlying expenses. This includes the Private Bank on the Non-Core portfolio and excludes the anticipated FDIC special assessment. Also, we've included Slide 25 in the appendix on the swaps impact through 2027. We expect higher swap expense in 2024 to be partly offset by the benefit to NII from the Non-Core rundown. Notably, the swap expense drag will reduce meaningfully over 2025 through 2027 as swaps run off and the Fed normalizes short rates. In addition, the impact of terminated swaps is dramatically lower in '26 and 2027. To wrap up, we delivered solid results this quarter while navigating through a dynamic environment. Importantly, we made good progress positioning the company with a strong capital, liquidity and funding position, which will serve us well as regulatory requirements are finalized and if the environment becomes more challenging. Our balance sheet strength also positions us to take advantage of opportunities through our strategic priorities as we continue to strengthen the franchise for the future and deliver attractive risk-adjusted returns. With that, I'll hand it back over to Bruce.

Erika Najarian:

My first question is for John. John, there has been a lot of feedback from investors on uncertainty over the NII trajectory for '24 in the environment of higher for longer. And I think you know where I'm going here. I think that investors are trying to sort of square the $11 billion, $12 billion increase in notional swaps, right, at a received fixed rate of 3.10% in the second half of next year and trying to square that in a higher for longer environment with some of the balance sheet optimization. So if you could just sort of take us through a little bit of the moving pieces and perhaps simplify it for the investors listening in terms of how that impacts your NII trough timing, what happens after you hit trough and are you still confident in what you said, I guess, a month ago and that you could exit 4Q '24 with a 3% NIM?

Erika Najarian :

And just to clarify, are you still confident that you could exit taking all out account -- exit 4Q '24 have a NIM of about 3%. And based on sort of what you're telling us, it sounds like the -- if the Fed doesn't cut as the forward curve indicated, that would be the risk to that 3%.

Erika Najarian:

Got it. And I'm going to step back after this because I think I'm taking up too much time. I just want to clarify I'm asking about 4Q '24. Are you talking about 4Q '23? I just wanted to make sure we were on the same page.

Operator:

Your next question comes from the line of Scott Siefers from Piper Sandler.

John Woods:

It will be lower. It just depends on the NII neutral liquidity build that we determined to be appropriate. So it's sort of -- it's -- I think it's useful to talk about an ex liquidity build, given the fact that that's the driver of NII, and there'll be possibly additional -- just in terms of the variability of cash and how that gets funded, it will be -- that's flat to NII, but it will be a denominator effect that would take the NIM below that plus or minus 3% that I talked about before, but not an NII driver.

John Woods:

Yes. I think that we were saying that we think that the Non-Core runoff will be a continued driver of sort of in the first half of -- in 4Q and the first half of '24, you'll see some declines in the loan portfolio. But in the second half of '24, we start seeing the Private Bank contributing as well as organic contribution starting to see loan growth such that year-over-year, we would have an expectation you'd see us starting to see loan growth in the second half of '24.

Peter Winter:

Just -- I was wondering on the credit side, we've just seen, in general, some pre-announcements on charge-offs in the shared national credit space. Can you just remind us what your exposure is to shared national credits and how you fared in the recent exam?

John Woods:

Sure.

Brendan Coughlin:

Yes. And I think just as part of BSO, as Bruce said, as part of BSO in general, we're kind of looking at the total relationship returns. And if we went into credit as a participant thinking we can kind of move left and become a more important bank, that's not panning out. We're not getting the cross-sell we anticipated, then we're extricating ourselves at the next available opportunity. So I think you'll continue to see that trend.

Peter Winter :

Got it. And then -- just can you just provide a little bit more color maybe on the deposit repricing and migration and how you see it playing out with a longer -- higher for longer rates just impacting the deposit pricing pressures?

Bruce Van Saun:

Yes. Maybe, Brendan, do you track very carefully how we're doing versus peers and some of our strategies to continue to maintain that low-cost focus. So maybe you can add some additional color.

Peter Winter :

Very helpful. And then just one quick housekeeping. I just want to confirm, John, you said that the private -- the expense outlook for next year being flat. That includes the Private Bank build-out expenses?

Operator:

Your next question comes from the line of Ken Usdin from Jefferies.

John Woods:

I think Brendan will probably have some color on this. So it's pretty similar into the fourth quarter. And then, of course, into next year, you see it starting to migrate towards a -- instead of being an EPS drag, it gets back to breakeven when you get out into 2024. And then more broadly, a 5% contribution to EPS is our outlook there. But...

Bruce Van Saun:

The other thing, just in the way the comp is structured, Ken, that the folks who came over on guarantees as if they're fully producing. So as the revenues come in, there won't be incremental costs. They'll just be kind of earning those pay levels. So another factor to consider.

Bruce Van Saun:

So it's Bruce. And let me start off and then John can amplify. But the TOP program, I think, has been a real consistent contributor to our ability to deliver positive operating leverage. But to actually get to flat for next year, we have to go beyond that. So we've geared up a very nice TOP program and we're adding to it. But I think we're going to have to look at kind of employment levels broadly to see where we can extract some folks and we'll look at certain business activities that may be less important going forward than what we have been engaged in historically. We've already done some of that this year. So we downsized the mortgage business quite a bit. We exited the auto business. So I think it's a combination of actions. It's continuing to find ways to upsize TOP, leverage things like AI, where we can do that. look at our overall board structure and staffing levels and see if we can pinch some efficiencies there and then look hard at our business mix and figure out where the key years not to just have a knee-jerk revenues, there's revenue pressure in the environment. So let's really take a hard knife at all expenses. We have to be judicious about where we're cutting and protect the things that we feel are really going to help us grow and outperform in the medium term. So things like the private banks, things like the New York Metro expansion. There's things that we're going to ring fence and then there's other areas we're going to have to go a little harder with the knife. John?

Operator:

Your next question comes from the line of Manan Gosalia from Morgan Stanley.

Bruce Van Saun:

Brendan, do you want to?

John Woods:

And just maybe just to add, that's all great points there. And then just to add one other point about this. I mean, the rate environment is not -- is expected to become more constructive, I guess, is the point. Meaning if you're raising deposits in a world where the yield curve is inverted or at best getting less inverted. That's always going to be a tricky situation for banks until it becomes a more stable upward sloping situation, which I think is more likely to be the case as you get into '24 and certainly to the end of '24, when you start seeing lower short-term rates and nevertheless, an attractive long-term rate where we can basically deploy our capital and make a positive return. So that's really what I think is going to shake out as you get into '24.

Manan Gosalia :

Great. I appreciate all the color there. And just separately on the LCR requirements, you mentioned that you're compliant in both Category 1 and Category 3 now and that this build is also NII neutral. But I guess the question is, how much more do you think you need to build from here? And how do you think about that increasing your asset sensitivity in the long run?

Operator:

Your next question comes from the line of Matt Connor from Deutsche Bank.

John Woods:

Yes, I mean we're still working through our 2024 outlook, right? So we're going to be much more, I would say, transparent about what our expectations are for '24 as you get into planning season here and completing that. And of course, we do that in January. With that said, we -- broadly, as you look at the swap trajectory for us into '24, we have a swap portfolio growing right around the time that the forwards would indicate the Fed would begin to cut. As a matter of fact, and as I mentioned earlier, there's -- you could actually see deviation around that. And we happen to have a view that that it's likely that it will actually come in a little lower than where the forwards have it coming in at the end of '24. So that will be a mitigant. And as I mentioned, the Non-Core rundown is a mitigant. And Private Bank as that grows is, of course, accretive. The other thing I'll mention, I mean, if you get the on '24 and you look at what's happening in the '25 through '27 timeframes, it's certainly more consistent with a more neutral Fed posture that would represent, regardless of what the transition is in '24, that would represent a significant tailwind getting into '25 through '27, as you see the swap portfolio being more of a neutral impact to net interest margin and NII. And so working our way through '24, we get some really nice tailwinds. And that's just on the Acosta portfolio. We also have a locked in and baked in tailwind from the terminated swaps which run off, as you can see on our slide, in a significant way over '25 to '27. So I would call '24 a transition year while the Fed normalizes rates and our balance sheet optimization takes hold with Non-Core and creates a lot of momentum as you look out into '25 and beyond.

Matthew O'Connor :

And then just in terms of the impact of rate cuts versus higher for longer scenario, what's -- what does hire for longer do versus the rate cuts? Because it sounds like you're still a little asset sensitive, but the roll-on of the swaps would obviously benefit from rate cuts, so what's the net impact if rates are stable versus what the forward curve has for next year? Is it better or worse?

Matthew O'Connor :

Okay. So to summarize, steeper is better as a good rule of thumb?

Operator:

Your next question comes from the line of Vivek Juneja from JPMorgan.

John Woods:

No, I'd say underlying expenses at the top of the house will be flat next year, '24 versus '23. Underlying includes Private Bank, it includes Non-Core overall CFG expenses will be flat in '24 versus '23.

Vivek Juneja :

Okay. So I want all these definitions, everybody has a little difference, so it's important to clarify that. The second one, I guess, John, going back to the rate discussion, just to get my head wrapped around that. If I heard you right, just in response to Matt's question, is that small increase in rate is beneficial to NII. But then rate cuts is also positive. So I'm trying to reconcile how both scenarios are positive for you?

Vivek Juneja :

And one more clarification -- that's helpful. On the expenses, Bruce, when you talk about stable for next year, what are you assuming for capital markets? Are you assuming capital markets revenues and therefore incentive comp goes up? Or are you just using current level? Any color on that?

Operator:

And at this time, there are no further questions. With that, I'll turn the call over to Mr. Van Saun for closing remarks.

Operator:

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

Kristin Silberberg:

Thank you, Alan. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our 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 earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. And with that, I will hand over to you Bruce.

John Woods:

Thanks, Bruce, and good morning everyone. Let me start with the headlines for the second quarter, referencing Slide 5. For the second quarter, we generated underlying net income of $531 million and EPS of $1.04. Our underlying ROTCE for the quarter was 13.9%. Net interest income was down 3% linked-quarter, and our margin was 3.17%, down 13 basis points with funding costs outpacing the increase in asset yields. We delivered very strong deposit growth in the quarter, reflecting the strength of the franchise with spot deposits up 3% or $5.5 billion. Period-end loans and average loans were down 2% quarter-over quarter, reflecting the impact of our balance sheet optimization efforts, including our ongoing run-off of auto. These dynamics improved our period end LDR to 85% and our liquidity position remains very strong. We reduced FHLB borrowings by about $7 billion to approximately $5 billion outstanding at quarter-end and we increased our available liquidity by 19% to about $79 billion. Our credit metrics and overall position remains solid. Total NCOs of 40 basis points are up 6 basis points linked-quarter as expected, primarily reflecting higher charge-offs, increased general office. We recorded a provision for credit losses of $176 million and a reserve build of $24 million this quarter, increasing our ACL coverage to 1.52% up from 1.47% at the end of the first quarter, with the increase directed to the general office portfolio. We repurchased $256 million of common shares in the second quarter and delivered a strong CET1 ratio of 10.3%, up from 10% in the first quarter. And our tangible book value per share is down 2% linked-quarter, reflecting AOCI impacts associated with higher rates. On the next few slides, I'll provide further details related to second quarter results. On Slide 6, net interest income was down 3%, primarily reflecting a lower net interest margin, which was down 13 basis points to 3.17% with the increase in asset yields, more than offset by higher funding costs, given the competitive environment and migration from lower cost categories. With Fed funds increasing 500 basis points since the end of 2021, our cumulative interest-bearing deposit beta is 42% through the second quarter which has been rising in response to the rate and competitive environment and is generally in the pack with peers. Our asset sensitivity at the end of the second quarter is still approximately 1% which is broadly stable with the prior quarter. Our received fixed cash flow swap position is similar to the prior quarter as we held off on adding further protection as rates continued to rise during the quarter. Moving on to Slide 7, we posted a solid fee performance in a challenging market environment. Fees were up 4% linked-quarter with card fees showing a seasonally strong increase from higher transaction volumes and increases in wealth and mortgage banking fees. FX and derivatives revenue was modestly lower. Capital markets fees were stable with market volatility through the quarter continuing to impact underwriting fees, largely offset by increased syndications and M&A advisory fees, despite a few deals being pushed into the third quarter. We continue to see good strength in our deal pipelines and are hopeful that deal flow picks up in the second half. Mortgage fees were slightly higher as production fees increased with market volumes, partially offset by lower margins and lower servicing fees. And finally, wealth fees were also up slightly reflecting growth in AUM. On Slide 8, expenses were broadly stable linked-quarter as seasonally lower salaries and employee benefits were offset by higher equipment and software costs, as well as higher advertising and deposit insurance costs. On Slide 9, average and period-end loans were both down 2% linked-quarter, reflecting balance sheet optimization actions in C&I, as well as the impact of planned auto runoff. Education was lower given the rate environment, but this was offset by modest growth in mortgage and from equity. Commercial utilization was down a bit as clients look to deleverage, given higher rates and we saw less M&A financing activity in the face of an uncertain economic environment. On Slide 10, period-end deposits were up $5.5 billion or 3% linked-quarter with growth led by consumer up $3 billion and commercial up $2 billion. Our interest-bearing deposit costs were up 47 basis points, which translates to a 101% sequential beta and a 42% cumulative beta. Strong deposit flows and a very successful auto loan collateralized borrowing program initiated during the quarter contributed to reducing FHLB levels by about $7 billion. Given our BSO objectives, we grew deposits, which drove a favorable mix-shift away from wholesale funding. As a result, our total cost of funds was relatively well-behaved up 38 basis points. Next, I'll move to Slide 11 to highlight the strength of our deposit franchise. With 67% of our deposits skewed toward consumer and highly-diversified across product mix and channels, we are able to efficiently and cost effectively manage our deposits in a rising rate environment. We increased the portion of our insured and secured deposits from 68% to 70% linked-quarter and when combined with our available liquidity of $79 billion, our available liquidity as a percentage of uninsured deposits increased to about 150% from around 120% in the first quarter. As rates grew another 25 basis points in the second quarter, we saw continued migration of lower-cost deposits to higher-yielding categories, primarily in commercial with noninterest bearing now representing about 23% of the book. This is back to pre-pandemic levels and should stabilize from here. Moving on to Slide 12. We saw a good credit results in retail again this quarter and higher charge-offs in commercial. Net charge-offs were 40 basis points, up 6 basis points linked-quarter, which reflects an increase in the general office segment of commercial real-estate, partly offset by a slight improvement in retail, primarily due to the strength in used-car values. Nonperforming loans are 79 basis points of total loans, up 15 basis points from the first quarter, reflecting an increase in general office, which tends to be lumpy. It's also worth noting that overall delinquencies were lower sequentially with retail and commercial both improving slightly. Retail delinquencies continue to remain favorable to historical levels. Turning to Slide 13, I'll walk through the drivers of the allowance this quarter. We increased our allowance by $24 million, which includes a $41 million increase in CRE general office, even after covering charge-offs of $56 million. Our overall coverage ratio stands at 1.52%, which is a 5 basis points increase in the second quarter. The runoff of the noncore portfolio primarily auto, facilitated the reallocation of reserves to CRE. The reserve coverage in general office was increased to a strong 8%. On Slide 14, you'll see some of the key assumptions driving the general office reserve coverage level which we feel represent a fairly adverse scenario that is much worse than we've seen in historical downturns. As mentioned, we built our reserve for the general office portfolio to $313 million this quarter which represents coverage of 8%. In addition to running a number of stress scenarios across the general office portfolio, we continuously perform a detailed loan level analysis that takes into account property-specific details, such as location, building quality, operating performance and maturity. We have a very experienced CRE team more focused on managing the portfolio on a loan-by-loan basis and engaging in ongoing discussions with sponsors to work-through the property and borrower-specific elements to derisk the portfolio and ultimately minimize losses. Our reserves reflect this detailed view of the portfolio as well as the key macro factors we set out on the page. The property value, default rate and loss severity assumptions we are using to set the reserve, are adequate for the risks we currently see and are significantly more conservative than what we've seen in previous CRE downturns. It's worth noting that the financial impact of any further deterioration behind what we expect would be very manageable, given our strong reserve and capital position. On the following Slide 15, there are some additional disclosures we are providing this quarter to give more detail on the type and location of the general office portfolio. You can see out of the $3.9 billion general office portfolio, 94% is Class A or B with the majority in suburban areas, which seem to be performing better than central business districts. On the bottom left-hand side of the page, it highlights that the portfolio is quite diversified across geographies, as well as the top 10 MSAs, listed on the bottom right-hand side. Broadly for New York MSA, we are starting to see return to office trends picking-up and more than 80% of the portfolio was outside Manhattan where property dynamics tend to be more favorable. Washington DC is 100% class A&D and 95% suburban. Moving to Slide 16, we maintained excellent balance sheet strength. Our CET1 ratio increased to 10.3% as we look to add capital given the uncertain macro and regulatory environment. We returned a total of $461 million to shareholders through share repurchases and dividends. Turning to Slide 17. You'll see that our CET1 ratio is among the highest in our regional bank peer group. This strong capital level reflects a relatively conservative approach since the IPO in maintaining robust capital levels. If you incorporate the removal of AOCI opt-out, our adjusted CET1 ratio would be 0.5% and we also expect that this replace us near the top of our peer group again this quarter. We expect to maintain very strong capital levels going forward with the ability to generate roughly 20 basis points of CET1 ratio post-dividend each quarter in 2H '23 before share buybacks. So, as you see, we've been focused for a while and playing really strong defense with a focus on capital, liquidity, funding and maintaining a prudent credit risk appetite. And that's the job one. Even long before the turmoil we saw in the first quarter. But we also recognized the need to continue to play offense. We need to be selective, investing in initiatives that will grow the franchise where we have a right to win. Over the next few slides, I'll spotlight a few of the exciting things we're doing and ensure that we can deliver growth and strong returns for our shareholders. First, on Slides 19 and 20, we were excited to announce a few weeks back that we hired about 50 senior private bankers and 100 related support professionals who were with First Republic. As many of you know, for a number of years, we've had an interest in growing our wealth business, both organically and inorganically. So we made a number of investments on the organic side, hiring financial advisors and converting that business from a transactional business to a very customer-centric financial planning approach. That's been a slow and steady build over the years. And then we supplemented that with the Clarfeld acquisition a couple of years ago and that's gone incredibly well. So, with our customer-centric culture, our financial strength and the full range of products and services we offer, we were the perfect fit for these bankers. We really admire their approach to delivering the bank to their customers in a unique way with white glove service. This is really a coast-to-coast team with a presence in some of our key markets like New York, Boston, and places where we'd like to do more like, Florida and California. In fact, we think the overlap with JMP in San Francisco is extremely complementary. These bankers serve the types of customers we are seeking to attract to the bank, high and ultra-high-net-worth individuals and families, often the strong connections to middle-market companies with a particular focus on private equity and venture capital firms, serving the innovation economy. We have a great deal of work ahead of us to integrate these teams and ensure that they are positioned to deliver that bank to their clients. We plan to open a few private banking centers in key geographies and build appropriate scale in our wealth business with Clarfeld as the centerpiece of that effort. We think this is going to be extremely attractive from a financial perspective. These teams and their staff, about 150 people in total, on-boarded late in the second quarter with revenue begin to ramp in the fourth quarter. Financial impact for the second half will be $0.08 to $0.10 of EPS plus an initial notable cost of about $0.03 for 2023. These bankers have hit the ground running and are out-working to build their book of business and we expect the effort to breakeven around the middle of 2024. By 2025, we expect EPS accretion of roughly 5% with 2025 year end projections of about $9 billion in loans, $11 billion of deposits and $10 billion of assets under management. So overall, a very exciting advance for us. Now let's go to Slide 21, and I'll walk you through how we'll be managing our balance sheet over the next few years. Since the IPO, we're prudently growing our balance sheet while managing the mix of assets and funding with an eye towards maximizing returns. With the increase in rates since the end of 2021, plus the advent of quantitative tightening and more recently, the heightened competition for deposits, we are entering the next stage of the journey with a plan to focus on attractive relationship lending, while lowering our LDR, which will improve our liquidity profile and benefit returns. In order to make this effort clear and show the benefits we expect, we've established a $14 billion non-core portfolio which is comprised of our $10 billion shorter duration indirect auto portfolio and lower relationship purchased customer loans - consumer loans. This portfolio will run down fairly quickly with about $9 billion of run-off expected by the end of 2025. Moving to Slides 22 and 23, you'll see that as the non-core loan portfolio runs down, this allows us to pay down higher-cost funding and redeploy capital into more strategic lending and our investment portfolio. We will also be growing relationship-based lending to the private bank and raising deposits to self-fund that growth. Despite the size of the run-off portfolio, we expect to see modest loan growth in 2024, picking up in 2025, driven by opportunities across retail and C&I as well as our private bank effort. The net result of these actions is an improved liquidity profile with a better loan and funding mix and higher returns. Next on Slide 24, a quick update on our entry into New York Metro where some really exciting things are happening. With the branch conversions behind us, we are full steam ahead working to serve our customers and capitalize on opportunities. We continue to be encouraged by our early success. We've seen strong sales in the branches as we leverage our full customer service capabilities to drive some of the highest customer acquisition and sales rates in their network. Most importantly, we have seen a steady improvement in our Net Promoter Scores. On the commercial banking side, we've got a strong new leadership team in place with local talent joining from larger firms and we are seeing some early success leveraging our new visibility to build pipelines with middle-market firms. And we are looking forward to what we can do with our new private banking capabilities in the market. On Slide 25, we have a great opportunity to build on Citizens Access, our national digital platform that has been focused on deposits for the last few years. We moved to a modern fully cloud-based core platform and we are trying to add checking capabilities later this year. Down the road, we plan to converge our legacy core system with this modern platform. We are confident that a single integrated platform will be more cost-efficient and flexible in meeting our client's needs. We aim for this to be a complete digital bank experience to serve customers nationwide with a focus on the young mass-affluent market segment. And on the right side of the page is CitizensPay where we have been very innovative in creating distinctive ways to serve customers. CitizensPay has been the top customer acquisition engine for the bank with very high promoter scores and this has been a great performer from a credit perspective. We have some fantastic partners on the platform for a while, such as Apple, Microsoft, Best Buy, BJ's and Vivint. And we are always very excited to welcome new partners like Peloton, Tre, The Tile Shop and Wisetack to platform. On Slide 26, I'll highlight how we are positioned to support the significant growth in private capital. Over the last several years, private capital fundraising had led - has led to record deal formation, M&A activity and substantial fees. The activity has been relatively muted recently and many sponsors have not deployed meaningful amounts of capital. So there is a tremendous amount of pent-up demand for M&A and capital markets activity. We have been executing a consistent strategy to serve the sponsor community with distinctive capabilities for the last 10 years and we've done a great job moving up to the top of the sponsor lead tables, particularly in the middle market. We have made significant investments in talent and capabilities, including five advisory acquisitions since 2017. And our new private bankers significantly expand our sponsor relationships and capabilities. Our success supporting private capital has been a large part of our strong capital markets performance over the last few years and we are poised to capitalize on the next wave of sponsor activity as the path of the economy becomes clearer. Let's move to Slide 27 for an update on our TOP program. Our latest TOP 8 program is well underway and progressing well. Given the external environment, we have decided to augment the program to protect returns as well as ensure that we can continue to make the important investments in our business to drive future performance. We have increased our targeted benefit by $15 million to $115 million by accelerating some of our other efforts and to further rationalize our branch network and reduce procurement costs. We have also begun planning for our TOP 9 program, looking for efficiency opportunities driven by further automation and the use of AI to better serve our customers. We are also looking at ways to simplify our organization and find even more savings in procurement. Continuous improvement is part of our DNA and I'm very confident that we'll continue to deliver these benefits to the bank. Moving to Slide 28, I'll walk through the outlook for the second quarter for Citizens, which excludes the impact of the Private Bank and I will also provide some comments for the full year. The outlook takes into account another rate increase, followed by Fed on hold for the remainder of this year. For the third quarter, we expect NII to decrease about 4%. Noninterest income to be up by approximately 3%. Net interest expense should be broadly stable. Net charge-offs are expected to be broadly stable to up slightly. Our CET1 is expected to rise modestly from 10.3% with additional share repurchases planned, which will depend upon our ongoing assessment of the external environment. Relating to the full year, our liquidity position is quite strong and given the BSO actions I discussed earlier, we will continue to build on this, targeting an LDR of low-to mid-80s by the end of the year, positioning us well for anticipated regulatory changes. Worth noting we are already - we already are fully LDR compliant with Category 3 bank requirements. Based on the forward curve, we are expecting a terminal interest-bearing deposit beta of 49% to 50%. Our net interest margin should begin to stabilize in Q4 as the Fed is expected to reach the end of the rate hike cycle. We are off to a great start of drilling up the private bank, and we expect the EPS impact of this to be $0.06 in the third quarter and $0.02 to $0.04 in the fourth quarter. So we really think of this as a capital investment. To wrap up, our results were solid for the quarter as we continue to navigate a turbulent external environment. We are focused on positioning the company with a strong capital, liquidity and funding position, which will serve us well as we continue to navigate a challenging environment ahead. Our balance sheet strength also positions us very well to focus on our strategic priorities to continue to strengthen the franchise for the future and deliver attractive returns. With that, I'll hand back over to Bruce.

Operator:

Thank you. Thank you, Mr. Van Saun, we are now ready for the Q&A portion of the conference call. [Operator Instructions] Your first question will come from Scott Siefers with Piper Sandler. Go ahead.

John Woods:

Yes, I'll go ahead and start off. Thanks for the question. I mean, I think, broadly, we're seeing the impact of the rate environment on our net interest margin. We're managing it quite well as the Fed is continuing on its hiking cycle. And as you get into the end of the year, taking into consideration all of the balance sheet optimization activities, we see NIM flattening out and kind of holding it around 3% or so, as you get to the end of the year. The tailwinds from balance sheet optimization are meaningful and will continue to build into '24 and so those are the big drivers there, I think that also contributing to that NIM stability would be the fact that we think that balance sheet migration is starting to stabilize. And also you can ignore the fact that the Private Bank itself as you get out into '24, would start to deliver accretive NIM. So we're feeling good about the profile after we get through this last hikes from the Fed here in July, watching that NIM starts to stabilize as you get into the end of the year.

John Woods:

Yes. And it's a little bit front-end loaded as the expenses will come in and drive probably more in the neighborhood of $0.06 of that $0.08 to $0.10 happening in third quarter with $0.02 to $0.04 really into the fourth quarter. And it's primarily expenses in the neighborhood of $40 million or so, as you get into the 3Q and 4Q and but the loan book starts to build later this quarter and into 4Q. So that gives you the front-end loaded of that $0.08 to $0.10 into 3Q.

Scott Siefers:

Perfect. Okay, good. Thank you very much.

Erika Najarian:

Hi, good morning. John, I was just wondering if you can help us with lots of moving pieces that's sort of unfurling in front of us. So, just I guess, the first question is, you noted stability in the 3% - at the 3% level. Does that mean that fourth quarter 2024 will be at about the third quarter level? I'm just wondering sort of how those dynamics play out in terms of what you expect to the - how the balance sheet trend for the rest of the year or those sort of the run-off continue to pressure it at that level and what does that fourth quarter NII about look like from a range perspective.

Erika Najarian:

'23. And building out of '24 fund.

Bruce Van Saun:

And I would comment, Erika, that this was a really important quarter for us to kind of get the deposit level where we wanted to get the Fed - the Federal Home Loan Bank borrowings lower and really take a big step in lowering the LVR. And so we paid up a little bit to achieve that and the impact of that full quarter effects the third quarter guide, but I think at this point, we feel that we don't need to continue to really aggressively grow deposits. We can have a more stable deposit profile. As John indicated, less migration from non-interest bearing to interest-bearing and so there won't be kind of a full quarter impact of an aggressive plan that affects Q4 from Q3, because we'll be kind of looking at a more stable profile in Q3.

John Woods:

Yes. Maybe I'll just start off in a couple of areas. Just when you think about NII, similar numbers that you're throwing out there are probably a little lighter than where we will see them come out. I think our NII be a little better than that and into fourth quarter, I think we have some opportunities to - if interest earning assets are going to be stabilized, as Bruce indicated and net interest margin stabilized, so we think the NII has also stabilized at that solid levels. So that was I think the first question that you had. I mean I think the -

John Woods:

Yes, there is a very limited adjustments. Things do roll-off and come on, but broadly, our asset sensitivity profile was pretty stable quarter-over-quarter, meaning we are - we were still asset sensitive. So a rate rise, which we're about to get from the Fed does actually contribute to NII and net interest margin for us. So from that perspective, all of that has been built into the commentary that we've been giving you in terms of swap roll-off and our ongoing positive asset sensitivity. Again, when you get - when you think about net interest margin over kind of the next several quarters, we have a number of tailwinds. You've got flattening out non-interest-bearing migration. So that's no longer expected to be a big headwind. You've got the run-off book that we talked about and that runoff book is going to be rotated into relationship lending at higher yields. So the runoff -

John Woods:

And paying down high cost funding, right, so which - where we have a negative kind of spread situation there. We already mentioned the fact that the Private Bank is going to start contributing to the balance sheet later this year and that the net interest margin on that is actually accretive to the overall legacy bank. I think, throughout there is that, just front book back book dynamics, where you basically have originations in the front book. Just in the securities portfolio alone, there's 300 basis points positive front book, back book in terms of - we're actually creating a bigger security stock, but we're doing at the right time where securities yields are actually historically quite favorable. And so we're putting a lot of way from that standpoint. And we're seeing back into the loan book, spreads on our front book originations are higher than they were. And for example in C&I, spreads are up 50 basis points over the last year, year-over-year. So that's also a tailwind and all those things are the things that are going to help us manage the fact that - manage the rate environment and the other items that we have --

Erika Najarian:

Got it. And just to wrap it up, just because I got a few emails to clarify and I'll step aside. It sounds like you're sensitivity hasn't changed or whatever that fourth quarter number is, which is stable to the third quarter, that down 1.2% on down 100 is still valid, but then the balance sheet optimization will get you closer to stable despite Fed cuts.

Bruce Van Saun:

Yes, I'll just close and you got an extended period of time here, Erika, and we're very interested in NII and NIM, which I'm sure is on a lot of investors' minds. But, kind of bigger picture is, we're kind of transitioning the loan book to things that are more strategic and offer better returns on capital and better opportunities for cross-selling deepening with customers. And so we're kind of working through a transition period this year and even into next year. It's a little hard to give you full guidance at this point, given a lot of uncertainty still in the market. We're giving you our best instincts at this point on that. But I feel quite confident that as we kind of emerge through '24 and then even look out to '25, that - kind of, with the lift-off of this Private Bank effort and the kind of run-down of these less strategic portfolios that we're going to get a lot of benefit from this and we're really poised to do quite well, I think looking out into kind of back-half of '24 into '25.

Bruce Van Saun:

Sure.

Nathan Stein:

Hi, good morning. This is Nate Stein on behalf of Matt O'Connor. Just one question from me. So the capital build was good this quarter with the CET1 rising to 10.3% from 10% and guidance calls for this increase again in 3Q. Just wanted to ask how high are you willing to let the ratio get to?

Nathan Stein:

Thank you.

Gerard Cassidy:

Good morning, Bruce. Good morning, John.

Gerard Cassidy:

Bruce and John, can you guys share with us, obviously, Vice Chair Barr came out with a speech last week talking about RWA increases that will lead to higher capital levels for all banks over $100 billion in assets. Have you guys given some thought on where this could be - where you could be most impacted by the new Basel 3 Endgame that maybe will come out next week. And then second, as part of this, this week Bloomberg reported that there may even be some RWA increases for residential mortgages which really hasn't been discussed. And how are you guys approaching, what could be coming possibly as soon as next week?

JohnWoods:

Yes, I agree with all of that. And I think the issue is in credit RWA versus operational risk RWA, Gerard. So, I think there was the view that there would be some puts and takes on the credit risk RWA and maybe it wouldn't be much of an increase expected at the regional bank level, but I did see - we did see those reports on residential mortgages. We'll see how it all plays out. But on the operational risk side of things, with a complex fee-based sort of businesses are where a lot of that is directed and it's not just - we don't have much of exposure - as much of exposure to that as maybe some other banks in the industry do. So broadly we felt like that we would be impacted possibly a little less than most and we're sitting with capital a little more than most. So from that perspective, we feel pretty well-positioned for the uncertainty of the regulatory. We are making process and as you heard from Bruce, we're growing capital into the end of the year and I think a 10 - something in the neighborhood of 10.5% CET1 is a pretty strong mitigant to anything that might come down the road from the Fed.

Operator:

Your next question will come from the line of Ken Usdin with Jefferies. Go ahead.

Bruce Van Saun:

Turn that over to Brendan.

Ken Usdin:

Great color. Thank you, Brendan. And just one more question on the other side of the BSO. John, obviously talking a lot about the consumer side of the non-core portfolio here. Can you just dig and just let us know, you previously had done a lot on the commercial portfolio. And I'm just wondering, have you done any key currently deep diving into the CRE book, as you've talked about on the credit side. What might there still be to do on the commercial side of the portfolio in terms of BSO from that perspective. Thanks.

DonMcCree:

Yes, so we've been at this for probably three or four years now as we just grown out relationships where we haven't been able to achieve across all that we've thought we have been achieved when we were going into the credit, several years ago. So it's really an ongoing effort. It's been running about $1 billion a year, and we probably will be running about that same pace. The good news is we've been able to replace some of that with growth in places like New York Metro, where we see a good amount of opportunity on a full wallet basis, particularly in the middle market, as we bring on these new hires. On the CRE side, as everybody knows, there is not a lot of liquidity, but there is some liquidity and we're actually moving some of our exposures after the agencies and then do some private capital also. So we'll try to liquefy CRE, particularly multifamily over the next couple of quarters, couple of years to the best we can bring those overall exposures down, even though they're performing pretty well.

Operator:

Your next question will come from the line of John Pancari with Evercore. Go ahead.

Bruce Van Saun:

Yes. I would say that is something we felt comfortable with in Q3. We were going through the Q2. We were going through the CCAR process at the time, but we saw the opportunity to build kind of have our cake and needed to build the ratio while also repurchasing shares and I think we'll still be in that position. So we still have noncore kind of rundown working for us, which is releasing RWAs. So you should again have a chance to somewhat - have your cake and needed to both in Q3 and Q4.

John Woods:

Yes, I think there's two items that we look at. One is just the - as we are getting back to the historical place that the platform generated noninterest-bearing pre-pandemic, and so that's been sort of a foundational spot that we think creates some solidify of the operating accounts in both retail and consumer. So that's one really important spot. So around that 23% level is about how we see it. And then the second item is that, in the second quarter, we started to see some deceleration for the first time in several quarters. We started to see the turn and deposits kind of migration decelerating. And then we have a number of, I would say activities on the product and low-cost strategy front that we're seeing some really positive uptick on in retail, in particular, and so -

Brendan Coughlin:

Yes, couple of quick points, just a quick recall, as we've talked over the last bunch of quarters. The consumer portfolio has been under a five-six year transformation for quite some time and it's in a very, very different starting points through the beginning of the cycle than ever before for this franchise with significant improvements in things like customer primary - primacy growth and households, or mass-affluent mix has improved and low-cost deposit profile has moved up. So coming into the cycle, we were very confident that we'd be more pure like or maybe outperform and data that we're seeing with benchmarking suggested in the consumer bank, we are indeed better-than-average versus peers right now on all the mentions interest-bearing cost, beta, as well as low-cost control. So we feel pretty good how we're performing against peers, it is starting to stabilize. So the excess surge deposits have burned down maybe by about 60%, so there's still a little bit out there. But a lot of those are starting to be sticky and turn into wealth creation. If you dissect the various different segments, the wealthier segment is still having some modest outflows of rotation into interest-bearing as well as rotation outside of the banking industry. So year-over-year the wealthier segment is down about 10%. We're seeing the mass-affluent segment in deposits on a per customer basis about flat and the mass-market portfolio has actually increased in net deposits and that's a function of a lot of our strategies that we put in place to really drive primacy and activity and engagement. And so we've seen a bit of a bottoming at the lower end in terms of DDA balances. What we have done to drive that is a lot of product innovation. So we did things like get your paycheck two days early. It doesn't seem like a big deal, it's actually an incredibly big deal. That's driving a lot of primary banking behavior. We've got technology we put in place that when you open a new DDA, you're automatically porting over your direct deposit that seems very operationally oriented. But it actually is a dramatic improvement that things like primary banking behavior which drives low-cost deposits. We've made overdraft perform through our Peace of Mind 24-Hour Grace program and a variety of other things, which has also driven a lot of primacy and we're starting to really rev up the engines on household growth. Overall, all of those things contribute to some controllable. So we're - I think we're outperforming peers on the market, given our starting point in the cycle and we're continuing to invest to try to further outperform through all of these different initiatives and strategies. It is the long game. These are driving primacy in low-cost deposits. It takes a while to build up scale, but I feel like we've got a lot of the right things in place in addition to outperforming on our back-book to win the game uncontrollable where we're at right now.

Don McCree:

Yes, that's right. I mean, we've been broadening out our deposit base quite nicely and as Bruce said, it's a combination of just the growth in the cash management business overall and bringing on more clients on the cash management side. As I said, in New York Metro, the things that we're adding are really full wallet for cash management relationships and those bring really nice deposits. And then on the product side, we've done a lot around green deposits and carbon offsets deposits in our ESG strategy that was approved to be quite profitable. We've built out escrow products and bankruptcy products. So there's a variety of product development things which are attracting nice operating deposits with some nice breadth for them.

John Pancari:

Okay, great. Thanks.

Manan Gosalia:

Hi, good morning, I appreciate all the detail on the office book. It looks like you have a pretty conservative assumption baked into your CRE office reserve levels of 8%. What - I guess the question is, what would you need to see to take that up even more. Or over the next few quarters, as some of your office portfolio comes up for renewal, should we expect the reserve levels go down as you have more normalized NCOs in that portfolio?

John Woods:

Yes. I'll just reiterate the fact that, as you mentioned, we took $56 million, that's a 1.5%. So that - we've got 8.5% - we got 8% set-aside, so that implies a 9.5% coverage for the losses through the cycle and we think that's pretty darn adequate, matter of fact, very strong. And so, I think that - as you also mentioned NPLs flattening out and charge-offs kind of getting in the run-rate rather than step-change from here which I think is important to reemphasize. And maybe just turn it over to Don.

Bruce Van Saun:

In the office sector.

Manan Gosalia:

That's very helpful. Thanks for the fulsome answer. Just to move on to capital. Is there any color you can share on what drove the increase in the stress capital buffer this year? I know that mortgage was something that was a little bit of a headwind for the whole group, but any other information you glean from your conversations with the Fed. And then maybe what you need to do to bring that down in future years?

John Woods:

Yes. I think that as you get past this year, where we have those integration expenses, and there's a hypothesis that, but that will roll off as you get into next year. And we'll have another bite at the apple next year given the fact that we're going to be doing this again. And in the end, the SCB is not our constraint. Our constraint is our own view of what capital we need to be prudent to support our business. And frankly, where the Fed and the regulators are headed with required kind of levels outside of the SCB is going to be our constraint. So we're going to be, as Bruce mentioned earlier, about 200 basis points over the SCB by the end of the year and probably heading towards earlier compliance with whatever the Fed comes out within most. So we're feeling pretty darn good about the capital position, notwithstanding the SCB.

John Woods:

No, it will - it might. I mean, I think more importantly, it will - it gives us flexibility to rotate RWA capital into relationship lending and return that capital. To the extent that those front book opportunities are not there, we probably have the opportunity to do both, where we rotate that capital into relationship lending and provide an ability to buy back. It doesn't have a direct impact on the SCB.

Operator:

Your next question will come from the line of Vivek Juneja. Go ahead.

Brendan Coughlin:

Yes. Yes, thanks for the question. We already, prior to the lift-out of the private bankers, had a relationship-based pricing in play in all of our asset classes, including mortgage. So when you bring heavy levels of deposits in AUM, we price down modestly for that. So we don't have any intention of changing what we already do. And so our new private bankers will have access to the same relationship pricing grids that we've had in play for a while. So as you think about pricing and yields of things like mortgages or even some of the small business commercial lending, we're not expecting a dramatic different profile in terms of profitability or yields from legacy Citizens in how we operate the business to make sure that we're considering the full relationship and that we're really competitive in pricing. But we're not undercutting the market by a material amount that will deteriorate either lending return -

Brendan Coughlin:

They do.

Brendan Coughlin:

And another question around expenses, implied in the comments that John and Bruce both made around breakevens inside of 2024 is the team's production covering kind of TOP guarantees to come over. So we've been really thoughtful about how we do that. But obviously, we've got the way these folks get paid is on a book of business model. And they're going to go out and develop a lot of business, and we're going to give them the runway to do that. We had a lot of debate with them on the appropriate timing to make that happen and make sure the operations excellence is available here at Citizens. The cost of that is considered in all of our guidance and commentary we made about the profitability of the business. And we're already well underway on tinkering with the way the bank works to make sure we're creating the conditions for them.

Vivek Juneja:

Okay. Thank you. And for a follow-up, just Don. Don, what are you seeing on the whole sponsor side given with high rates in the market? When - what level do you expect it to come back to even in '24, say, just given if rates stay high, yes, some cuts, but I don't think anybody is expecting it to go back to where we were 1.5 years ago? So any thoughts on what level of activity do you think we get back?

Vivek Juneja:

Thank you.

Bruce Van Saun:

All right. Thanks, Alan, and thanks again, everyone, for dialing in today. We certainly appreciate your interest and support. Have a great day.

Kristin Silberberg:

Thank you, Allan. 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 first quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color. We will be referencing our first quarter earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on page two of the presentation. We also reference non-GAAP financial measures, so it’s important to review our GAAP results on page three of the presentation and the reconciliations in the appendix. With that, I will hand over to you Bruce.

John Woods:

Thanks, Bruce, and good morning, everyone. Let me start with the headlines for the financial results referencing slide five. Big picture, first quarter results were solid against the backdrop of volatility in the macro environment. We continue to progress against our portfolio of strategic initiatives, including the well-executed conversion of the Investor platform in February. For the first quarter, we generated underlying net income of $560 million and EPS of $1.10. Our underlying ROTCE for the quarter was 15.8%. Net interest income was down 3% linked-quarter given the lower day count and lower interest-earning assets. Our margin was stable at 3.3%. Period-end loans and average loans were down slightly quarter-over-quarter, reflecting the impact of our balance sheet optimization efforts, such as our ongoing runoff of auto. Deposit levels declined in the quarter primarily due to the impact of seasonal factors, the compounding impact of the rate environment and particularly earlier this occurred in the quarter. Importantly, our deposit levels were broadly stable during the market turbulence in March. Our quarter end LDR is 89.8% and our liquidity position remains very strong with current available liquidity as of today of about $66 billion. Our credit metrics and overall position remains solid. Total net charge-offs of 34 basis points are up 12 basis points linked-quarter, in line with ongoing normalization trends. We recorded a provision for credit losses of $168 million and a reserve build of $35 million this quarter, increasing our ACL coverage to 1.47% up from 1.43% at the end of the fourth quarter, with most of the increase directed to the general office portfolio. Our current coverage ratio is about 17 basis points stronger than our pro forma day one CECL reserve of 1.3%. We repurchased $400 million of common shares in the first quarter and delivered a strong CET1 ratio at the top of our target range at 10% and our tangible book value per share is up 6% linked-quarter. Before I walk through the details of the results for the quarter, let me address some of the industry issues that are top of mind on slide six. First, we have a very strong capital base, which is one of the highest in our regional bank peer group, even if one were to include the rate driven unrealized losses on all of our investment securities. We have a quality deposit franchise, which has performed very well since the turbulence, which began in early March. We continue to see the benefit from all of the investments we have made since the IPO with 67% of total deposits from Consumer and a well-diversified Commercial portfolio with about 66% of our clients using us as their primary bank. Finally, 68% of deposits are insured or secured. Our liquidity position is quite strong with a diverse funding base, ample available liquidity and strong risk management capabilities. In fact, our LCR level exceeds what would be required as a Category 3 bank at March 31, 2023. Looking at credit, our metrics continue to look solid. Retail is normalizing, but is still performing quite well as the employment picture remains strong. On the Commercial side, our focus is on the CRE portfolio and on general office in particular, which is impacted by back-to-work trends and rising interest rates. We have a very strong reserve coverage of 6.7% on the general office portfolio and I will go through some of the details later. And lastly, the market is concerned about how the regulators may respond to the disruption in March, which in our view, was unique to the banks in question and not reflective of broader in regulation or management lapses. We will watch closely how things develop, but in any case, we think the process will be thoughtful and deliberate. Finally, we believe we are well positioned for any increase in regulatory requirements, given our diverse business model and current excess capital and liquidity regulatory ratios. Let’s drill into the details on the next few slides, starting with capital on slide seven. We ended the quarter with one of the highest capital levels in our regional bank peer group with a CET1 ratio at the top of our target range of 10%. This strong capital level reflects our prudent approach to deploying capital as we prioritize driving improved returns over the medium-term. If you include the rate-driven unrealized loss on debt securities and AOCI, our adjusted CET1 ratio would be 8.7%. If you remove the unrealized losses in HTM, our tangible common equity ratio would reduce by 20 basis points to 6.4%. All of these ratios are expected to be near the top of our peer group again in this quarter. We expect to maintain very strong capital levels growing -- going forward with the ability to generate roughly 25 basis points of capital post dividend each quarter and before share buybacks. We have $1.6 billion of repurchase capacity remaining under our current Board authorization, timing of repurchases will be dependent on our view of external conditions. Next, I will move to slide eight to discuss our deposit franchise. As you can see, our deposit franchise is skewed towards Consumer and highly diversified across product mix and in terms of the various channels we can tap. About 67% of our total deposits are Consumer, up from 60% at December 31st, which puts us in the top quartile of our peer group and roughly 68% of our deposits are insured by the FDIC or secured, which is up from 60% at year-end. Demand deposits represent about 26% of the book, down slightly from 27% at year-end as customers have naturally rotated towards higher yielding alternatives. On slide nine, the headline is that our deposit performance since midyear 2022 following the Investors acquisition and the commencement of QT [ph] has been in line with industry performance. We outgrew both the industry and peer average in the second half of 2022. We entered 2023 expecting that the normal seasonal deposit outflows in the first quarter would be somewhat exacerbated by the higher rate environment and we saw a little more of that than we had forecast by about 1% and but most of that happened in January and February. Given our rundown in auto, we were willing to let some deposits run off early in the quarter trying to hold the line on betas. In March, we saw some elevated inflows and outflows as customers across the industry can look to diversify their deposits in the wake of bank failures, but overall, our deposits were broadly stable during the month. This strong performance is attributable to investing heavily in our deposit offerings and capabilities since the IPO and this will remain a focus as we continue to build a top performing bank franchise. On slide 10, we highlight some of the things that we are doing to attract deposits and drive primacy with our customers. In Consumer, we have developed a compelling set of products and features that drive higher customer satisfaction and encourage them to do more with us. We have strong analytics capabilities and compelling offerings such as Citizens Plus in our Private Client Group, as well as Citizens Access, our digital bank to leverage. And with the final conversion complete at Investors, we have a substantial opportunity to take deposit share in the New York Metro market. On the Commercial side, we have invested heavily in our treasury solutions capabilities with a state-of-the-art platform and strong talent to serve client needs. We continue to add better tools for our clients to manage their cash and drive higher operational deposits, as well as innovative products and capabilities to attract deposits. Moving to slide 11. We are monitoring the commercial real estate portfolio closely given the softening macro environment and the pressure of rising rates impacting refinance needs. The general office sector is a particular concern as tenants rethink their space needs given the remote work trends. Given these pressures, we are evaluating our loan portfolio very carefully for early signs of stress, in particular, CRE office. It’s worth noting, however, that near 100% of our borrowers are current on their obligations with NPLs under 50 basis points. We are starting to see an increase in criticized assets and have added workout resources, but given the diversity and quality of the portfolio, we feel the credit costs will be manageable. Our total CRE allowance coverage of 2% includes an elevated coverage for the general office portfolio of 6.7%. On slide 12, we drilled down a bit on the $6.3 billion office portfolio, which includes $2.2 billion of credit tenant and life sciences properties, which are not as exposed to adverse back to office trends and are expected to perform quite well. The remaining $4.1 billion relates to the general office segment, which we feel is reasonably well positioned across type, geography and suburban areas and central business districts. About 90% of the general office portfolio is income producing and about 70% is located in suburban areas and the majority is Class A. Next, I will provide further details related to first quarter results. On slide 13, net interest income was down 3%, given lower day count, which was worth about $29 million and slightly lower interest-earning assets. The net interest margin of 3.3% was stable with the increase in asset yields offset by higher funding costs. With debt funds increasing 475 basis points at the end of 2021, our cumulative interest-bearing deposit beta has been well controlled at 36% through the end of the quarter. We continue to dynamically adjust our hedge position so that we have down rate protection in the second half of 2023 and through 2026. As we approach the height of the rate cycle, we have managed our asset sensitivity down from roughly 3% at the end of last year to a more neutral 1.1% at the end of the first quarter. Moving on to slide 14. We posted solid fee results despite seasonality and headwinds from market volatility and higher rates. These showed some resilience in a challenging environment, down 4% linked-quarter with seasonal impacts in capital markets and service charges, partly offset by strength in FX and derivatives revenue and a modest improvement in mortgage banking fees. Focusing on capital markets, market volatility continued through the quarter and syndications and M&A advisory fees were seasonally lower. We continue to see good strength in our M&A pipelines and signs that deal flow should pick up as the year progresses. Mortgage fees were slightly better with higher production fees as we are seeing volumes rising and margins improving with the industry reducing capacity. This should continue to benefit margins over time. And finally, card and wealth fees posted solid results for the quarter. On slide 15, expenses came in better than expected, up only 2.8% linked-quarter, given seasonally higher salaries and employee benefits, as well as the impact of an industrywide FDIC surcharge implemented at the beginning of the year. On slide 16, average loans were down slightly a bit over the quarter as inflation and supply chain pressures continue easing and clients are adjusting inventories to reflect this, as well as lower CapEx in anticipation of reduced economic activity. Average retail loans are down slightly, reflecting the planned runoff in auto, which was largely offset by growth in mortgage and home equity. On slide 17, average deposits were down $4.7 billion or 2.6% linked-quarter, driven by seasonal and rate-related outflows. As I mentioned earlier, the majority of the deposit decrease occurred in January and February, with balances broadly stable in March. Our interest-bearing deposit costs were up 51 basis points, which translates to a 73% sequential beta and a 36% cumulative beta. Moving on to slide 18. We saw good credit results again this quarter across the retail and Commercial portfolios. Net charge-offs were 34 basis points, up 12 basis points linked-quarter, which reflects continued normalization. Non-performing loans are 64 basis points of total loans, up 4 basis points from the fourth quarter as an increase in Commercial was offset by improvements in retail. Retail delinquencies were broadly stable with the fourth quarter and continue to remain favorable to historical levels, but we continue to closely monitor leading indicators to gauge how the consumer is faring. Turning to slide 19, I will walk through the drivers of the allowance this quarter. We increased our allowance by $35 million to take into account the growing risk of an economic slowdown and the outlook for losses in the Commercial portfolio, particularly general office. Our overall coverage ratio stands at 1.4%, which is a 4 basis point increase from the fourth quarter. The current reserve level calculation contemplates a moderate recession and incorporates expectations of lower asset prices and the risk of added stress on certain portfolios such as CRE. Moving to slide 20. We maintained excellent balance sheet strength. Our CET1 ratio increased to 10%, which is at the top end of our target range. Tangible book value per share was up 6% in the quarter and the tangible common equity ratio has improved to 6.6%. We returned a total of $605 million to shareholders through share repurchases and dividends. Shifting gears a bit, on slide 21, we continue to make good progress with our push into the New York Metro market. We were very excited to complete the branch and systems conversion at Investors in February, which went very smoothly. With that behind us, we are full steam ahead working to serve our customers and capitalize on opportunities to capture market share. We continue to be encouraged by the strong early momentum we are seeing in the branches where customer satisfaction has been improving significantly and we continue to see some of the highest customer acquisition and sales rates in our network across the legacy HSBC and Investors branches. We have also seen some good early client wins and a growing pipeline in Commercial. We look forward to making further strides as we leverage the full power of our product lineup and customer focused Retail and Small Business model across the New York market. Moving to slide 22 for a quick update on our TOP 8 program. Our latest TOP program is well underway and progressing well. Given the external environment, we have begun to look for opportunities to augment our TOP 8 program in order to protect returns, as well as ensure that we can continue to make the important investments in our business to drive future performance. We will have more to say about this in the coming months. Moving to slide 23. I will walk through the outlook for the second quarter and give you an update on our outlook for the full year that takes into account a modest economic slowdown with the Fed expected to raise rates by 25 basis points in May and then begin easing late in the year. For the second quarter, we expect NII to decrease about 3%. Non-interest income is up mid-to-high single digits. Non-interest expense should be stable to down slightly. Net charge-offs should remain in the mid-30s basis points. Our CET1 is expected to come in above 10% with some share repurchase planning depending upon our view of the external environment. Moving to slide 24. As we think about the full year, we remain focused on maintaining strong capital, liquidity and funding position, while sustaining attractive returns. Of course, there is a continued level of uncertainty in the current environment. For the full year 2023, we expect NII to be up 5% to 7%. We are focused on initiatives that will stabilize and even grow our deposits modestly from first quarter levels over the remainder of the year. Non-interest income is expected to be up mid-single digits. Non-interest expense is expected to be up about 5%. Net charge-offs are expected to be in the mid-to-high 30s basis points. Our current reserve level contemplates a moderate recession and known risks and there should be less of a need for further reserve builds given anticipated spot loan decline for the year as auto runs down and our CET1 ratio is expected to be above the upper end of our 9.5% to 10% target range. At 10% to 10.25% assuming stable market conditions, our share repurchases are expected to build over the course of the year. To sum up on slide 25, we delivered a solid quarter despite expected -- unexpected challenges and are ready for the uncertainty that lies ahead in 2023. Our strong capital, liquidity and funding position will serve us well to move forward with our strategic priorities and deliver attractive returns this year as we balance the need for strong defense with the imperative of continuing to play prudent offense to strengthen the franchise for the future. Even as we navigate through the current challenging environment, we reaffirm our commitment to our medium-term financial targets. With that, I will hand back over to Bruce.

Operator:

Thank you, Mr. Van Saun. [Operator Instructions] Your first question will come from the line of Erika Najarian with UBS. Go ahead please.

Bruce Van Saun:

Good morning.

Bruce Van Saun:

Yeah. Let me start and I will quickly flip it to John. But I would say, Erika, that really we are just recognizing what we have seen on -- in the deposit markets and the cost of deposits is going up. I think that was partly a response to kind of the Fed rapid rises and money funds becoming alternatives. So there was, I think, a greater sensitivity around earning a return on cash that kicked in and then that was, I think, further exacerbated by the bank failures in March. And so I think there was kind of heightened velocity of deposits moving around the system and so to retain those deposits, folks had to increase rate paid. We feel that we did a pretty good job here. We came into the year expecting that there would be some seasonal outflows in Q1, and since we had built deposits in the second half of the year and then we had auto running down, so less volume on the asset side, we were prepared to let those run down by about 3.5% in the quarter. We actually saw about 1% higher than that in the runoff, but in any case, we tried to hold the line on betas and I think the betas that we posted are slightly better than peers that have reported at this point. So, but if you kind of play out the rest of the year, we are going to be paying more for our funding than we thought coming into the year and that’s pretty much the big driver. I would say there might be kind of a little more disciplined in terms of who we are extending credit to, given I think probably a higher likelihood that we could see a shortened shallow recession. So there might be a little volume impact there from slightly lower earning assets and maybe there’s a little mix where we are holding a little precautionary cash. But if I had to kind of put it in order, I would say, number one is the cost of deposits, and maybe slightly the volume on assets, and then thirdly, would be composition. So, John, I will flip it to you.

Bruce Van Saun:

Right. You might have add too John about the swaps that we continue to dynamically recalibrate the swaps to provide protection for the event that the Fed ultimately moves lower.

Bruce Van Saun:

This will help support a good guide for 2024.

Bruce Van Saun:

Yeah.

Bruce Van Saun:

Yeah. And I guess just to close this off, Erika, I would say, if you look at the outlook for the year, kind of the one thing that got marked down was really NII. We still feel pretty good about the fee outlook. We are going to work a little harder on expenses and probably bring that in below where we thought coming into the year. I’d say credit provisioning should be about kind of where we thought coming into the year. We are still angling to repurchase shares over the course of the year. So our expectation is that we can continue to deliver return on tangible equity in the kind of mid-teen area and just reflective that it won’t make quite as much net interest income this year, but still investing in the things to position us to have a good kind of runway into 2024.

Bruce Van Saun:

Yeah. Great question. And I guess just to set the big picture, Erika, that I would say, first off, I don’t believe that the answer to the two bank failures is more regulation on regional banks. I think those were idiosyncratic situations and there was sufficient regulation. So you basically had business models that were not well diversified and the banks grew too fast and stretch management capabilities, the supervisors didn’t really do their job and so I think there will be a thoughtful review of what were the issues and then how to address them. I think it’s probable that there will be some tightening around liquidity and capital, and probably, closer reviews of how banks are handling their asset liability management. There may be other aspects of this in terms of the overnight repo facility and creating a kind of viable drain on bank deposits in the money funds and should they change that and deposit insurance and should they take a look at that. So there’s a bunch of things that I think will come under review. Specifically, with respect to us, I think, the good news is that we have managed our capital at the high end of our peer group and so we are already compliant. We would be if we ended up having the AOCI filter removed, we would be in compliance today. The same thing John pointed out, the LCR. We have run that at a high level. We won very rigorous internal liquidity stress testing regimen that we would already be in compliance with the Category 3 bank as well. So the fact that we have managed the balance sheet conservatively, we are already in compliance if they go kind of heavier regulation if it ends up going down that path, I think, we are in good position. So I think we will have and the fact that these will be phased in over kind of, I’d say, two years or three years gives us lots of capital flexibility to be buying back our stock or taking advantage of other situations where that could arise. And if it’s strategically and financially compelling, I think, we have the capability to go on offense. So anyway, that’s kind of my thoughts on that, it was good to kind of stay conservative even when we had lots of questions as to why aren’t you leveraging your capital structure more where you are keeping your CET1 target so high. Guess what? We keep it that way, and we run conservative for precisely these air pockets that you are always going to experience turbulence and high capital and high liquidity is your best friend in these circumstances.

Operator:

Your next question will come from the line of Peter Winter with D.A. Davidson. Your line is open.

John Woods:

Yeah. I will go ahead and get started on that. So the guide being up 5% to 7%. What we built into that, as we mentioned, is the fact that we are going to have some downward kind of impact on margin coming from the deposit migration, as well as increased beta assumptions that we are building in. So it’s -- there’s a lot of uncertainty here and a lot of things to play out. But to try to frame it a little bit, go out to -- if you think about where we may end -- 4Q 2023 where we may end the year, we are starting the year at 330. We may end the year, call it, in a wide range, maybe 310 to 320 and if things kind of if there’s good execution and some trends maybe end up going our way, we will end up at the high end of that range, and vice versa on the lower end. And then so I’d say that when you think about playing it out throughout the year, there will be a step down as you work through the year with maybe a little bit of weighting into 2Q and things basically flattening out into the second half of the year. But like I said, there’s a lot of uncertainty there and -- but that helps -- hopefully, that will help give you a frame. And then you have got, as we mentioned, on the volume side of things, we do have the auto rundown, which we began last year that will be -- is built into that guide, as well as the ongoing work that we are doing in Commercial and balance sheet optimization. So you put all that together then that gives you the NII guide.

Peter Winter:

Got it. And if I could just ask about deposits, the outlook. I recognize deposits stabilized in March and you have done a lot of work to improve the deposit franchise. But it just seems like in this environment to keep deposits stable to growing deposits from here could be a little bit of a challenge, not only for you. And I was wondering if you could just give some color on some of the deposit opportunities?

Brendan Coughlin:

Yeah. Thanks. So the Consumer -- in the Consumer business have got sort of kind of three segments of deposits, the Traditional Retail, Wealth Management and then Small Business. And it’s kind of progressing as expected, has been chatting mode over the last couple of quarters. We certainly have customers coming into the cycle that have excess deposits and liquidity from pre-COVID. We are seeing very, very small earn down rates, but nothing that is unexpected. And broadly right in line with trends from mid-summer last year through this quarter. As John pointed out, through March, on all three of those portfolios, we saw 60% to 75% increase in inflows, but the same sort of increase on outflows broadly just moving money around it. So we were very stable on net balances across those businesses through the month of March. We feel really good about the underlying health. Over the last eight years, we have invested a lot of time and energy in making our Consumer deposit base much more granular. Our primacy rates, so whether customers consider us a primary bank or not is up dramatically to above peer levels. That’s a good thing. That means stability in low cost deposits when payroll is coming in. We have done things like added benefits like early pay for consumers, which is an encouragement to bring payroll and direct deposit over that’s going quite well adds more granularity and stability of the deposit base. So when I look at levers to continue to have strong deposit performance for the rest of the year. There’s a couple of things in the Consumer Bank that we are really, really focused on. One, John mentioned New York City, New Jersey, household growth, getting more customers. That is going well. We are performing at the top end of our peer set in terms of net market share gain and household growth. We expect that to continue in all of our markets and supported by the really early momentum in New York City and New Jersey that we expect to continue. We have also made a pretty meaningful pivot into customer relationship deepening. So we have rolled out program, as Bruce mentioned, Citizens Plus, which the simple concept is you do more with us, you get more, really encouraging customers to bring more of their wallet to us. We have seen very, very strong take up on that, a 300% plus improvement in customers going into these relationship propositions, encouraged by the breadth of the offering and bringing more to us and profitability of those customers almost doubles when they migrate up. So we think that will give us a shot in the arm as customers look at us to consolidate relationships over. And then maybe last would be Citizens Access. So and it gives us a great lever to raise deposits as we need it, but it also gives us a great lever to cost contain interest-bearing deposits in the Consumer Bank, which will allow us to have much more manageable betas in the core bank where we can focus on relationship banking and not deposit raising for the sake of deposit raising and when we need to contain deposit growth, we can do it in a very targeted way through Citizens Access. That’s proven to be exceptionally effective for us and we had a great quarter in growing Citizens Access here in Q1.

Don McCree:

Yeah. So on our side, I think, a lot of it surrounds the Payments and Treasury Services business. You have heard us talk for the last couple of years about the investment we are making in that business. It has not only been around the core operating services, but also a lot of work around deposit franchises and liquidity franchises, frankly. One of the things we haven’t talked about is we have a liquidity advisory service and the liquidity portal, which goes beyond deposits, but allows us to capture customer funds even if they are on balance sheet. And then on the deposit side, over the last couple of years, we have introduced five or six new products. We have talked about the green deposits, talked about carbon offset deposits, we have talked about escrow deposits. So the product sets quite broad. The other thing we saw during the disruptions is we added about 300 new deposit clients, a lot of which interestingly came out of the JMP franchise as they referred some of the technology customers onto our platform. Some of those are funded up. Some of those aren’t funded up. But like Brendan said, the core of our franchise is really the primary core relationships and the operating relationships and about 66% of our deposit base is really with core primary relationships. And the last thing we are doing is we have turned the deposit business into a primary thrust sell. So where we were asking for capital markets business, when the capital markets were, we are now asking for deposits and we are framing the deposit raise in the context and overall relationship and have gotten a very good response from a lot of our clients.

Peter Winter:

That’s great.

Peter Winter:

Thank you for the detailed answer.

Operator:

Your next question will come from the line of Scott Siefers with Piper Sandler. Your line is open.

Bruce Van Saun:

Thanks,

Don McCree:

Yeah.

Don McCree:

Yeah. As I mentioned, we have opened about 300 new accounts over the last month, which has been encouraging. I’d say at the top end of the client base we have seen more diversification activity. So the public companies, which had excess deposits kicking around the system, some of which were search deposits, some of those flowed out and went to other banks and then on the flip side, some of them flowed into us as customers balance their deposit accounts, so kind of net neutral on that. And then the other thing we have seen, frankly, and this is far before SVB and some of the disruption is clients are, because the capital markets are kind of quiet and the lending markets are kind of required, clients are using some of their cash to fund their operations and fund CapEx. So we have seen a little bit of a drift out in terms of just utilization of excess cash balances. And then the -- I’d say, the core operating deposits have stayed pretty flat. I mean people are basically toggling between ECR and deposits, if there’s a toggle, but I’d say, the kind of core funding of operational activities is relatively flat.

Don McCree:

Yeah. I think we will see. It’s going to depend on what happens in the marketplace. I will say that over the last couple of weeks, we have seen a pretty strong bid in a lot of different asset classes, particularly the syndicated loan underlying asset class. So there’s some signs of life in the market, whereas it was dead quiet at the beginning of the year. We are starting to see some transactions actually clear the market some and kind of and some get restructured in ways that are, I would say, not more aggressive, but more regular way from various structured transactions that were happening over the last couple of months. So good signs of life. I’d say our pitch activity and our pipelines are extremely robust. And I would come back to what I said a couple of times is in things like our M&A business, we are a middle-market investment bank and so we play in smaller-sized transactions, say, $250 million to $1 billion, not the $5 billion to $10 billion transactions. So the financing dependency that’s in a lot of our pipelines is not as difficult as it is for the mega transaction. So we think as things begin to stabilize and recover and the rate cycle begins to come to an end, we will see activity in the second half of the year and we are seeing that in our pipeline. And then remember, we also have a very diverse set of capabilities now. So we are doing a lot around private equity, we are doing -- placing equity for clients into, for example, a family office or a lot of pitch activity around convertible bonds. So while some traditional full market products might not be fully back yet, we have a wide arsenal that we are actually deploying on behalf of that.

Don McCree:

Yeah. Let me just add one more thing, Bruce. So if the first quarter is an indication we were down about $14 million quarter-on-quarter in syndicated finance. We were up about $13 million in our interest rate products and commodities hedging businesses. So diversification of those fee streams to Bruce’s point is quite important.

John Woods:

Yeah. Just picking up on that, so I was going to make that exact point just in terms of the bond and equity diversification along with M&A and cap markets. But in terms of cards, I mean, we do see some positive outlook in card as well, primarily in the credit card space. In mortgage production volumes and margins starting to recover a bit and that’s really good to see after quite a few quarters with headwinds there. And so -- and then on the wealth side of things, that has just been steady for us and is continuing even early April activity has been quite strong and so we are feeling good in the wealth space. So it’s sort of diversified across four, five categories in terms of what we are seeing for the 2023 outlook.

Operator:

Your next question will come from the line of Gerard Cassidy with RBC. One moment, please. We are having a technical difficulty. Mr. Cassidy, your line is open. You may proceed.

Bruce Van Saun:

Hi.

Gerard Cassidy:

John, you talked about lowering the asset sensitivity of the balance sheet. Can you share with us how quickly you could take -- can take that to neutral if you want -- wanted to as the rate environment shifts possibly towards the second half of the year and then also the cost or the strategies you would use to do that?

Gerard Cassidy:

Very good. And Bruce, I like the branding you are doing in New York with the Giants, looking forward to the day that Citizens becomes the bank of the Yankees. But with that as a follow-up on retail, this is maybe for Brendan. You guys gave us really good detail on slide 31 on the FICO scores. And a theory out there, I don’t know if it’s true or not, that the FICO scores have been inflated, because of what we came through during the pandemic, some people claim as much as 70 points. Do you guys buy into that theory, and if so, would you then expect maybe the behaviors of your customers to be different than what the actual FICO scores are?

Gerard Cassidy:

Great. Appreciate the color. Thank you.

John Pancari:

Good morning.

John Pancari:

On the expense side, I think, Bruce, you had alluded to potentially being able to come in below the expense expectation, the 5% expectation may be for the year as you are focusing on that given the topline pressures. Can you maybe give us a little more color there what you are looking at and how material of a potential benefit you could have on that front as you see the topline pressure building on the NII side?

John Woods:

Yeah. I think that’s well said. I would just add that we are take -- we try to calibrate our expense base along with the revenue base that’s being projected here. And so I think you could very well see an upside in TOP 8 in the coming months. We are working on that. The couple of areas that we are thinking about expanding on is the further simplification of our operating models all of our -- we have taken a look at -- a harder look at all of our third-party spend, reimagining how we operate from an automation perspective is something that structurally we have been making investments in and we can double down on that going forward. And just making sure everything we are doing is absolutely focused on our core objectives of growing a top performing bank, generating low moderate cost deposits and investing in our customers and clients. And so when you put a sharp eye on all of that, you often come up with opportunities to basically create additional efficiencies and we have demonstrated that over the years and then we are going to intensify those efforts here in the coming months.

Don McCree:

All right. General criticized is running at about 24% for the office space. I don’t have it for the overall real estate book at the time, but office is what we are very focused on. We haven’t seen a lot of appraisals yet, because we are not really in the restructuring mode, the ones we have seen have actually been modestly better than we expected. I don’t have the exact downdraft. But our entry LTVs are around 60%. So there’s a lot of cushion in our underwriting of commercial real estate. As Bruce and John said, we have really staffed up our workout teams and we are really putting each individual property, each individual MSA under the microscope. We are focused on maturities. In the office book, we have about 60% of the book maturing by the end of 2024. So it’s not a huge amount and we have a majority of the risk in the book swapped or fixed in terms of interest rate protection. So while we are beginning to engage client-by-client, remember the way -- we are very kind of focused on who we are doing business with. So client selection is very important. MSA is very important, suburban versus urban is very important and so we think we will have some trouble in the book and we are going to have to restructure a lot of the transactions, it’s going to be very manageable in terms of the overall loss content.

Operator:

Due to time constraints, we will now turn the call back over to Mr. Van Saun.

Operator:

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.

Kristin Silberberg:

Thank you, Keeley. 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 fourth quarter and full-year results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color. We will be referencing our fourth quarter and full-year earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on page two of the presentation. We are also referencing non-GAAP financial measures. So it's important to review our GAAP results on page three of the presentation and the reconciliations in the appendix. With that, I will hand over to you, Bruce.

John Woods :

Thanks, Bruce, and good morning, everyone. Big picture, 2022 was a strong year for Citizens with significant delivery of strategic initiatives against the backdrop of uncertainty and volatility in the macro environment. Most notably, we closed our acquisitions of HSBC and ISBC. We captured the benefit of higher rates with strong NII and NIM, and our balance sheet and interest rate position were well managed. While fee revenues were impacted by the environment, we are very well positioned across our businesses to capitalize on the upside potential when markets normalize, particularly in capital markets. Mortgage margins and volumes should recover over time, and we are excited for the growth prospects arising from our wealth investments. We are actively managing our loan portfolio, focusing on allocating capital where we can drive deeper relationship business into 2023 and beyond. We continue to maintain good expense discipline, delivering in excess of $115 million of pre-tax run rate benefit through TOP 7, generating 4.7% underlying positive operating leverage for the year and 16.4% full-year ROTCE. Let me give you the headlines for the financial results, referencing slide five. For the fourth quarter, we reported underlying net income of $685 million and EPS of $1.32. Our underlying ROTCE for the quarter was 19.4%. Net interest income was up 2% linked quarter with 5 basis points of margin expansion to 3.3% and relatively stable loans given a planned reduction in our auto portfolio. Period ended average loans are broadly stable linked quarter, up 1%, excluding auto runoff. We grew deposits up 1% linked quarter and our LDR was stable at 87%. Fees showed some resilience in a challenging environment, down 1% linked quarter. We saw a modest improvement in capital markets fees driven by underwriting and M&A, but this was more than offset by a drop in mortgage fees and a CDA DDA impact in our FX and IRP business. Expenses were broadly stable linked quarter. Overall, we delivered underlying positive operating leverage of 1% linked quarter, and our underlying efficiency ratio improved to 54.4%. Our credit metrics were good, with NCOs of 22 basis points, up 3 basis points linked quarter. We recorded a provision for credit losses of $132 million and a reserve build of $44 million this quarter. Our ACL ratio stands at 1.43%, up from 1.41% at the end of the third quarter and approximately 13 basis points above our pro forma day 1 CECL adoption coverage ratio. Our tangible book value per share is up 5% linked quarter. Next, I'll provide further details related to the fourth quarter results. On slide six, net interest income was up 2% given higher net interest margin. The net interest margin of 3.3% was up 5 basis points. As you can see on the NIM walk on the bottom left-hand side of the slide, a healthy increase in asset yields continues to outpace funding costs, reflecting the asset sensitivity of our balance sheet. With Fed funds increasing 425 basis points since the end of 2021, our cumulative interest-bearing deposit beta has been well controlled at 29% through the end of the fourth quarter. Moving on to slide seven. We posted solid fee results despite headwinds from continued market volatility and higher rates. These were fairly stable, down 1% linked quarter with lower mortgage and FX and derivatives fees, partly offset by an improvement in capital markets fees. Focusing on capital markets. Market volatility continued through the quarter. However, underwriting and M&A advisory fees picked up. We continue to see good strength in our M&A pipeline, including several deals that were pushed into Q1. Mortgage fees were softer as the higher rate environment continued to weigh on production volumes. We have seen pressure on volumes moderating and size of the industry reducing capacity, which should benefit margins over time. Servicing operating fees were stable. Card and wealth fees posted solid results for the quarter. On slide eight, expenses were well controlled, broadly stable linked quarter. Our TOP 7 efficiency program delivered over $115 million of pre-tax run rate benefits by the end of the year. We are excited to announce the launch of our new TOP 8 program, and I'll cover that in a few slides. On slide nine, average and period-end loans were broadly stable linked quarter but up 1% ex auto runoff with 1% growth in commercial, reflecting demand in asset-backed financing and growth in CRE, primarily reflecting line draws and slower paydowns. We have seen commercial utilization moderate a bit over the quarter as inflation and supply chain pressures continue easing and clients are adjusting inventories to reflect this as well as lower CapEx in anticipation of a softer economy. Average retail loans are down slightly, but up 1% ex planned runoff in auto, given growth in mortgage and home equity, which bring an opportunity for deeper relationships and better risk-adjusted returns. On slide 10, average deposits were up $1.4 billion or 1% linked quarter, with growth primarily coming from term deposits, money market accounts and Citizens Access Savings. Overall, commercial banking deposits were up 2.4% and consumer banking deposits were broadly stable. We feel good about how we are optimizing deposit costs in this rate environment. Our interest-bearing deposit costs were up 67 basis points, which translates to a 29% cumulative beta, broadly consistent with our expectations. We began the rate cycle with a strong liquidity and funding profile including significant improvements through our deposit mix and capabilities. We achieved overall deposit growth this quarter, and we will continue to optimize our deposit base and to invest in our capabilities to attract durable customer deposits. Overall liquidity remains strong as we reduced our FHLB advances by $1.3 billion and increased our cash position at quarter end. Our period-end LDR improved slightly to 86.7%. Moving on to slide 11. We saw a good credit results again this quarter across the retail and commercial portfolios. Net charge-offs were 22 basis points, up 3 basis points linked quarter, which is still low relative to historical levels. Nonperforming loans are 60 basis points of total loans, up 5 basis points from the third quarter, given an increase in commercial, largely in CRE. Retail delinquencies continue to remain favorable to historical levels but we continue to closely monitor leading indicators to gauge how the consumers vary. Although personal disposable income remains strong, debt service as a percentage of disposable income has essentially returned to pre-pandemic levels while consumer confidence has stabilized as inflation has eased. Turning to slide 12, I'll walk through the drivers of the allowance this quarter. While our current credit metrics are good, we increased our allowance by $44 million to take into account the growing risk of an economic slowdown. Our overall coverage ratio stands at 1.43%, which is a modest increase from the third quarter. The current reserve level contemplates a moderate recession and incorporates expectations of lower asset prices and the risk of added stress on certain portfolios, including those subject to higher risk from inflation, supply chain issues, higher interest rates and return to office trends. Given these pressures, we are watching our loan portfolio very carefully for early signs of stress, in particular, CRE office. Back on slide 32 in the appendix, we have provided some additional information about the CRE portfolio. Our total CRE allowance coverage of 1.86% includes elevated coverage for the office portfolio while the multifamily portfolio has a much lower reserve requirement. The $6.3 billion office portfolio includes $2.2 billion of credit tenant and life sciences properties, which are not as exposed to adverse back-to-office trends. The remaining $4 billion relates to the general office segment for which we are holding a roughly 5% allowance coverage. About 95% of the general office portfolio is income producing and about 70% is located in suburban areas. Moving to slide 13. We maintained excellent balance sheet strength. Our CET1 ratio increased to 10%, which is at the top end of our range. Tangible book value per share was up 5% in the quarter, and the tangible common equity ratio improved to 6.3%. We returned a total of $350 million to shareholders through share repurchases and dividends. Our strong capital position, combined with our earnings outlook, puts us in a position to continue to return capital to shareholders through additional share repurchases. Shifting gears, a bit. Starting on slide 14, we'll cover some of the unique opportunities we have to drive outperformance over the next few years. We have tried to be very disciplined in prioritizing the areas that we think have big potential and where we have a right to win. So, in Consumer, we've got four big opportunities. First is our push into New York Metro. We are investing in brand marketing, doing well in the technology conversions and putting our best people against the market opportunity. We are encouraged by our early success with some recent client wins in commercial and the HSBC branches driving some of the highest customer acquisition and sales rates in our network. The full ISBC conversion is just around the corner on President's weekend, and we look forward to making further strides as we leverage the full power of our product line-up and customer-focused retail and small business model across the New York market. You will see more details on slide 28 and 29 in the appendix. Importantly, we achieved about 70% in run rate of our planned $130 million of investors' net expense synergies as of the end of the year and we expect to capture the rest by the middle of the year. We also continue to expect that the integration costs will come in below our initial estimates. Moving to wealth. We've launched a number of exciting initiatives with Citizens Private Client and CitizensPlus as we orient the business towards financial planning led advice. These should really help us penetrate the opportunity with our existing customer base. On slide 15, our national expansion is another area where we have a great opportunity to build on our digital platform that has been focused on deposits for the last few years. We've moved that to a cloud-based platform, and we are adding our other product capabilities so that we can offer a complete digital bank experience to serve customers nationwide with a focus on the young mass affluent market segment. Where we might have only had a lending or deposit relationship before, our vision is to build a national platform that allows us to serve our customers in a comprehensive way. And we have also been very innovative in creating distinctive ways to serve customers. Citizens Pay, for example, is an area where we have significant running room. We've attracted many new partners, up about 150 versus a year ago, which should really ramp the business. And we built an industry-leading home equity business, powered by our innovative fast line process, which is enabled by advanced analytics and digital innovations that have drastically reduced originations time. Moving to the Commercial Bank on slide 16 and 17. We filled in all the product gaps. Acquisitions brought us M&A and other advisory capabilities, and we built out debt capital market capabilities organically. We've hired some great coverage bankers and we are focused on high-growth regions around the country and the right industry verticals to serve larger companies. We also have a very strong sponsor coverage and are well positioned to support private equity capital. Bottom line, we have aligned ourselves with the attractive opportunities with a full product set to drive significant market share and fee revenues. Moving to slide 18. We are excited to announce the launch of our latest TOP program. Even as we push forward on offense with our strategic initiatives and acquisitions, it is important to remember that a key to Citizens success since our IPO has been our continuous effort to find new revenue pools and realize efficiencies and then reinvest those benefits back into our businesses so we can serve customers better. We've effectively executed our TOP 7 program achieving a pre-tax run rate benefit of approximately $115 million at the end of 2022. And we've launched TOP 8 with a goal of an exit run rate of about $100 million of pre-tax benefits by the end of 2023, with that split about 80-20 between efficiency and revenue-oriented initiatives. Moving to slide 19. I'll walk through the outlook for the full-year, which contemplates an economic slowdown and the end of December forward curve view of two 25 basis point Fed hikes before an expected 25 basis point cut in the fourth quarter. We expect solid NII growth, up 11% to 14%, and we project our NIM to gradually rise towards approximately 3.4% for the fourth quarter of 2023. Our overall hedge position is expected to provide a NIM floor of about 3.2% through the fourth quarter of 2024 and a gradual 200 basis point decline across the curve, commencing in Q4 2023. In the fourth quarter, we took actions to transition $3 billion of active swaps from 2023 to forward-starting positions in 2024. And we've done even more so far in January to rebalance the distribution of down rate protection. You'll find a summary of our hedge position in the appendix on slide 30. We expect moderate loan growth with average loans up 4% to 5%. We are targeting about $3 billion of spot auto runoff as we shift the portfolio towards products with more attractive risk-adjusted returns. We expect total average earning assets to be up 3% to 4%. On the deposit side, we see 3% average deposit growth and a 2% to 3% spot deposit decline with cumulative deposit betas at year-end reaching the high 30s. These are expected to be up 7% to 9% with a capital markets rebound building over the course of the year. Noninterest expense is expected to be up roughly 7% or about 3.5% to 4% if you adjust for the full-year effect of the HSBC and investors acquisitions and the FDIC premium increase. If the year unfolds as we expect, we should be able to drive about 400 basis points to 500 basis points of positive operating leverage. Given current macro trends and portfolio originations, we expect that our ACL ratio will rise to the 1.45% to 1.5% level, depending upon how the economy fares. We expect our CET1 ratio to land at the upper end of our target range of 9.5% to 10%, even with our target payout ratio approaching 100%. All of this translates into a ROTCE in the high teens for 2023. On slide 20, we provide the guide for Q1. Note that Q1 is seasonally weak for us with the day count impact and seasonality impacting revenues and taxes on compensation payouts impacting expenses. Moving to slide 21. As Bruce mentioned, we have completely transformed the franchise since the IPO, executing well against our priorities and achieving our desired performance targets, and we are ready to raise the bar, lifting our ROTCE target of 16% to 18%. The key to the further ROTCE improvement is continuing to deliver positive operating leverage. As we look out over the medium term, we should see a recovery in loan and deposit growth and we will continue to be balance -- continue our balance sheet optimization efforts to focus on deep relationship lending to maximize risk-adjusted returns. We are well positioned to grow fees meaningfully. And even if rates come down a bit, we expect NII to benefit from the protection we have put on through the swap portfolio. You should expect us to stay disciplined on expenses. Credit is projected to be stable as the economy strengthens. And we continue to focus on returning a meaningful amount of capital to our shareholders through our repurchase program and targeting a dividend payout of 35% to 40%. Over this timeframe, we would expect our CET1 ratio to remain within our target range of 9.5% to 10%. To sum up, slide 22, we delivered a strong quarter against the backdrop of a dynamic environment, and we have a positive outlook for 2023. We are ready for the uncertainty of an economic slowdown in 2023 with a strong capital, liquidity and funding position. We've taken actions to protect our NIM and we are being prudent with respect to our credit risk appetite and loan growth. At the same time, we are moving forward executing against our strategy and making important investments in our business that we believe will deliver sustainable growth and outperformance over the medium term. With that, I'll hand it back over to Bruce.

Operator:

[Operator Instructions] Your first question comes from the line of Scott Siefers of Piper Sandler.

John Woods :

Yes, I'll go ahead and start off. I mean on the big picture, we -- asset sensitivity last quarter was around 3%. We're a little bit below that this quarter just given the way the outlook for the balance sheet appears to be playing out in 2023. So as we're -- as you've seen over time, we've taken our asset sensitivity down. We are -- most of that asset sensitivity is really driven by the short end of the curve, which we expect to remain elevated throughout 2023. And as a result, we're looking at some of the down rate protection that we had in place in 2023 and just repositioning that out of spot-starting active swaps into forward-starting swaps into 2024 and beyond. So we're looking to looking to basically push that out and basically get that down rate protection smoothed out into the '24 and '25 periods rather than holding on to all of that down rate protection here in '23. That's the main objective in what we were doing in the fourth quarter, and we've done a little bit more of that in early 1Q. And then more broadly, we're looking at net interest margin, that corridor, if you will, we're trying to protect that corridor with -- at the low end, if rates were to fall by 200 basis points out in 2024, that you'll see a floor of around 320. So you see that 320 to 340 corridor being something that over time is more narrow than you would have seen from us maybe in past cycles. So that's the main objective.

Scott Siefers :

Terrific. And then just a separate question. It looks like fees will need to rebound fairly meaningfully following the first quarter to hit the guide? I know, Bruce, you had mentioned an expectation for improved capital markets through the year. Maybe just a thought or two on how you see the main drivers of that fee guide as the year progresses, please?

Don McCree:

Yes. I think you've pretty much covered it on cap markets. I said this last quarter, I'll just remind people, again, we are a middle market investment bank. So we're not dependent on these giant transactions that need $5 billion of financing. We do singles and doubles all day long, and our pipelines are reasonably strong with a very heavy content of private equity who is a watch with cash. So, there will be transactions. If you don't get regular way transactions, you're going to get a lot of restructuring transactions. So, there's minority capital. There's a lot of different ways to skin the cat. So, we're relatively optimistic about what's ahead of us in the coming year.

Brendan Coughlin :

I think you nailed that pretty well. I'd say well for the year, we're projecting slow and steady, continued progress, and it's a bit of a hopeful coiled spring when the equity markets really come back. But as long as they're stable, we should see some growth. I'd say the other bright spot is debt and ATM fees that continue to hit records both through customer engagement and primacy and all the investments we made in the health of the franchise that's also translating into our deposit quality, also some restructure on vendor relations and such that's giving us a bit of a boost there, too. So that should be a continued area of slow and steady progress. On the other side, there will continue to be a little bit of pressure still on overdraft income and service charges, but we're sort of near the -- that's in the run rate. Most of that's in the run rate. So we're sort of near the bottom, which is good that we'll move away from being a headwind for us, real soon.

Peter Winter :

I wanted to ask on credit. John, you mentioned that most of the increase in nonperforming loans was commercial real estate. I was just wondering, was that office related? And if you can just give a little bit more color on what your outlook is for office?

Bruce Van Saun :

Hey, Don, do you want to add?

Peter Winter :

Got it. And then just as a follow-up, can you just talk about what changed in the updated margin guidance of towards 3.40 versus the prior guidance of 3.50? Is it just the higher deposit beta outlook?

Operator:

Your next question comes from the line of Ken Usdin with Jefferies.

Bruce Van Saun :

Sure. I'll start. John, you can pick up. But I'd say what we've done for the past several quarters is kind of keep looking forward as to what's the macro forecast and are there any particular segments of the portfolio that could come under stress given that the Fed has continued to push higher and the economic growth has been downgraded. So I think there's -- like I read today that over 60% of the leading economists are projecting a forecast for this year. So the reason that we've been building gradually is just taking that into account. I think at some point, you kind of get the cards turned up in 2023, and you'll have more information and less uncertainty, but we don't see that where we sit today. So I think it's prudent to continue to view the course -- likely course, is that the ACL will go up a couple of basis points a quarter like we've done and get into that 1.45 to 1.50 range. At some point, then you'll have seen whatever the recessionary impact is, and then you'll be looking forward and then you may get to the point where you can release some of those reserves depending on what your charge-off experience is. Clearly, Ken, the slower loan growth plays into that, to some degree is mitigating what the build could have been, but anyway, those are the dynamics that like, John, I don't know if you want to add to that?

Kenneth Usdin :

Got it. Okay. And just one quick follow-up on the capital point. You're nearing 100% implies a nice incremental step up in the buyback. I'm just wondering how you're thinking about the mix of the dividend versus the buyback going forward, yet you obviously moved to $0.42 in the third quarter. Should we also think about that you would be moving the dividend up in line with increased earnings potential as well within that context?

Bruce Van Saun:

Yes. And I would just add to that, Ken, that clearly, with the uncertainty in the environment, we are being cautious in terms of the lending of kind of risk appetite. And so, I think that, in and of itself, creates some additional capital versus what we've had in prior years. I also think we still have our plate full integration of existing acquisitions and we haven't seen a whole lot that's attractive at valuations that we're interested in on the acquisition front. And so I think the combination of operating at very high profitability levels with ROTCE returns in the high teens plus more modest loan growth than historical, more modest acquisition activity than historical creates the opportunity. And I think it's appropriate given the uncertainty and chance for recession that returning capital to shareholders is the right course of action here. So you could expect we would like to raise the dividend during the course of the year, and we'd also like to get close to that 100% return of capital to shareholders.

John Pancari :

On the overall deposit dynamics, I know you expect a 2% to 3% year-over-year spot decline. Can you maybe give us a little more color on how you expect overall deposit trends to progress through 2023 to get to that 2% to 3% spot decline? Maybe help us with the magnitude of declines that you think is reasonable here in the coming quarters as you look at deposit flows?

Bruce Van Saun :

You can just start and then maybe pass it to Don and have Brendan.

Bruce Van Saun :

I would just add -- I would add to that is that I'd say we did not take in as much surge deposit as many in our peer group. We have a consumer-tilted deposit base, which tends to be more stable. And so, we've been monitoring that surge deposits quite carefully. And we have seen it actually be more sticky than we initially expected. I think where you'd see a slight runoff probably is more on the commercial side where treasurers have other alternatives besides bank deposits to move some money out. But again, we're relatively protected there because we didn't take in a lot of that money in terms of search deposits. So maybe, Don, you could comment here or Brendan?

Brendan Coughlin :

Yes. Without being too redundant to what John mentioned, I'd say consumer has been broadly stable on deposits, which is a really good thing. And the story for us is going to be controlling the mix, but all indications are quite positive. We look at a lot of benchmarking data, and we're pretty confident that we're performing in the top quartile of our peer banks in terms of retention of low-cost deposits as well as interest-bearing deposit costs so far in the cycle. It's sort of midway through the cycle. So we've got to stay disciplined and manage it well, but it's been driven by a lot of health improvements, household growth, improvements in primacy, mix shift to Bruce's point, we were 45% mass affluent and above five years ago, we're now 60% of our customer base is mass affluent and above. So, the quality has been quite good. On the stimulus front, what we're seeing is the bottom two deciles of our customer base is essentially at the paycheck to paycheck. So that stimulus has already burned off and is in the rearview mirror. So the stimulus that remains with us tends to be with the more affluent customers, whether that's actual stimulus check. So that's balance parking that happened during COVID for not making mortgage payments and not traveling, et cetera, et cetera. We're not actually seeing that burn off as much as we're starting to see that rotate out of low-cost deposits into interest-bearing, which is natural given the stated interest rate. So, we're managing that really tight. All the investments we've made in the franchise, whether analytics, new products, the introduction of CitizensPlus in our Private Client Group as well as having Citizens Access to fence off interest-bearing deposits to maintain discipline in the core have all been really big levers for us to manage well. And all indications we see so far is that we're right on track with where we want it to be and dramatically outperforming where we were last time and up rate cycle and at worst, in line with peers, but some signs that we may be doing a bit better, which is a big turnaround from where we were five, six years ago.

John Woods:

Yes. The office -- the 60% was the office LTVs in terms of not the overall CRE book. So, we think those are still pretty good. We're refreshing the property by property. We haven't gone through and done a total refresh on the entirety of the book yet, but we're kind of working on the maturing quarter-by-quarter maturities and working with the sponsors to either refinance out, inject equity or adjust the value of the portfolio. And that's what drove the NPL this quarter. It was really one real estate deal.

John Woods :

It's all throughout origination.

Unidentified Analyst:

This is [Megan Stein] (ph) on behalf of Matt O'Connor. On capital, so the 9.5% to 10% medium-term CET1 target range, that's well above the regulatory minimum. You've built reserves a lot, and it seems like the conversion time line of ISBC is going really well. So I guess my question is, I hold so much capital down the road given solid reserves and successful deal integration time line?

Unidentified Analyst:

Okay. And just a -- second question is just on loans. So, the $3 billion auto runoff will offset growth in other areas this year. What are your expectations for other loan categories in 2023 coming off of a strong 2022?

Operator:

Your next question comes from the line of Manan Gosalia with Morgan Stanley.

Bruce Van Saun :

Yes, I'll start and flip to John. It's Bruce. But I think the two numbers are tethered together. So if the 3.50% is now seen to be 3.40%, then your floor is going to also commensurately move lower. The good news is, in a way, is that we've tightened the bottom side of that range. So previously, it was 3.50% down to 3.20%, 3.25%. So, it was 25 basis points and now it's 3.40% to 3.20%. So, it's 20 basis points. So anyway, I think we -- certainly, John's initial answer on the movement down has been focused more on migration, the DDA and low-cost migration, but then also some of the impact from the yield curve on front book back book has been the other dynamic. So those are the things that we're watching. But John, you can out from there.

Bruce Van Saun :

It's a very dynamic process. So we look and see where the forward day rates are going to be. We have our own view of that. We see what the valuations we can get in the hedge market are. And you can be assured, I think we played our hand quite well so far, and we'll continue to stay really focused on.

John Woods :

Yes, I'll go and cover that. I'd say the one dynamic to keep in mind is that we tend to form these programs and generate a year-end run rate benefit that will contribute for each of them. Mostly on the one hand, the $100 million will build throughout '23 so that it gets to a run rate when you get to the fourth quarter of '23. But keep in mind, we did the same thing with TOP 7. So, there's a full-year effect of TOP 7 that comes in. And so when the programs are reasonably similarly sized, you can almost use that as an estimate of what the contribution is in any given year. And so you have maybe a combined $100 million plus contribution from the full-year effect of TOP 7 hitting '23 and the in-year effective TOP 8 hitting '23. And so the big drivers of that really you've got the traditional areas that we focus on, which is third-party costs and vendor cost management, which is an area that's been contributing over the years as well as continue to optimize the branch network. And just being really careful about ensuring that our organizational approach is fit for purpose with respect to what we're trying to accomplish in '23. So those are more traditional areas. The other places we're looking at that have been more recent include maturing our Agile delivery model away from a waterfall approach to agile and next-gen technology initiatives continue to contribute as well. We're working towards a data center exit in 2025. We're looking to migrate to the cloud from our internal applications, and that's contributing in '23 as well. But there's a lot of very strategic sort of initiatives that are built within the TOP 8 program and we're excited about it. It's part of who we are, and we're looking forward to deliver against that next year.

Vivek Juneja :

A couple of questions for you folks. Firstly, the deposit betas that you expect to get to the high 30s. Given the pace of change in the fourth quarter, should we and your expectation for rate hikes early in the year and not after that, should we expect you get to that in Q1? Any color on that, on the pace of it, especially given how rates have been going up?

Bruce Van Saun :

Deposit tend to replace reprice with a lag. So even after the Fed pauses, you still see a little bit of upward pressure on those betas.

Vivek Juneja :

But I would -- okay. But then does that mean, Bruce, the bulk of it is probably early on and just a little further increase after that, after the Fed is done?

Vivek Juneja :

Okay. Different question, a second one. Fee income, your guide of about 7% to 9% growth in full-year '23 versus '22. How much of that would you expect would come from capital markets or at least what's in your forecast that you're thinking how much comes from capital markets?

Bruce Van Saun :

A little bit of rebounding.

Operator:

There are no further questions in queue. And with that, I'll turn it over to Mr. Van Saun for closing remarks.

Operator:

Thank you. That does conclude today's conference. Thank you for your participation, and you may now disconnect.

Kristin Silberberg:

Thank you, Alan. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our third quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color. We will be referencing our third quarter earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. With that, I will hand over to Bruce.

John Woods:

Thanks, Bruce, and good morning, everyone. First, I'll start with our headlines for the quarter, referencing Slide 5. We reported underlying net income of $669 million and EPS of $1.30. Our underlying ROTCE for the quarter was 17.9%. Net interest income was up 11% linked quarter, driven by a 21 basis point improvement in margin to 3.25% and 2% growth in average interest-earning assets. Average loans are up 2% linked quarter, with 3% growth in commercial. Fees were fairly stable, down 2% linked quarter as our client hedging business returned to more historical levels following an exceptional first half of the year and mortgage results softened a bit. Capital markets fees and service charges were stable. We remain highly disciplined on expenses, which are up 1% linked quarter. Overall, we delivered underlying positive operating leverage of 6% linked quarter, and our underlying efficiency ratio improved to 54.9%. We recorded a provision for credit losses of $123 million and a reserve build of $49 million this quarter, which reflects an increased risk of recession, partly offset by improvement in portfolio mix. Our ACL ratio stands at 1.41%, up from 1.37% at the end of the second quarter and compares with a pro forma day 1 CECL reserve of approximately 1.3%. Our tangible book value per share is down 8.6% linked quarter, driven by the impact of higher long-term rates on AOCI. We continue to have a very strong capital position with our CET1 ratio at 9.8%, just above the midpoint of our target range. Next, I'll provide further details related to third quarter results. On Slide 6, net interest income was up 11%, given higher net interest margin and 2% growth in interest-earning assets. The net interest margin was 3.25%, up 21 basis points. As you can see on the new block in the bottom left-hand side of the slide, the healthy increase in asset yields outpaced funding costs, reflecting the asset sensitivity of our balance sheet. Moving to Slide 7. With the current expectation for the Fed to rates further, we are confident that we will continue to realize meaningful benefits from rising rates as the forward curve plays out. Our asset sensitivity has driven a significant improvement in NII year-to-date and those benefits will continue to accumulate into the fourth quarter and compound into 2023. Our overall asset sensitivity increased to approximately 3.3% at the end of the third quarter, up from 2.6% for the second quarter, primarily driven by the impact of variable rate loan originations. Our asset sensitivity will allow us to have further upside as the forward curve continues to evolve. We expect cumulative loan betas to exceed the positive betas through the rate cycle. Our interest-bearing deposit beta is tracking well within our expectations, and the ultimate outcome will depend upon the pace and level of Fed rate hikes from here. So far in this cycle, with Fed funds increasing 225 basis points since 4Q '21, our cumulative interest-bearing deposit beta is well controlled at 18% through the end of the third quarter. On a sequential basis, our deposit beta was 26%. We began the rate cycle with a strong liquidity and funding profile, including significant improvements through our deposit mix and capabilities. We will continue to optimize our deposit base and to invest in our capabilities to attract durable customer deposits. We continue to execute our hedging strategy to managing a more predictable and stable outlook for NII as we benefit from the higher rate environment. You'll find a summary of our hedge position in the appendix on Slide 23. In the third quarter, we did an additional $10 billion of hedges with a focus on extending our protection out through 2024 and beyond, primarily through forward starting swaps. We expect our NIM to rise to 3.5% or better by the end of 2023 and for our overall hedge position to provide a NIM floor of about 3.25% through the fourth quarter of 2024 if we see rates come down by 200 basis points across the forward curve before it could move higher with further hedge actions. Moving on to Slide 8. We posted good fee results despite headwinds from continued market volatility and higher rates. These were fairly stable, down 2% linked quarter as our client hedging business returned to more historical levels following an exceptional first half of the year. Car fees were strong again this quarter, while capital markets and service charges were stable. Focusing on capital markets, market volatility continued to impact the bond and equity markets. M&A advisory fees picked up nicely, but this was offset by lower loan syndication revenue amid increased economic uncertainty and market volatility. We continue to see good strength in our M&A pipeline to continue to build with strong pinch activity and a growing backlog. While current market volatility may constrain the ability for deals to close, capital markets fees should see some seasonal improvement in the fourth quarter, particularly in M&A advisory even more broadly if markets settle down. Mortgage fees were softer as the higher rate environment weighed on production volumes, which more than offset the fact that production margins improved modestly this quarter, but still remain below historical levels. We are seeing signs of the industry reducing capacity, which should benefit margins over time and servicing operating fees were stable. Wealth fees are $5 million lower linked quarter given the impact of lower market levels on AUM. And in other income, we saw a seasonal benefit from our tax advantaged investments and an increase in leasing revenue. On Slide 9, expenses were well controlled, up 1% linked quarter. Our TOP 7 efficiency program is continuing to make good progress and is on track to deliver over $115 million of pretax run rate benefits by the end of the year. Average loans on Slide 10 were up 2% linked quarter driven by 3% growth in commercial with growth in C&I and CRE, given modestly higher loan utilization and slower paydowns. Retail loans increased 1% with growth in mortgage and home equity, offsetting planned runoff in auto. Period-end loans were broadly stable linked quarter given higher-than-usual end-of-quarter C&I line paydown, which were generally redrawn after quarter end. On Slide 11, average deposits were up $1.3 billion or 1% linked quarter, with growth coming from retail term deposits and Citizens Access savings and commercial banking deposits were broadly stable. Deposit costs remain well controlled. Our interest-bearing deposit costs were up 38 basis points, which translates to an 18% cumulative beta. We feel good about how we are optimizing deposit costs in this rate environment, and our performance to date is reflective of the investments need to strengthen our deposit franchise since the IPO. Overall, liquidity improved as we reduced our FHLB advances by $2.3 billion and increased our cash position at quarter end. Moving on to Slide 12. We saw good credit results again this quarter across the retail and commercial portfolios. Net charge-offs were 19 basis points, up 6 basis points linked quarter, but still very low relative to historical levels. Nonperforming loans were broadly stable at 55 basis points of total loans. Given the higher risk of recession, we are watching our loan portfolio very carefully for early signs of stress, in particular, pre office, leveraged loans and selected nonprofit sectors. At this point, we aren't seeing significant issues emerge. Also, the leading indicators for consumer continue to be stable and favorable to pre-pandemic levels. Personal disposable income has declined from stimulus-driven highs but remains above the pre-pandemic 2019 average. Spending for travel and restaurants remain steady and above pre-pandemic levels, while credit card and home equity line utilization are still well below pre-pandemic levels. And retail delinquencies continue to remain favorable to historical levels. Turning to Slide 13. I'll walk through the drivers of the allowance this quarter. We continue to see very good credit performance across the retail and commercial portfolios. While we aren't seeing stress in the portfolio at this point, we increased our allowance by $49 million to take into account an increased risk of recession, partly offset by improvement in portfolio mix. Our overall coverage ratio stands at 1.41% which is a modest increase from the second quarter. If you recall, when we adopted CECL at the beginning of 2020, our coverage ratio was 1.47%. However, given the Investors acquisition and some shifts in the portfolio mix, we estimate our pro forma day 1 CECL allowance to be approximately 1.3%. The current reserve level contemplates a shallow recession and incorporates the risk of added stress on certain portfolios including those subject to higher risk term inflation, supply chain issues and return to office trends. Moving to Slide 14. We maintained excellent balance sheet strength. Our CET1 ratio increased to 9.8%, which is slightly above the midpoint of our target range. This, combined with our strong earnings outlook puts us in a position to resume share repurchases in the fourth quarter. Tangible book value per share and the tangible common equity ratios were both reduced by the impact of higher long-term rates on AOCI. We have increased our held to maturity portfolio for about 30% of total loans at quarter end which has helped to mitigate the impact of rising rates. Our fundamental priorities for deploying capital have not changed, and you can expect us to remain extremely disciplined in how we manage capital allocation. Shifting gears a bit. On Slides 15 and 16, you'll see some examples of the progress we made against the key strategic initiatives and what's on tap for our businesses in the near term. Since we closed the Investors acquisition in April, we've been executing against a phased approach to the integration. In the second quarter, we began originating mortgages on our systems. And since then, we have completed the conversion of mortgage servicing. We also successfully completed the conversion of more than 10,000 Investors' wealth clients, representing about $1.6 billion in assets to our platform. We have a lot more to do, but I'm pleased to say that we are on track to complete the deposit and branch conversions in mid-first quarter 2023. We have included a high-level integration timeline in the appendix on Slide 22. Importantly, we remain on target to achieve our planned $130 million of run rate net expense synergies by the end of 2023 of which approximately 70% will be achieved by the end of 2022. We also continue to expect that the integration costs will come in below our initial estimates. In the last three years, we have launched a collection of new banking products and features that make it easier to bank with us. Last week, we announced the next step in that evolution with CitizensPlus, which provides financial rewards, banking features and tailored advice that grows with customers from everyday banking to personalized wealth management. This includes Citizens Private Client our new expanded wealth management offering, which will launch by the end of the year. We are fully committed to driving momentum in our wealth business. And as part of the launch, we are hiring more than 200 new financial advisors and relationship managers. We continue to make meaningful strides forward with our national digital strategy and tech modernization. Earlier this year, we migrated Citizens Access to a fully cloud native platform, and we launched a national storefront adding mortgage and education refis to the portal. Over the next year or so, we plan to expand our national storefront, adding card and checking first and then Wealth and Citizens Pay. As we add products to the platform, we have an exciting opportunity to build relationships across a growing national customer base. Our vision is to migrate our core branch deposits to this modern platform over time, which will be a key change in efficiency and flexibility in terms of implementing upgrades and enhancements. We are also growing our innovative Citizens Pay offering, which is currently at about 160 merchant partners and expanding across targeted verticals. Over the next year, we are working to launch a new mobile app and a unique customer direct experience. Moving to the commercial business on Slide 16. Over the past eight years, we've invested heavily in talent and product capabilities in M&A, corporate finance, bond and equity underwriting, FX and commodities and so on. Despite the challenging environment, we remain near the top of the league tables, consistently ranking in the top 10 as a middle market and sponsor book runner and helping corporates and private equity sponsors access capital through the public markets. We have also integrated our cash management and global market solutions as well with our coverage. We are excited about the potential synergies from our recent acquisitions as we target growth in key verticals the JMP acquisition gets us much deeper into the growing healthcare, technology and financial services sectors, expands our equity underwriting and adds research capabilities and DH Capital expands our capabilities in the Internet infrastructure, communication sectors, software and next-generation IT services. These businesses are exceptionally well positioned for when markets reopen. Moving to Slide 17, I'll walk through the outlook for the fourth quarter. We expect NII to be up roughly 3%, driven by the benefit of higher rates with a margin rising to the 3.3% to 3.35% range. Average loans are expected to be stable to up modestly as commercial growth is partially offset by order rundown. These are expected to be stable to up modestly. Noninterest expense is expected to be stable. Net charge-offs are expected to be approximately 20 basis points to 22 basis points. We expect our CET1 ratio to land near the upper end of our target range of 9.5% to 10%. And our tax rate should come in at approximately 22%. With respect to the full year, we continue to track well and expect to beat our full year 2022 guidance across key P&L categories and performance measures. We expect to deliver positive operating leverage for full year 2022 in excess of 5%, with fourth quarter sequential positive operating leverage of about 3%. We also expect to deliver a full year efficiency ratio of about 57% with the fourth quarter coming in under 54%. And we expect to deliver a full year ROTCE in excess of 16% with the fourth quarter well above both Q3 and our medium-term target range of 14% to 16%. To sum up, on Slide 18, we delivered a strong quarter amid a dynamic environment, and we are optimistic about the outlook for the fourth quarter and into 2023. We expect to continue to see significant benefits in our net interest income from the higher rate environment. Our diverse fee business is driving solid results and our capital markets business, in particular, is well positioned for when markets stabilize. And our commitment to operating efficiency remains a hallmark. We are well prepared for a slowdown in the environment with a strong capital, liquidity and funding position, and we are being prudent with respect to our credit risk appetite and loan growth. At the same time, we are playing some offense, executing well on strategic initiatives in each of our businesses that will deliver medium-term growth and outperformance. With that, I'll hand it back over to Bruce.

Operator:

Thank you, Mr. Van Saun. [Operator Instructions] Your first question comes from Scott Siefers with Piper Sandler.

John Woods :

Yes, sure. So just break it down into two overall categories. You've got the net interest margin dynamic, which is a big driver, and we're messaging that. We expect our net interest margin to continue to rise. I think loan betas in the last cycle for us were up near 60% or so this cycle, we're doing some more hedging. So you could see our loan betas dropping a little bit. The nice part about that is that it provides a downside protection. So you're going to see loan betas in the mid- to -- sort of low to mid-50s. You compare that to a deposit beta, that we previously messaged, would be around 35% or so. Rates have been up 100 basis points since then. I mean you could see our deposit betas may be getting into the upper 30s or thereabouts given -- cumulatively what's going on with rates in the last -- in the recent couple of months. So you take that dynamic and see cumulative loan betas and exceeding deposit betas and that drives names higher. We're also remixing on the loan side into more variable. You're seeing the strength of the multiyear investments on the deposit side playing. And then let's not forget the other aspects of the balance sheet where you've got securities book and that securities book is funded primarily by DDA and some wholesale. And so you can see the front book, back book dynamics really taking hold where you've got securities yields on the front book in the fourth quarter somewhere between 4.50% and 5% with a 2% runoff. And so that's pretty powerful when you've got essentially a strong DDA underpinning what's going on there in the securities book. So those are some of the net interest margin dynamics. If you flip forward to the other side of things where you see our opportunity for continued loan growth, we're -- you're seeing us rotate into more of a variable rate approach, solid opportunities in home equity and other aspects in the retail side. But commercial is -- we're feeling optimistic on the commercial side and that's going to drive loan growth into '23. It will be economic environment dependent. But nevertheless, the underpinning of rising NIMs, I think, is really what gives us the confidence to continue to see that NII improving into '23.

Bruce Van Saun :

Brendan, why don't you take that one?

John Woods :

Then the strategic aspects of Citizens Access that over time is just another benefit of that platform.

Operator:

Your next question comes from the line of Erika Najarian with UBS.

Bruce Van Saun :

Yes. Well, Erika, I think when we ended up hitting the TOP 2 and TOP 3, we were getting questions as to how much re-architecture and reengineering of how you're running the bank is left. Is the -- are you now picking the fruit that's really high in the tree. And yes, it was getting higher in the tree. But I think what we've been able to do is exhibit this mindset of continuous improvement that we're not going to be satisfied with how we're running the bank and we're going to look at all aspects in terms of how we're staffed and organized and our vendor relationships and other kind of efficiency new technology deployment to deliver more efficiencies. And so over time, that's just become part of our DNA here. And so we're not going to rest and say, well, we just had another successful result with TOP 7. Let's take a breather, you really can't take a breather because we have investments that we want to fund in our future, the business initiatives that we list on a couple of the slides in Consumer and Commercial, and that requires net investment in CapEx and OpEx and in order to fund those things, having these top programs and finding efficiencies to self-finance those investments and keep the overall rate of expense growth modest is the equation that we've used to drive ROTCE from the 5% when we started at the IPO to 18% levels today. So I think you're going to continue to see us pursue that mindset of continuous improvement and don't be surprised when we have a successful announcement and execution of TOP 8 that there might be even more TOP programs down the road after that.

Bruce Van Saun :

Yes. I'll just take the -- the first one is, we're using some fairly conservative assumptions when we set the ACL. So I would characterize it as a moderate recession rather than a short recession. And the unemployment levels get up over 6% is kind of where we've modeled it. So we think we're being fairly conservative, but we reassess that each quarter. So John, I'll hand the deposit question over to you.

Operator:

Your next question will come from Matt O'Connor with Deutsche Bank.

Bruce Van Saun :

Yes, I'll start and then maybe turn it over to my colleagues for some additional color. But Matt, I think what continues to be very positive is that the expectation that things will normalize back to pre-COVID levels continues to be deferred. And so we're only seeing very slow migration in terms of consumer charge-offs and NPAs and delinquencies still kind of better than pre-pandemic period. And I would highlight there that our focus on very high-quality borrowers in these portfolios, super prime and high prime, those folks are still doing pretty well through the current environment and have a lot of liquidity. And so we feel really good about where things sit in Consumer. Similarly, in Commercial, over time we've migrated to lend to kind of bigger companies, so mid-corporate space companies with in excess of 500 in revenues, and they tend to be more diversified and better credits. And so we also see very solid performance metrics across all the things, NPAs and charge-offs, et cetera. On that side, you've got to go to the usual suspects, if you think the economy is weakening, and that would be commercial real estate, leveraged lending. And then maybe certain sectors in non-profit, which we've heightened our monitoring in those areas, but we don't see any smoke at this point. So maybe with that, let me turn it to Don for additional color on.

Bruce Van Saun :

And the other thing is that the high percentage of our office property is A caliber…

Bruce Van Saun :

Yes. How about you, Brendan?

Operator:

Your next question will come from the line of Ebrahim Poonawala with Bank of America.

John Woods :

Yes, I'll go ahead and start there. I mean I think that, first, I'd like to just make sure we're reminded. So we've got 141 basis points against the portfolio right now, when you pro forma adjust that for Investors and some other things, you get a day 1 of about 130. So we're 11 basis points over day 1. So that covers a lot. And so we're covering the environment that Bruce described earlier. I think you could -- and he also mentioned a few pockets of areas that we're watching very closely. So we're watching the CRE office space, and we're watching a few sectors on the C&I side. Just reminding that we're not seeing any -- when you look at where delinquencies are, we're not seeing any early signs of any deterioration here. But that could change, and that could change quickly. So we're keeping a close eye on it. But -- and as things turn, we'll have those areas of concern that we were focused on in the pandemic, which -- most of which got cleaned out and has been improved over time, but those are -- that's the playbook we'll go back to. We'll go back to those areas of concern and take from there.