Q3 2023 Citizens Financial Group Inc Earnings Call

Okay.

Good morning, everyone and welcome to the citizens Financial Group third quarter 2023 earnings Conference call. My name is Greg 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.

The call over to Kristen Silverberg Executive Vice President Investor Relations Kristin you may begin.

Thank you Greg Good morning, everyone and thank you for joining US. This morning are chairman and CEO Who's been film and CFO , John Woods will provide an overview of our third quarter results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking are all sitting here to provide additional color.

I'll be referencing our third quarter earnings presentation, located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for you.

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 reconciliation in the appendix and with that I will hand over to Bruce.

Okay, Thanks, Bruce and good morning.

Everyone. Thanks for joining our call today.

We continue to execute well through a challenging environment. Our focus has been on playing a strong defense.

Maintaining a strong balance sheet.

During the quarter, we grew our <unk> ratio to 10, 4% near the top peers, while still buying and $250 million in stock with noncore loan runoff of one 4 billion and deposit growth of $500 million in the quarter, we lowered our spot loan to deposit ratio to 84 person.

At quarter end.

We focused on building up our liquidity, even further given geopolitical uncertainty in the regulatory direction of travel, adding almost 4 billion into cash and securities.

We also bill our ACL further to 155%.

Our pro forma day, one seasonal reserve of one 3% with our general office reserves now at nine 5%.

While the balance sheet has been a principal focus we continue to execute well on our strategic initiatives, which should drive strong medium term performance. Our private bank is being built out we had a soft launch during the back half of Q3, and we brought in around $500 million in deposits and investments.

The launch was scheduled over the next several weeks, we're executing well on our New York City Metro push our deposit strategies, our top programs, our ESG initiatives that our payment strategy.

Our underlying EPS for the quarter, Mr. Mark slightly at 89.

Several capital markets deals slipped from Q3 to Q4, given late quarter market volatility.

This was the weakest capital markets quarter since the third quarter of 2023 years ago and prior to several acquisitions like JMP and th capital.

Good news here is that the pipelines remained strong and we continue to maintain and grow our market share.

Expenses and credit costs, all track to expectations.

We didn't put it in what we hope is an informative and useful slide in the deck page five which breaks out results for our legacy core business, our private bank startup investment and the drag from non core.

Note. The legacy core performance shows Q3, EPS of $1 eight says NIM of 333% and ROTC a 15, 3%.

Private banks should turn positive by mid 'twenty four would be nicely accretive in 2025, and noncore will dramatically run down over the next several quarters. This dynamic will help offset the drag from forward, starting swaps and help propel results higher overtime.

Given the continued macro uncertainty and pressure on revenue from higher rates, we've initiated a zero based review of expenses in an effort to keep expenses flat in 2024.

We will report further on this on our January call when we give 2020 for guidance.

For Q4, we expect to see key trends begin to stabilize NII will decline, but less than in the past two quarters fee should bounce back somewhat so do you expect this market to kind of.

Expenses and credit costs should be stable and we should buy and a modest amount of stock given continued solid earnings and loan runoff.

This has clearly been a challenging year for regional banks like citizens rest assured we are working hard we're navigating the current turbulence as well and we're taking the actions to position us well for the medium term.

And with that let me turn it over to John to take you through more of the financial details John .

Thanks, Bruce and good morning, everyone.

Let me start with the headlines for the third quarter referencing slides five and six.

For the third quarter, we generated underlying net income of $448 million and EPS of 89.

This includes the private banks startup investment in <unk>, and a negative <unk> 14 impact from the noncore portfolio.

Our underlying royalty for the quarter was 12, 5%.

On slide five Youll see that we provided a schedule separating out our noncore runoff portfolio and the startup investment in our new private bank from our legacy core results. So you can see how those impact our performance.

Our legacy core bank delivered a solid underlying ROTC a 15, 3%.

Currently the private banks startup investment is a drag to results, but relatively quickly this will become increasingly accretive 5% EPS benefit in 2000 22025. Similarly, while noncore is currently a sizable drag to revenues it will run off quickly.

Further bolstering our overall performance and partially mitigating the expected impact of forward starting swaps.

Back to slide six total net interest income was down 4% linked quarter and our margin was 3.0% to 3% down 14 basis points, both in line with expectations.

Deposits were up slightly in the quarter, reflecting the ongoing resilience of the franchise.

We continued our balance sheet optimization efforts further strengthening liquidity during the quarter, given the uncertain geopolitical environment and in preparation for potential changes to liquidity regulations, increasing cash and securities by about $4 billion.

In addition, the noncore portfolio declined by $1 4 billion ending the quarter at $12 3 billion.

While we await clarity on new liquidity rules for category for banks and it's worth pointing out that we currently exceed the current LCR requirements for both category, one and three banks.

Our period end LDR improved to 84%, while our credit metrics remained solid with net charge offs of 40 basis points stable linked quarter.

We recorded a provision for credit losses of $172 million and a reserve build of $19 million this quarter, increasing our ACL coverage to 155% up from 152% at the end of the second quarter with the increase primarily directed to raising the general office portfolio reserves from 8% in <unk>.

<unk> to nine 5% at the end of <unk>.

We repurchased $250 million of common shares in the third quarter and delivered a strong set one ratio of 10, 4% up from 10, 3% in the second quarter.

And our tangible book value per share decreased 3% linked quarter, reflecting a OCI impacts associated with higher rates.

Turning to slide seven our net interest income.

First quarter results were down 4% as expected, primarily reflecting a lower net interest margin, which was down 14 basis points to 3.0% to 3%.

As you can see from the walk at the bottom of the slide the decrease in margin was driven by deposit repricing, which includes mix shift from lower cost or higher interest bearing categories noninterest bearing deposit migration as well as the mix impacted the liquidity build I mentioned earlier.

These factors were mitigated by positive impacts from asset repricing and rundown of the noncore portfolio.

Our cumulative interest bearing deposit beta is 48% through <unk>, which has been rising in response to the rate cycle and competitive environment.

Our deposit franchise has performed well with deposit betas generally in the pack with peers. This is a significant improvement compared to prior cycles. When our beta experience was at the higher end of peers.

Our sensitivity to rising rates at the end of the third quarter is roughly neutral down slightly versus the prior quarter.

Moving to slide eight.

Fees were down 3% linked quarter, driven primarily by lower capital markets and card fees, partly offset by the increase in mortgage banking fees.

The capital markets fees outlook was positive early in September , but with market volatility and higher long rates picking up at the end of the month, we saw a number of M&A deals pushed into the fourth quarter, resulting in lower linked quarter M&A advisory fees as well as lower bond underwriting.

While we continue to see good strength in our deal pipelines uncertainty continues around the timing of these deals close and given the level of market volatility.

Card fees were slightly lower reflecting lower balance transfer fees the.

The increase in mortgage banking fees was driven by higher MSR valuation.

The servicing P&L provides a diversifying benefit which in the quarter more than offset the decline in production as higher mortgage rates weighed on lock volumes.

On slide nine we did well on expenses keeping them broadly stable linked quarter, excluding the $35 million private bank startup investments.

Okay.

On slide 10 average loans are down 2% in period end loans were down 1% linked quarter.

The noncore portfolio run off of $1 4 billion drove the overall decline, partly offset by some modest core growth in mortgage and home equity.

Average core loans are down 1% largely driven by largely driven by generally lower loan demand in commercial along with exits of lower returning relationships and our highly selective approach to new lending in this environment.

Period end core loans are stable.

Average commercial line utilization was down slightly this quarter as clients look to deleverage given the environment and higher rates.

We saw less M&A financing activity in the face of an uncertain economic environment.

Next to slides 11, and 12, we continue to do well up deposits.

Period end deposits were up $530 million linked quarter with growth led by commercial and consumer deposits broadly stable.

Our interest bearing deposit costs were up 39 basis points, which translates to a 48% cumulative beta.

Our deposit franchise is highly diversified across product mix and channels and with 67% of our deposits in consumer and about 70% and shorter securities.

This has allowed us to efficiently and cost effectively manage our deposits in this rising rate environment.

As rates rose in the third quarter, we saw continued migration of lower cost deposits to higher yielding categories with noninterest bearing now representing about 22% of total deposits.

This is back to pre pandemic levels, and we would expect the decline to moderate from here. Although this will be dependent upon the path of rates and consumer behavior.

Net moving to moving to credit on Slide 13, net charge offs were 40 basis points stable linked quarter with a decrease in commercial offset by a slight increase in retail driven by auto which normalized following at very low second quarter result.

Non accrual loans increased 9% linked quarter to 87 basis points of total loans, reflecting an increase in general office.

We feel the rate of increase in non accruals is decelerating after a jump in Q2.

Turning to the allowance for credit losses on slide 14, our overall coverage ratio stands at 155%, which is a three basis point increase from the second quarter, which reflects a reserve build of $19 million as well as the denominator effect from the rundown of the noncore portfolio.

We increased our general office coverage to nine 5% from 8% in the second quarter.

You can see some of the key assumptions driving the general office reserve coverage level, which we feel represent a fairly adverse scenario that is much worse than we've seen in historical downturn.

As mentioned, we built our reserve for the General office portfolio to $354 million this quarter, which represents coverage of nine 5% against the $3 $7 billion portfolio.

We have already taken $100 million in charge offs in this portfolio, which is about two 5% of loans.

In setting the General office Reserve, we are factoring in a very severe peak to trough decline in office values of about 68% with the remaining 18% to 20% default rate and a loss severity of about 50%.

So we feel the current coverage of nine 5% is very strong it's.

It's worth noting that the financial impact of further deterioration beyond our outlook would be manageable, given our strong reserve and capital position.

We have a very experienced <unk> team, who are focused on managing the portfolio on a loan by loan basis and engaging in ongoing discussions with sponsors to work through the property and buyer borrower specific elements to derisk the portfolio and ultimately minimize losses.

You should also note that about 99, 2% of pre General office is in current pay status.

Okay.

Unknown Executive: Good morning, everyone, and welcome to the Citizens Financial Group 3rd quarter 2023 earnings conference call. My name is Greg and I'll be your operator today. Currently, all participants are in a listen only mode.

Moving to slide 15, we have maintained excellent balance sheet strength.

Our <unk> ratio increased to 10, 4% as we look to grow capital given the dynamic macro environment and new capital rules proposed by the bank regulators.

Unknown Executive: Following the presentation, we will conduct a brief question and answer session. As a reminder, this event is being recorded.

We returned a total of $450 million to shareholders through dividends and share repurchases.

Kristin Silberberg: Now I'll turn the call over to Kristin Silberberg, Executive Vice President and Investor Relations.

We plan to maintain strong and growing capital and liquidity to levels that fortify our balance sheet against macro uncertainties and position us to quickly transition to any new regulatory rules that may impact banks at our size.

Kristin Silberberg: Kristin, you may begin. Thank you, Greg. Good morning, everyone, and thank you for joining us.

Kristin Silberberg: First this morning, our Chairman and CEO, Bruce Saun and CFO John Woods will provide an overview of our third quarter results. Brendan Coughlin, head of Consumer Banking and Donald McCree, head of Commercial Banking are also here to provide additional color. We will be referencing our third quarter earnings presentation located on our Investor Relations website.

Turning to slide 16, and 17 I will update you on a few of our key initiatives, we have underway across the bank. So that we can deliver growth and strong returns for our shareholders.

On Slide 16, we've included just a few of the business initiatives, we are pursuing to drive improving performance over the medium term.

Kristin Silberberg: 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. We set may calls our results to different materially from expectations. These are outlined for your review on page two of the presentation. We also referenced non-gap financial measures. So it's important to review our gap results on page three of the presentation and the reconciliations in the appendix.

On the commercial side, we highlight how we are positioned to support the significant growth in private capital.

Although deal activity has been relatively muted recently, many sponsors have meaningful amounts of capital to deploy so there is a tremendous amount of pent up demand for M&A and capital markets activity, given the right market conditions.

We have been serving the sponsor community with distinctive capabilities for the last 10 years and we've established ourselves at the top of the middle market sponsor details.

Bruce Saun: And with that, I will hand over to Bruce. Hey, thanks, Kristin, and good morning, everyone. Thanks for joining our call today. We continue to execute well through a challenging environment. Our focus has been on playing strong defense and maintaining a strong balance sheet. During the quarter, we drew our set one ratio to 10.4% near the top of peers, while still buying in 250 million in stock. With non-core loan runoff of 1.4 billion and deposit growth of 500 million in the quarter, we lowered our spot loan-to-deposit ratio to 84% at quarter end.

And our new private bankers will significantly expand our sponsor relationships and we stand ready to leverage our capabilities in this space when sponsor activity picks up.

We also think there is a tremendous opportunity in the payment space and we've been investing in our treasury solutions business developing integrated payments platforms and expanding our client hedging capabilities.

On the consumer side, our entry into New York Metro is going very well and with some early success, attracting new customers to the bank and growing deposits about nine times faster and.

In our legacy branches as we leverage our full customer service capabilities to drive some of the highest customer acquisition and sales rates in our network.

Bruce Saun: We focused on building up our liquidity even further, given geopolitical uncertainty and the regulatory direction of travel, adding almost 4 billion to cash and securities. We also built our ACL further to 1.55%. Well above our pro format day one, Cecil Reserve of 1.3% with our general office reserve now at 9.5%. Well, the balance sheet has been a principle focus. We continue to execute well in our strategic initiatives, which should drive strong medium-term performance.

The build out of the private bank is also going very well. These bankers have hit the ground running and have already brought in around $500 million in deposits and investment balances through a soft launch in the back half of Q3.

This is a coast to coast team with a presence in some of our key markets like New York, Boston and places, where we'd like to do more like Florida and California.

We plan to open a few private banking centers in these geography and build appropriate scale in our wealth business with our car felt legacy wealth business as the centerpiece of that effort.

Bruce Saun: Our private bank is being built out. We had a soft launch during the back half of Q3, and we brought in around 500 million in deposits and investments. Full launch is scheduled over the next several weeks. We're executing well on our New York City Metro push, our deposit strategies, our top programs, our ESG initiatives, and our payment strategy. Our underlying EPS for the quarter missed the mark slightly at 89 cents as several capital markets deals slipped from Q3 to Q4 given late quarter market volatility.

Turning to slide 17 on the top left side as our balance sheet optimization program, which is progressing well.

The chart illustrates the relatively rapid rundown of the noncore portfolio, which is comprised of our $9 billion shorter duration indirect auto portfolio and purchased consumer loans.

This portfolio is expected to decline by about seven $6 billion from where we are now to about $4 7 billion at the end of 2025.

NSS runs down we plan to redeploy the majority of the cash Paydowns to building core bank liquidity with the remainder used to support organic relationship based loan growth in the core portfolio.

Bruce Saun: This was the weakest capital markets quarter since the third quarter of 2020, three years ago, and prior to several acquisitions like JMP and DH capital. The good news here is that the pipelines remain strong, and we continue to maintain and grow our market share. NII expenses and credit costs all track to expectations. We included what we hope is an informative and useful slide in the deck, page 5, which breaks out results for our legacy core business, our private bank startup investment, and the drag from non-core.

The capital recaptured through reduction in noncore <unk> will be reallocated to support the growth of our private bank.

In summary, this strategy strengthened liquidity and has already been a source of about $3 billion of term funding ABS issuance this year.

It builds capital by reducing <unk>, and it's accretive to NIM ETF and ROTC.

Next to our top program on the right side of the slide our latest program is well underway and on target to deliver $115 million pre tax run rate benefit by year end.

Bruce Saun: Note the legacy core performance shows Q3 EPS of a dollar and eight cents, NIM of 3.33% and ROTC of 15.3%. The private bank should turn positive by mid-24 and be nicely accretive in 2025, and non-core will dramatically run down over the next several quarters. This dynamic will help us set the drag from forward starting swaps and help propel results higher over time.

Our top programs are essential to improving our returns our returns over the medium term and we are ready to launch on top nine looking for efficiency opportunities driven by further automation and the use of AI to better serve our customers.

We are looking at ways to simplify our organization and save more on third party spend as well.

In light of pressure on revenue given the rate environment, we are targeting to keep 2024 underlying expenses flat.

Bruce Saun: Given the continued macro uncertainty and pressure on revenue from higher rates, we've initiated a zero-based review of expenses in an effort to keep expenses flat in 2024. We'll report further on this on our January call when we give 2024 guidance. For Q4, we expect to see key trends begin to stabilize, and I will decline, but by less than in the past two quarters. V should bounce back somewhat, though the extent is market dependent.

On the technology front, we have a very extensive agenda with a multi year next gen Tech cloud migration targeting the exited all of our data centers by 2025, and a program to converge our core deposit system onto our cloud based modern banking platform.

We've come a long way of monetizing our platform since the IPO.

And on the ESG front, we recently announced a $50 billion sustainable finance target, which we plan to achieve by 2030 and committed to achieve carbon neutrality by 2035.

Bruce Saun: Expenses in credit costs should be stable, and we should buy in a modest amount of stock given continued solid earnings and loan runoff. This has clearly been a challenging year for regional banks like citizens. Rest assured, we are working hard, we're navigating the current turbulence well, and we're taking the actions to position as well for the medium term.

And we are working diligently to help our clients prepare for and finance their own transitions to a low carbon lower carbon economy.

Moving to the outlook for the fourth quarter on slide 18.

Our outlook incorporates the private bank and assumes that the fed hold rates steady through the end of the year.

We expect NII to be down approximately 2% next quarter, given the impact from noninterest bearing and low cost deposits migrating to higher cost categories, albeit at a decelerating rate more than offsetting the benefit of higher asset yields noncore runoff and day count.

John Woods: And with that, let me turn it over to John to take you through more of the financial details, John.

John Woods: Thanks, Bruce, and good morning, everyone. Let me start with the headlines for the third quarter, referencing slides five and six. For the third quarter, we generated underlying net income of $448 million, and EPS of 89 cents. This includes the private bank startup investment of five cents, and a negative 14 cents impact from the non-core portfolio. Our underlying Rossi for the quarter was 12.5%. On slide five, you'll see that we provided a schedule separating out our non-core runoff portfolio and the startup investment in our new private bank from our legacy core results, so you can see how those impact our performance.

Based on the forward curve, we expect the cumulative deposit beta at the end of 2023 to be approximately 50% and to rise to a terminal level of low 50% before the first rate cut.

Noninterest income is expected to be up 3% to 4% for the seasonal pickup in capital markets, depending on the on the market virus environment.

Noninterest expense should be broadly stable, which includes the private bank and excludes the anticipated FDIC special assessment.

John Woods: Our legacy core bank delivered a solid underlying Rossi of 15.3%. Currently, the private bank startup investment is a drag to results. But relatively quickly, this will become increasingly accreted. Five percent EPS benefit in 2025. Similarly, while non-core is currently a sizable drag to revenues, it will run off quickly. Further bolstering our overall performance and partially mitigating the expected impact of forward starting swaps. Back to slide six, total net interest income was down 4% linked quarter, and our margin was 3.03%, down 14 basis points, both in line with expectations.

Net charge offs are expected to rise to approximately mid 40 basis points as we continue to work through the general office portfolio and expected further normalization.

We feel good about our reserve coverage around the current level and the ACL level will continue to benefit from loan runoff.

Our set one is expected to increase to approximately 10, 5%, but the opportunity to engage in a modest level of share repurchases the execution of which will depend upon our ongoing assessment of the external environment.

Beyond the <unk> 'twenty three guidance as I mentioned earlier, we are targeting flat 2024 underlying expenses. This includes the private bank on the noncore portfolio and excludes the anticipated FDIC special assessment.

John Woods: The profits were slightly in the quarter, reflecting the ongoing resilience of the franchise. We continued our balance sheet optimization efforts, further strengthening liquidity during the quarter given the uncertain geopolitical environment, and in preparation for potential changes to liquidity regulations, increasing cash and securities by about $4 billion.

Also we've included slide 25 in the appendix on the swaps impact through 2027.

We expect higher swap expense in 2024 to be partly offset by the benefit to NII from the non core rundown.

Notably the swap expense drag will reduce meaningfully over 2025 through 2027 as swaps run off and if that normalizes short rates and.

John Woods: Awards. In addition, the non-core portfolio declined by $1.4 billion, ending the quarter at $12.3 billion. While we await clarity on new liquidity rules for category 4 banks, it is worth pointing out that we currently exceed the current LCR requirements for both category 1 and 3 banks. Our period in LDR improved to 84%, while our credit metrics remain solid, with net chargeoffs of 40 basis points, stable, linked quarter. We recorded a provision for credit losses of $172 million and a reserve bill of $19 million in this quarter, increasing our ACL coverage to 1.55% up from 1.52% at the end of the second quarter, with the increased primarily directed to raising the general office portfolio reserves from 8% and 2Q to 9.5% at the end of 3Q.

In addition, the impact of terminated swaps is dramatically lower than 2006 and 2027.

To wrap up we delivered solid results this quarter, while navigating through a dynamic environment importantly, we made good progress positioning the company with a strong capital liquidity and funding position, which will serve as well as regulatory requirements are finalized and if the environment becomes more challenging.

Our balance sheet strength also positions us to take advantage of opportunities through our strategic priorities as we continue to strengthen the franchise for the future and deliver attractive risk adjusted returns with that I'll hand, it back over to Bruce.

Okay. Thank you John .

Greg why don't we open it up for some Q&A.

Okay, ladies and gentlemen, if you'd like 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 if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one zero at this time and one moment. Please for your first question.

John Woods: We reverseed $250 million of common shares in the third quarter and delivered a strong set 1 ratio of 10.4% up from 10.3% in the second quarter. And our tangible value per share decreased 3% linked quarter, reflecting AOCI impacts associated with higher rates. Credit to slide 7 on that interest income. Linked quarter results were down 4% as expected, primarily reflecting a lower net interest margin, which was down 14 basis points to 3.03%.

Your first question comes from the line of Erika Najarian from UBS. Please go ahead.

Hi, good morning, good morning.

Thanks.

My first question is for John John .

Has been a lot of feedback from investors on you know uncertainty over the NII trajectory for 'twenty for you now.

John Woods: As you can see from the walk at the bottom of the slide, the decrease in margin was driven by deposit repricing, which includes mixed shift from lower cost to higher interest bearing categories, non-interest bearing deposit migration, as well as the mixed impact of the liquidity bill I mentioned earlier. These factors were mitigated by positive impacts from asset repricing and run down of the non-core portfolio. Our cumulative interest bearing deposit beta is 48% through 3Q, which has been rising in response to the rate cycle and competitive environment.

The environment of higher for longer and I think you know where I'm going here I think that investors are trying to sort of square the.

11, and $12 billion increase in notional swaps right at our receive fixed rate of three.

<unk> in the second half of next year.

And trying to square that in a higher for longer environment with some of the balance sheet optimization. So if you could just sort of take us through a little bit of the moving pieces and perhaps simplify it for the investors listening in terms of how that impacts your NII trough.

John Woods: Our deposit franchise has performed well, with the deposit beta is generally in the back with peers. This is a significant improvement compared to prior cycles when our beta experience was at the higher end of peers. Our sensitivity to rising rates at the end of the third quarter is roughly neutral, down slightly versus the prior quarter. Moving to slide 8, fees were down 3% linked quarter driven primarily by lower capital markets and car fees, partly upset by the increase in mortgage banking fees.

Timing.

Now what happens after you hit trough.

And are you still confident in what you said I guess, a month ago and that you could exit four key 24 with a 3% NIM.

Thanks, Eric.

Maybe I'll take that a little bit in reverse order because it might help us with the jump off conversation so.

John Woods: The capital market's fees outlook was positive early in September, but with market volatility and higher long rates picking up to the end of the month, we saw a number of M&A deals pushed into the fourth quarter, resulting in lower linked quarter M&A advisory fees as well as lower bond underwriting. While we continue to see good strength in our deal pipelines, uncertainty continues around the timing of these deals closing given the level of market volatility.

Net interest margin came in as expected in the third quarter, so when you're talking about that at 3.03.

I think that the two big forces that I would talk about broadly as you as you look out into the fourth quarter would be our our.

Our basic.

Ongoing deposit migration.

And how that is expected to play out so I would say that if you look at overall net interest margin.

John Woods: Car fees were slightly lower reflecting lower balance transfer fees. The increase in mortgage banking fees was driven by higher MSR valuation. The servicing P&L provides a diversifying benefit, which in the quarter more than offset the decline in production, as higher mortgage rates weighed on low-fiance. On slide 9, we did well in expenses, keeping an broadly stable linked quarter, excluding the $35 million private bank, start of the best.

I'd say that we're going to see another call it mid single digit.

Sort of headwind into the fourth quarter, just on the entire balance sheet outside of liquidity, though and so that 338 kind of gets closer to how it comes in right around that 3%. So that's kind of played out the way we expect it.

Standing the fact that we are seeing ongoing migration I would say that that's holding about where we think it should be.

John Woods: Anderson. On slide 10, average loans are down 2% and period end loans are down 1% linked quarter. The non-core portfolio runoff of $1.4 billion drove the overall decline partly offset by some modest core growth in mortgage and home equity. Average core loans are down 1% largely driven by generally lower loan demands in commercial along with exits of lower returning relationships and are highly selective approach to new lending in this environment. Period end core loans are stable. Average commercial line utilization was down slightly this quarter as clients looked to be leveraged given the environment in higher rates. We saw less emanating financing activity in the face of an uncertain economic environment.

The other item as you may have seen in some of our walks in the slide deck is the fact that given the uncertainty and regulatory environment.

We have endeavored to actually build liquidity in a much much more meaningful way that liquidity build as NII neutral, but it doesn't have a nominal impact to the net interest margin and so you could see that being an impact in the fourth quarter.

It was a couple maybe two basis points or so in the third quarter that could be maybe another call. It.

Several basis points as you get into the fourth quarter. So you can see things playing out as we expected in the fourth quarter when you basically get to.

2024 dynamics once you reset the table in the fourth quarter. The big puts and takes are we do have the swap portfolio.

John Woods: Next to slide 11 and 12, we continue to do well on deposits. Period end deposits were up $530 million linked quarter with growth led by commercial and consumer deposits broadly stable. Our industry in deposit costs were up 39 basis points, which translates to a 48% cumulative beta. Our deposit franchise is highly diversified across product mix and channels and with 67% of our deposits in consumer and about 70% insurers secured. This has allowed us to efficiently and cost effectively manage our deposits in this rising rate environment.

Increasing as you get into.

Flattish when you get into the first half of the year, but it rises in the second half of the year. It happens to add as it relates to 'twenty four that's about when the forward curve would start implying the cuts are starting to come in so I'd say that when you think about some of the mitigates J outlook with the swap portfolio youre going to.

Half potentially.

Potentially the fed beginning to cut in the second half of 2024, you have the ongoing benefit of the noncore portfolio, you've got the growing accretive contributions from the private bank.

John Woods: As rates rose in the third quarter, we saw continued migration of lower cost deposits to higher yielding categories with non-interest bearing now representing about 22% of total deposits. This is back to pre-pandemic levels and we would expect the decline to moderate from here, although this will be dependent upon the path of race and consumer behavior. Moving to slightly moving to credit on slide 13, net charge offs were 40 basis points stable linked quarter with a decrease in commercial offset by a slight increase in retail driven by auto, which normalized following a very low second quarter result.

And with <unk>.

<unk> rates being where they are asset front book back book.

As a car will contribute positively and then just a broader balance sheet optimization efforts that we're doing across the bank I think are all the areas that I would highlight as as.

As nice mid against to what we're seeing play out.

Let's see where the rate environment plays out I mean, the forwards have it in one place we have economic Bloomberg Economists' consensus are probably 50 basis points lower than where the forwards are but nevertheless.

Nevertheless, we see this potentially playing out to a very manageable and frankly growing momentum as you exit 2024 on on the net interest margin.

John Woods: Non-acrual loans increased 9% linked quarter to 87 basis points of total loans reflecting an increase in general office. We deal the rate of increase in non-acruals is decelerating after a jump in YouTube. Turning to the allowance for credit losses on slide 14, our overall coverage ratio stands at 1.55%, which is a three basis point increase in the second quarter, which reflects a reserve build of $19 million, as well as the denominator effect from the rundown of the non-core portfolio.

And just to clarify you now or are you still confident that you could exit taking I'll address talent exit them for 24 have a NIM of about 3% and based on sort of what you're telling us it sounds like the you know if the fed doesn't cut as the forward curve, indicating.

That would be the risk to that 3%.

Yes, I think in the fourth quarter, I'd say that we're all else equal.

John Woods: We increased our general office coverage to 9.5% from 8% in the second quarter. You can see some of the key assumptions driving the general office reserve covers level, which we feel represent a fairly adverse scenario that is much worse than we've seen in historical downturns. As mentioned, we built our reserve for the general office portfolio to 354 million dollars a quarter, which represents coverage of 9.5% against the $3.7 billion portfolio. We have already taken 100 million in charge offs in this portfolio, which is about 2.5% of loans.

Getting we're getting.

Around that 3% level.

Depending upon the impact of liquidity builds which are NII neutral.

Quiddity Bill piece that I would say, which is kind of outside of sort of set that aside just given where just given where we are it doesn't drive NII. So I'm just thinking about the net interest margin that drives NII, we're going to be in that neighborhood of 3% ex liquidity adult.

Got it and I'm going to step back after this because I think I'm, taking up too much time, I just want to clarify I'm asking about <unk> 24.

John Woods: In setting the general office reserve, we are factoring in a very severe peak to trough decline in office values of about 68% with remaining 18-20% to fall rate and a loss of Department. So we feel the current coverage of 9.5% is very strong. It's worth noting that the financial impact of further deterioration beyond our outlook would be manageable given our strong reserve and capital position. We have a very experienced pre-team who are focused on managing the portfolio on a loan by loan basis and engaging in ongoing discussions with sponsors to work through the property and borrowers specific elements to de-risk the portfolio and ultimately minimize losses. I should also note that about 99.2% of pre-general office is in current pay status.

Are you talking about <unk> 23, I just wanted to make sure you're on the 14th.

<unk> 23, yes, sorry, I did it needs to make sure that was clear that everything I was just saying it was about in that last bit was back that we're getting around that 3% level give or take at the <unk> 23 <unk>.

Ex liquidity build and the liquidity Bill is NII neutral. So if you're trying to think about where we're driving NII. It's it's it's.

It's around that plus or minus 3% level ex liquidity bill.

For 2023, and all the other forces that we talked about earlier, where as you're going into 'twenty four when I when I was checking off the tailwind from noncore private bank.

Asset front book back book and BSO all of those are tailwind into 'twenty, four which will be mitigated.

John Woods: Moving to slide 15, we have maintained excellent balance sheet strength. Our set one ratio increased to 10.4% as we look to grow capital given the dynamic macroenvironment and new capital rules proposed by the bank regulators. We've defined the 19 strong and growing capital and liquidity to levels that fortify our balance sheet against macro uncertainties and position us to quickly transition to any new regulatory rules that may impact banks of their size.

Along with let's see where the rate the rate cuts actually start kicking in in the second half of 'twenty, four and we'll see where we exit 2024, but that's something we'll come back to you on in terms of adding more color in January as we typically do.

And we will assess our environment and all of those forces and puts and takes at that time.

Great. Thanks.

Your next question comes from the line of Scott <unk> from Piper Sandler. Please go ahead.

John Woods: Turning to slide 16 and 17, I'll update you on a few of our key initiatives we have underway across the bank so that we can deliver growth and strong returns for our shareholders. First, on slide 16, we've included just a few of the business initiatives we are pursuing to drive improving performance over the medium turn. On the commercial side, we highlight how we are positioned to support the significant growth in private capital.

Hey, guys. Thank you for taking the question I guess I wanted to revisit the fourth quarter margin just to make sure everybody's on the same page, but the reported margin it sounds like it will be below the 3%. However, right because you do and I know it will be dependent on.

Liquidity build but it sounds like you do anticipate liquidity built so it would be we'd be talking kind of something in the mid two ninety's would that be sort of the reported expectation.

John Woods: Although deal activity has been relatively muted recently, many sponsors have meaningful amounts of capital to deploy so there is a tremendous amount of pent up demand for M&A and capital market activity given the right market conditions. We have been serving the sponsor community with distinctive capabilities for the last 10 years and we've established ourselves at the top of the middle market sponsor details and our new private bankers will significantly expand our sponsor relationships and we stand ready to leverage our capabilities in this space when sponsor activity picks up.

It will be lower.

It just depends on the NII neutral liquidity belt.

That we determined to be appropriate. So it's sort of it's I think it's useful to talk about it ex liquidity build given the fact that that's the driver of NII and they'll be they'll be.

Possibly additional just in terms of the variability of cash and how that gets funded it'll be that's flat to flat to NII, because it'll be it'll be a denominator effect.

John Woods: We also think there is a tremendous opportunity in the payment space and we've been investing in our treasury solutions business developing integrated payments platforms and expanding our client hedging capabilities. On the consumer side, our entry into New York Metro is going very well with some early success attracting new customers to the bank and growing deposits about nine times faster than in our legacy branches. As we leverage our full customer service capabilities to drive some of the highest customer acquisition and sales rates in our network.

That would that would take the NIM below is that plus or minus 3% that I talked about before but not an NII driver.

Yeah, Okay, Alright, perfect and then maybe as we look out just in terms of.

Sort of the handoff from the noncore loan run off too.

More visible private bank growth wonder when do we sort of think that will.

Become sort of more neutral from in terms of visibility to the balance sheet like when would we expect the loan portfolio to just sort of level out.

Yes, I think that we were saying that we.

John Woods: To build out of the private bank is also going very well. These bankers have hit the ground running and have already brought in around $500 million in deposits and investment balances through a soft launch in the back half Q3. This is a coast to coast team with a presence in some of our key markets like New York, Boston and places where we'd like to do more like Florida and California. We plan to open a few private banking centers in these geographies and build appropriate scale in our wealth business with our car-filled legacy wealth business as the centerpiece of that effort.

We think that the noncore run off will be a continued driver of sort of.

In the first half of <unk> in the first half of 'twenty four you will see some declines in the loan portfolio, but in the second half of 'twenty four we start seeing.

The private bank contributing as well as the organic contribution starting to see loan growth.

Such that you know.

Year over year, we would have an expectation that you'd see us starting to see loan growth in the second half of 'twenty four.

Okay Alright.

John Woods: Turning to slide 17 on the top left side is our balance sheet optimization program which is progressing well. The chart illustrates the relatively rapid rundown of the non-core portfolio, which is comprised of our $9 billion shorter duration indirect auto portfolio and purchased consumer loans. This portfolio is expected to decline by about $7.6 billion from where we are now to about $4.7 billion at the end of 2025. And as this rundown, we plan to redeploy the majority of cash paydowns to building core bank liquidity with the remainder used to support organic relationship based longer from the core portfolio.

Alright, perfect alright, thank you very much.

Your next question comes from the line of Peter Winter from D. A Davidson. Please go ahead.

Thank you.

Just I was wondering on the credit side, we've just seen in general some pre announcements on charge offs in the shared national credit space can you just remind us what your exposure is.

Shared national credits and how you fared in the recent exam.

So let me take that juncture.

No.

Just in general as I think there is a lot of focus on shared national credits actually when we came through the exam. This year, we had more upgrades than we had downgrades. So we didn't have any force charge offs.

John Woods: The capital will recapture through reduction in non-core RWA will be reallocated to support the growth of the private bank. In summary, this strategy strengthens liquidity and has already been a source of about $3 billion of term funding EBS issuance this year. It builds capital by reducing RWA's and it's accreted to NEM EPS and Rossi.

In terms of our shared national credit book, we've been taking our participation is down as part of our BSL exercise with there about 10 basis points to 10% lower than they were a couple of quarters ago.

There's a lot of focus on shared national credit, we treat participations or shared national credit feels exactly as we treat every other credit extension. So one it has to return.

John Woods: Next to our top program on the right side of the slide, our latest program is well underway and on target to deliver a $115 million pre-tax run rate benefit by year end. Our top programs are essential to improving our returns over the medium term and we are ready to launch on top nine looking for efficiency opportunities driven by further automation and the use of AI to better serve our customers. We are looking at ways to simplify our organization and save more in third party spend as well.

People think about it is hanging paper and then deploying loans and not returning we go through the exact same process, whether we're participating we're leaving a transaction or a sole lender and then also we do full credit analysis of every single extension that we make but are you.

Shared national credit extension or not so.

Nick book doesn't perform any worse than any other book that we have in the back of that it actually in some cases, it's larger credits so they might perform marginally better than some of the middle market assets that we have on the book over time and I think just as part of <unk>, Bruce as part of <unk> in general.

John Woods: A lighted pressure on revenue given the rate environment, we are targeting to keep 2024 underlying expenses flat. On a technology front, we have a very sensitive agenda with a multi-year next-gen tech cloud migration targeting the exit of all of our data centers by 2025 and a program to converge our core deposit system onto a cloud-based modern banking platform. We've come a long way at modernizing our platform since the IPO.

We're kind of looking at the total relationship returns and if we went into the credit as a participant thinking weekend kind of move left and become more important bank, that's not panning out or not getting the cross sell anticipated then we're extricating ourselves at the next available opportunity. So I think you'll continue to see.

John Woods: On the ESG front, we recently announced a $50 billion sustainable finance target which we plan to achieve by 2030 and commitment to achieve carbon neutrality by 2035 and we are working diligently to help our clients prepare for and finance their own transitions to a low carbon, lower carbon economy.

That trend.

Let me just pick up on that just in the last quarter back to the loan growth question, we had about $900 million.

Our front book loan originations offset by about $1 billion six of BSO activity. So we're really churning the book.

John Woods: Moving to the outlook for the fourth quarter on slide 18. Our outlook incorporates the private bank and assumes that the federal rates steady through the end of the year. We expect NIA to be down approximately 2% next quarter given the impact from non-intersparing and low cost deposits migrating to higher cost categories, albeit at a decelerating rate more than offsetting the benefit of higher asset yields, non-core runoff and day count. Based on the whole report, we expect the cumulative deposit beta at the end of 2023 to be approximately 50% and to rise to a terminal level of low 50s percent before the first rate cut.

Towards full relationship credits and away from some of those participations that.

That Bruce mentioned and I think a lot of the competition is doing exactly the same thing when you see people supporting their lead bank relationships and moving away from more speculative future opportunities.

Got it. Thank you and then just could you just provide a little bit more color maybe on the deposit repricing migration and how you see it playing out.

With a longer higher for longer rates.

Just impacting that deposit pricing pressures.

Yeah I'll go ahead and handle that I mean, I think so.

First off I mean, I think when you look at our performance from a deposit beta standpoint, we feel like we're basically in the pack with what youre seeing across the industry, which is a really positive results compared to where we were last cycle just part of the ongoing investments, we've been making in privacy and product capabilities.

John Woods: Non-interspan income is expected to be up 3 to 4% with a seasonal pickup in capital markets depending on the market environment. Non-interspan should be broadly stable, which includes the private bank and excludes the anticipated FDIC special assessment. Net charge drops are expected to rise to approximately mid 40s basis points as we continue to work through the general office portfolio and expected further normalization. We forget about our reserve coverage around the current level, and the ACL level will continue to benefit from loan runoff.

Delivering the entire bank for our customers. So we're really.

Kind of pleased to see where we're at how things are playing out our cycle to date.

That said, we still are and.

Frankly, if you look at the overall metric of of noninterest bearing to overall deposits were around 22%, that's basically back to where we were pre pandemic.

We've seen <unk>.

John Woods: Our set one is expected to increase to approximately 10.5% with the opportunity to engage in a modest level of shared repurchases, the execution of which will depend upon our ongoing assessment of the external environment. Beyond the 4Q23 guidance, as I mentioned earlier, we are targeting flat 2024 underlying expenses. This is includes the private bank and the non-core portfolio, and excludes the anticipated FDIC Special Assessment. Also, we've included flat 25 in the appendix on the SWAPS impact through 2027.

Salaries migration.

Out of noninterest bearing into interest bearing and seeing decelerating migration, even inside of the interest bearing book Nevertheless.

It's it's it's getting smaller every quarter.

We would expect to see.

That really really.

Dissipating over the coming.

A quarter or two.

And that's really what you see when you get late in the cycle. The fed's on hold so feeling very good about that trajectory, maybe Brendan do you track very carefully how we're doing versus peers and some of our strategies to continue to maintain that low cost focus. So maybe you can add some additional color, yes sounds good.

John Woods: We expect higher SWAP expense in 2024 to be partly offset by the benefit to NII from the non-core rundown. Notably, the SWAPS expense drag will reduce meaningfully over 2025 through 2027 as SWAPS runoff and affect normalizes short-rate In addition, the impact of terminated SWAPS is dramatically lower in 26 and 2027.

So much of our low cost deposit book is in the consumer space and obviously was buoyed through the pandemic by all the stimulus.

We saw the rundown of the stimulus right peak in May and it started to abate as we got into the summer and the fall, although it's still it's still kind of spending down.

John Woods: To wrap up, we deliver solid results this quarter, while navigating through a dynamic environment. Importantly, we make good progress positioning the company with a strong capital, liquidity, and funding position, which will serve us well as regulatory requirements are finalized, and if the environment becomes more challenging. Our balance sheet strength also positions us to take advantage of opportunities through our strategic priorities as we continue to strengthen the franchise for the future and deliver a tractor risk adjusted returns.

At a decent clip we do have a lot of analytics benchmarking analytics on how we're doing and this is supportive of Johns commentary that the franchise is performing in a very different level than it did the last upgrade cycle.

We believe we're number two in the peer set in terms of DDA consumer migration, so were performing exceptionally well on the DDA side. When you look at data on the consumer side as compared with the growth that we're getting.

Bruce Saun: With that, I'll hand it back over to Bruce. Okay, thank you, John.

It appears we are about four to 500 basis points better than net growth on the consumer book through this cycle, so far and our betas are mildly better so more growth slightly better cost from the core book, that's excluding citizens access that's a real indicator of the quality of the franchise and the quality of the customer base that we've moved from sort of.

Greg: Greg, why don't we open it up for some Q&A? Okay, ladies and gentlemen, if you'd like to ask a question, please press 1.0 on your telephone keypad. You may withdraw your question at any time by repeating the 1.0 command.

Greg: If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1.0 at this time. And one moment, please, for your first question.

If a community banking high price deposit focused deeply engaged primary banking relationships. So we expect the pay down of low cost deposits to continue to slow obviously, depending on the rate environment and the economy that that potentially could change what I do feel really confident in is that our relative performance to peers will be strong.

Erika Najarian: Your first question comes from the line of Erica Najarian from UBS.

Erika Najarian: Please go ahead. Good morning.

Erika Najarian: My first question is for John. John, there has been a lot of feedback from investors on uncertainty over the NII trajectory for 24 in the environment of higher for longer. I think you know where I'm going here. I think that investors are trying to sort of square the $11, $12 billion increase in notional swaps at a received fixed rate of 310 in the second half of next year and trying to square that in a higher for longer environment with some of the balance sheet optimization.

And we will continue to outperform on the consumer side on the stability of our low cost book at the individual customer level. They still had a little bit more liquidity in their balances than they did pre pandemic, that's largely held by affluent and high net worth individuals are mass market book and even in the mass affluent space, that's sort of moderated back.

Down to operating floors. So we think those are all signs that would support a continued slowdown in the rundown of low cost deposits pending any recessionary impact that maybe bring them below operating floors. So we feel pretty good and just on the uninsured and insured deposit front, we saw a little bit of a blip on the uninsured in March.

John Woods: So, if you could just sort of take us through a little bit of the moving pieces and perhaps, you know, simplify it for the investors listening in terms of, you know, how that impacts your NII trough timing, you know, what happens after you hit trough. And are you still confident in what you said, I guess a month ago, in that you could exit for Q24? of the 3% NIM. Thanks, Erika.

Since since March that has been incredibly stable in all parts of the book has been growing so all the fundamentals point to <unk>.

<unk> trajectory of stability and certainly continue to outperform and then in addition to that we're controlling what we can control as you know.

We're performing in the top quartile in the United States in terms of household acquisition growth. The New York market as John pointed out is helping to give us an extra lever to drive low cost deposit growth over and above just the portfolio trends, which are generally outperforming. So we do believe we've got a distinctive amount of levers for the franchise to continue to.

John Woods: Maybe I'll take that a little bit in reverse order, because it might help us with the jump off conversation. So, you know, we, net interest margin came in as expected in the third quarter. So we'll talk about that at 3.03. I think that the two big forces that I would talk about broadly, as you can, as you look out into the fourth quarter, would be our basic, you know, ongoing deposit migration and how that is expected to play out.

Outperforming the medium term outlook on our low cost deposits.

Right.

Very helpful. And then just one quick housekeeping I just want to confirm John you said that the private the expense outlook for next year things what that includes.

John Woods: So I'd say that, you know, if you look at overall net interest margin, you know, I'd say that we're going to see another subcall of mid-single-digit sort of headwind into the fourth quarter just on the entire balance sheet outside of liquidity bill. And so that 3.03 kind of gets to, you know, comes in right around that 3%. So that's kind of playing out the way we expected. Notwithstanding the fact that, you know, we are seeing ongoing migration, I'd say that that's holding about where we think it should be.

The bank build out expenses.

So underlying expenses to be flat next year, including the private bank as well as noncore.

Got it.

Thank you.

Your next question comes from the line comes from the line of Ken <unk> from Jefferies. Please go ahead.

Hey, Thanks, good morning.

Just a follow up on that last question John .

John I just wanted to ask you I know the private bank build out was $35 million of costs. This quarter. Just wondering if there's any changes to your expectation of what that would trend like going forward as part of that.

John Woods: The other item, as you may have seen in some of our walks in the slide deck, is the fact that given the uncertainty and regulatory environment, you know, we've, we've endeavored to actually build liquidity in a much more meaningful way. That liquidity bill is NII neutral, but it doesn't have a nominal impact to the net interest margin. And so you could see that being an impact in the fourth quarter. So it was a couple, you know, maybe two basis points or so in the third quarter. That could be maybe another call it, you know, at several basis points as you get in the fourth quarter. So you can see things playing out as we expect in the fourth quarter.

Cost commentary.

But I think Brennan.

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

The Etfs is our outlook there.

Yes, there'll be into Q4, some mob very modest upticks.

Low forty's potentially and the reasons for that you would retire the majority of the team as you all know in the early part of the summer of the influences on that nudging up is our successful securing of various different private banking offices coast to coast.

John Woods: When you basically get to the 2024 Dynamics, once you reset the table on the fourth quarter, the big puts and takes are, you know, we do have the swap portfolio increasing as you get into, you know, it's pretty flat as when you get into the first half of the year, but it rises in the second half of the year. It happens that as it relates to 24, that's about when the forward curve would start applying the cuts are starting to come in.

How is the team and start to bring in customers into the platform. Some operating expenses clients come on board as well as we're playing some very selective second tier offense theres still a lot of talented motion in this quarter. After the first 150. We also hired another 25 really top talent folks in all of those same offices that we.

John Woods: So I'd say that, you know, when you think about some of the mitigants to the outlook with the swap portfolio, you're going to have, you know, potentially the Fed beginning to cut in the second half of 2024. You have the ongoing benefit of the non-cooler portfolio. You've got the growing accretive contributions from the private bank. And with, you know, long raised being where they are, you know, asset frontbook, backbook is a look and tribute positively.

We opened in the summer and so we're gonna be selective, but as we see the right talent pop up we're going to we're going to grab grab them and adding to the team. So.

The other thing just in the way the Companys structured tender.

The folks who came over on guarantees as if they are fully producing so as the revenues come in there won't be incremental costs, they'll just be kind of earning those pay levels. So.

Another factor to consider yes.

John Woods: And then just a broader balance sheet optimization efforts that we're doing across the bank, I think are all the areas that are at highlight as nice midagence to what we're seeing play out. You know, let's see where the rate environment plays out. I mean, the forwards have it in one place. We have economic, you know, Bloomberg economist consensus are probably 50 basis points lower than where the forwards are. But I mean, nevertheless, we see this potentially playing out to a very manageable and frankly, growing momentum as you exit 2024 on the net interest margin.

Yes, just picking up.

That's a great point and then as a follow up you guys have done a great job over the years on the TARP program and.

If I take your commentary about holding costs flat inclusive of these extra builds that would imply a real <unk>.

Turn exiting the year given that you ramped through the year on cost this year and John I know you mentioned AI as a piece of that increment, but.

<unk> done a 100 plus of top each year I'm, just wondering like where else would you be digging in across the organization to get that magnitude of what seems to be a pretty meaningful implied extra cost saved out of the numbers next year. Thanks guys.

John Woods: And just to clarify, you know, are you still confident that you could exit, taking all out of the account, exit 4224 have a minimum of about 3% and based on sort of what you're telling us, it sounds like the, you know, if the Fed doesn't cut as the forward curve indicated, that would be the risk to that. Reaverhood of 3% extra quantity bill.

So it's Bruce.

Let me start often and John can amplify, but you know at the top.

Top program I think has.

Ben.

Real consistent contributor to our ability to deliver positive operating leverage but to actually get to flat for next year. We have to go beyond that so we geared up a very nice top program and we're adding to it but I think we're going to have to look at kind of employment levels broadly to see where we can.

Extract.

Some some folks.

We will look at certain business activities that may be less important going forward.

We have been engaged and historically, we've already done some of that this year. So we downsized the mortgage business quite a bit we exited the auto business.

John Woods: God, and I'm going to step back after this because I think I'm taking up too much time. I just want to clarify, I'm asking about 4Q24. Are you talking about 4Q23? I just wanted to make sure we were on this screen. 4Q23, yeah, sorry, I need to make sure that was clear. Everything I was just saying was about, and that last bit was that we're getting around that 3% level give or take at the in 4Q23. 3, extra quantity bill, and the liquidity bill is NII neutral. So, if you're trying to think about where we're driving NII, it's around that plus or minus 3% level, extra liquidity bill.

So I think it's a combination of actions, it's continuing to find ways to upsize top.

Leverage things like AI, where we can do that.

Look at our overall org structure and staffing levels and see if we can pinch some efficiencies there and then look hard at our business mix and figure out where the key years.

Not to just have a knee jerk revenues, there's revenue pressure in the environment. So, let's really take a hard knife at all expenses, we have to be judicious about where we're cutting.

And protect the things that we feel are really going to help us grow and outperform in the medium term so things like the private banks things like the New York Metro expansion Theres things that we're going to ring fence and then theres. Other areas, we're going to have to go a little harder with the nice job, yes, I think that covered it well Bruce just and just to <unk>.

John Woods: For the 2023, and all the other forces that we talked about earlier, we're as you're going into 24 when I was ticking off the tailwinds from non-core private bank asset frontbook, backglow book, and BSL, all of those are tailwinds into 24, which will be mitigates along with, let's see where the rate cuts actually start kicking in in the second half of 24, and we'll see where we exit 2024, but that's something we'll come back to you on in terms of adding more color in January as we typically do. And we'll assess our environment and all of those forces and puts in takes at that time.

Ongoing fundamentals of our bread and butter of focusing on on the organizational related items in third party spend and the like and I won't repeat all that all the categories that Bruce articulated, but we've got a fundamental underpinning that we feel like we have the opportunity to broaden out west while protecting the the <unk>.

Shifts that are going to help us outperform over the medium term.

Erika Najarian: Great, thanks.

Okay got it thank you for the color.

Your next question comes from the line of Manav Ghazaliya from Morgan Stanley . Please go ahead.

Scott Seifers: Your next question comes from the line of Scott Seifers from Piper Sandler. Please go ahead. Hey guys, thank you for taking the question. I guess I want to revisit the 4th quarter margin just to make sure everybody's on the same page, but the reported margin sounds like we'll be below the 3% however, right? I know it'll be dependent on liquidity bill, but it sounds like you do anticipate liquidity bill. So it would be we'd be talking kind of something in the mid to 90s. Would that be sort of the reported expectation?

Hey, good morning.

You have 67% of deposits from consumer.

Wrong franchise there.

You noted that you should outperform on a relative basis.

But one of your large peers noted last week that banks may still be over earning on NII.

I guess my question was how do you see competitive factors playing out for our consumer deposits.

Next Dr, especially if the rate environment stays higher for longer.

John Woods: It will be lower. You know, it just depends on the NIN neutral liquidity bill that that we that we determine to be appropriate. So it's sort of I think it's useful to talk about the next liquidity bill given the fact that that's the driver of an NII. And they'll be there'll be possibly additional, you know, just in terms of the variability of cash and how that gets funded, it'll be that's flat to flat to NIA. It'll be it'll be a denominator effect that would take the NIM below that plus or minus 3% that I talked about before, but not an NII driver. Yeah, okay. All right, perfect.

Brendan you want to yeah, we certainly have seen continued.

Heavy competition for consumer deposits, you're seeing kind of money market and CD rates in the mid fives in some spots.

We feel like we're competing really really well on that obviously, it's supported by our transformation on low cost, that's where you kind of start on how you manage strong NII levels in NIM levels is having a solid foundation of low cost highly engaged customers.

Probably more levers than others have to manage through whatever the competitive intensity ends up coming our way in 2024.

John Woods: And then maybe as we look at just in terms of sort of the handoff from the non-core loan runoff to more visible private bank growth, when do we sort of think that will become sort of more neutral from in terms of visibility to the balance. So actually, like when would we expect a loan portfolio to sort of level out? Yeah, I think that we were saying that we think that the non-core run-off will be a continued driver of, you know, you know, in the first half of the, in 4K in the first half of 24, you'll see, you know, some declines in the loan portfolio.

We are citizens access, which has been an incredibly positive tool for us to grow interest bearing deposits.

In a smart way with really sticky relationships, but also it helps not put too much contagion into the retail banking system with heavy kind of window rates on the front of the branches that may drive drive in hot money and bring the franchise into non relationship based banking and so that's been an incredibly effective tool to both raise money and also protect how we manage and <unk>.

Pete on interest bearing costs. We've also where we have competed in the core franchise.

Some of the more aggressive rates, we've done it in an incredibly relationship based way so the access into no pun intended with citizens access access into higher rates on deposits. If your core banking customer of ours requires you to be in a relationship product we call at quest or private client, which is our mass affluent or affluent value proposition. So when you do more with US you get more.

John Woods: But in the second half of 24, we start seeing the private bank contributing as well as organic contributions starting to see long growth such that, you know, you know, year over year we would have an expectation that you'd see us starting to see long growth in the second half of 24. All right, perfect.

That strategy has enabled us to be more targeted in how we think about introducing interest bearing cost into the environment that we're able to protect and retain balances in a really thoughtful way versus reprice the entire book.

Scott Seifers: All right, thank you very much.

Peter Winter: Your next question comes from the line of Peter Winter from DA Davidson, please go ahead. Thank you. Just, I was wondering on the credit side, we've just seen in general some pre-announcements on charge-offs in the shared national credit space. Can you just remind us what your exposure is to shared national credits and how you fare it in the recent exam? So let me take that. Sure. So just in general, as I think there's a lot of focus on shared national credits actually when we came through the exam this year, we had more upgrades than we had downgrade.

Some spots so it's intense out there we expect that to continue through the first half of the year as deposits are sort of hard to come by to the U S banking system, but we think we've got the right tools and the right levers to continue to win and compete well with our peers.

Peter Winter: So we didn't have any forced charge-offs in terms of our shared national credit book. We've been taking our participation down as part of our BSL exercise. We've there about 10 basis points, 10% lower than they were. A couple of quarters ago, I, you know, I think there's a lot of focus on shared national credit. We treat participations or share national credit deals exactly as we treat every other credit extension. So one, it has to return.

Maybe just to add it's Ed.

Great points, there and then just to add one other point about this I mean the rate environment is.

Is it is not it is expected to become more constructive I guess is the point being if youre, if youre raising deposits in a world where the yield curve is inverted or at best getting getting less inverted.

As always going to be.

A tricky situation for for banks until it becomes a more stable upward sloping situation, which I think is more likely to be the case as you get into 'twenty four and certainly to the end of 'twenty four when you start seeing lower short term rates.

And nevertheless.

Peter Winter: People think about it as hanging paper and then deploying loans and not returning. We go through the exact same process, whether we're participating or leaving a transaction or a sole lender, and then also we do full credit analysis of every single extension. That we make whether it be shared national credit extension or not. So our, our SNCC book doesn't perform any worse than any other book that we have in the back.

A H.

An attractive long term rate, where we can basically deploy our capital and make a positive returns. So that's.

That's really what I think is going to shake out as you get into 'twenty for many other one one last piece of color I would add is that as.

As we enter 2024, we're still kind of having a net loan shrink and that'll eventually turnaround as the private banks starts to.

Peter Winter: And actually in some cases, this larger credits. So they might perform marginally better than some of the middle market assets that we have on the book over time. And I think just as part of BSL has Bruce as part of BSL in general, we're kind of looking at the total relationship returns. And if we went into a credit as a participant thinking we can kind of move left and become more important bank, that's not panning out. We're not getting across selling anticipated. Then we're extricating ourselves at the next available opportunity. So I think you'll continue to see that trend.

Put on loans.

We'll see where the economy is but.

We won't really need to we're not pressured to grow deposits given that dynamic on loans, we can still see the that'll be our improved just by keeping loans stable or even letting it drop a little bit so factoring that into the calculus of.

Do you really need to be aggressive given thats your dynamic around loans and deposits. It helps you manage the cost to do the deposit franchise.

Great. Thank you I appreciate all the color there.

Peter Winter: Yeah, let me just pick up on that. Just in the last quarter back to the loan growth question. We had about $900 million. A front book loan originations offset by about a billion six of BSL activity. So we're really churning the book towards full relationship credits and away from some of those participations that that Bruce mentioned. And I think a lot of the competition is doing exactly the same thing. We see people supporting their lead bank relationships and moving away from more speculative future opportunities. Thank you.

And just separately.

On the LCR requirements are you mentioned that your combined.

Category One academy between now.

And that Bill has also NII neutral.

The question is how much more do you think you need to build from here.

And how do you think about that increasing your asset sensitivity in the long run.

Yeah, I mean, I basically say.

Couple of questions in there I mean, I think the you know the <unk>.

John Woods: And then just can you just provide a little bit more color maybe on the positive repricing migration and how you see it playing out with a longer higher for longer rates. Just impacting the positive pricing pressures. Yeah, I'll go ahead and handle that. I mean, I'd say first off, I mean, I think when you look at our performance from a deposit data standpoint, we feel like we're basically in the back with what you're seeing across the industry, which is a really positive result compared to where we were last cycle, just part of the ongoing investments we've been making in in primacy and product capabilities and delivering the entire bank for our customers.

Regulatory requirements are are generally.

Inducing banks to become more asset sensitive you got the issue of more broadly.

It's the long term debt roll goes in that would be.

Along with having to old.

Liquidity that that.

That is shorter duration, that's going to cause asset sensitivity to grow overtime, where naturally an asset sensitive bank.

There's always those forces would cause us to be more asset sensitive so that all will that will have to consider.

John Woods: So we're really kind of pleased to see where we're how things are playing out, cycle the day. You know, that said, we still are. And we, you know, and frankly, you look at the overall metric of of non-interest bearing to overall deposits, we're around 22%. That's basically back to where we were pre pandemic. We've seen a decelerating migration out of non-interest bearing into interest bearing and seeing decelerating migration even inside of the interest bearing book.

And they're coming at during the transition periods, whether it makes sense to moderate those positions without balance sheet types of types of actions, but nevertheless, there is generally a tailwind of asset sensitivity being created from the regulatory environment, but also idiosyncratic to us our noncore portfolio as that runs off that's mostly a fixed book.

And that has a tailwind to asset sensitivity.

We're around neutral now so going becoming a bit more asset sensitive over time is as some of the underlying forces there that I would say.

John Woods: Nevertheless, you know, it's, it's, it's getting smaller every quarter. We would, we would expect to see that really, really dissipating over the coming, you know, quarter or two. And, and you know, that that's really what you see when you get late in the cycle and the feds on hold. So I'll be able to very get it out that trajectory. Yeah, maybe Brendan, you track very carefully how we're doing versus peers and some of our strategies to continue to maintain that low cost focus.

Our in place and we will decide.

As the environment plays out whether how and whether too.

To to moderate that and again the liquidity build as NII neutral so it's really not a driver.

And it's something that.

Again.

The NII guide of down 2% is really driven by.

Basically having a the then the ex liquidity build NIM decline is really the driver of that equates to the 2% that youre seeing in the guide so that's the way to pull it altogether for for Q.

John Woods: So maybe you could have some additional code. Yeah, something good. You know, so much of our low cost about the book is in the consumer space and obviously was buoyed through the pandemic by all the stimulus. We saw the rundown of the stimulus rate peak in May. And it started to evade as we've gotten to the summer and the fall. Although it's still kind of spending down at a decent clip. We do have a lot of analytics, benchmarking analytics on how we're doing.

Great. Thank you.

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

Good morning.

A lot of talk earlier in the call in terms of net interest income trajectory for next year and all the puts and takes but I just wanted to circle back on that.

A stable rate environment kind of higher for longer.

John Woods: And this is supportive of John's commentary that the franchise is performing at a very different level than it did the last upgrade cycle. We, we believe were number two in the peer set in terms of DDA consumer migration. So we're performing exceptionally well on the DDA side. And when you look at data on the consumer side, as compared with the growth that we're getting, it appears for about four to 500 basis points better in net growth on the consumer book through the cycle so far.

N and around what level.

Non interest income dollars start to bottom.

Yes.

We're still working through our 2024 outlooks right. So we're going to we're going to be.

So much more.

I would say transparent about what our expectations are for 'twenty four as you get into planning season here and completing that in and of course, we do that in January .

John Woods: And our data are mildly better. So more growth, slightly better cost on the core book. That's excluding citizens access. That's a real indicator of the quality of the franchise and the quality of the customer base that we've moved from sort of a community banking high price deposit focus. To deeply engaged primary banking relationship. So, you know, we expect the paydown of low cost deposits to continue to slow. Obviously, dependent on rate environment and the economy that that potentially could change what I do feel really confident in is that our relative performance appears will be strong and will continue to outperform on the consumer side of the stability of our low cost book.

With that said we do.

Probably.

As you look at the swap trajectory for us into 'twenty four we have a swap portfolio growing.

Right around the time that the forwards would indicate the fed would begin to cut in a matter of fact as I mentioned earlier. There is you know you could you could actually see deviation around that and we haven't had to do that.

<unk>.

It'll actually come in a little lower than that where the forwards have been coming in at the end of 'twenty four so that'll be a mitigate and as I mentioned, the non core rundown isn't met again.

And and.

Private bank as that grows is of course accretive.

John Woods: At the individual customer level, they still have a little bit more liquidity in their balances than they did three pandemic that's largely held by fluent and high net worth individuals are mass market book. And even in the mass influence space, they've sort of moderated back down to operating floor. So we think those are all signs that would support the continued slowdown in the rundown of low cost deposits, pending any recessionary impact that may bring them below operating floor.

The other thing I'll mention it I mean, if you get get the on 24 and you look at what's happening in the 25 through 27 Timeframes you you you did.

Certainly more consistent.

With a more neutral fed posture.

Posture.

That would represent.

Regardless of what the transition is in 24 that would represent a significant tailwind getting into 25% or 27 actually.

John Woods: So we feel pretty good and just on the uninsured and insured deposit front, you know, we saw a little bit of a blow up on the uninsured in March and since since March, that has been incredibly stable in all parts of the book have been growing. So all the fundamentals point to continued trajectory of stability and certainly continued outperform. And in addition to that, you know, we're controlling what we can control is, you know, we're performing in the top quartile in the United States in terms of household acquisition.

You see the swap portfolio being more of a neutral impact to net interest margin and NII.

And so working our way through 'twenty four we get we get we get some really nice tailwind and that's just on the active swap portfolio. We also have a locked in.

And baked in tailwind from the terminated swaps, which run off.

As you can see on our on our slide.

In a significant way over 25% to 27% so I would call. It 24 transition year, while the fed normalizes rates and our balance sheet optimization.

John Woods: The New York market as John pointed out is helping to give us an extra lever to drive low cost deposit grows over and above just the portfolio trends, which are generally outperforming. So we do believe we've got a distinctive amount of levers for the franchise to continue to perform in the medium term outlook on low cost deposits.

It takes it takes hold with noncore and creates creates a lot of momentum as you look out into 'twenty five and beyond.

Just to add a little color here, Matt to you and Eric because question I think.

John Woods: Very helpful. And then just one quick housekeeping, I just want to confirm, John, you said that the private the expense outlook for next year being flat, that includes the private bank buildout expenses. Yeah, so underlying expenses to the flat next year, including the private bank as well as non core. Thank you.

Erika was looking for John to say are you still holding at 3%.

In the fourth quarter. This year in the fourth quarter next year I think the reluctance to draw a line in the sand on 3% is the amount of the liquidity build in that some.

Some of the cards from the regulators on.

New liquidity regulation are turned over yet so just putting that aside if you just say that's a bit of an unknown that we still have an ambition to of our exit rate at the end of 'twenty three b roughly the exit rate at the end of 'twenty four yeah that would still be the ambition we have to go through the work.

Ken Usdin: Your next question comes from the line, comes from the line of Ken Usdin from Jeffries. Please go ahead. Hey, thanks. Good morning. Just follow up on that last question. I just wanted to ask you, I know the private bank bill that was 35 million across this quarter, just wondering if there's any changes to your expectation of what that would trend like going forward as part of that, you know, cross commentary? I think Brendan will probably have some color on this.

As John said to go through kind of the.

Budget process for next year, but that's still where we'd be hoping to to Iraq.

Yeah.

And then just in terms of the impact of rate cuts versus higher for longer scenario.

Ken Usdin: It's pretty similar into the fourth quarter. And then of course, in the next year, you see it starting to migrate towards a instead of being an EPS drag. It gets back to break even when you get out into 2024 and then more broadly, a 5% contribution to EPS is our arrow up there, but go ahead. Yeah, there'll be an interview for some mod, very modest up picks, you know, in the low 40s, potentially, and the reasons for that, you would hire the maturity of the team, as you all know, in the early part of the summer, the influences on that nudging offers are successful, securing of various different private banking offices coast to coast to house the team and start to bring in customers into the platform, some operating expenses clients come on board, as well as we're playing some very selective second tier offense.

What's what does higher for longer do versus the rate cuts because it sounds like there's still a little asset sensitive, but the roll on of the swaps would obviously benefit.

Benefit from rate cuts, so what's the net impact.

If rates are stable versus what the forward curve has for next year is it better or worse.

Yes, I would say I would say that.

We're positioned we're right around neutral.

Yeah.

A small.

All increase in rates was actually positive.

Two two hour.

Our platform.

A large tend to calculate this stuff you're using the <unk>.

The 100 basis points 200 basis point gradual rises with Brett diligently neutral and those kinds of calculations, which you'll see disclosures on in our 10-Q, but when it comes to just another hike.

Ken Usdin: There's still a lot of talent in motion and this quarter after the first 150, we also hired another 25 really top a list talent folks and in all of those same offices that we we opened in the summer. And so we're we're going to be selective, but as we see the right talent pop up, we're going to we're going to grab grab them and add them to the team. So. The other thing just in the way that top structure 10 that the folks who came over on guarantees is if they're fully producing so as the revenues come in, there won't be incremental costs, they'll just be kind of earning those pay levels, so not a factor to consider.

Or and those kinds of conversations meeting we tend to in the end.

And in those environments continue to make money.

And.

And have a positive impact on NII.

The other way so generally the forward curve is favorable to us I think we like the the tracking of the Foraker, we start getting cuts at the end of 'twenty four and that allows the continued front book back book, we like the long end being more anchored of little higher that helps too in terms of our originations and our fixed rate loan book.

Ken Usdin: Yeah, that's a great point. And then as a follow up, you guys have done a great job over the years on the top program. And I just I take your commentary about holding cost flat and inclusive of these extra builds that would apply a real turn exiting the year given that you ramped through the year on costs this year. And John, I know you mentioned AI as a piece of that increment, but you know, you've done a hundred plus of top each year.

So again and it also provides opportunities to later on lock in higher rates to the extent that that's desirable. So the forward curve is I think constructive for us.

Plus or minus is fine.

I think large moves either way is where we would say it starts to kind of create.

Pension headwinds, but other than that were feeling we feel okay with it.

Ken Usdin: I'm just wondering like where else would you be digging in inside across the organization to get that magnitude of of you know what seems to be a pretty meaningful implied extra cost save. Yeah, out of numbers next year. Thanks guys.

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

Yeah, I'd say I'd say forward curve is better and plus or minus is not going to move the needle very much.

Bruce Saun: So it's Bruce and let me start off and then John can amplify, but you know, the top program I think has been a real consistent contributor to our ability to deliver positive operating leverage, but to actually get to flat for next year. We have to go beyond that. So we've geared up a very nice top program and we're adding to it, but I think we're going to have to look at kind of employment levels broadly to see where we can extract some folks.

So we are having some cuts.

At a slow in general over the long term, thanks to better where maturity we are maturity intermediary.

Win rate when we have an upward sloping yield curve so.

Short short rates are at $5 50.

We think that it's more constructive to see short rates are around three to $3 50 over the long term. We also think it's constructive to have a 10 year, that's north of 4% in that same environment. So therefore, a gradual decline from $5 50 down to about $3 to $3 50 over the next two years, we think is not only.

Bruce Saun: And we'll look at certain business activities that may be less important going forward than what we have been engaged in historically. We've already done some of that this year. So we've downsized the mortgage business quite a bit. We've exited the auto business. So I think it's a combination of actions that's continuing to find ways to up size top leverage things like AI where we can do that. Look at our overall org structure and staffing levels and see if we can pinch some efficiencies there and then look hard at our business mix and figure out where.

Good for us, but good for the industry and and allow us to get back to an upward sloping yield curve and I think that that's the environment. We're in.

We would be it would be.

And in a very in a very good way that said, where we we pivoted and manage to the extent that the rate environment migrate differently than that but that's the one that I would say works out best for us in the industry as a whole.

Okay makes sense. Thank you.

Your next question comes from the line of Vivek <unk> from Jpmorgan. Please go ahead.

Bruce Saun: The key years, you know, not to just have a knee jerk revenues. There's revenue pressure in the environment. So let's really take a hard knife at all expenses. We have to be judicious about where we're cutting and protect the things that we feel are really going to help us grow and outperform in the medium term. So things like the private banks, things like the New York Metro expansion, there's things that we're going to ring fence and then there's other areas.

Hi, Thanks, I guess I have a couple of clarification just given all the discussions are going on.

John When you said, let's start with expenses you talked about underlying expenses to be flat next year. But then you also said that includes <unk>.

I would think and noncore.

Non core is not included in the way you define underlying expenses, so you're saying both.

Bruce Saun: We're going to have to go a little harder with the nice job. Yeah, I think that that covered it well, Bruce. I just, you know, and just ongoing the fundamentals of bread and butter of focusing on on organizational related items and third party spend and the like and I won't repeat all the all the categories that Bruce articulated. But we've got a fundamental underpinning that we feel like we have the opportunity to broaden out with while protecting the the initiatives that are going to help us outperform over the medium term. Okay, got it.

Underlying which is.

Core and reported expenses are both going to be flat next year.

No I'd say underlying expenses at the top of the house will be flat next year 24 versus 23 underlying includes private bank. It includes noncore overall CFT expenses will be flat in 24 versus 23.

Underlying does not exclude those things today vivek that include okay. Okay. So I wonder.

Bruce Saun: Thank you for the card.

Manan Gosalia: Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead. Hey, good morning. You have 67% of deposits from Consumer, the strong franchise there. And you noted that you should outperform Pia's on a relative basis. But one of your large Pias noted last week that banks may still be over earning on NII.

All of these definitions everybody has a little different so it's important to clarify that thank.

Thank you.

The second one I guess, John going back to the rate discussion.

Just trying to get my head wrapped around that.

If I heard you right just in response to Matt's question is that small increase in rates is beneficial to NII.

But then re cost is also positive so I'm trying to reconcile how both scenarios are positive for you.

Brendan Coughlin: So I guess my question was, how do you see competitive factors playing out for consumer deposits next year, especially if the rate environment stays higher for longer? Friends, anyone else? Yeah, we certainly have seen continued heavy competition for consumer deposits. You're seeing kind of money market and CD rates in the mid fives in some spots. We feel like we're competing really, really well on that. Obviously it's supported by our transformation on low cost.

Okay.

Yes, I can clarify that Vivek I mean, not a small increase in <unk>.

In rates from here would drive some NII, a small amount of NII and a small decline would be a would be a small a small negative in terms of the small decline in NII, but they're both quite small which is why we're calling ourselves neutral.

Brendan Coughlin: That's where you kind of start on how you manage strong NII levels and NIN levels is having a solid foundation of low cost, highly engaged customers. We have probably more levers than others have to manage through whatever the competitive intensity ends up coming our way in 2024. Certainly we have citizens access, which has been an incredibly positive tool for us to grow, intersparing deposits in a smart way with really sticky relationships, but also it helps not put too much contagion into the retail banking system with heavy kind of window rates on the front of the branches that may drive in hot money and bring the franchise into non-relationship based banking.

But just from a positioning standpoint, it would be a small positive if rates rise rates rose from here.

You know.

Let's say one one additional hike for example, lets say that if the fed is a hike in the fourth quarter in November December we'll see we'll see.

And then our contribution to that a small a small cut.

Goes the other way and also as you know.

Brendan Coughlin: And so that's been an incredibly effective tool to both raise money and also protect how we manage and compete on intersparing costs. We've also where we have competed in the core franchise with some of the more aggressive rates. We've done it in an incredibly relationship based way. So the access into no pun intended with citizens access, access into higher rates on deposits of your core banking customer of ours requires you to be in a relationship product.

But not not not a significant decline if there was a cut.

Okay. Thanks.

And to be clear that that's the.

The difference here is what happens immediately say in the next quarter versus what happens overtime, we are very constructive and and and feel very good about a gradual decline in rates. We are in the shorter end gets down to three to three and a half over call. It a.

Orderly quarterly period of time, we think that is very good as it gets timed for balance sheets to adjust and.

To have front book back books continue to get locked in and be supportive of a healthy balance sheet.

<unk> over the next you know call it a year or two is that our balance sheet optimization continues to take hold with noncore runoff et cetera. So we would.

Brendan Coughlin: We call it Quest or Private Client, which is a massive fluent or fluent value proposition. So when you do more with us, you get more, that strategy is enabled us to be more targeted and how we think about introducing intersparing costs into the environment, that we're able to protect and retain balances in a really thoughtful way versus reprice the entire book in some spots. So yeah, to the tens out there, we expect that to continue to the first half of the year as deposits are sort of hard to come by through the US banking system, but we think we've got the right tools and the right levers to continue to win and compete well with our peers.

Balance sheet does well with an upward sloping balance sheet that will migrate to over over the call. It the 24 and early 25 period.

And one more clarification on that that's.

That's helpful.

The expenses Bruce when you're talking about table for next year. What are you assuming for capital market. So are you assuming capital markets revenues and therefore incentive comp goes up or are you just using current level any color on that.

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

Yes, well, we haven't given the full guidance yet on 24, but there is a variable element of pay that if revenues go up and capital markets.

Pay would go up.

It's probably the one area that has the greatest tied to revenues across the bank and.

And we would have to contemplate that as we go through the budget process. So.

We said, we're targeting flat expenses for next year, and we would we would incorporate our view on kind of where the capital markets fees are going to be and then what additional payouts would result from that and then we'd have to find ways to offset that elsewhere in the bank.

Thanks.

And at this time there are no further questions with that I'll turn the call over to Mr. Vincent for closing remarks.

John Woods: So that's really what I think is going to shake out as you get into 24. Any other one last piece of color I would add is that as we enter 2024, we're still kind of having a net loan shrink and that'll eventually turn around as the private banks starts to put on loans and we'll see where the economy is, but we won't really need to we're not pressured to grow deposits given that dynamic on loans.

Okay. Thanks again for dialing in today, we certainly appreciate your interest and support have a great day. Thank you very much.

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

Yes.

Yeah.

John Woods: We can still see the LBR improved just by keeping won't stable or even letting them drop a little bit. So factoring that into the calculus of do you really need to be aggressive given that's your dynamic around loans and deposits that helps you manage the cost of your deposit franchise. Great. Thank you. I appreciate all the color there. And just separately on the LCR requirements, you mentioned that you are compliant and both category one and category three now, and that this bill is also NIH neutral. But I guess the question is how much more do you think you need to build from here?

We're sorry your conferences ending now please hang up.

John Woods: And how do you think about that increasing your asset sensitivity in the grant? Yeah, I mean, I basically say a couple of questions in there. I mean, I think the regulatory requirements are generally inducing banks to become more asset sensitive. You've got the issue of more broadly, the long term debt rule goes in that would be, you know, along with having to hold liquidity that is shorter duration, that's going to, you know, cause asset sensitivity to grow over time.

John Woods: We're naturally an asset sensitive bank, and those forces would cause us to be more asset sensitive. So that will, that will, you know, we'll have to consider in the, you know, in the coming and during the transition periods, whether it makes sense to moderate those positions without balance sheet types of actions. But nevertheless, there's generally a tailwind of asset sensitivity being created from the regulatory environment. But also, it is in credit to us, our non-core portfolio if that runs off.

John Woods: That's mostly a fixed book, and that has a tailwind to asset sensitivity. You know, we're around neutral now. So, you know, going, you know, becoming a bit more asset sensitive over time is some of the underlying forces there that I would say, you know, are in place, and we'll decide, as the environment plays out, whether how and whether to moderate that. And again, the liquidity bill is an AI neutral, so it's really not a driver.

John Woods: And it's something that, you know, again, you know, the NII guide of down 2% is really driven by, you know, basically having a, then the ex liquidity bill, NIM decline is really the driver of that. And it equates to the 2% that you're seeing in the guide. That's the way to pull it all together for 4Q. Great.

Matt Connor: Thank you.

Matt Connor: Your next question comes from the line of Matt Connor from Deutsche Bank. Please go ahead.

John Woods: Good morning. A lot of talk earlier in the call in terms of interesting conductories for next year and all the puts and takes. But I just wanted to circle back on that, you know, in a stable rate environment to kind of hire for longer, when and around what level. Because I'm not just thinking dollars start to bottom. Yeah, you know, we're still working through our 2024 outlooks, right? So we're going to, we're going to be, you know, much more.

John Woods: I would say transparent about what our expectations are for 24 as you get into planning season here and completing that and of course we do that in January. You know, with that said, we probably, you know, as you look at the swap trajectory for us into 24, we have a swap portfolio growing right around the time that the forwards would indicate the Fed would begin to cut. No matter, in fact, and as I mentioned earlier, there's, you know, you could, you could actually see deviation around that.

John Woods: And we happen to have a unit that it's like that it'll actually come in a little lower than where the forwards have it coming into the end of 24. So that'll be a midagent. And as I mentioned, the non-core rundown is a midagent. And, and, you know, private bank as that grows is of course creative. The other thing I'll mention, I mean, if you get, get the on 24 and you look at what's happening in the 25 through 27 time frames.

John Woods: You, you, you, it's certainly more consistent with a, a more neutral fed posture. That would represent, regardless of what the transition is in 24, that would represent a significant tailwind getting into 25 through 27. And, as you see, the swap portfolio being more of a neutral impact to net interest margin and AI. And so working our way through 24, we get, we get, we get some really nice tailwinds. And, and that's just on the act of swap portfolio.

John Woods: We also have a locked in and baked in tailwind from the terminated swaths, which run off. As you can see on our, on our slide, in a significant way over 25 to 27. So I would call 24 transition year while the fed normalizes rates.

Bruce Saun: And our balance sheet optimization takes, takes hold of non-core and creates a lot of momentum as you look out into 25 and beyond. Yeah, I would just add a little color here, Matt, to you and Erica's question. I think Erica was looking for John to say, you know, are you still holding a 3% in the fourth quarter this year and the fourth quarter next year? I think the reluctance to draw a line in the sand on 3% is the amount of liquidity bill.

Bruce Saun: And that, you know, some of the cards from the regulators on new liquidity regulation part turned over yet. So just putting that aside, if you just say that's a bit of an unknown, do we still have an ambition to have our exit rate at the end of 23 be roughly the exit rate at the end of 24. Yeah, that would still be the ambition. We have to go through the work is John said to go through kind of the budget process for next year, but that's still where we'd be hoping to to arrive, and then just in terms of the impact of rate cuts versus higher for longer scenario, you know, what does higher for longer do versus the rate cuts?

Bruce Saun: Because it sounds like it's still a little acid sensitive, but the roll on of the swaps, you know, would obviously benefit from rate cuts. So what's the net impact if rate is stable versus what the forward curve has for the next year? Is it better or worse? Yeah, I would say that we're positioned to get, we're right around neutral. The, you know, the, a, a small increase in rates is actually positive to, you know, to our, our platform, a large, you know, we tend to calculate the stuff using the, the 100 basis point and 200 basis point gradual rises with breath, relatively neutral and those kinds of calculations, which you'll see disclosures on in our 10 queue.

Bruce Saun: But when it comes to just, you know, another hike or, and those kinds of conversations, meaning, you know, we tend to, in, in, in those environments, continue to make money and, and, and, and have a positive impact to NII. The, the other way, the, you know, so generally the forward curve is, is, is favorable to us. I think we like the, the tracking of the forward curve. We start getting cuts at the end of 24 and that allows the continued front book, back book.

Bruce Saun: We like, you know, the long end being more anchored of little higher. That helps too in terms of our originations of our fixed rate loan book. So again, and it also provides opportunities to later on lock in higher rates to be said that that's desirable. So, you know, the forward curve is, I think, constructive for us. Slaughter minus is fine. I think large news either way is where we would say it starts to, you know, kind of, uh, create, you know, potential headwinds.

Bruce Saun: But other than that, we're feeling, we, we feel okay with it. Okay, so the summarized steeper is better as a good rule of thumb. I say, I say forward curve is, is better. And plus or minus is, you know, is not going to move the needles very much. Um, you know, so, so having some cuts at a slow, and I mean, in general, over the long term, banks do better. What we're, we're maturity, you know, we, we're maturity intermediary.

Bruce Saun: Uh, when, when rate, when we have an upward slope in yield curve. So, um, we, you know, the short short rates are at 550. Um, we think that, that it's more constructive to see short rates around 3 to 350 over the long term. We also think it's constructive to have a 10 year that's north of 4% in that same environment. So therefore, a gradual decline from 550 down to about 3 to 350 over the next two years, we think is not only good for us, but good for the industry.

Bruce Saun: And, uh, and, and, and allow us to get back to an upward slope in yield curve. And I think that that's the environment where, where we would be, we would be performing in a, in a very, in a very good way. That said, we're, you know, we, we, um, we, we pivot and manage to the extent of the rate of arm and migrates differently than that. But that's the one that I would say works out the best for us in the industry as a whole.

Matt Connor: Okay, thanks.

Vivek Juneja: Thank you.

John Woods: Your next question comes from the line of Vivek, Juneja from JPMorgan. Please go ahead. Hi, thanks. I guess I have a couple of clarifications given all the discussions going on. John, when you said, let's start with expenses, you talked about underlying expenses to be flat next year, but then you also said that includes private bank and non-core. Non-core is not included in the way you define underlying expenses. Are you saying both underlying, which is core and reported expenses, are both going to be flat next year?

John Woods: Now, say underlying expenses at the top of the house will be flat next year, 24 versus 23. Underlying includes private bank, it includes non-core. Overall, CFG expenses will be flat in 24 versus 23. Underlying does not exclude those things today, Vivek, it includes those things.

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

John Woods: Yeah, I can clarify that with that. I mean, a small increase in rates from here would draw some NII, a small amount of NII, and a small decline would be a, would be a small, a small negative in terms of a small decline in NII, but they're both quite small, which is why we're calling ourselves neutral, but from a positioning standpoint, it would be a small positive if rates were raised from here, and I mean, you know, let's say one, one additional hike, for example.

John Woods: Let's say if the Fed has a hike in the fourth quarter in November or December, we'll see, we'll see an NII contribution to that. A small, a small cut, you know, goes the other way and also, you know, but not, not, not a significant decline if there was a cut. Thank you. Yeah, and, and to be clear, that's, that's, and it, you know, it's the difference here is what happens immediately, say in the next quarter versus what happens over time.

John Woods: We are very constructive and, and, and, and feel very good about a gradual decline in rates, where the short and gets down to three to three and a half over, you know, call it, you know, a, a orderly, orderly period of time. And we think that's very good, and it gets time for balance sheets to adjust and, and, and, and to have front-back books continue to get locked in and, and be supportive of a healthy balance sheet migration over the next, you know, call it year or two as a balance sheet optimization continues to, to take hold with non-core runoff, et cetera. So, we, we, we would, our balance sheet does well with an upper floating balance sheet that will migrate to over, over the, the, you call it the 24 and early 25 period.

Bruce Saun: And one more clarification that, that's helpful on, on, on the expenses. Bruce, when you talk about table for next year, what are you assuming for capital markets? Are you assuming capital markets, revenues, and their incentive cost goes up, or are you just at the, using cart level, any color on that? Yeah, well, we haven't given the full guidance yet on 24, but, you know, there is a variable element of pay that if revenues go up in capital markets, that pay would go up.

Bruce Saun: That's probably the one area that has the greatest time to revenues across the bank. And we would have to contemplate that as we, you know, go through the budget process. So, we said we're targeting the flat expenses for next year, and we would, we would incorporate our view on kind of where the capital markets fees are going to be, and then what additional payouts would result from that. And then we'd have to find ways to offset that elsewhere in the bank. Thanks.

Bruce Saun: And at this time, there are no further questions. With that, I'll turn the call over to Mr. Van Sen for closing remarks. Okay, thanks again for dialing in today. We certainly appreciate your interest and support. Have a great day. Thank you very much.

Unknown Executive: Ladies, gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect. We're sorry, your conference is ending now. Please hang up.