Q1 2022 Citizens Financial Group Inc Earnings Call
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Good morning, everyone and welcome to the citizens Financial Group first quarter 2022 earnings Conference call.
My name is Connie 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 Kristen Silverberg Executive Vice President Investor Relations Christian you may begin thank.
Thank you Tony Good morning, everyone and thank you for joining us.
This morning, our chairman and CEO , Bruce Van <unk>, and CFO , John Woods will provide an overview of our first quarter results Brendan Cofflin head of consumer banking and Don Mccree head of commercial banking are also going to provide additional color we will be referencing our first quarter earnings presentation located on our Investor Relations website.
After the presentation, we'll 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 overview on page two of the presentation. We also reference non-GAAP financial measures. So it's important to review our GAAP results on page three of the presentation and the.
Filiation kidney appendix with that I will hand over to you Bruce.
Thanks, Chris and good morning, everyone and thanks for joining our call today.
They are clearly been changes in the external environment relative to what was expected coming into the year along with significant volatility we feel we've executed well in this environment and are positioned to perform well over the course of 2022.
Among the highlights of the quarter, we had a successful conversion of the HFC HSBC branch and online customers, which was then followed by closing the investors acquisition on April six we continue to take actions to position our balance sheet well for rising rates and we've made further progress on our strategic.
Including our digital agenda and top seven program.
With respect to our financial results, we are off to a good start with underlying EPS of $1 seven and <unk> of 13%.
This is generally our softest quarter from a seasonal standpoint, given fewer days in the quarter and the impact of payroll taxes on expenses.
Net interest income was up 2% sequentially, given 3% average loan growth and higher NIM, which more than offset a sizable drag from lower PPP loan forgiveness revenue and data out.
Lower revenue in capital markets and mortgage given the environment. So high volatility benefited our global markets hedging business.
We maintained strong deal pipelines in capital markets and remain optimistic for a significant revenue pick up if market stabilize.
We managed expenses well in the quarter and turnover has normalized somewhat.
Credit metrics are all excellent and so far both our consumer and corporate customers are navigating well through the current challenges.
Our balance sheet remains in great shape with the set one ratio of nine 7%, we have the capacity to grow loans pursue fee based bolt on acquisitions raised our dividend in the second half of the year and buy back some stock.
Our loan growth has picked up on the commercial side and we plan to throttle back our growth in mortgage and auto a little glitch, we'll maintain an attractive L. D. R.
I'd like to shift gears to emphasize a few key points that are topical for investors at the moment.
First and to be clear, we will benefit nicely from the accelerated path to higher rates. Our funding base has vastly improved from where it was entering the last rate up cycle.
We have a 7% benefit from a 200 basis point gradual rise in rates.
10 basis points cost of interest bearing deposits and an 83% loan to deposit ratio we.
We project roughly 300 million in higher NII, given the current curve, which annualized is too much more in 2023.
This will more than offset roughly $100 million in lower fee income from the environment.
John will take you through this in detail in his remarks.
Second while inflation pressures are real and the possibility of recession in 2023 has increase we feel our credit risk position is in very good shape.
We have maintained a super prime high prime risk appetite and consumer and over time, we have migrated our credit exposure in commercial to bigger companies will have better credit profiles.
As a result, our overall credit profile has improved over time.
Our realized at CCAR stress test results demonstrate that our credit profile is slightly better than middle of the superregional Pak.
And we are carefully assess investors' credit book and loss history and remain confident in their positioning which we will further harmonize over time.
Lastly, with respect to acquisitions I would like to highlight that our focus in 'twenty. Two is on integrating the acquisitions that we've made last year and getting each of those off to a strong start, particularly our New York City Metro area initiatives.
We will still look for acquisitions in the wealth space, but we are highly disciplined acquirer and have not been able to get much done as a result.
With respect to Florida, we now have eight branches in the state and job one is bringing them into network performance levels.
It does not appear to be much to do thats attractive and organically and the likely path is that we will open several more wealth centers and additional cities down the road.
In short you can count on us to maintain a strong financial discipline.
Since the IPO.
All in all we feel very good about how we've started the year and how we are positioned to navigate the challenging environment.
Given the significant move in rates and the closing of the two bank acquisitions. We've provided detailed guidance in our earnings presentation to assist analysts and investors and updating their models.
We continue our journey to building a great bank that can do evermore for our stakeholders and with that I'll turn it over to John .
Great. Thanks, Bruce Good morning, everyone first I will start with our headlines for the quarter, we reported underlying net income of $476 million and EPS of $1 seven.
Our underlying rocky for the quarter was 13%, which includes the impact of a modest credit provision benefit.
Net interest income was up 2% linked quarter, driven by strong loan growth and a nine basis point improvement in margin.
Period end loan growth was up a solid 2% linked quarter.
Our retail loans were up about 3%, while commercial loans are up 2% or 3% ex PPP impacts.
Average.
Loans are up 3% linked quarter paced by commercial up 3% or 4% ex PDP and retail up 3%.
These were down 16% linked quarter, driven primarily by lower capital markets fees off of record prior quarter, given market volatility seasonal impacts and some pull forward of transactions into the fourth quarter.
On a positive note, we had our best quarter ever in interest rate and commodities revenues as we help clients manage through the volatile volatile environment.
We remained disciplined on expenses, which were up 3% sequentially, excluding acquisitions, reflecting seasonal payroll tax index.
Year over year expenses were up a modest 2% excluding acquisitions.
We reported an underlying credit provision benefit of $21 million, which reflects strong credit performance across the retail and commercial portfolios.
The near term macroeconomic outlook remains positive that we are monitoring whether fed actions to slow inflation can do so while engineering a soft landing for the economy.
The underlying credit benefit for the quarter excludes $24 million for the double count of day, one feasel provision expense tied to the HSBC transaction.
Our ACL ratio stands at 143% down slightly from 151% at the end of 2021, and a 147% day one seasonal level.
Our tangible book value per share was down 10, 5% linked quarter, driven primarily by the impact of rising rates on securities and hedge valuations that impact NCI.
We continue to have a very strong capital position with set one at nine 7%. After a 20 basis point impact from the HSBC transaction.
Next I'll provide some key takeaways for the first quarter, while referring to the presentation slides.
Net interest income on slide six was up 2% given strong loan growth and the benefit of higher rates more than offsetting the approximately $41 million combined impact from lower day, count and the reduced benefit from PPP forgiveness.
The net interest margin was 275% up nine basis points, reflecting the benefit of higher rates with front book yields rising which more than offset reduced PPP benefit.
Margin is also benefiting from lower cash balances as we continue to redeploy some of our excess liquidity into loan growth.
Of note PPP spot loans were down to roughly 400 million at quarter end and forgiveness benefit headwinds are substantially behind us.
We made continued progress lowering our interest bearing deposit costs, which are now 10 basis points and all time low down three basis points linked quarter.
Moving to slide seven.
Given the fed's recent rate hike and the expectation for fed funds rate to end the year in the 225 to 250 basis points range. We thought it would be helpful to discuss why we are confident that we will realize meaningful benefits from rising rates as the forward curve plays out.
We entered this rate cycle with a much higher level of asset sensitivity at 10% before the first rate hike in March.
This is already starting to benefit NII in the first quarter and is driving a significant improvement in our full year outlook.
And those benefits will continue to accumulate into 2023.
Importantly, our expected asset sensitivity reflects how we have completely transformed our funding base since the IPO.
We are beginning the current up cycle with a very strong liquidity profile. Our LDR is much lower our deposit costs are as low as they've ever been and our overall funding profile has greatly improved.
Our period end demand deposits are now 32% of the book compared with 27% at the beginning of the last rate cycle.
Within our interest bearing deposits are consumer Cds are now less than 3% of total deposits compared with about 10% at the start of the last cycle.
We are also starting to cycle with a much lower level of floating of self funding.
This improved deposit profile reflects the significant improvements we've made to our deposit franchise since the IPO with improved and expanded retail and commercial deposit offerings.
We have also enhanced data analytics that allow us to attract and retain more stable deposits.
With a better starting position and the improvements in our deposit mix and capabilities. We expect our interest bearing data to be about 35% over this rate cycle, which is meaningfully lower than the last cycle.
Our overall asset sensitivity stands at 7% at the end of the first quarter. This was down modestly from 10% at the end of <unk> with the decrease primarily driven by the denominator impact of our higher NII outlook given the benefits from the April six forward curve and the evolution of the balance sheet.
Pro forma for the investors acquisition asset sensitivity is slightly over 6%.
Since the path of the rate cycle is uncertain on the bottom left side of this page. We've given you an estimate of our sensitivity to further changes in rates either up or down from the forward curve.
Centrally at 25 basis point instantaneous change in the forward curve is worth about $20 million to $25 million a quarter with most of that coming from our exposure to exposure to the short end of the curve.
This includes the pro forma impact of investors.
Moving on to slide eight we delivered good fee results this quarter, despite headwinds for capital markets, demonstrating the strength and diversity of our businesses and we drove solid performance across other fee categories.
Capital markets delivered solid results, despite the market volatility seasonal impacts and some pull forward into the full fourth quarter of 2021.
Given the strength of our pipelines capital markets fees could rebound nicely as market settle down and there was more certainty regarding the path of the economy.
Demonstrating the diversity of our business, we delivered our best quarterly results ever in global markets, a 46% linked quarter as we worked with clients to manage their foreign exchange interest rate and commodity of soldiers.
Mortgage fees were down 9% linked quarter against the backdrop of lower industry origination volumes, given rising rates and seasonal impacts.
Strong competition and excess industry capacity continued to pressure margins.
Mortgage servicing income improved as higher mortgage rates resulted in slower amortization of the MSR.
Card fees and service charges and fees were slightly lower linked quarter given seasonality.
Debit transactions and credit card same continued to exceed pre pandemic levels and wealth fees also remains strong.
On slide nine expenses were well controlled up 3% linked quarter, and just 2% year on year excluding acquisitions.
Our top set an efficiency program is well underway targeting $100 million of pretax run rate benefits by the end of the year.
Period end loans on slide 10 were up 2% linked quarter. We were pleased to see strong commercial loan growth again, this quarter up 2% or 3% X PTT.
Average loans were up 3% linked quarter driving this was average commercial loan growth of 3% or 4% ex PPP impacts led by C&I with growth across almost every region, including our expansion markets.
Average retail growth was also 3%.
Line utilization began to rebound a bit with an increase of about 150 basis points to a little over 36% on a slot basis, primarily driven by corporate banking led by manufacturing and trade as companies look to build the inventories to get ahead of supply chain issues and rising input prices and facilitate some emma.
Hey activity.
On slide 11, our period end deposits were up 3% linked quarter as we added $6 3 billion of lower cost deposits with the HSBC transaction.
Excluding HSBC period end and average deposits were down slightly given the seasonal impacts as well as continued normalization from elevated liquidity levels.
Moving on to credit on Slide 12, we saw excellent credit results again, this quarter across the retail and commercial portfolios.
Net charge offs were up slightly at 19 basis points for the first quarter with good performance across the portfolio.
Nonperforming loans increased by 87 million linked quarter, primarily driven by residential real estate secured loans exiting forbearance.
Other credit metrics continues to look excellent across the retail and commercial portfolios and criticized loans were lower.
While we are mindful of inflationary pressures in the higher possibility of recession, we feel good about the improvements to the portfolio. We've made over the last few years and the overall positioning of our credit risk.
In the appendix on slide 21, you'll see that the risk profile of our commercial portfolio is significantly improve given changes through the pandemic, including prudent lending and our focus on growing the bigger mid corporate credit portfolio, which is higher rate as well as reductions in distressed sectors, such as retail malls education in casual dining.
On the retail side, we continue to focus on the Super Prime and Prime segments. Our risk profile has improved given our disciplined risk appetite and changes in our portfolio mix, including the run off of our personal unsecured product.
Of note the investors' portfolios have performed well in prior cycles, and we feel good about them.
Moving to slide 13, we maintained excellent balance sheet strength are set one ratio remains strong at nine 7% at the end of the first quarter. After closing the HSBC transaction, which had a 20 basis point impact.
We also wanted to mention that we have widened our targets set one operating range to nine 5% to 10%.
975% to 10% reflective of the continued progress we've made in improving profitability revenue diversity and overall risk management.
Our fundamental priorities for deploying capital has not changed and you can expect us to remain extremely disciplined in how we manage the company.
Shifting gears a bit on slide 14, you'll see some examples of the progress we've made against our key strategic initiatives and other work we are doing across the bank to better serve our customers and make citizens a great place to work.
As you know we closed the acquisition of investors at the beginning of April further expanding the foothold we established in the New York City Metro area through the HSBC branch transaction and significantly advancing our growth plans.
In the consumer business, we were excited to complete the upgrade of citizens access to a fully cloud enabled core platform, which enhances the capabilities that our national digital bank and is the first step toward our multi year objective of convergence with our core banking platforms.
We also recently announced citizens ever value checking our new overdraft free checking account designed to meet bank on National account standards and increased banking access for underserved communities.
On the commercial side, we continue to perform well in the league tables consistently ranking in the top 10 is our middle market and sponsor book runner.
On the right side of the page. We have included some digital metrics. We are very excited with how our digital first approach is increasing engagement with our customers and how this is all translating into a better experience and higher satisfaction.
Given the significant change in the rate environment and the closing of our two bank acquisitions, we provided a comprehensive update to our 2022 guidance on slide 15.
The good news here is that our guide is up for our Standalone business rates are helping NII more than offsetting the fact that we are download onesies.
So <unk> higher and there is no change in our positive view on credit and we remain confident in the outlook for the bankers.
I'll focus my comments on our full year outlook, including both HSBC and investors, but we've also added the standalone outlook without the bank deals to help isolate performance we.
We have also included a comparison to our original guidance from January to help highlight what is driving the overall improvement in our full year outlook.
The rate scenario using our outlook is based on the forward curve as of April six which implies a fed funds target of 225 to 250 basis points by the end of the year.
On the long end this rate curve implies the 10 year treasury to be about 270 basis points at the end of the year.
It is also useful to keep in mind that the cumulative benefit from rates would also represent meaningful full year effects upsides to NII in 2023.
For 2022, we expect NII to be up 27% to 30% driven primarily by the improved rate environment and solid average loan growth of $20 to 22%.
On a standalone basis, NII is about 290 to 330 million better than our prior guidance given the higher rates.
Average interest your interest, earning assets are expected to be up 14% to 16%.
Fee income is expected to be up 3% to 7% on a standalone basis fee revenue will be about $100 million lower than the January guide as the environment will impact mortgage revenue as well as capital markets somewhat.
Noninterest expense is expected to be up 16% to 18% given the full year effect of HSBC and investors as well as our commercial fee based acquisitions.
Credit is expected to remain excellent with net charge offs broadly stable to down slightly for the year.
And we expect to end the year with a <unk> ratio of about 975%, which incorporates an anticipated increase in our dividends in the second half of the year.
Our capital projections include the impact of our expected notable items for the year, including the integration expenses for the acquisitions and our top seven costs you can see those in the appendix on slide 20.
Importantly, we expect to deliver positive operating leverage of approximately 2% on an underlying basis for the year, excluding the acquisitions and if you set aside the impact of PTT that would be over 4% operating leverage.
Including acquisitions, we expect operating leverage of over 4% and over 7% excluding TVD.
Overall, we expect our full year Ross each of land solidly within our 14% to 16% medium term target range.
Moving to slide 16, and I'll walk through the outlook for the second quarter.
On a standalone basis, we expect NII to be up 6% to 8% driven by the benefit of higher rates and solid loan growth with.
With the bank acquisitions, we expect NII to be up 27% to 29%.
On a standalone basis average loans are expected to be up 1% to 2% led by commercial with interest earning assets on slightly.
These are expected to be up 3% to 5% on a standalone basis, reflecting some improvement in capital markets and seasonal benefits.
Including the acquisition fees are expected to be up 7% to 9%.
Noninterest expense on a standalone basis is expected to be up 1% to 2% given higher revenue based compensation, including.
The acquisition expenses are expected to be up 12% to 13%.
Net charge offs are expected to be broadly stable and we expect our set one ratio to land at around 975%.
To sum up with slide 17, and 18, we started 22 was a solid quarter, we have a winning strategy and are well positioned to succeed given the strength and diversity of our businesses. We are very optimistic about the outlook for the rest of 2022 and beyond we expect to materially benefit from a higher rate environment and strong loan growth our capital market.
Business is well positioned as market stabilized and we are very excited about the opportunity to grow our business in the New York Metro region, as we integrate and build on HSBC and investors we.
We will continue to focus on execution and building a top performing bank that delivers for all our stakeholders with that I'll hand, it back over to Bruce.
Okay. Thank you John operator, let's open it up for some Q&A.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press one then zero on your telephone keypad.
You may withdraw your question at any time by repeating the one zero command.
Once again, if you have a question. Please press one zero at this time.
Your first question comes from the line of Scott <unk> with Piper Sandler Your line is now open.
Good morning, guys. Thank you for taking the question.
I was hoping maybe you could spend just a moment discussing sort of magnitude of recovery, you're assuming in the capital markets environment and the.
The forward guide it looks like you assume some recovery in the second quarter, but of course moderated the full year target a bit just curious for some some thoughts or color on how you see things trajectory from here.
Yeah I'll go ahead and start off on that I mean, I think you had.
Yes, a number of impacts there that that we're building into the guide.
I'd say that we mentioned are $100 million guide over guide.
Which is driven primarily by by by mortgage, but theres some capital markets implications there as well given the fact that the <unk>, we had some pull forward into the fourth quarter. If you look back at the fourth quarter, we had a record quarter.
But our pipelines look excellent and so there could be a little bit of.
Time to build that back into <unk>.
Delivering in the last three quarters of the year, but as markets stabilize we really think that the momentum there is strong and so maybe maybe Don can cover I think it's I think it's a tale of a couple of different cities. So one thing we're seeing is quite a bit of strength in the loan markets and syndicated loan markets. So while the bond markets, particularly high yield in the equity markets have been.
Pretty much closed for the last few months.
We're seeing some rotation into the syndicated loan markets.
Liquidity there.
Kind of rebuild that you've seen quite a dramatic rally in the loan markets over the last couple of days actually and that's been quite supportive. So I think the second quarter will be really a story about syndicated lending and then if we get if we get a reduction in volatility. We think we're going to begin to see the bond markets reopen a little bit in the equity markets reopen.
Say, what Jon said, which is our pitch activity our pipelines of our mandates are extremely strong and so it's really a matter of waiting for the constructivist excuse me in the markets to return and then we'll begin to bring deals and we saw three or four deals start to emerge last week, which we were on and we feel pretty good about.
Particularly in the back half of the year.
The other thing that you didn't mention is the M&A pipeline I.
I think still looks really really good and again there are certain markets market has stabilized a little bit I think we will start to pull those deals through and it's typically seasonal but the fourth quarter huge which it was for us.
In 2021, and then the first quarter is usually softer seasonally.
Pipelines look good and I think as the year goes we should see a nice build in M&A revenue. Yeah. I'll also just amplify that Bruce to say a lot of our capital markets and M&A activity surrounds private equity. So private equity is still flushed with cash and they actually are looking quite interesting valuations in the market right now so it's a matter of.
Matching salaries sellers kind of designers and buyers desires and that will just take a little time to kind of.
We worked through the system.
Wonderful that's good.
Color. Thank you and then John I was hoping you could talk just a bit about how your rate sensitivity changes as the cycle progresses in your meeting effectively how did the first few rate hikes.
In your mind versus the next several.
So did you say asset sensitivity or was it.
And if yes, what are your borrowings.
Alright.
In other words, how much more powerful or the first few rate hikes. Then the next two yes, I mean I'd say that.
Yeah, We mentioned, our 20 to 25 million per instantaneous 25 rate hike and and that's really an average so you get a little more on the front.
Maybe a little less as you get to the end of it.
And that's really driven by deposit betas, which are going to be extremely well controlled and the first 100.
And then that starts to build into the second 100, and then beyond so so yes, I think you will see possibly a bit more on the front end.
When that when we're seeing those that lag effect of deposit betas contribute a touch more and then amendment that all of that.
It'll it'll be up a little.
Lowering on the backend will mentioned this but the other point that.
About 20% 25, as an average but it's also a first year average and so there's actually more upside when you get into even if it's instantaneous you still get a lag effect benefit from the asset side as well as assets re price. So you might see for example in year two even for an instantaneous 25 days.
At this point changing you would see upside from there in the 15% to 20% range on top of that as you get into the role in year two.
Mhm.
Perfect Alright, thank you very much.
Thank you. Your next question comes from the line of Erika Najarian with UBS. Your line is open.
Thank you so much for slide seven and I guess, John maybe let me start my line of questioning here.
So.
Your current asset sensitivity from here.
Pro forma for Ambac.
I wanted to understand.
Chris made earlier about acceleration right. So on one hand, we see with deposit betas accelerate.
We are deeper into the rate cycle, but on the other hand, we have some swaps on your portfolio. Today can you talk a bit about the interplay of both and how should we think of this asset.
As we move forward in the rate cycle and as the swap portfolio gives you a different trajectory for enhanced sensitivity leaner.
Yeah. Thanks, Eric I think if youre on page seven I mean, I think the drivers there are that.
That we're entering this cycle, but much better positioned.
Then the last cycle and you think about just the starting point with interest bearing deposit costs being a 10 basis points in all time low for US we started the last cycle at 34 basis points and and.
<unk>.
Our balance sheet position the mix on the deposit side is much better with 32% noninterest bearing so.
Just was much better prepared to benefit from rising rates. This time around we still benefited from rising rates last time around by the way, but that was much better.
Prepared to benefit from this side around this time around on on on deposit betas.
Even given all of the strength on the balance sheet I think when you when you ask about.
When you ask about balance sheet, I mean, I think and swaps you really have to think about in the context of the entire balance sheet. So we do have a significant amount of asset sensitivity left to play out.
That will that will decline over time as NII keeps rising as I mentioned in my remarks, the denominator effect as we as we update and increase our NII that alone reduces the percentage further benefit that could occur.
For future rate hikes, just dollar for dollar it's fine, but the percentage is Paul.
But.
I do think that there is significant firepower left both with respect to the balance sheet.
Bone growth part of the story as well as.
Much more hedging left to do before asset sensitivity gets anywhere near near neutral. So that's how I would describe it I mean in terms of deposit betas again 2022, you're going to see a lot of lag lot of lag on the first 100, it will start to catch up maybe in the second 100, and then if we really do get to 300 basis points in fed funds, you'll see some of that catch up in 2012.
Three and then I'll, just close out with our our hour.
Conversation about NII being up $290 million to $330 million guide over guide is an important thing to focus on and that's that's in a gradual rate rising scenario. It may be as it could be it's much higher on a full year effect when you get to 2023 approaching maybe two two X that.
I would just add to that.
We have been.
I think a very keen to leave the asset sensitivity high end.
And not too significant additional swaps we've done.
Bit.
But anyway, we're still I'd say.
<unk>.
The view that rates could go even higher here so feel feel good about how we're positioned right now.
Yes.
Got it and the second question is for you Bruce the Stockist.
Having a good start to the day that the valuation on tangible book value is underneath your ROTC, you're landing point for the year, either on a standalone or a pro forma basis.
I guess it.
What do you think in your estimation that this market doesn't understand about the improvement of the bank has made since the IPO.
I'm wondering.
Part of that is asset sensitivity and deposits wondering if you could answer that question as well.
However way you want to but also could you give us a sense of how much checking accounts do you have for example on the consumer side versus previous and maybe remind us why you have to keep it seems like a 50 to 100 basis points higher capital level than a lot of your regional peers.
Yeah.
Theres a lot than that I'll try to unpack that.
Erika but.
I think partly.
<unk>.
<unk>.
Well our objective here is to continue to perform well through cycles and so we're a relatively new company with a relatively fresh management team.
So I think when.
The market goes into a risk off cluster.
Some assumptions.
How are they going to do we're not as we don't.
The historical track record of some of our peers I'd say I think we've done a good job of.
The selling some of those worry beads.
We went through the pandemic and our credit performance was very good I think there was some concern for a while that we've grown the best balance sheet fairly quickly to get re leveraged after the IPO.
Is that going to end in tears and we've said all along that we've been very disciplined in terms of.
Where we were lending money and how we were allocating capital and I think that's borne fruit I think now with an up cycle at the beginning of the year when the environment looked like rates, we're going to go up gradually.
To use a Goldilocks example that was the part was just right scenario and so stuff above our stock performed quite well out of the shoot I think once.
It became clear that the fed was was behind the curve and was going to start to raise rates much more aggressively.
Then you kind of tipped into well, maybe the porridge too hot.
And will our deposit betas go up too fast and curtail some of the benefit from higher rates.
And I think again with all the work we've done an analysis, we provided we're quite confident.
The liability side of this bank is much much better than it's ever been done a lot of hard work on that.
So we still think of whether it's the path as fast or whether it's more gradual.
To benefit significantly in terms of interest rates.
I'd say also on fees.
Probably a concern that we've built up some areas that.
Maybe are more volatile and.
Capital markets and mortgage.
Just kind of the big big fee elements for US, having said that I think you've seen that theres good diversity in our fees and so.
And a pandemic period when capital markets were a bit softer mortgage revenues were really early strong given lower rates.
We see we can see that flip around but I think the.
The fact that we've assembled.
Excellent.
Commercial bank with very strong capabilities in our targeted focus on <unk>.
Private capital and serving private capital and.
Helping the industries that really are the engine of the economy technology health care with our JMP acquisition I think we're very confident that we can grow revenue sustainably in capital markets move around a little bit from quarter to quarter, but I think the trend line is upwards into the right.
And again on the mortgage business I think we've built that out to have a nice diversity of revenues across our wholesale channels and our retail channel I think we can combat some of the lower production volumes by building market share. So we plan to hire more bellows this year so.
I think all of these.
These aspects are take time for the market to come around and fully appreciate and we'll just keep doing what we're doing and putting up good results and executing well and Ben and I think ultimately the stock will take care of itself.
With respect to the <unk>.
Noninterest bearing liabilities.
The deviation as a percentage of the total deposit base is up to about 32% I think when I walked in the door at the time of the <unk>.
Yeah that was probably in the low twenties, so thats been a dramatic improvement focusing on total value proposition to certain target customer segments on the consumer side and then also on the commercial side.
Actually just building out our capabilities and investing in our core platform and cash management offering.
So it's just been a gradual improvement over time as we are.
<unk>, our capabilities and our targeting.
And we've had nice growth as a result.
So I think I'll stop there does anybody want to add to that Brendan do you want to talk about our consumer deposits are done on yes, I'm happy to give up.
He had asked about sort of counts of checking account customers.
Just a couple of quick points when you look at total relationships in the consumer bank when we went public.
We have about $2 nine to 3 million customers. We now have over 7 million customers in total now some of those are loan customers. So when you unpack that to core deposit customers.
That number is sort of we went from two 9% to three 5 million customers. So that's good growth, but thats really not where the action is in the story versus sort of heading down this path really under the covers on that growth, which we've been sort of top quartile growth of our peers has.
<unk> has been a quality transformation. So there's been a dramatic overhaul and how many customers view us as their primary bank and.
More than 100% of the growth in the household basis come from mass affluent and affluent customers. So when you combine the higher quality customer with deeper relationships. That's what's driving a lot of the improvement in DDA and noninterest bearing deposits, which is very sustainable kind of ground game.
Lot of work over multiple quarters over a lot of years to get that to scale and look we still have some running room I think theres still oxygen left in that tank for us to continue to improve the quality of the customer base.
Made a lot of progress in catching up to peers, but we still have momentum. It does not seem to be slowing I think you should expect more and more of that putting aside what happens with the extra stimulus deposits link under the under the covers the quality story is still continuing and continuing at scale. The other point I'd make mentioned above as you think about betas for this up cycle last time because of the.
Although DDA balances that we had in consumer we had about $10 billion in Cds now we start that period. It was only three bill and so we look a lot more like a bigger sized bank in terms of deposit composition than we do a smaller sized bank, where we're not as rate sensitive and how we're driving deposits because of that quality transformation that you see.
And the customer base.
Yes, I'll just I'll just add.
Emphasize Bruce what you said in terms of we've gone through a complete reconstruction of our Treasury service business. It was frankly, a basket case six years ago.
And now I would put it up against any other companies Treasury service business and Thats driving.
In above trend growth rate, 7% to 10% in terms of year on year growth and also driving a skew towards noninterest bearing deposits and we didn't even have in deposit team six years ago and now we have a built out team which is.
Fantastic analytics.
Bringing new offerings like green deposits in the ESG agenda, and also building our liquidity.
Put a portal so it's it's a totally different place you were seeing the results in terms of deposit levels and we're seeing a skew towards noninterest bearing also so so we're giving you a long winded answer Eric but I wanted to just come back to the last thing you touched on.
Which was our OTC and also our capital targets. So I think we're pleased that we can say that will be solidly in the in the range for our medium term targets this year.
14% to 16% and.
And you can see that where we were in the first quarter that should ramp and so we could be.
Even even stronger I think as we exited the year so feel very good about that.
Did move the targets.
975 to 10 to nine five to 10.
So we moved that modestly.
I'm still a big believer in being somewhat conservative on the capital, particularly as as I said, we're relatively new company and so I think all our stakeholders take some comfort from maybe being slightly higher than our peers, but if you look at it over time, we've been converging to peers and honestly when you look at the CCAR.
And our risk profile. There is no reason that longer term, we will need to have that premium.
Thank you for the complete answer.
Sure.
Thank you. Your next question comes from the line of Brian Foran with Autonomous your line is now open.
Hey, good morning, maybe to follow up on deposits.
You've been very clear and convincing on the improvement in the book, So that's appreciated and great information.
As you think also about the ability to grow deposits over the next two years I Wonder I know theres a lot of moving parts. There is no one answer but if you could just give your thoughts on the ability to grow deposits overall, and maybe I'll touch on consumer versus commercial.
That might behave as rates go up.
Yes, Great question, Brian appreciate it I think that that to you.
Basically look at excellent opportunities to grow deposits over time as our product lineup on both consumer and commercial Havent have improved and I think you separates.
The expectation for us as rates rise there is some impact on on how those deposits play out and there is also the surge deposits that came in in the pandemic that all appear to be a lot stickier than maybe a lot of us thought when they first showed up.
I do think more broadly when you think about the macro.
Deposits have grown consistently over the last several decades under a number of different macroeconomic scenarios, even even through quantitative tightening and alike. The bank the banking industry deposit.
Growth seems to continue to chug, along so we're optimistic that the industry as a whole and we in particular, given our our our significantly expanded product capabilities will be able to continue to drive really strong deposit growth.
On both consumer and commercial side, so maybe I'll just turn it over to <unk>.
Brendan and then have you done yes, absolutely I think we've demonstrated in a variety of cycles the ability to drive deposits at scale. The question is always at what cost and I think we're in a dramatically different position in this up cycle than we were certainly in the last up cycle. We continue to make improvements sort of on the consumer side, starting with just the breadth of the levers that we built whether it's the <unk>.
<unk> access platform nationally to raise deposits away from our core book the new markets that we're entering where we've got a solid and stable deposit base that we think theres a lot of running room and in fact, we are starting to see early signs already of we've got $100 million in inflow of balanced sales already in the New York market from great execution.
<unk> and solid sales were optimistic continuing to afford that can continue and as we bring and convert the customer base from investors close to legal day, one onto the platform, we think that same opportunity.
We will exist in New Jersey, and then our analytics have improved materially over the last couple of years, which allows us to be even more targeted and when you marry that with what I said a minute ago around just the quality of the engagement of our customer base the confidence of being able to grow deposits with highly engaged customers at more market rates then needing to.
Reached for promo rates as the market. So I feel really good that we'll be able to to grow at the pace we need with.
A much more moderate costs.
Yes.
I think I said, a lot of it and the last comment around Treasury services and the growth of that business, but also remember we're expanding aggressively in terms of our client base. So we are in expansion markets, we're adding a lot of clients with that come with that comes the opportunity to gather deposits at reasonable costs. So we feel pretty good about it but I'll go back to what Brendan and also it's really a matter of matter.
The day to day balancing volume versus cost and managing that against the asset side of the balance sheet and where we can redeploy capital. So it is something that can be managed carefully but actual confident we were going to continue to expand the deposit base.
I appreciate all that I will say on the citizens access customer I'm not loving the.
The renewed beta assumptions, youre, making but I guess I'll have to look at it [laughter] well you can count on us continuing to be disciplined yet still competitive [laughter]. Thank you very much I appreciate it.
Okay.
Yeah.
Thank you. Your next question comes from the line of Betsy <unk> with Morgan Stanley . Your line is now open.
Hi, good morning, Alright.
Two questions. One was just on the most recent conversation that we had on deposit growth I was intrigued by that relative to Bruce your comment about slowing Ramsey and auto lending growth too.
I don't know if this is the right word, but keep the LDR protect the LDR at around the 83% level. So I guess I just wanted to understand.
If that comment about LDR was more about the deposit growth rate.
That you were talking to just now or was that because of the <unk>.
Just opportunities in <unk> and Otto that that you're.
You're not seeing as much as maybe you have had over the past few quarters I'd say.
It's a kind of a <unk>.
Factor in a number of considerations one is that we're already seeing very strong loan demand on the commercial side, we're seeing line utilization tick up so it can be somewhat of a rotation over into more growth on commercial therefore, when we look at consumer.
Then in the higher rate environment. So some of the margins on the lending in areas like auto and mortgage aren't what they used to be.
And so we can still get to the law.
Loan growth assumptions that we had coming into the year with that location up to more commercial and throttling back a little bit on that.
Consumer side.
We could keep the pedal to the floor and keep pushing on bringing in those consumer assets, but we think we don't need to do that at this point, we've got NIM going up the rate hikes is providing a big lift.
And if the marginal return on that incremental lending in the consumer side for mortgage and auto isn't hitting our hurdles and we have no problem backing off that.
Net result of that is that.
Benefits sale, Dr versus keeping the pedal to the floor. So we think that's a trade off with <unk>.
King.
Okay and then just.
Your I guess the underlying question is how high up are you willing for LDR to go and then I also had just a quick question just on yields in general.
This past quarter, you had some nice uplift in Ramsey and the Securities book other other retail loans and I'm just wondering was that.
A function of swap activity that drove up those yields QQ or was there and it didnt look like the balances would have driven that you know QQ. So just wondering how that.
Let me, let me start off and then maybe John and Brendan can add on the yield question, but.
We've been.
Historically.
Since the IPO, we've had a relatively higher that'll be I think we worked hard to bring down from the high <unk> down into the mid nineties and then with this big influx of liquidity into the market <unk> been able to bring <unk> back down to 80 ish and it's inching up a little bit here with all the loan growth that we are.
We're experiencing.
I think we should still be able to manage that.
In the eighties and can't really call exactly where that is that likely to be partly depends on the amount of loan growth that we that we see but I think just the way we overtime brought it from high ninety's down into mid nineties.
Think we can take another step function here with all the liquidity that we have in the house continue to manage that.
And a reasonably conservative position with lots of liquidity, so that would be my answer there John maybe you want to pick up the yields yes, I'll start off on securities maybe Brendan can take mortgage but I can tell you overall its not swap activity, that's having an impact on either of those and as it relates to securities just to give you a sense. There's two dynamics going on there one is the <unk>.
Book, where current current.
Yields on the stuff going into the portfolio or north of 3%. So we are in the three to 330 basis point range, that's a driver in <unk>.
It wasn't at that level during <unk>, but it was it was well over 2%. It was probably 230 to $2 50 during the first quarter.
And that was compared to maybe 175000 <unk>. So that's that's the dynamic youre seeing $1 75 in <unk> to 30 ish in <unk> I think now it's over 3%. So that will continue into the second quarter of the other dynamic is the back book premium amortization.
Declines when rates rise, so youre seeing the tailwind from that into the Securities book and.
So that's the driver there and maybe you can talk about mortgages, yes, theres a theres a handful of things on the consumer side. So on other retail theres a good percentage of that book that's variable linked to the.
The market with our merchant partners and such as you can see that kind of ramp up as the market changes on the resi side. We're obviously, a very big lender and HELOC, which is essentially all variable and we've had four sequential quarters in row in net balance sheet growth and believe we are the number one originator in all of the United States and <unk>.
Really striking while the iron is hot and taken advantage of that business.
You're seeing that flow through in the resi book with the yield improvements there as the rates kind of March March north on the mortgage side. So a couple of things one is front book pricing, we've been disciplined on front book pricing to the point of being a little out of the market at times as the market lags capacity, but we're going to make sure we're using our balance sheet for deep relationships in China.
Push our rates up as fast as we can with the market. The other technical dynamic that youre seeing if youre looking at linked quarter on mortgages. In Q4, we did have a one time reserve adjustment to the yields in Q4 that is nonrecurring and didn't happen in Q1. So if you look back a couple of quarters Youll see a little bit of noise on what what you saw in Q4, but that's kind of gone.
That's sort of washed out so we should start to see the mortgage book.
Again decline with the percentage of that book that has been variable rate and continued expected discipline on front book pricing.
Got it thank you.
Thank you. Your next question comes from the line of Matt O'connor with Deutsche Bank. Your line is now open.
Good morning I.
I was hoping you guys could remind us with investors is there any portion of the loan book or the securities book that Youre looking to kind of deemphasize or run off.
Yeah.
Yes, just to start off there I mean, I think that the securities book at investors.
It looks it has a profile that we would migrate and frankly have already been migrating to our profile, which is mostly claim duration plus mortgage backed securities agency type paper. So we've been in the process of migrating the securities book on that front.
In general we like the the loan book that comes over from investors has performed well from a credit perspective, they have they have.
A nice set of core portfolio over there, but maybe John can talk about anything else debate that might be migrated at the margin yes.
Certain elements of the book that might be a little bit different as we move forward, but it's not going to be.
Quick and aggressive we're going to do it we're going to migrate it over time, but a lot of a lot of the business that they do is very diversifying for us there and different elements of the <unk> business than we are so it looks quite different and then a lot of the C&I business is smaller company business banking and we're looking to grow that segment as we move forward. So you'll see some adjustments at the Mart.
But no aggressive asset sales I think animal box.
Other than that.
I will say, Matt on my side, we arent doing roughly $1 billion to $1 billion two of BSO adjustments on the citizen side and Youll see us do some of that as we as we move around low yielding assets that we might be acquiring but we don't have full claims on that balance sheet optimization and that's okay.
And then I guess, obviously there is some opportunities.
Well to.
Cross sell but as we think about layering in investors.
To the kind of medium term do you think it'll have any net impact as we think about your loan growth you there a.
A little bit less than citizens stand alone a little bit more or roughly the same.
Well I mean I look at it is as so what John and Brent and have been able to accomplish when they go into the expansion markets right in particular dance.
Business in commercial when we entered in the southeast is a good is a good playbook for how we've been able to grow those expansion markets a little faster for a period of time until it converges over time. So I think you would expect that once we get the engine running with respect to all of the all of the integration and conversion.
And we've been able to make our investments that we plan to make in New York Metro I would I would suspect for a number of years you could see the growth rates once that all settles out and baselines you can see those great growth rates actually being higher than citizens standalone for a number of years until.
It balances out in terms of expected market market share that we plan to plan to take in that Metro yes.
John I'll also add that they have a very limited product set on the C&I side, so bringing in the variety of products that we can offer and capabilities. We can offer we think there is an opportunity to go after larger companies and also serve their clients in a much more substantial way soft.
Akshay and comments on the consumer side at a yard product set is significantly more diversified than both HSBC and investors, which is great and we didn't build those revenue synergies into the deal model. So we're seeing early signs of <unk>.
Significant sales opportunity in New York, where we're delivering on that we're starting marketing middle of the year.
We're going to convert early on mortgage and wealth for investors inside of 2022 and in the rest of the platform will convert in 2023. So it will take some time, but we see an outsized opportunity for sustainable revenue growth over time, Yeah. Let me, let me just chime in here as well.
We think these deals are going to be a big success and it's really not just the expense synergies, which were which were going to go get but if it's a big success. It means that we were successful.
And cross selling more to the customers who haven't had the benefit.
<unk> of our broader products and services and then just gained market share.
I think we have some very clear ideas about how to go after that both on the commercial side and the consumer side and really none of that has been put into our forward forecasts at this point so.
<unk> would be like within three to five years, If New York starts to take on a look and feel of what we built in Boston and what we built in Philadelphia is going to be a homerun for us.
Thank you very much.
Thank you. Your next question comes from the line of Ken <unk> with Jefferies. Your line is now open.
Hey, Thanks, Good morning, I had a.
A question about reserving and provisions so just looking back at where you are we are $131 43, ACL is pre SBC.
And then just with all the seasonal stuff going on just wanted to kind of understand where do you think that the reserve lands vis vis a blended day, one and what does that mean for <unk>.
Further release or where provisioning growth relative to your expectation that you laid out for charge offs.
Yeah. That's a good question I mean, I think the first thing I would say when you were saying blended.
We're speaking about investors on a blended basis.
I think that.
They're proof of their profile is actually quite good and when you look back in different cycles their loss rates actually are lower than that not only ours, but the but the regional bank peer set so so and given.
Given the Collateralization et cetera in a number of other things that helped that profile. So.
Pound for pound they come on with a slightly lower.
ACL and seasonal.
Hit to what the CFC Standalone, it's not by a lot and they are smaller so it won't have a huge impact, but they come in a little lower than that call. It the $1 43.
Where we are so from that perspective. It gives you a sense for how that might cause us to kick down on a blended basis seasonal day. One was 147, we're at $1 43.
We've cleaned out a lot of the portfolios of concern that might have existed back at the end of 19, when <unk> was adopted.
And Theres been significant as we mentioned earlier and we have in the slide deck in the appendix significant improvements in both commercial and and.
Retail businesses. Since then so you could see some opportunity all else equal for back book needs as long as the macro holds for for those needs to tick down I think all of the all of the variability will be on loan growth and so we're just going to provide for our loan growth.
And all in probably be a little lower than we are here, but but not but not by a long and the other the other wildcard obviously Ken has said.
What is the kind of long term or the medium term macro forecasts look like in <unk>.
Ken the fed engineer, a soft landing the spicier, a higher possibility of recession, which could.
Change that dynamic somewhat.
I think certainly right now with respect to 2022.
Feel really good about how we're positioned from a credit standpoint.
If you if you asked me to make a call I'd say, it's unlikely we'll have a recession in 'twenty two so.
At least.
Good clean credit metrics should continue for a while.
Whether we can still.
Show net benefits on the provision line I think those days are probably numbers.
But in any case I think there is still going to be big numbers.
As John said, the ACL may tick down a little more from here, but I don't want to kind of starting to feel like.
Like we're not kind of go a huge amount lower yes.
And Bruce as a follow up to that it was good nice to see the commercial line utilization up 150 basis points you talked about.
Youre reiterating your full year loan growth guidance I'm, just wondering if you can give us some on the ground color about business activity supply chain constraints, just in terms of and also that tradeoff, possibly between loans going on the balance sheet versus out the door in capital markets and just kind of a feel for just how the commercial side of the economy is feeling and how that.
It influences your your views on commercial growth.
Let me just say a word and then really it is the best color, but clear.
Clearly.
It's nice to see the line utilization tick up.
Some of it is a little defensive in nature, so people have been.
Worried about their supply chain and inventory levels and so when they can get a hold of the materials that they need to go out and buy it so I'd say.
Inventory build in light of supply chain issues, probably has been the biggest driver and a little of that also is inflation, which is causing those materials to cost more so.
That would be I'd say number one.
Still people doing deals doing smaller deals since playing offense in terms of growth, there's a little bit of that kicking in as well.
I think what continues to give us confidence as a thing that Don mentioned earlier that there is private capital has a mask.
Tons of firepower to put to work in the markets.
King to get deals done and so theres still deal related activity that should continue to fuel some loan growth, but with that let me turn it over to Dan, Yes, So I think and I think you've covered most of it in fact to the second half of the question a lot of the capital markets activity. We do is in the leveraged buyout area and things like that so that's a origination for dish.
Tribunal business, which it should be we don't want a lot of that on our balance sheet. We continue to maintain average holds of about $12 million in our in our sponsor business so very diversified.
Very careful from a risk profile I will say that the utilization trend that we're seeing is actually even a little bit higher as we sit here in mid April so that trend really is driven by cost of goods. So theres inflation inflation aspect and some of the stockpiling, but the broader question is we're hearing generally positive things from our customers. So you know the credit quality.
Cities as we said its feels pretty good theres, a little bit of pressure on margins as companies have varying degrees of an ability to pass on cost increases whether she'd like to remember that these companies have been through hell over the last two years with the pandemic and they've cut their cost restructure their businesses and they're entering whenever we're entering it whether it would be a slow.
Down or something Thats, just slower growth in a much better positioned from a management standpoint that they were just two years ago. So that gives us a lot of confidence and certain clients are being optimistic where they're seeing is that as Bruce said, where they're seeing competitors that are slightly weakened we're seeing a little bit of M&A activity in the middle market channels that era.
Companies are buying each other right now.
Let's say you might also add Don is on the subscription.
Subscription line financing you got some of the securitization.
We're seeing we're seeing significant volume in our subscription line financing for private equity and significant volume in our asset backed securities businesses in the warehouses. So those markets are very strong and we continue to see growth in our loan books on both of those activities.
Great. Thanks for all the color.
Okay.
Thank you. Your next question comes from the line of John <unk> with Evercore.
Your line is now open.
Good morning.
Alright I appreciate the color you gave there in terms of the commercial drivers in the.
Trend behind the demand are you able to perhaps help on.
Past the high single digit loan growth expectation would be over the next PPP for.
For 2022 in terms of how you're thinking about C&I growth.
And perhaps growth in your CRE portfolio as well.
Yes, so why don't I start with that.
We're down to basically almost nothing on the C&I side on PPP.
It's in the rearview mirror, so that's not in any of our loan growth projections. So long as the loan growth that we've referenced is really CFT loan growth, we've assumed a little bit of growth on the investors bank.
Signed but not a lot for the rest of 'twenty two so all the comments, we're making cft's specific I would say subscription lines are growing the fastest C&I is growing second fastest and pre we're seeing very very modest growth in <unk>.
We basically on a pre business really still focused on our purpose built office industrial and life science, and a little bit of multifamily, but not a lot.
Really off off risk on hospitality and retail so not a lot of pre business there the issue that we're fighting.
And continue to final, though it's getting a little bit better as our originations are really strong and we're seeing lots of activity both coming into the book and also in the pipeline, but paydowns have been quite high and this was the first quarter, where we saw paydowns begin to decline maybe that's a little bit of the volatility in the capital markets, maybe that's a little bit of the bill.
Loan market aggressiveness right now, but we're seeing a little bit of a benefit from lower pay downs, which were running very very high last year for almost the whole year and it really eating up a lot of the origination activity that we're seeing.
Okay, Great. That's helpful and then separately on the credit side you just have a question here in terms of.
The increase in the NPA increase in the 90 day delinquencies I know you indicated that's mainly mortgage coming off forbearance just wanted to give you.
Give us a little color in terms of your confidence there in terms of the resolution of those.
Those items and then separately any signs of that.
With an expected credit normalization on the consumer side, perhaps in your merchant partnerships or anything.
Yes, it's Brendan I can take that on the mortgage side look this is fully expected. These are sort of an administrative move of customers that have been in forbearance for quite some time, we've done extensive analytics on how much loss exposure, we have to folks that are coming off a forbearance onto a full repayment schedule and its de minimis, especially in the mortgage.
We've got very significant coverage on.
Our loan to <unk>.
Value.
And so we feel we feel really confident in not just broadly on the consumer book.
We haven't seen much of any early signs that we're starting to see a tick up and returned to normal we are expecting one but the delinquency levels generally remain in very strong spot and significantly depressed.
Some of the newer portfolios that we've talked a lot about over the years on these calls and others around student loans and merchant point of sale maintain.
Incredible strength and have not shown any signs of uptick in early delinquency whatsoever. So we feel really confident around the outlook state of credit and consumers at the lowest levels, it's ever been and we continue to sort of beat to the to the positive.
Almost every month on what we're seeing on NCO, So I feel really good and I think.
And when you look at the other side of ledger for the average consumer they are still showing a lot of excess liquidity the money in consumer checking accounts are still at all time highs really hasnt moved down while we've seen a lot of velocity and cut customers using credit cards, and spending and paying for things, it's not adding to outstanding. So in order to believe that youll start to see a meaningful correction on that.
Credit line I think you'd have to see some deflation on the excess cash built up in the consumers' wallet and start to see a rebound in receivables building up on the credit card. So we haven't seen that so the all the early indicators just arent moving yes of course, we do expect it will but just right now it's not so we'll take it.
Add to that John .
All the early warning signs are flashing green, which is great. So on the consumer side.
Delinquency roll rates some of the things Brendan quoted all appear really really good.
Similarly on the commercial side.
<unk> class ratio continues to go.
Go down and the heightened there's very few.
Credits that are in heightened monitoring.
So that also bodes well for the future you can at these very low levels for things like charge offs NPA as you can see kind of one eight I mean, Ken kind of move that number around a little bit but.
Overall, we feel really really positive about the outlook for credit for certainly the balance of this year.
Yes.
Great. Thanks Bruce.
Thank you. Your next question comes from the line of Peter Winter with Wedbush Securities. Your line is now open.
Hi, Thanks, I was just curious are there any plans to manage the available for sale securities portfolio, just given the rising rates or any plans to move any of it until I held to maturity or hedge some of this.
Yes, it's a good question I mean, I think we are.
We're in about a little bit less than 10% call. It high single digits of H T. M. If you in the first quarter I think youll see.
That number will rise in the second quarter based upon a number of things that we're doing will put a lot. We're putting a lot of securities to work just in CFT Standalone just given the environment now that now that there is a highly attractive place to to grow the securities book.
North of 300% yields just don't stand alone and then we're of course.
We've closed on the acquisition of investors and theirs.
There's about $4 billion of securities there that were rotating out of the profile that they had into the profile of it looks like the kinds of securities that we own. So there's lots of opportunities to address that and youre likely to see the HTM percentage of rise in the second quarter.
Okay. Thanks, and then just secondly, just.
On the HSBC acquisition I think at the time of the announcement in May there was about $9 billion in deposits and you closed it was $6 3 billion and.
In deposits do you think at these levels deposits hold steady you can grow them.
Just if you could just talk about that change in the outlook, yes pre legal day one.
The rundown in deposits is principally driven by their online business.
Segment of international customers that were rotating into banks that have more global capabilities and so the good news on that is that we didn't have to pay a premium of any kind for those customers that we weren't really going to consider core than we had modeled in.
Essentially twice the level of deposit attrition post legal day, one than you would normally expect in a deal like that given the.
The profile of the customers that we're banking HSBC. The good news is since legal day, one it looks like a lot of that attrition had accelerated pre legal day, one and you can see in the portfolio.
Broadly stable level.
With good sales very strong sales.
Normal expected in and outflows on the backlog and so we do expect that to be stable now and start to get into growth mode. As we ramp up our marketing activities.
Obviously, a bit of a benefit on the deal model side.
Offsetting some of the shortfall in deposits, we got on legal day, one so we feel really really good.
The early signs that we're seeing here, we are six or seven weeks.
Thank you.
Go ahead, Kevin we had the transition free legal day one.
We did have to pay for it and it produces the trend would be.
The attrition happening post legal day, one there's no doubt about that.
Davidson.
Okay. Thanks, a lot.
Yes.
Thank you. Your next question comes from the line of Gerard Cassidy with RBC. Your line is now open.
Good morning, John .
Good morning, Good morning, Bruce Bruce you said in your opening comments that obviously the focus this year is to integrate the acquisitions you did in the Metro New York marketplace, but in the wealth space, if something was price right that would be something you'd consider thinking about the Florida franchise as you build that out.
It's a depository came up at attractive pricing and again I know your plate is full with what Youre doing in New York is that something that you could.
When you consider or are you really know we're just we're going to wait until we get these things fully integrated before we'd consider it.
Suffice it clearly.
Yes, I don't see us looking at a depository there anytime soon I think we've got enough on our plate.
It's Ed.
Getting off to this really great start and launching New York Metro is job one.
We do have a strategy in Florida that I think is interesting. So we had a couple of de Novo wealth centers, one in Palm Beach and one in Naples that we focused on launching and starting to get those to the right.
Customer levels and the right staffing so that we can really make some make some traction in those markets and.
We had five or six come over from HSBC very attractive locations in branches with good staffing in the Miami area and so again that's job one is to try to really make that work, what we have and really drive up the performance of those sites and keep good.
<unk> smart in the market and keep talking to people keep trying to figure out kind of wherever the next city beef, where we think we could come in and make an entrance and gained some share.
So so so that's to me the focus and.
We will keep trying to get smart on the market, but let's digest, what we have and make that productive. The other point I would make with respect to Florida and elsewhere.
Outside of our core footprint is we're investing heavily in the digital bank and.
Very recently, we migrated to a new cloud based core platform, which is really exciting for us and it's going to unlock the ability for us to.
It really broadened our offerings and integrate those offerings on the digital platform.
So that's kind of also twinned with some white branches in markets like Florida can we really start to.
Bang the opportunity through our digital platforms and then over time, we'll figure out what physical presence do we need to complement those digital offerings. So its pretty exciting we have a similar opportunity in the greater Washington area, where we picked up I think it's nine or 10 branches from <unk>.
<unk>. So we can try to attack that market through digital and decide as nine or 10, the right number.
Are they in the right locations do we need to alter that and then using test and learning from Florida in from D. C are there some other attractive cities, where we might want to go next and really put effort.
Growing the digital presence combined with some thin branch presence.
Very good Bruce to pivot and the next question is on deposits.
How do you guys weigh you talked about how certificates of deposits have come down dramatically <unk> got a very strong DDA balance core now much higher than when you went public of course, but with rates moving up so quickly now the 10 years almost at 3% today when does long term funding.
With look with low cost Cds makes sense and then done when do your customers start asking for higher compensating balances as rates move up.
You guys seen more.
Discussions there as well on the compensating balances on the commercial side.
Yeah I'll go ahead and start a couple of a couple of thoughts there I mean, I think that as you heard from Brendan earlier and you saw on our slide seven our CD portfolio is much smaller than it was before and what that will have to start and I think what the point there is that that Cds could be part of the story.
But we would do it in a way that's connected to a deep customer relationship rather than sort of a pseudo wholesale funding approach, which is I think how things got played out early in the last cycle for us, whereas this cycle, it's all going to be about customer relationships I think the other thing to keep in mind is that that over the last site.
We expect CD.
CD at beta to be lower during this cycle in part due to how quickly you think the cycle is going to go the last cycle took a longer time two to three years and so you've kept getting that ratcheted up cost of Cds every time. They came to came to maturity. So I do think Cds can be part of the story.
Given deep customer relationships and a shorter cycle cities can absolutely be something a tool that will utilize coming off a lower base. So that's the first point and the second point is that on the on the commercial side you will have balanced migration that's natural as.
Compensating balances don't need to be quite as high.
Two two days.
Earnings credit rates actually rise overtime, so yes, there'll be some of that migration that's built into the deposit betas that we articulated earlier and built into our deposit cost overall and so.
But it's the same point there that given the number of ways that we can interact with our customers on the commercial side, we're deepening our relationships there and I expect that those migrations will be will be well controlled and as expected.
Yes.
Thats I think thats exactly right and we've actually gone out over the last month or so with a full or information package with all of our bankers to discuss deposit and pricing levels as part of the overall relationship with all of our relationship managers. So we're well on top of it. We have we have had some people pull deposits, but we haven't had a problem back filling in.
And bring in other deposits to basically cover any outflows.
Great. Thank you for the color.
Okay.
Alright, I think thats sort of the questions in the queue.
Let me just close by thanking everybody again for dialing in today.
We appreciate your interest and your support have a great day. Thank you.
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