Citizens Financial Group, Inc. (NYSE:CFG) Q1 2024 Earnings Conference Call April 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, Consumer Banking
Don McCree - Head, Commercial Banking

Conference Call Participants

Ryan Nash - Goldman Sachs
Scott Siefers - Piper Sandler
John Pancari - Evercore
Peter Winter - D.A. Davidson
Ken Usdin - Jefferies
Matt O’Connor - Deutsche Bank
Dave Rochester - Compass Point
David Konrad - KBW
Manan Gosalia - Morgan Stanley

Operator

Good morning, everyone and welcome to Citizens Financial Group First 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 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.

Bruce Van Saun

Thank you, Kristen. Good morning, everyone. Thanks for joining our call today. We were pleased to start the year with a solid quarter. We continue to play strong defense through an uncertain environment with a CET1 ratio of 10.6%, our LDR at 81%, our allowance for loan loss ratio of 161%, and general office reserves now at 10.6%. On the P&L, we are still seeing a modest decline in NII though our NIM was stable at 2.91%. Fees picked up by 3% sequential quarter, led by capital markets and card and expenses were flat.

Our credit trends are in line with expectations. We repurchased $300 million of shares during the quarter as we free up capital from our non-core rundown. Our guide for Q2 and full year remain consistent with our expectations at the outset of the year. Our strategic initiatives are making good progress. The Private Bank is off to a good start, reaching $2.4 billion in deposits at quarter end. We expect momentum to accelerate further over the course of the year. We are also focused on building out private wealth management through further investment in Clarfeld plus several imminent team lift-outs.

Our New York City Metro initiative continues to go well with the fastest growth of any of our regions and really strong net promoter scores. Our focus in the commercial bank of serving the middle-market, private capital and key growth verticals has put us in great position to benefit from a pickup in deal activity, which we expect to build further over the course of the year. And our TOP 9 program is being executed well, allowing us to self-fund our growth investments while keeping overall expense growth rate muted.

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. Over the past decade, we have undertaken a major transformation of Citizens. Our Consumer and Commercial Banking segments are positioned for success, and we are now looking to build the premier bank owned private bank and wealth franchise.

Our balance sheet has been repositioned with an exceptionally strong capital liquidity and funding profile and we are deploying our loan capital more selectively to achieve better risk-adjusted returns. Our expense base has been tightly managed with AI offering the potential for further breakthroughs. Lots accomplished with more to do, clearly, exciting times for Citizens.

With that, let me turn it over to John.

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.

Bruce Van Saun

Okay. Thank you, John. And Alan, let’s open it up for Q&A.

Question-and-Answer Session

Operator

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

Ryan Nash

Hey, good morning Bruce. Good morning, John.

Bruce Van Saun

Good morning.

John Woods

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.

John Woods

Yes, sure. I’ll go and talk through that. I’d say, as you may have heard in some of the opening remarks, we do expect that net interest margin trends have been quite good. And so we do expect net interest margin to come in a little better, maybe at the high end of that range rather than where we were at the beginning of the year. And a lot of the drivers of that net interest margin can be pinned on the investments we’ve made in the deposit franchise over the years that are really starting to come to fruition. And when you look at it, deposit levels are better in the first quarter than we expected and interest-bearing deposit costs are a little bit better. So just – and funding overall, when you look at our borrowing mix has improved significantly. So that’s underpinning a lot of the net interest margin. And when you combine that with the other side of the balance sheet, where you see the front book back book dynamic playing out. It’s very powerful. And so we’re feeling better about NIM trajectory. And I think that’s what you’re seeing with respect to our confidence in hitting that that net interest income range, given the confidence around net interest margin.

As you get towards the end of the year, as I mentioned, I think, previously, we said our guide would be around 280 to 285 in that range, I’d say we’re probably going to come in at the upper end of that range now when we look out and maybe a tad above, we’ll see as it plays out. And then we’ll see the loan just given where loan demand has started off the year, maybe average loans maybe towards the lower end of that original range. But those offset a couple of basis points of NIM equals about a percentage point on loans. So that math just works out to be right down the middle of the fairway in terms of our guide. What could cause it to come in a little better, continued execution of our strategic initiatives if we see our execution kind of accelerating across the private bank, and our other key initiatives on the deposit side. And let’s see how the second half commercial rebound plays out. We are expecting working capital starting to pick up in the second half. We’re expecting utilization levels to pick up. We’re expecting activity in general, even in the M&A front and M&A finance to be part of the story in the second half. And so if that starts a little earlier or it comes in a little stronger, you could see us coming in maybe towards the lower end of that original NII guide.

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.

Ryan Nash

Got it. And thanks for all the color. And just maybe as a follow-up, just – any color in terms of what you’re seeing on the credit side, which seems to be tracking in-line with your expectations? And maybe specific to office where we saw a jump in the losses this quarter relative to the past few. Maybe just some color on what’s driving that? Was that increased severity? Are you front-loading some losses? And when inevitably do you think we could see the allowance in that portfolio peak. Thank you.

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.

Don McCree

No, I think that’s exactly right. We’ve taken our general office from about $4.2 billion to $3.4 billion. So it’s actually coming down nicely, and the charge-offs have actually been modest. The – most of the charge-offs are where we’re selling out of properties and doing AB loan structures and basically deciding to move on. We’ve had quite a few paydowns also. So it’s not all doom and gloom. But I’d go back to what Bruce said, it’s name by name, property by property. We’ve got our workout teams fully involved. It’s kind of playing out exactly as we expected it to be. If I took myself back 1.5 years ago and looked at the office portfolio, there was a lot of uncertainty. I think there’s a lot more uncertainty now. So remember, I’ve got a huge amount of absorption capacity just in my P&L for any losses that are materializing, and our reserve levels for the portfolio are well above where the severity of losses to date have been. So we feel we feel like we’re going to work through this, as we said, over the next few quarters and begin to peak at the loss levels.

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.

John Woods

Yes, I agree with all that, I’d just add a point or two. So what’s built into the 10 you’ll see it in some of our slide materials is an expectation of a 71% decline in property values. And that’s what drives this 10.6% reserve for remaining losses.

Bruce Van Saun

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

John Woods

Exactly. And I think we should also mention that just given what we put behind us, implies another 6% of losses that we put behind us. So we’ve got 10.6 in the reserve. We’ve charged off about 6. So you’re up over 16% in terms of coverage, we feel pretty good about it, and that’s where we think the losses are going to play out. And as Bruce mentioned, we’ll charge-offs themselves, maybe they peak later this year or early next. But we think we’ve got the reserves covered.

Bruce Van Saun

Okay, next question.

Operator

Your next question will come from the line of Scott Siefers with Piper Sandler. Go ahead.

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.

John Woods

Yes. I mean, we’ve been saying for a while that things have been decelerating. And I’d say our deposit performance this quarter has been – has been excellent in terms of – versus what we were expecting coming into the year. So again, deposit levels overall look good. DDA flows and low cost to high cost, migration overall, continuing to decelerate. And I think you can – we can point to, if you look at where we are, we were at around 21% of DDA at the end of last year at 12/31 and that flattened out. We were at 21% at 03/31. So DDA for us is stabilizing. And the – however, the low cost to high cost, again, decelerating and as it will continue to decelerate. And what we’ve been indicating is that that’s going to continue until you see the first cut out of the Fed, which is historically what we would expect. But it’s getting to the point where it’s having a diminishing impact on net interest margin.

And so when you elevate overall, the contribution that our deposit franchise is delivering for net interest margin trends is excellent. And we’re feeling very good about the trajectory, the DDA stability throughout the rest of ‘24 and getting back to growth because when you think about what’s idiosyncratic to us and the strategic initiatives that we’re launching, the private bank non-interest-bearing is accretive to the overall company. We’re at maybe around 30% or more. And so that’s dragging that number up. So I think we have some…

Bruce Van Saun

New York Metro offers another opportunity.

John Woods

And New York Metro as well as a really good point. So the combination of those strategic initiatives, we have some expectation of DDA flattening out and growing as you get into the latter part of the year. And that underpins the net interest margin quite nicely.

Bruce Van Saun

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

Brendan Coughlin

Yes. Sure. We’ve been talking for a couple of years now around how – since so much of our deposit book comes through consumer that we believe that we’ve transformed the book to be pure like or better. And I would just reiterate that, that’s what we’re seeing. We were up modestly linked quarter on overall deposits in the consumer book with some benchmarking that we get from a variety of sources, we believe we were number one in our peer set linked order on DDA.

So on a relative basis, we still have a lot of confidence that we’re outperforming peers and it’s demonstrating the franchise quality that we’ve built. When you look at the customer level, customer deposits have actually been quite stable around $31,000 per customer. And the remixing of, as John pointed out, is pretty dramatically slowing. And I think that’s kind of indicating that the COVID burn down is beginning to really run its course. So there may be a little bit more, but we feel pretty good that we’re getting kind of the end of that behavioral cycle. We look at overall deposits on an inflation-adjusted basis, they’re back to basically pre COVID. So I think we’re kind of nearing the operating floors here for consumer. Given the strength of low-cost deposits that we have had relative to peers. The other implication is how we’re managing interest-bearing deposits. I do believe that we’ve peaked in the consumer segment in Q1 in our cost of funds. And why do I believe that we had $3 billion in CD rollover in March alone that were priced around 5%. We’ve retained 75% of those as they flipped over and materially lower prices between 3% and 4%.

So you start to see the tailwinds building in that you can imagine the cost of funds in the consumer segment potentially beginning to reduce. We’ll see how it plays out where rates are at. But I do believe we’ve sort of peaked here in Q1, and it’s really driven by the strength of our low-cost performance. So we don’t need to chase high interest-bearing costs as a result of that. So I feel really good about where we’re at.

Scott Siefers

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

Operator

Your next question will come from the line of John Pancari with Evercore. Your line is open.

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?

John Woods

Yes, I’ll just start off on loans and others can add. But I mean, what we’re seeing is that utilization coming in a little lower in the first quarter and that than was originally expected. But nevertheless, we still see the – in the second half, the interest around putting some working capital to work and commercial activity starting to pick up is really going to drive the reversal of that utilization trend as you get into the second half.

On the retail side of things, we’re still seeing good opportunities in relationship mortgage and HELOC and in the private bank, where we’ve gotten a nice start in terms of – which is mostly a commercial lending driven amount of activity in the subscription line space. And that we see that picking up. So all in, one it is playing out about as expected, meaning we may be just a little bit lighter on loans, but we had expected that would be the case. And then the pickup in the second half will be coming out of the commercial business and private bank. Maybe any other color.

Bruce Van Saun

That’s well said, Don, any color.

Don McCree

Yes. No, I’ll – I think it’s across the board on the commercial side. And Part of it is due to the booming bond markets. I mean, we’re seeing a lot of customers access the bond markets as opposed to draw down existing lines. And then I think there’s a positive to it also, not for loan levels, but customers are running with lower leverage levels because they’ve been concerned about the economy. We’re seeing a broad, more positive view of the overall economy across really wide swaths of our client base. So that would indicate that they’re going to get more active in things like plant construction, working capital, growth, M&A, and so that should drive some bounce back in the back half of the year.

Bruce Van Saun

Anything from you, Brendan.

Brendan Coughlin

Yes. The only thing I would add is maybe just strategically that there’s a lot of ins and outs under the cover. So, as we run down auto by essentially $1 billion and other non-court getting replaced with high relationship, high-returning asset growth, whether it’s on the HELOC side or the private bank. So the headline numbers that you see around our loan growth, what you have to dig into is the transformative use of capital that we’re doing around a handful of areas that have more durable, sticky revenue sources that are going to create more cross-sell around fees and other things over time. So we’re pleased with how that’s going.

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.

Bruce Van Saun

Yes, I would just – I would highlight that – just one last quick piece of color is that very pleased to see the Private Bank now has had kind of two quarters with $1 billion-plus of deposit growth and we certainly think that, that’s sustainable and could even accelerate. So the ship has landed, and we’re off to a great start, and we expect that to continue and even accelerate.

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.

John Woods

Yes. I think this capital position that we’ve generated and have maintained is really creating a lot of flexibility. And when you think about our capital waterfall, I mean our top priority is to put capital to work that is to support customers and clients that is accretive to our cost of capital over time. And that’s really what we want to do and that we’re expecting to do. And that’s what capital allows us that flexibility. It also cushions against uncertainties. And so there have been a number – we look at the macro and being at a very strong capital level to be there for our clients, but also to cushion the downside to the extent uncertainties manifest is another use of a strong capital position. When you get down into kind of other potential uses of the capital, we support our dividend, of course, at top of the list. And then if we’re left with elevated capital levels, then we’re able to give it back to shareholders, which we did in the first quarter, we’re planning to do that here in the second quarter. And that flexibility will continue into the second half. So as we monitor loan demand and the macro, that will play into the trajectory of buybacks in the second half.

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.

John Pancari

Alright. Thanks, Bruce. Appreciate it.

Bruce Van Saun

Okay, thanks.

Operator

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

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?

Bruce Van Saun

Well, what I would say on that is the broad credit quality is still very good. So if you look at our C&I book, that’s in really good shape. Companies weathered the pandemic and leaned our business models, locked in lower cost financing. They’re doing more of that now early in the year. So we don’t really see hotspots even with kind of a higher for longer scenario in C&I. Similarly, in consumer, we’re still in very good shape. The consumer is benefiting from still strong liquidity levels, a strong labor market. And so we haven’t seen any adverse migrations in delinquencies or NPAs or anything like that. So that’s the bulk of the loan portfolio. If you then kind of look at the commercial real estate and the general office in particular, that’s relatively small as a percentage of the overall loan book. And I think there’s potentially some trends. We’re watching the reports that return to office is picking up. And so maybe there’s a little counter trend in office that offsets the kind of additional burden of hire for longer. But I think at the margin, it’s not going to change that charge-off number materially.

Peter Winter

Got it. And then…

Don McCree

Peter, I’ll just that from my side. We made no assumptions in our forecast that we’re going to benefit from lower rates. Because we just didn’t know and that’s our credit policy. We don’t go out on the future curve. We run all our scenarios based on where rates are today. So I think you’ve got a peak-ish kind of rate environment. If it lasts another couple of quarters or even another year, I don’t think it’s going to make a material difference to the way we forecast charge-offs.

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.

Peter Winter

And then just quickly, just a follow-up on office. I guess, I believe that more than half of the maturities on office happened this year. So do you think net charge-offs could peak towards the end of this year, maybe early next year and then start to trend lower?

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.

Peter Winter

Got it. Thank you.

Operator

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

Ken Usdin

Hi. Good morning guys. Just a question on the fee side, it’s really nice to see the capital markets improvement as you would have been thinking as we are seeing more broadly. I am just wondering a couple of line items went well, a couple of items kind of went backward. Just wondering just how you are thinking about the fee progression, the drivers and what’s your pipeline look like relative to the better start point here for the first quarter capital markets. Thanks.

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.

Bruce Van Saun

I would just say, to your point, Ken, also that there were those three strong areas. And then we had a little bit of weakness in some other areas, service charges, mortgage, the global markets, FX and interest rate lines were a little below our expectations. The good news there is there is nothing structural that we worry about. I think we will see bounce backs over the rest of the year, which will add to our overall growth and our confidence that we will maintain strong fee performance for the year.

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?

John Woods

Yes, it is. And so what that is, that $35 million is made up of about $50 million, primarily driven from active swaps that are outstanding. So, there is about $20 billion notional of active swaps outstanding. That grows to about $30 billion by 4Q. That’s incorporated into that number. But then it’s offset by the positive benefit from non-core of about, call it, $17 million or so, or $15 million to $20 million coming from non-core and that gets you to the $35 million drag. But really, when you play it out for the rest of the year, again, broadly, net interest margin trends are coming in a little better, incorporating all of our swap activity, what you see on Page 25 is just the receive-fixed swaps. We actually have pay-fixed swaps in the securities portfolio that are offsetting this, as well as of course, everything that’s happening in the core balance sheet. So, you got to kind of think at the broadest sense that NIM trends are actually coming in a little better. And then as you get out to later years, you start getting all of this tailwind is really baked in. And you start seeing the fact that terminated swaps begin to contribute. It gets to the point where you get out into 2026 and 2027 that a majority of, a super majority, if you will, of the tailwinds are actually baked in and aren’t rate dependent. But you have that right in terms of the 4Q components that incorporates everything on the receive-fixed swaps side plus non-core.

Ken Usdin

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

Bruce Van Saun

And I would just add color there, Ken, is I think coming into the year, people were concerned about that step-up that we had forward starting swaps in Q2 and then more in Q3. The guide that we are giving and our confidence in the NIM outlook incorporate that. So, we are able to absorb that because higher for longer is better for the core balance sheet. We have some pay-fixed swaps we did in the securities book. So, we are able to absorb kind of that step-up in the swap book and continue to maintain confidence in the NIM outlook for the year.

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.

Bruce Van Saun

Yes. To me, it’s really volume would be the key to where we land in that range. So, do we actually see that strong growth in the private bank accelerating that could be strong for deposits and attractive deposit funding, and then the spread that they are making on their loans is also very attractive. So, that’s totally accretive to front book, back book. Do we see the growth in commercial that we expect come in, and I think we – based on our kind of pipelines and our conversations with our customers and also a feeling that the sponsor community. Right now, there has been a lot of pull forward in refinancing, but I think you are going to start to see some more new money deals in the second half of the year. So, I think that those volume factors will have a big impact. But the way we kind of see it looking out the window today, we are highly confident that those things will materialize. I don’t know, John, if you want to add anything.

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.

Ken Usdin

You said we could come in at the higher end. I think you meant the better end.

John Woods

Yes.

Ken Usdin

Just for everybody’s clarity on that plan. Okay.

Operator

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

Matt O’Connor

Good morning. Most of my questions have been answered, but I am curious when you talk about kind of this medium-term net interest margin. What are your thoughts on the size of the balance sheet? And I guess, specifically, like do you think the overall balance sheet will grow or is there the remixing, Clearly, you are running off the non-core book [ph] on the private bank. But do you envision kind of net balance sheet growth as you look out the next few years? Thank you.

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.

Bruce Van Saun

Yes. I would say the kind of flex point is kind of middle of the year when we have done a lot of that heavy lifting on the repositioning, and then we start to see the private bank growth in commercial bank as we discussed, start to kick in. So, we should see net growth already in the second half of the year. And then kind of looking out ‘25 to ‘27, we would expect in a strong economy that we could get back to reasonably strong growth rates. Again, being selective where we play, focusing on primary relationships and primacy, but there is no reason we couldn’t grow back at nominal GDP the way we did for kind of many years before we hit the pandemic, and that plays into math that, the delivery of positive operating leverage, which is part of how you get your return on equity up. And so that’s the model we would like to get back to.

Matt O’Connor

Got it. Thank you.

Operator

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

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?

Bruce Van Saun

Yes. So, I would say that right now, we have a very full plate in terms of the things that we are investing in the organic growth initiatives we have. So, I would not – we are not really looking much at inorganic situations or opportunities. And so I want to just stay focused on great execution. There is a big pay-off for getting these initiatives right and they are all kind of on the trend line. I would say team lift outs, you mentioned is something that we are hinting at, at this point because while we have the private bank in place, and we have kind of Clarfeld as part of a private wealth complex, we need to scale up our private wealth capabilities to a large extent. And so we are having discussions with teams. And you can watch this space because I think you will start to see us build that part of the business out. But again, it will be prudent. We will treat them like they are kind of M&A transactions that are accretive and they fit our strategy and they are good cultural fits, but that’s kind of the only thing I would say that we are looking kind of outside. And to some extent, that’s organic. You could argue whether that’s organic or whether it’s acquisition like, but we are kind of using the same acquisition lens on these as if they were small deals. I don’t know, Brendan, if you want to put any color on that.

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.

Unidentified Analyst

Okay. Great. That’s helpful color. Thank you. And then just separately on loan growth. C&I demand has obviously been pretty tepid despite pretty healthy growth in the economy as measured by real GDP, do you think that lack of C&I loan demand is being driven by just general customer caution, or are you guys seeing more competition from non-bank players like the private credit market and others?

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?

Don McCree

I think that’s right. I think the area that we see private credit most active is in the leverage buyout market, which we don’t hold a lot of that on our balance sheet anyway. So, they are a source of distribution for us. So, we have actually done a couple of deals in the first quarter where we have distributed into the private credit market. So, it doesn’t have a balance sheet impact that it helps drive some of our fee lines.

Unidentified Analyst

Okay. Great. Thank you for taking my questions.

Operator

Your next question will come from the line of Dave Rochester with Compass Point. Your line is now open.

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?

Bruce Van Saun

Yes. I mean I would say that we are still confident in the range. And so if things break our way, we could be at the better side of that range. If they don’t, we could be at the lower end of that range. So, I would still kind of use that as the guardrails. You would have to have kind of quite a bit of deviation from expectation to fall outside of that range.

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.

Dave Rochester

Yes. Perfect. Thanks guys.

Operator

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

David Konrad

Hey. Good morning. Sorry if I missed this earlier, but just kind of drilling down on the NIM discussion. Just looking at this quarter, curious on C&I yields dropped around 36 bps quarter-over-quarter. I didn’t think this was a heavy swap onboarding this quarter, but just curious where we are looking at that maybe in the next quarter before the swaps come on in the third quarter.

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.

David Konrad

Yes, I agree. And then you talked about the securities book both the front book, back book and then the pay floaters coming out. But just curious your outlook for the growth of the securities book going forward?

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.

David Konrad

Perfect. Thank you.

Operator

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

Manan Gosalia

Maybe as a follow-up to the last question, is there any change in how you are thinking through positioning in the medium-term with the expectation for fewer rate cuts coming through? So, with loan growth being a little bit weaker right now, deposit growth being pretty solid, as you noted, are you willing to put on a little bit more duration on the securities side? And separately, has it got cheaper to put in some downside protection on NIM as you look into 2025 and 2026. And is that something you are considering right now?

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.

Manan Gosalia

Got it. Very helpful. And then this morning, one of your peers has suggested that they are seeing corporate behavior shifting from NIB to IB. Are you seeing some of your corporate clients take another look at optimizing their NIB balances in the higher for longer rate environment recently?

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.

John Woods

Yes. And I would say overall, you saw our DDA stable at 21% at the end of 1Q, 21% at the end of 4Q. That’s important. That’s the first time this has happened in a while. And so that stability we expect to continue as you get throughout the – for the rest of the year and actually see growth, as we mentioned earlier, based on other strategic initiatives and the private bank contributing.

Manan Gosalia

Great. Thank you.

Operator

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

Bruce Van Saun

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

Operator

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