Citizens Financial Group, Inc. (NYSE:CFG) Earnings Conference Call July 17, 2024 9:00 AM ET

Company Participants

Kristin Silberberg - Executive Vice President, Investor Relations
Bruce Van Saun - Chairman and Chief Executive Officer
John Woods - Chief Financial Officer
Brendan Coughlin - Head of Consumer Banking
Don McCree - Head of Commercial Banking

Conference Call Participants

Peter Winter - D.A. Davidson
Erika Najarian - UBS
Scott Siefers - Piper Sandler
Ken Usdin - Jefferies
Manan Gosalia - Morgan Stanley
John Pancari - Evercore
Gerard Cassidy - RBC
Matt O’Connor - Deutsche Bank

Operator

Good morning, everyone, and welcome to the Citizens Financial Group Second Quarter Earnings Conference Call. My name is Alan and I'll be your operator today. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this event is being recorded.

Now I'll turn the call over to Kristin Silberberg, Executive Vice President, Investor Relations. Kristin, you may begin.

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.

Bruce Van Saun

Okay. Thanks, Kristen, and good morning, everyone. Thanks for joining our call today. We announced solid results today and we continue to execute well through an uncertain environment. Highlights for the quarter include very strong fee performance, good deposit cost management, tight expense control, and credit metrics which were within expectations. Our balance sheet remains robust with a CET1 ratio of 10.7%. Our loan to deposit ratio was 80%. Our ACL ratio was 1.63%. And Federal Home Loan Bank advances are now below $600 million.

Of note, we saw our revenues tick up relative to Q1. Our underlying PPNR grew by 2% over Q1. Our underlying net income grew by $13 million or 3%. We repurchased $200 million in shares over the quarter with our sequential EPS up 4%. The combination of our strong capital position, solid returns, and capital freed up from non-core rundown has allowed us the capital flexibility to support our customers and return capital to shareholders. Share count is down over 5% versus a year ago. Our fee growth was relatively broad as capital market fees continued their rebound, led by low syndications and bond underwriting. Wealth and card fees, both hit record levels. We also are seeing nice momentum in our well-positioned payments business.

Our private bank had a terrific quarter. We reached $4 billion in deposits, up from $2.4 billion in Q1, and tracking well towards our year-end 2025 goal of $11 billion. We brought in two leading private wealth teams in the quarter, one from San Francisco and one from Boston, and we've reached $3.6 billion in assets under management at quarter end with nice momentum. Our commercial bank hired a middle market leader for Florida and for California during the quarter, two increasingly important states for us. Our overall commercial franchise continues to be well positioned in serving the middle market, private capital, and key growth verticals, and we look for our strong performance to continue in the second half.

I should pause to give a shout-out to Don McCree for his appointment as Senior Vice Chair in June. Great recognition for his efforts over the years at Citizens. We have done a good job in executing on our strategic initiatives. TOP 9 is tracking well to targets, and we have commenced work on TOP 10, which will push into new areas like AI. Our BSO work is progressing well. Non-Core ran down $1.1 billion in the quarter. Commercial C&I is refocusing on deep relationships, and we have a medium-term plan to reduce our CRE exposure.

Credit metrics are holding up fine outside of General Office. We continue the lengthy workout of General Office, which will take several more quarters before we see improvement. Roughly 70% of our office exposure is suburban versus central business district, where loss given defaults have been about half of CBD properties. The good news is that, we have our arms around the issue and we don't expect to see major surprises. Looking forward, we continue to be upbeat about our prospects. While there are still many uncertainties in the external environment, we feel we are in good position to navigate the challenges that may arise, and we maintain a positive outlook for Citizens over the balance of the year, as well as the medium term.

Our strategy rests on a transformed consumer bank, the best positioned super regional commercial bank, and the aspiration to have the premier bank-owned private bank. We will continue to execute with the financial and operating discipline that you come to expect from us.

With that, let me turn it over to John.

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.

Question-and-Answer Session

Operator

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

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?

John Woods

Yes, I'll go ahead and jump on that one. So, I mean, I think we're seeing pretty positive signs, for 2H as it relates to loan growth. When we look at the three different businesses that really will drive that, we've got the private bank, which has demonstrated the ability to not only grow deposits and AUM, but the private bank is actually penetrating its customer base and growing loans in the second quarter, and we expect that to actually continue and begin to accelerate into the second half.

In the commercial space, customer activities picking up, we do expect to see, particularly in our sort of, you call it, M&A, advisory-related driven finance arena, we're seeing some opportunities in the subscription line space as well as some pick up in fund finance. And then in retail, we've been seeing some opportunities in HELOC and mortgage. So all three legs of our stool, as we call it, are starting to demonstrate the ability to really deliver on that loan growth expectation as you look out into the second half.

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.

Bruce Van Saun

Yes, and I'll jump in too on the consumer and private banking side. The consumer story is a little complicated given the non-core run down. We're running down $800 million to $1 billion each quarter, but if you put that aside, the fundamentals of our core loan business are actually growing at a reasonable clip, really led by residential lending and a little bit in card. Our HELOC position remains incredibly strong. And with rates being higher than we had expected going into the year and our customers having the most home equity in their personal balance sheet in the history of the United States, our HELOC market position is reaping a lot of benefits for us. So we're seeing very strong HELOC growth despite the mortgage challenges, some modest growth in the mortgage portfolio. And we're starting to see a bit of a tick-up on the card book.

And then turning to the private bank, really our offering is much broader than what the team that we hired was used to. So we're starting to see a diversification of that book. Early days it was really led by private equity and venture capital call lines. That's still a strength of the business model. We did see in this last quarter in Q2 a diversification towards consumer. So consumer is now 36% of the loan book versus in the low 20s earlier in the year. So mortgage is starting to pick up, some HELOC lending, and still continued strength in business banking and private equity. We expect that trend to continue.

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

Yeah, I guess we were a bit disappointed in the SCB result. And I'd say, I think the Fed overall does a pretty good job on credit. They are very conservative, but they have a lot of data to work from. And where we've consistently been frustrated has been on their modeling of PPNR. And so, our own modeling of PPNR is kind of much more robust. I think we do things like we pick up forward to starting swaps. We tailor the situation to the scenario where if rates are much lower, then we're going to see a pickup in mortgage fees and a pickup in capital markets fees, depending on the scenario. But anyway, I'd say the good news is, we have sufficient capital. We run at a conservative level. So having a higher SCB than we think is appropriate isn't really hindering our strategy. And so, I don't think, Peter, that we need to make significant changes to the business model. I think we're on the right track.

Having said that, the balance sheet optimization is still places where there's work to do to optimize the risk-adjusted return that we make off the balance sheet and to hopefully improve some of the stress results on the credit side. And so, CRE, we can see, that run down, we popped up after we did the investors acquisition. A lot of that was low risk, multifamily. But certainly, we want to create the capacity to lend in areas that really further deeper relationships and we'll have more C&I kind of fill some of that void as we bring down CRE would probably be the biggest shift that you'd see on the balance sheet over time.

Peter Winter

Got it. Thanks, Bruce.

Bruce Van Saun

Okay. Next question, Alen.

Operator

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

Erika Najarian

Hi, good morning. This question -- this first question is for John. John, I think you were at a conference in June, and you talked about, very positively, about an exit rate for the fourth quarter of 2024 and the net interest margin. I'm wondering if you could readdress that again and maybe put it in context of -- you noted that the swap costs were peaking in the third quarter. If you can give that in context on how you expect asset yields to traject as we think about that September and December rate cut. And obviously the 3 basis point improvement in interest bearing deposit costs are notable. It's often the trajectory from here, whether it's in context of the rate cuts and without.

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.

Erika Najarian

That does. And as you lay out the past, and you said a third -- from a rising past for the net interest margin from what you mentioned as a 3Q 2024 trough. I'm wondering about the size of the balance sheet. Do you feel like your mix is optimized? In other words, as your investors think about a normalizing NIM and multiply that by your balance sheet, is your balance sheet growth going to be in line with business growth, or will there be moves that you're making in terms of wholesale funding or whatever else that could move balance sheet growth sort of underneath business growth or above business growth?

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.

Bruce Van Saun

I would just add to that, Erika, is I do think we have one thing that's pretty unique to us, which is the launch of the private bank. So, if we just grow at kind of nominal GDP, kind of in the medium term for consumer and commercial, we should grow a little faster, because the private bank is scaling up. And certainly as the customer base grows and we keep adding and investing in the business, we should see additional growth there.

Erika Najarian

Well said, guys. Thank you.

Operator

Your next question will come from the line of Ryan Nash with Goldman Sachs. Your line is now open. Mr. Nash, if you could please check your mute feature on your phone.

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.

Scott Siefers

Thanks for taking the question. Maybe we could sort of pivot to the fee story for a moment. That's been a pretty solid story this quarter. And John, it sounded like we'll see maybe some seasonal capital markets weakness in the third quarter, but it feels like it's on a good trajectory. So just maybe some thoughts on the overall investment banking pipeline, how it looks, and then just broader thoughts on the main drivers as you see them for the fee-based outlook?

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.

Bruce Van Saun

And also, just to add to that, we did take some regulatory cleanup items in other incomes, so that was suppressed in the quarter, which should bounce back next quarter.

But with that, Don, why don't you give a little more color on kind of…

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.

Brendan Coughlin

I'd maybe just very quickly add on the consumer side, our improvement is very durable, sticky fee revenue. So the card changes that both John and Bruce mentioned, we reissued 3.5 million debit cards last quarter in a new contract that just drops directly to the bottom line. It's predictable and will stick around. Service charges has bottomed out. Mortgage we think will be in the zone, it could get a little bit of favorability if rates drop a little bit. And then the wealth AUM growth is sticky, durable, repeatable fee income. So that's what we're calling for, a steady continued upward momentum on consumer without a lot of volatility.

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.

Scott Siefers

Perfect. Thank you for that color. And then wanted to ask a little bit about the reserve and specifically the office reserve. I think we're up at 11.1% now, which is, of course, very, very high. I guess I'm curious about the factors, as you might think about them, that would allow you to start sort of absorbing losses with that existing reserve. In other words, what sort of allows that office reserve to start to come down rather than to continue to take off? I think when you talk about the reserve more broadly, you've pointed to non-core runoff as being the thing that might allow the reserve to benefit, but just curious about how office fits in there in particular.

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?

John Woods

Yes. I would just echo that point. I mean just having some growing confidence in valuations and seeing maybe transactions occur could be a likelihood of 2025 outcome. And so this is a multi-quarter probably multiyear journey that we're on. But given all the balance sheet strength, that we have with our capital position, we feel really confident that any uncertainties are expressed in the reserves and any other -- anything else would be supported by the capital. I would also mention that we're working the book down. I mean we started out at $4.2 billion, we’re down to $3.3 billion. So we're lowering the exposure every quarter we're working...

Bruce Van Saun

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

John Woods

Exactly. And we're getting some kind of payoffs and paydowns. We're getting -- we're working through the riskier credits and we're having conversations that have been accelerated given our maturity profile that we've had the opportunity to really lean in with our borrowers and when and if we've come to sort of extensions, we've been able to extract, in many cases, better positioning and collateral. So this is, as I said, a multi-quarter journey, and we're feeling good about our [indiscernible].

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.

Scott Siefers

Perfect. All right. Thank you all very much.

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.

Ken Usdin

Okay, great. Good morning. Hey, John and Bruce, on the cost side, so you guys are doing early job keeping costs flat. You mentioned earlier, you're hiring some bankers. You obviously have the wealth management people. And I'm just wondering if you can help us understand like the growth that you have there and like where the top and extra cost program are in terms of the offsets to be able to kind of still hold the line? I know that it's kind of in line with your full year guidance, but just the puts and takes of kind of where we are at this point of the year in terms of -- is there just more to come on top to offset those hires and the growth and the strong investment banking results, et cetera? Thanks.

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.

Ken Usdin

Okay. Great. All right. Second question, I know that you issued 400 preferreds and redeemed 300 at the -- in early July. And I think with that, you're still kind of in the 1.2%, 1.3% zone, maybe 1.3%, preferred to RWAs as you contemplate the buyback as you think about the SEB and all of that, like how do you just think about the overall capital stack in terms of like what your ultimate goals are for optimization of your capital position? Thanks.

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.

Ken Usdin

Okay. Great. And sorry, just one to follow up on that last one. Just the -- so the RWAs have been coming down and your average earning assets have been kind of flat. And I know you talked a little bit about this earlier. But is kind of flattish on total balance sheet size, average earning assets. Is that the right way to think about things going forward given all the moving parts on both sides of the balance sheet?

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.

Bruce Van Saun

We can see some growth, though, in I'd say, spot deposits and spot loans in Q4 above that, about just deploying the liquidity. So just to be clear.

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.

Ken Usdin

Got it. Thank you.

Operator

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

Manan Gosalia

Hey, good morning. If I try to back into the 4Q NII number using your full year guide and the 3Q guide, it implies 3% to 4% quarter-on-quarter increase in NII in 4Q. My question there is, what do you need to see that uptick in NII? I know there's some benefit from the -- on the swaps front, but do you also need to see loan growth. Do you need to see deposit costs continuing to come down? Do you need any help from rates? Can you help us frame that?

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.

Bruce Van Saun

Yes. And I would just add to that as well that we also think that reminder that the Q4 is a seasonally strong quarter for fees. So I think there could be that rebound in NII kicking in Q4, strong feed quarter, continued discipline on expenses, credit seemingly moving in the right direction. So -- and then continued share repurchase. So you put that all together, you could have kind of a nice uptick in the Q4 results.

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?

Don McCree

Yes, what we're assuming in our utilization growth as it's largely in the capital call and subscription lines. So we're seeing a little bit in the middle market. So I think the middle market trend will be a little bit longer. What we've seen our middle market companies do is kind of take their leverage levels down with economic uncertainty. So as the economy begins to show signs of stabilization, more certainty stabilization, maybe they get a little more aggressive investing in their businesses. And I was with a whole bunch of middle-market CEOs last week and every single one of them said they have were new investment plans over the next 18 months. So that will take a little bit longer.

And I don't really see massive impact of -- from the election. I think you may get some market volatility based on what someone says day in, day out. But I think the medium-term trend is intact. And we are seeing -- I mean, the playbook we're going to run in California and Florida, which Bruce mentioned, is going to mirror the playbook we ran in New York, where we're having just extremely strong client acquisition as we bring experienced market bankers onto the platform, and they their clients with them. So very early days, but those pipelines are building kind of literally within two months of hiring the new bankers. So there won't be huge numbers of the asset, but that will be another tailwind for us, I think.

Manan Gosalia

Great. Thank you.

Operator

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

John Pancari

Good morning.

Bruce Van Saun

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.

Bruce Van Saun

Yes. I'd say over the medium term, we'd probably take the pure commercial book down at least 25%. And that will come across the asset classes, obviously, want to be smaller in office, multifamily, we can lead that down a bit since we took a big upsurge with the investors deal. We will make room for some CRE opportunities with the private bankers since it's important part of their customer base. And so, there'll be a little bit of offset to that. But that kind of directionally gives you a sense as to kind of what the plans are.

And as I said earlier in the call, I think we're making room for more C&I growth that we'd like to kind of flex and have a bigger loan capital allocation to C&I and a smaller to CRE over time.

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.

Brendan Coughlin

Yes. Of the commercial and business banking oriented deposits, the majority are from private equity and venture firms. But I would note that it's heavily led by operating deposits. And so the way that the relationship actually works is starting as their cash management operating bank, which is why the DDA and [indiscernible] percentages is so high in the business. So they're stable, predictable and generally lendable deposits. So we're pleased with the profile. If you think of the loans that have come in, obviously, the LDR of the private bank is quite low, and we've got a good amount of liquidity padding when you look at the lendability of the deposit base to continue to drive loan growth even within the profile of just the private bank.

So we're pleased with the quality that you're seeing the loan book diversify to consumers. The deposit book has still remained in that sort of 80-20 split. But given the pace of growth, that obviously suggests that the consumer business is also growing at a pretty healthy clip. That just takes some time, and we do expect that to catch up. And it will diversify over time to more of a 60-40, maybe over the longer-term horizon 50-50. But…

Bruce Van Saun

With both deposits and loans...

Brendan Coughlin

Both deposits and loans, I mean the higher rates have held back on mortgage, obviously, and then the business banking and commercial deposit growth is quicker and lumpier, but we do expect that to continue to change over time, and we're pleased with the strength of the consumer opening these private banking offices, which should attract more of a high net worth individual as well.

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.

Bruce Van Saun

Yes, I'll start and pass it to Brendan. But I just want to make an overriding point is that, we want to demonstrate that we can run this as a profitable business. And so, when we initiated the launch of the private bank, we put some markers out there as to where -- what we were going to do this year, hitting breakeven in the fourth quarter. And then next year getting to numbers that had $9 billion of loans, $10 billion of AUM, $11 billion of deposits. That translates to 5% accretion to our bottom line. And so, we're still building the business. We're building the service levels. We're making investments in more support people, and we feel really good about the trajectory that we're on.

We want to get that right, we want to get that flywheel running and hit those numbers before we start going crazy making investments in other regions and other opportunities. Having said that, if there are particularly unique situations that we can kind of fit in and execute over the next 18 months that are important locations, and they don't affect our ability to hit the numbers, we'll be open to that.

And then the other thing is on the Wealth management side, we had a strong base with Card sell. We knew ultimately that we were going to have to expand the capabilities that we had by bringing in more teams. And the focus has been on a geographically situated teams that can be contiguous with the private banking teams that we've set up in San Francisco, Boston, New York and Florida. And so, so far, we've been able to bring two great teams like quality, everything, one in San Francisco, one in Boston. That's accounting for a big chunk of that rise in AUM with more to transfer in from their customer base. So we have momentum there.

We also have a ton of folks interested in joining our platform. So we can have those conversations and keep bringing those wealth teams in because they don't really impact the near-term financials negatively that usually come in around breakeven with an opportunity to quickly turn into profitability. So Brendan, you can add to that.

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.

John Pancari

Great. Thanks, Brendan.

Operator

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

Gerard Cassidy

Thank you. Good morning, Bruce. Good morning, John. John, you talked and gave us good detail about the office portfolio of commercial real estate. And I think you said that some of your assumptions in the bottom left-hand corner of Slide 14 show that this downturn is far worse than historical downturns. Can you share with us two ideas or two answers. First is, when you look back, I think you guys have been aggressively attacking this portfolio for just over a year now. When you look back at those early workouts in the second quarter of 2023, how are the assumptions that you're using then compared to today?

And then second, and I'm with Bruce that maybe this office problem doesn't resolve itself until sometime next year. What are you seeing incrementally in terms of valuations or losses? Is it still deteriorating in office? Or has it just stabilized and we just got to work through these portfolios?

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]

Bruce Van Saun

I would just add that I do think the Fed starting to move rates lower will certainly be help here. So part of the reason the losses ended up higher than what potentially we thought back in early 2023 because those cap rates going up at inflation that was impacting NOI and things like that. And so, I think we've seen inflation now leveling off. And if the Fed starts to move rates down, that could also start to move things in the other direction. It's too early to call a victory here, but there are some positive signs. And I think lease up rates generally are actually holding or potentially getting a little better as return to office picks up. But again, that's not that significant in the big scheme of things.

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…

Bruce Van Saun

Yes. Yes. Definitely.

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?

Don McCree

Yes. Hi, Gerard, why don't I take that? It's Don. So we bank the private capital sector in several different ways. We obviously have capital call and subscription lines, which are based on LPs, we have financing lines to some of the private credit organizations, which are kind of structured as almost like asset-backed lending, where we have diversified pools of loans underneath it, we have advance rates and the like. So it's actually relatively safe, almost investment-grade like lending, even if those complexes begin to take some losses on their underwriting portfolios. So we like those two businesses a lot.

We're probably not going to grow them too much more across the entirety of the company because it is a large concentration already. But when you look at those non-bank financial numbers that includes insurance companies. There's a whole bunch of other exposures in there also. And then, of course, we land the riskiest stuff we do is to the underlying leverage buyouts and our strategy there forever has been very large holds. It's an underwrite to distribute business. The average outstanding is like $12 million on a given deal. So very diversified across a large group of leveraged credit. The book is actually shrinking, given the lack of market activity over the last kind of 1.5 years or so. So we feel like we're very well diversified and I've been doing this business, as you know, for a very long time and where you get really hurt is when you have big concentrations in leveraged loans and we see that with some of our competition, but we're not going to go there just because that's the way you run those businesses. So those are the really big pops.

Gerard Cassidy

Thank you.

Operator

Your next question will come from the line of Matt O'Connor with Georgia Bank. One moment while we open your line Mr. O’Connor. Your line is now open.

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?

John Woods

Yes, sure. I'll take that. I mean I think what we're likely to see under the first couple of cuts we're modeling out approximately 20% to 30% down betas in those first couple of cuts. The way the forwards have it playing out overall. The longer those cuts are in place, the more there's the opportunity to see rollovers of CDs, et cetera, and to lean in and price down. So the fact that we have, I think the forwards get down to around 4% by the end of 2025 and may start to get into the 3.50% range in terms of our outlook when you get out into 2026 and beyond. Through that full tightening cycle, we think that the full round trip could be -- could approach -- the down beta is good approach where up betas were. Our up beta is around 51%. I think the down beta could get up to that level over the full cycle, but it will be $20 million to $30 million for the first couple.

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?

John Woods

Yes. I mean, I think broadly, we believe we're going to have deposit growth in the second half contributing from all three of our businesses. So 2Q is a seasonally down quarter. We saw that, and we're expecting that plus all of our initiatives that we have in place are going to contribute to deposit growth in the second half. We've got that one cut in September, and our outlook that will be helpful. I don't think that it's absolutely necessary to have that cut in order to continue to have deposit growth. But certainly, it would be helpful to get that deposit growth to stop kind of the migration aspects and the mix shifts that the industry has been seeing.

And then as you broaden that out, when we have overall deposit growth and average deposits are higher, that will be consistent with a very positive funding mix because wholesale funding can be lower in terms of funding the balance sheet, and that's a tailwind for NII and NIM into the second half as well.

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.

Brendan Coughlin

The one point I would add on the consumer side is that, we a number of years in a row where we've outperformed on a relative basis on DDA low-cost deposits and with benchmarking that we see so far this year, we believe we're number one in the peer set and consumer for relative DDA performance, and we see that continuing. So we think the trends have stabilized up so much of our deposit strategy is grounded in the health of our DDA base and we expect whatever the market throws us that we'll continue to outperform peers and doing that for a long time now. And certainly, this year has been a real strength.

Matt O’Connor

Okay. Thank you.

Bruce Van Saun

Okay. I think that's it for the queue. Thank you, everybody, for dialing in today. We certainly appreciate your interest and your support. Have a great day.

Operator

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