Q3 2024 Citizens Financial Group Inc Earnings Call
Unknown Executive: Good morning, everyone, and welcome to the Citizens Financial Group's third quarter earnings conference call.
Good morning, everyone and welcome to the citizens Financial Group third quarter earnings Conference call My.
Unknown Executive: My name is Alan, and I'll be your operator today. Currently, all participants are in a listen-only mode.
Ellen: My name is Ellen and I'll be your operator today.
Ellen: All participants are in a listen only mode. Following the presentation, we will conduct a brief question and answer session.
Unknown Executive: Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this event is being recorded.
Ellen: As a reminder, this event is being recorded.
Kristin Silberberg: Now I'll turn the call over to Kristin Silberberg, Executive Vice President and Investor Relations. Kristin, you may begin.
I will turn the call over to Kristen Silverberg Executive Vice President Investor Relations Christian you may begin.
Kristin Silberberg: Thank you, Alan.
Kristin Silberberg: Good morning, everyone. And thank you for joining us.
Kristen Silverberg: You Alan and good morning, everyone and thank you for joining US This morning, Chairman and CEO, Bruce Van <unk> and CFO, John Woods will provide an overview about third quarter results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking are also here to provide additional color, we will be referencing our third quarter.
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 Don McCree, head of commercial banking, are also here to provide additional color. We will be referencing our third quarter earnings presentation located on our Investor Relations website. After the presentation, we'll be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties. This may cause our results to differ materially from expectations. These are outlines for your review on page two of the presentation.
Kristen Silverberg: Earnings presentation, located on our Investor Relations website. After the presentation, we'll be happy to take questions.
Kristen Silverberg: Comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your overview on page two of the presentation. We also reference non-GAAP financial measures. So it's important to review our GAAP results on page three of the presentation and the <unk>.
Kristin Silberberg: We also referenced non-GAAP financial measures, so it's important to review our GAAP results on page three of the presentation and the reconciliations in the appendix.
Kristen Silverberg: Conciliation in the appendix and with that I will hand over to Bruce Thanks, Chris and good morning, everyone. Thanks for joining our call today.
Bruce Saun: And with that, I will hand over to Bruce. Thanks, Kristin. Good morning, everyone. Thanks for joining our call today. We continue to execute well through an uncertain environment. We've made good progress on our strategic initiatives. Our balance sheet remains strong across capital, liquidity, funding, and loan reserves, and our profitability is stabilized and is poised to move higher.
Bruce Van: We continue to execute well through an uncertain environment. We've made good progress on our strategic initiatives, our balance sheet remains strong across capital liquidity funding and loan reserves.
Bruce Van: <unk> ability has stabilized and is poised to move higher.
Bruce Saun: Let me start with an update on our initiatives. First, the private bank delivered another terrific quarter. We reached 5.6 billion in deposits, up from 4 billion in Q2, and our assets under management reached 4.1 billion. During the quarter, we opened two new private bank offices in the San Francisco Bay Area, and we added a new private banking team to cover Southern California. We reached break even in August and September, and expected to be profitable in Q4 with good momentum entering 2025.
Bruce Van: Let me start with an update on our initiatives.
Bruce Van: First the private bank delivered another terrific quarter, we reached $5 6 billion in deposits up from $4 billion in Q2, and our assets under management reached $4 1 billion.
Bruce Van: During the quarter, we opened two new private bank offices in the San Francisco Bay area, and we added a new private banking chain to cover Southern California.
Bruce Van: We reached breakeven in August and September and expect to be profitable in Q4 with good momentum entering 2025.
Bruce Saun: Next, our commercial bank continues to demonstrate its capacity to serve private capital well. For the quarter, we were number two in the league tables for sponsor leveraged loan arrangements, and we remain number one over the past 12 months. We continue to add quality talent to our coverage in our capital markets teams. Our New York City metro initiative continues to show nice growth. We have 5% year-on-year growth in households and 7% growth in deposits. We look forward to being a key sponsor of the upcoming New York City Marathon as we continue to raise our brand profile in the market.
Bruce Van: Next our commercial bank continues to demonstrate its capacity to serve private capital well for the quarter. We were number two in the league tables for sponsor leveraged loan arrangements and we remain number one over the past 12 months.
Bruce Van: We continue to add quality talent to our coverage and our capital markets teams.
Bruce Van: Our New York City Metro initiative continues to show nice growth, we had 5% year on year growth in households, and 7% growth in deposits. We look forward to being a key sponsor of the upcoming New York City Marathon as we continue to raise our brand profile in the market.
Bruce Saun: We've executed well on top 9, achieving a Q4 run rate benefit of 135 million, and we're finalizing the details of top 10, which should have a 100 million plus run rate benefit by end of 2025.
Bruce Van: We've executed well on top nine achieving a Q4 run rate benefit of $135 million and we're finalizing the details of top 10, which should have a 100 million plus run rate benefits by the end of 2025.
Bruce Saun: RPSO actions continue to proceed as planned, non-core reduced by a billion dollars in the quarter, and we continue to use the liquidity generated to pay down higher cross funding like brokerage CD.
Bruce Van: Our BSO actions continue to proceed as planned noncore reduced by $1 billion in the quarter and we continue to use the liquidity generated to pay down higher cost funding like brokered Cds, we continue to execute actions in commercial to exit lending only relationships and we're focused on our medium.
Bruce Saun: News. We continue to execute actions in commercial to exit lending-only relationships, and we're focused on our medium-term plan to reduce CRE exposure. With respect to our balance sheet, our set one ratio is at 10.6%; adjusting for OCI puts us at 9.2%. We repurchased $325 million in stock during the quarter. Our spot LVR was 80.8%, and our Federal Home Loan Bank advances remain low at well under a billion dollars. We are not seeing much loan demand, though we remain hopeful this should start to pick up in coming quarters. Our P&L was impacted by the drag from forward starting swaps, which commenced in July, as well as some fees that pushed out to Q4.
Bruce Van: Term plan reduced CRE exposure.
Bruce Van: With respect to our balance sheet are set one ratio is at 10, 6% adjusting for OCI puts us at nine 2%.
Bruce Van: We repurchased $325 million in stock during the quarter.
Spot LDR was 88% at our federal home loan Bank advances remained low at well under $1 billion.
Bruce Van: We are not seeing much loan demand, but we remain hopeful this should start to pick up in coming quarters.
Bruce Van: Our P&L was impacted by the drag from forward, starting swaps, which commenced in July as well as some fees that pushed out to Q4.
Bruce Saun: Nonetheless, we did a good job managing expenses, and credit is performing broadly as expected. Our Q4 guide shows a nice rebound in both NII and fees, leading to positive operating leverage in the quarter. We expect credit to remain broadly stable, and we will continue to repurchase shares. For the full year, we will hit most of our beginning of your guide with the exception of balance sheet volume impacting NII and a modestly higher ACL build.
Bruce Van: Nonetheless, we did a good job managing expenses and credit is performing broadly as expected.
Bruce Van: Our Q4 guide shows a nice rebound in both NII and fees, leading to positive operating leverage in the quarter. We expect credit remained broadly stable and we will continue to repurchase shares for.
For the full year, we will hit most of our beginning of year guide with the exception of balance sheet volume impacting NII and a modestly higher ACL build.
Bruce Saun: We continue to have strong confidence in our medium-term outlook, and we've added to the materials in the appendix to show more detail on our NIM progression. Lots of uncertainty in the environment remains, but we feel good about our capacity to manage through that and continue to execute on our broad strategy.
Bruce Van: We continue to have strong confidence in our medium term outlook and we've added to the materials in the appendix to show more detail on our NIM progression.
Bruce Van: Lots of uncertainty in the environment remains but we feel good about our capacity to manage through that and continue to execute on our broad strategy.
Bruce Saun: Our strategy rests on a transformed consumer bank, the best positioned super regional commercial bank, and the aspiration to have the premier bank-owned private bank. We will continue to execute with the financial and operating discipline that you've come to expect from us.
Bruce Van: Our strategy rests on a transformed consumer bank the best positioned Super Regional commercial bank and the aspiration to have the Premier Bank owned private bank.
Bruce Van: We'll continue to execute with the financial and operating discipline that you've come to expect from us.
John Woods: With that, let me turn it over to John. Thanks, Bruce, and good morning, everyone. As Bruce mentioned, third quarter saw continued strong execution of our initiatives, and importantly, we believe the third quarter represents a trough in earnings, as NIM tail lens strengthening fees and continued expense discipline will result in positive operating leverage prospectively. We continue to maintain a strong balance sheet with excellent liquidity and capital levels and a healthy credit reserve. This positions us well to continue to execute on our strategic initiatives, which should help DRIP drive strong momentum in 2025 and performance over the medium term.
Speaker Change: With that let me turn it over to John.
John Woods: Thanks, Bruce and good morning, everyone.
John Woods: As Bruce mentioned third quarter saw continued strong execution of our initiatives and importantly, we believe the third quarter represents a trough in earnings as an Intel Lynn's strengthening fees and continued expense discipline will result in positive operating leverage prospectively.
John Woods: We continue to maintain a strong balance sheet with excellent liquidity and capital levels and a healthy credit reserve.
John Woods: This positions us well to continue to execute on our strategic initiatives, which should help drive strong momentum in 2025 and performance over the medium term.
John Woods: First, I'll start with some highlights of the third quarter financial results, referencing slides five and six. We generated underlying net income, a $392 million for the third quarter, EPS of 79 cents, and Rossi of 9.7%. This includes a negative 11-cent impact from the non-core portfolio, which will continue to steadily run off, creating a tail end for overall performance going forward. The private bank is making strong progress towards profitability, reaching breakeven mid third quarter, and we expect it to start being a creative turnings in the fourth quarter. Our capital position remains strong, with set one in 10.6% at September 30th, or 9.2% adjusted for the AOCI opt-out.
Speaker Change: First I'll start with some highlights of the third quarter financial results referencing slide five and six.
Speaker Change: We generated underlying net income of $392 million for the third quarter EPS at 79 cents and ROTC of nine 7%.
Speaker Change: This includes a negative 11% impact from the non core portfolio, which will continue to steadily Brian off creating a tailwind for overall performance going forward.
The private bank is making strong progress towards profitability, reaching breakeven mid third quarter, and we expect it to start being accretive to earnings in the fourth quarter.
Our capital position remains strong with <unk> at 10, 6% at September 30th.
Speaker Change: Nine 2% adjusted for the <unk> opt out removal and we executed $325 million in stock buybacks during the quarter.
John Woods: removal, and we executed 325 million in stock buybacks during the quarter. We also maintain the strong funding and liquidity profile. Our pro forma LCR is 122%, which is well in excess of the large bank category one requirement of 100%, and our period NLDR is 80.8%. Our ACL coverage ratio of 1.61% is down two basis points from the prior quarter, given an improved macroeconomic outlook, an ongoing frontbook activity driving a mixed shift with slower expected loss content in the loan portfolio. We increase our general office reserve to 12.1% up from 11.1% in the prior quarter.
Speaker Change: We also maintained a strong funding and liquidity profile.
Speaker Change: Our pro forma LCR is 122%, which is well in excess of the large bank category, one requirement of 100% and our period end LDR is 88%.
Speaker Change: Our ACL coverage ratio of 161% is down two basis points from the prior quarter, given that improved macroeconomic outlook and ongoing front book activity driving a mix shift towards lower expected loss content in our loan portfolio.
Speaker Change: We increased our general office reserve to 12, 1% up from 11, 1% in the prior quarter.
John Woods: Now I'll talk to you the third quarter results in more detail, starting with NIIs down 2.9% linked order, primarily reflecting lower NIM and slightly lower interest starting assets. With respect to NIM, our margin was down 10 basis points to 2.77%, largely reflecting the impact from the increase in hedge costs as forward starting swaps kicked in during the quarter. Other NIM impacts were largely offsetting. Moving to slide 8, our fees were down 2.7% linked order with seasonality in capital markets and solid card and wealth results. On the heels of a very strong second quarter, our capital market fees decreased 30% as deal activity slowed given seasonal trends and some M&A deals pushed into the fourth quarter.
Speaker Change: Now I'll talk through the third quarter results in more detail starting with net interest income on slide seven.
Speaker Change: And then.
Speaker Change: Two 9% linked quarter, primarily reflecting lower NIM and slightly lower interest earning assets.
Speaker Change: With respect to NIM, our margin was down 10 basis points to 277% largely reflecting the impact from the increase in hedge costs as forward starting swaps kicked in during the quarter.
Speaker Change: Other impacts were largely offsetting.
Speaker Change: Moving to slide eight our fees were down two 7% linked quarter with seasonality in capital markets and solid card and wealth results.
On the heels of a very strong second quarter, our capital markets fees decreased 30% as deal activity slowed given seasonal trends and some M&A deals pushed into the fourth quarter.
John Woods: Here on year, however, capital market fees were up 40%, led by bond underwriting and M&A advisory fees. Our client hedging revenue was down slightly as some clients delayed their interest rate hedging plans given the potential for a faster pace of rate cuts after the Fed eased aggressively in September. Mortgage banking fees are down modestly, given a decline in MSR results net of hedging. This was offset by securities gains we took in making adjustments for the investment portfolio. Our wealth fees were up slightly, given growth in AUM from the private bank, which was somewhat offset by lower transactional sales activity.
Speaker Change: Year on year, However, capital markets fees were up 40% led by bond underwriting and M&A advisory fees.
Speaker Change: Our client hedging revenue was down slightly as some clients delayed their interest rate hedging plans given the potential for a faster pace of rate cuts after the fed eased aggressively in September.
Speaker Change: Mortgage banking fees are down modestly given the decline in MSR results net of hedging.
Speaker Change: This was offset by securities gains, we took in making adjustments to the investment portfolio.
Speaker Change: Our wealth fees were up slightly given growth in AUM from the private bank, which was somewhat offset by lower transactional sales activity.
John Woods: We continue to focus on building out our wealth business in both our branch-based financial advisory activity as well as in private wealth, where we are adding teams in our private bank office geographies. Total assets under management now approximate approximate $30 billion.
Speaker Change: We continue to focus on building out our wealth business in both our branch based financial advisory activity as well as in private wealth, where we are adding teams and our private bank office geographies.
Speaker Change: Total assets under management now approximate approximately 30 about $30 billion.
John Woods: On slide 9, we did a nice job on expenses, which were down 1.3% linked quarter, notwithstanding continued investment in our strategic initiatives. Our top 9 program is on target to deliver $135 million pre-tax run rate benefit by the end of the year. And we are planning to launch our top 10 program, which will target more than $100 million in run rate efficiencies by the end of 2025. We will provide more details for you in our next rounds or down 1% linked quarter for reflecting limited loan demand as well as continued balance sheet optimization. We continue to run down a non-core portfolio to the tune of about $1 billion in the quarter.
Speaker Change: On slide nine we did a nice job on expenses, which were down one 3% linked quarter notwithstanding continued investment in our strategic initiatives.
Speaker Change: Our top nine program is on target to deliver $135 million pre tax run rate benefit by the end of the year.
Speaker Change: And we are planning to launch our top 10 program, which will target more than $100 million and run rate efficiencies by the end of 2025.
Speaker Change: We will provide more details for you on our next earning call.
Speaker Change: On.
Speaker Change: 10.
Speaker Change: Period end loans are broadly stable and average loans were down 1% linked quarter, reflecting limited loan demand as well as continued balance sheet optimization.
We continue to run down the non core portfolio to the tune of about $1 billion in the quarter.
John Woods: Governor. The core loan portfolio was up about $800 million with solid contributions from the private bank and growth in retail mortgage and home equity. On a period in basis, the private bank is making good progress with loans up about $630 million to $2 billion. Excluding the private bank, retail loans were up about $750 million, reflecting growth in mortgage and home equity, while commercial loans were down about $580 million, reflecting paydowns, driven by corporate's continuing to issue in the debt markets, exits of lower returning credit-only relationships, and generally lower client loan demands.
Speaker Change: The core loan portfolio is up about $800 million with solid contributions from the private bank and growth in retail mortgage and home equity.
Speaker Change: On a period end basis, the private bank is making good progress with loans up about $630 million to $2 billion.
Speaker Change: Excluding the private bank retail loans were up about $750 million, reflecting growth in mortgage and home equity while commercial loans were down about $580 million, reflecting paydowns driven by corporates continuing to issue in the debt markets.
A lower returning credit only relationships and generally lower client demand.
John Woods: Next, on slide 11 and 12, we continue to do a good job on deposits in a very competitive and dynamic environment. Average deposits are broadly stable, with period-end deposits down 1%, driven by the paydown of higher-cost treasury deposits tied primarily to non-core rundowns. This was partially offset by $1.6 billion of attractive growth in private bank deposits. Our interest bearing deposit costs were up four basis points linked quarter. However, total deposit costs were up only two basis points, while total cost of funds was stable. DDA bonds were effectively flat-linked quarter, with growth in the private bank being offset by lower commercial.
Speaker Change: Next on slides 11, and 12, we continued to do a good job on deposits in a very competitive and dynamic environment.
Speaker Change: Average deposits are broadly stable with period end deposits down 1% driven by the Paydown of higher cost treasury deposits tied primarily to noncore rundown.
Speaker Change: This was partially offset by $1 $6 billion of attractive growth and private bank deposits.
Speaker Change: Our interest bearing deposit costs were up four basis points linked quarter. However, total deposit costs were up only two basis points, while total cost of funds was stable.
Speaker Change: DDA balances were effectively flat linked quarter with growth in the private bank being offset by lower commercial.
John Woods: We anticipate that migration of lower to higher cost categories will drop off now that the Fed has commenced the cutting cycle. Overall, our deposit franchise continues to perform well in a very competitive environment. Our estimates indicate we ended the upgrade cycle with a terminal interest bearing deposit data better than the peer average. Our deposit franchise is highly diversified across product mix and channels. About 70% of our deposits are granular, stable consumer deposits, and roughly 68% of our overall deposits are insured or secured.
Speaker Change: We anticipate that migration of lower to higher cost categories will drop off now that the fed is commit has commenced the cutting cycle.
Speaker Change: Overall, our deposit franchise continues to perform well in a very competitive environment.
Speaker Change: Our estimates indicate we ended the upgrade cycle with a terminal interest bearing deposit data better than the peer average.
Speaker Change: Our deposit franchise is highly diversified across product mix and channels about 70% of our deposits are granular stable consumer deposits and roughly 68% of our overall deposits are insured or secured.
John Woods: Moving to credit on slide 13, net charge-offs rose two basis points to 54 basis points, primarily reflecting seasonal impacts on auto. A decline in commercial real estate charge-offs was offset by the resolution of several non-performing credits in C&I. Now the cruel loans increased 10% linked quarter, primarily reflecting an increase in Cree General Office, as we proceed with workout actions on a handful of loans. We believe we are in a peak of NPAs as criticized classified loans have been broadly stable for four quarters, and loans in workout get resolved. Starting from the allowance for credit losses on slide 14, our overall coverage ratio stands at 1.61%, which is the two basis point decline from the prior quarter, reflecting an improving macroeconomic outlook and better loan mix, given the runoff of the non-core auto portfolio and lower lost content originations in retail, real estate, secured, and commercial categories.
Speaker Change: Moving to credit on slide 13.
Speaker Change: Net charge offs rose two basis points to 54 basis points, primarily reflecting seasonal impacts in auto.
Speaker Change: A decline in commercial real estate charge offs was offset by the resolution of several nonperforming credits and C&I.
Speaker Change: Non accrual loans increased 10% linked quarter, primarily reflecting an increase in Cree General office as we proceed with workout actions on a handful of loans.
We believe we are going to peak of Npa's as criticized classified loans have been broadly stable for four quarters and loans and workout get resolved.
Speaker Change: Turning to the allowance for credit losses on slide 14.
Speaker Change: Our overall coverage ratio stands at 161%, which is a two basis point decline from the prior quarter, reflecting an improving macroeconomic outlook and better loan mix given the runoff of the noncore auto portfolio and lower loss content originations in retail real estate secured and commercial categories.
John Woods: The general office portfolio was down 150 million to 3.2 billion at the end of the third quarter, and our reserve of 382 million represents 12.1% coverage, up from 11.1% in the second quarter. On the right side of the page, you can see some of the key assumptions driving the general office reserve covers level. While rate cuts may be beneficial at the margin, we continue to expect the sector to be challenged. We believe our current reserve represents a severe scenario that is much worse than we've seen in historical downturns, so we feel the current coverage is very strong.
Speaker Change: The General office portfolio was down $150 million to $3 2 billion at the end of the third quarter and a reserve of $382 million represented 12, 1% coverage up from 11, 1% in the second quarter.
Speaker Change: On the right side on page you can see some of the key assumptions driving the general office reserve coverage level.
Speaker Change: Rate cuts may be beneficial at the margin we continue to expect our sector to be challenged we believe our current reserve represents a severe scenario. It is much worse than we've seen in historical downturn. So we feel the current coverage is very strong.
John Woods: Additionally, since the second quarter of 2023, we have absorbed 364 million of cumulative loss of the general office portfolio. When you add these cumulative losses to the reserve outstanding, this represents an almost 20% loss rate based on a March 2023 balance of $4.1 billion. Over the past six corners, we have continued to work down the exposure to general office. With the portfolio down roughly $1 billion over the last 18 months to $3.2 billion at September 30th, given pay downs of about $600 million.
Speaker Change: Additionally, since the second quarter of 2023, we have absorbed $364 million of cumulative cumulative losses and the general office portfolio.
Speaker Change: When you add these cumulative losses to the reserve outstanding. This represents an almost 20% loss rate based on our March 2023 balance of $4 1 billion.
Speaker Change: Over the past six quarters, we have continued to work down the exposure to general office.
Speaker Change: With the portfolio down roughly $1 billion over the last 18 months to $3 2 billion at September 30th given Paydowns of about $600 million. In addition to the charge offs are just mentioned.
John Woods: In addition to the charge also just mentioned.
John Woods: Moving to slide 15 and 16, we have maintained excellent balance sheet strength. Our set one ratio is a strong 10.6%, which compares to 10.7% in the prior quarter. And if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our set one ratio increased from 9% to 9.2%. Both our set one and TCE ratios have consistently been above the average of our peers. Given our strong capital position, we repurchased $325 million in common shares. And including dividends, we've returned to total of 516 million to shareholders in the third quarter.
Speaker Change: Moving to slide 15, and 16, we have maintained excellent balance sheet strength.
Speaker Change: Our set one ratio is a strong 10, 6%, which compares with 10, 7% in the prior quarter and if you were to adjust for the <unk> opt out rooms, all under the current regulatory proposal are set one ratio increased from 9% to nine 2%.
Speaker Change: Both at <unk> and TCE ratios have consistently been above the average of our peers.
Speaker Change: Given our strong capital position, we repurchased $325 million in common shares and including dividends. We returned a total of 560 <unk> $16 million to shareholders in the third quarter.
John Woods: Moving to slide 17, our strategy is built on a transformed consumer bank, the best position commercial bank among our regional peers, and our aspiration to build a premier bank on private bank and well franchise. First, we have a strong transformed consumer bank with substantial well-revenue potential that is set to drive further deposit growth while efficiently managing costs. And we are well positioned to continue gaining market share in the important New York metro market. Next, we believe we have built a leading commercial bank among the super regional banks. We are focused on serving sponsors and middle market companies and high growth sectors of the economy.
Speaker Change: Moving to slide 17.
Speaker Change: Strategy is built on a transformed consumer bank that best position commercial bank among our regional peers.
Speaker Change: Our aspiration to build a premier bank on private bank and wealth franchise.
First we have a strong transformed consumer bank with substantial wealth revenue potential and are set to drive further deposit growth while efficiently managing costs and we are well positioned to continue gaining market share in the important New York Metro market.
Speaker Change: Next we believe we have built a leading commercial bank among the superregional banks.
Speaker Change: Our focus on serving sponsors and middle market companies in high growth sectors of the economy.
John Woods: Our investments over the years in capital market scalabilities and coverage of the private capital space, a position does well to take advantage when market activity takes up. With the Fed beginning to ease and fears of room of a recession subsiding, the moon and our commercial client base is decidedly more positive, which has us optimistic that we'll see a strong finish to the year and good momentum into 2025. And we are pleased to report that for the third quarter in a row, our capital markets business is at the top of the middle market lead tables, holding the number one sponsor middle market book runner position on a trailing 12-month basis.
Our investments over the years and capital markets capabilities and coverage of the private capital space have positioned us well to take advantage when market activity picks up.
Speaker Change: With the fed beginning to ease and fears of a recession subsiding the mood of our commercial client base is decidedly more positive which has us optimistic that we will see a strong finish to the year and good momentum into 2025.
Speaker Change: And we are pleased to report that for the third quarter in a row, our capital markets business at the top of the middle market lead tables, holding the number one sponsor middle market book runner position on a trailing 12 month basis.
John Woods: Moving to the private bank, and pleased to report that the effort is going very well and continues to gain momentum, we are growing our client base and now have about 5.6 billion dollars of attractive deposits. This is a 1.6 billion increase from the prior quarter, with roughly 34% non-interest bearing. Governor. Also, we are now at $2 billion of loans and continuing to grow. We recently announced the addition of a top private banking team in Southern California, and we have plans to add new offices in the Bay Area, which adds to the offices we've already opened in San Francisco and Mill Valley, California, Palm Beach, and Boston.
Speaker Change: Moving to the private bank I am pleased to report that the effort is going very well and continues to gain momentum.
Speaker Change: We're growing our client base and now have about $5 $6 billion of attractive deposits.
Speaker Change: This is a $1 6 billion increase from the prior quarter with roughly 34% noninterest bearing.
Speaker Change: Also we are now at $2 billion of loans and continuing to grow.
Speaker Change: We recently announced the addition of a top private banking team in Southern California, and we have plans to add new offices in the Bay area, which adds to the offices, we've already opened in San Francisco in Mill Valley, California.
Speaker Change: Beach and Boston.
John Woods: You should expect to see us opportunistically adding talent to bolster our banking and wealth capabilities. Notably, our private bank revenue grows 64% to $49.7 million in the third quarter.
Speaker Change: You should expect to see us opportunistically, adding talent to bolster our banking and wealth capabilities.
Speaker Change: Notably our private bank revenue rose, 64% to $49 7 million in the third quarter.
Speaker Change: Moving to slide 18, we provide our guidance for the fourth quarter.
John Woods: We've prepared by the guys for the fourth quarter. This outlook contemplates a 25 basis point rate cut in each of November and December. We expect NII to be up about 1.5 to 2.5% driven primarily by a five basis point improvement in net interest margin, reflecting the benefit of swaps, given lower rates, deposit repricing, non-core run-off, and favorable front book backlog dynamics, partially offset by a lower half a yield. Spot loans should be up slightly, paced by private bank and commercial sponsor activity. Non-interest income should be up mid to high single digits, reflecting expected seasonal strength in capital markets.
This outlook contemplates a 25 basis point rate cut in Egypt November and December.
Speaker Change: We expect NII to be up about one five to two 5% driven primarily by a five basis point improvement in net interest margin.
Speaker Change: Afflicting the benefit of swaps given lower rates deposit repricing noncore runoff and favorable front book back book dynamics.
Speaker Change: Actually offset by lower asset yields.
Speaker Change: Bought loans should be up slightly paced by private bank and commercial sponsor activity.
Speaker Change: Noninterest income should be up mid to high single digits, reflecting expected seasonal strength in capital markets.
John Woods: Our deal length lines are robust, and we expect to see a strong finish to the year. We also expect modest improvements across other key categories. Non-interest expenses projected to be up about 2%, and we expect to achieve positive operating leverage. Now, charge drops are expected to be broadly stable while the ACL should continue to benefit from non-core run-off and improving low mix. Our set of one ratio is expected to be broadly stable with about 200 to 250 million of share repurchases.
Our deal pipelines are robust and we expect to see a strong finish to the year.
Speaker Change: We also expect modest improvements across other categories.
Speaker Change: Noninterest expense is projected to be up about 2% and we expect to achieve positive operating leverage.
Speaker Change: Net charge offs are expected to be broadly stable, while the ACL should continue to benefit from non core runoff and improving loan mix.
Our set one ratio is expected to be broadly stable with about $200 million to $250 million of share repurchases.
John Woods: I call your attention to an updated side in the appendix on our medium-term in-walk, which projects us to be in the 3.25 to 3.4% range in 2027. To wrap up, we delivered a solid quarter in a dynamic environment with strong role results in capital markets, wealth and card, and credit performance that continues to play out largely as expected. We are playing strong defense, maintaining a robust capital and reserve position. Importantly, we are also playing offense as we pursue our unique multi-year strategic initiatives, which will drive improving performance over the medium term. We remain confident in our ability to hit our medium term 16 to 18% return target.
Speaker Change: I call your attention to an updated slide in the appendix on our medium term NIM walk, which projects us to be in the three to five to three 4% range in 2027.
Speaker Change: To wrap up we delivered a solid quarter in a dynamic environment with strong ruble result in capital markets wealth and card and credit performance that continues to play out largely as expected.
We are playing strong defense, maintaining a robust capital and reserve position.
Speaker Change: Importantly, we are also playing offense as we pursue our unique multi year strategic initiatives, which will drive improving performance over the medium term.
Speaker Change: We remain confident in our ability to hit our medium term, 16% to 18% return target with that I'll hand back over to Bruce.
Bruce Saun: With that, I'll hand back over to Bruce. Okay, thank you, John.
Bruce Van: Okay. Thank you John.
Unknown Executive: Alan, let's open it up for some Q&A. And thank you, Mr. Vanson. Ladies and gentlemen, we will now begin the Q&A portion of the call.
Bruce Van: Open it up for some Q&A.
Speaker Change: Thank you Mr. Vince on ladies and gentlemen, we will now begin the Q&A portion of the call.
Unknown Executive: Your first question comes from me. If you would like to ask a question, please press 1, then 0 on your telephone keypad. You'll hear an indication you've been placed into Q, and you may remove yourself from the Q by repeating the 1 then 0 command.
Speaker Change: Your first question comes pardon me.
Speaker Change: If you'd like to ask a question. Please press one then zero on your telephone keypad, you'll hear an indication do you have been placed into queue and you may remove yourself from the queue by repeating the one zero command, if youre using a speakerphone and.
Unknown Executive: If you're using a speaker phone, or pardon me, if you're using a speaker phone, ask that you please pick up your handset and to make certain your phone is unmuted before pressing any buttons. Again, for questions, press 1, then 0 at this time.
Speaker Change: Or pardon.
Speaker Change: Pardon me if you are using a speaker phone and I ask that you. Please pickup your handset and to make certain your phone is on muted before pressing antibody.
Again for questions, perhaps one zero at this time.
Scott Siefers: Our first question will come from the line of Scott Siefers with Piper Sandler. Your line is open.
Speaker Change: Our first question will come from the line of Scott <unk> with Piper Sandler Your line is open.
Scott Siefers: Morning, everyone. Thank you for taking the question. John wanted to start out with a couple questions, both related to the margin progression and that medium-term walk to which you alluded on slide 23, as we kind of start the March upward. Maybe first in the immediate term, can you sort of walk through the puts and takes that allow for the five basis points or so of margin expansion into the fourth quarter. And then I get more importantly, as we sort of start the journey upward and think about that next year or so, it looks like that 18 basis points of time-based benefits is largely programmatic, which all else equal would get us to like a 295.
Speaker Change: Good morning, everyone. Thank you for taking the question.
John wanted to start off with a couple of questions both related to the margin progression in that medium term work towards you alluded on slide 23, as we kind of start the March upward maybe first in the immediate term can you sort of walk through the puts and takes that allow for the five basis points or so of margin expansion into the fourth quarter, and then I guess more importantly, as we sort of.
Speaker Change: Start the journey upwards and you think about that next year or so it looks like that 18 basis points of time based benefits is largely programmatic, which all else equal would get us to like a 295, but of course, the wildcards are like the timing of the ebbs and flows of the swaps and the rate based impact. So maybe if you could sort of help.
Scott Siefers: But of course, the wild cards are like the timing of the ebbs and flows of the swaps and the rate-based impact. So maybe if you could sort of help, I guess narrow the cone on the moving parts as we think about the next few quarters, please.
I guess narrow the cone on the moving parts as we think about the next few quarters. Please.
John Woods: Yeah, sure. Thanks. Thanks for the question, Scott.
Speaker Change: Yes sure. Thanks. Thanks, Thanks for the question, Scott I'd say, starting off with the fourth quarter.
John Woods: I'd say starting off with the fourth quarter. I mean, I think when you think about the progression there, one of the drivers, several drivers of tailwinds that we're seeing. First off, I would know if I light non-core, which continues to contribute about two basis points of quarter. And so that's the starting point. I think the second big driver is broadly the active balance management, fixed asset repricing, and in front book back book that continues to play out on a, we'll continue to play out every quarter going forward. And that's a huge contributor. I'll offer up one of the highlights of the balance sheet transition as you get into the fourth quarter. Also, it relates to deposit migration.
Speaker Change: When you when you think about the progression there.
Speaker Change: The drivers several drivers of tailwind that we're seeing first off highway job I'd highlight noncore, which continues to contribute about two basis points a quarter and so that's the starting point I think the seventh the second big driver is broadly.
Speaker Change: Active balance sheet management fixed asset repricing and front book back book that continues to play out on US we will continue to play out every quarter going forward.
Speaker Change: That's a huge contributor.
Speaker Change: I'll offer up one of the.
Speaker Change: The highlights of.
Speaker Change: Our balance sheet transition as you get into the fourth quarter also relates to deposit migration. We've had we've had negative deposit migration throughout the cycle that's been.
Bruce Saun: We've had negative deposit migration throughout the cycle that's been declining over time. And we're seeing late third quarter, early fourth quarter trends that tell us that that's going to flip around to be more of a neutral, maybe a slightly positive, going into the fourth quarter. And that's really significant for that to become less of a headwind than it's been given what's been going on in the past. I mean, I think broadly, just on the color on that, let me just jump in here, John, but we have the private bank continuing to generate very attractive deposits.
Speaker Change: Kind of declining over time.
Speaker Change: And we're seeing it.
Speaker Change: Late third quarter early fourth quarter trends that tell us that that's going to flip around to be more of a neutral maybe slightly positive going into the fourth quarter.
Speaker Change: And that's really significant.
Speaker Change: For that to become.
Speaker Change: Less of a headwind that it's been and given given what's been going on in the past.
Speaker Change: I think broadly just on the color on that let me just jump in here John but.
Speaker Change: We have the private bank continuing to generate very attractive deposits, they've been growing well over $1 billion and $1 billion five range for the last two quarters, so that will be.
Bruce Saun: And they've been growing well over a billion in a billion and a half range the last two quarters. So that that'll be positively benefiting that mix, and then typically seasonally in the fourth quarter, we'll see an uptick in both commercial and consumer in terms of demand deposits. So we're counting on that as part of the equation. Absolutely.
Speaker Change: Positively benefiting that mix and then typically seasonally in the fourth quarter, we will see an uptick.
Speaker Change: In both commercial and consumer in terms of demand deposits. So were counting on that as part of the equation.
John Woods: I think just just playing on that a little further. I mean, I think, you know, we are we are slightly, you know, the other big category. We are slightly asset sensitive, but based on the non core and those balance sheet trends that we just talked about, you know, we, those are more powerful. And are, you know, you've got to keep in mind that, you know, the receipts like swaps, which have been ahead when they're going to flip over to a tailwind and be a midagent to our assets sensitivity going forward. So they'll actually contribute into the fourth quarter.
Speaker Change: And I think just just playing on that a little further I mean I think we are we are slightly the other way.
Speaker Change: <unk>, we are slightly asset sensitive, but based on the non core and those balance sheet trends that we just talked about.
Speaker Change: Those are more powerful and our.
Speaker Change: You got to keep in mind that the rich.
Speaker Change: <unk> swaps, which had been a headwind are going to flip over to a tailwind and be a mitigate to asset sensitivity going forward. So they will they will actually contribute into the fourth quarter.
Speaker Change: And.
John Woods: And so one of the important things we're also doing is being extremely proactive on downbatas. You know, just taking all the learnings from prior cycles and what you've seen from our deposit portfolio, where we're our deposit betas on the up are. Now, you know better than peer average from what we can tell. We're flipping that all of that energy and capability into the down beta management, being highly proactive in the consumer side of things. And, you know, on the commercial side, most of our deposits there are, majority of them are 100% beta anyway, but we're feeling really good about how we're really bouncing on this transition to a down rate cycle.
Speaker Change: And so one of the important things. We're also doing is being extremely proactive on down betas.
Speaker Change: Just taking all the learnings from prior cycles, and what you've seen from our deposit portfolio, where our deposit betas on the App are now.
Speaker Change: Better than peer average from what we can tell we're flipping that all of that energy and capability into the down data management being highly proactive.
Speaker Change: In the consumer side of things and on the commercial side most of our deposits. There are the majority of them are 100% beta anyway, but we're feeling really good about how we're really pouncing on this transition to a downrate cycle.
John Woods: And all of that, you know, when you add all that up, that gives us, you know, confidence that we're going to achieve that five basis points. And as I mentioned earlier, you know, the late three two trends and the early four few trends are very consistent with that trajectory.
Speaker Change: And all of that.
Speaker Change: When you add all that up that gives us.
Speaker Change: Yes confidence that we're going to achieve that five basis points and as I may have mentioned earlier the late <unk> trends in the early <unk> trends are there.
Speaker Change: Very consistent with that trajectory.
John Woods: Committee. So that's the 4Q. I think the second, there are similar themes, but the second question was, you know, take me out to the fourth quarter of 25. And you're right, if you look at the 277 and 3Q, you have the 18 basis points that's really time-based, and it's just really baked in. We'll get to 295. And there's another, you know, call it, I'd say in the neighborhood of five basis points of benefit that we can really expect, such that we can get in that neighborhood of 3% NIM in the fourth quarter of 25, and the drivers are very similar.
Speaker Change: So that's the <unk> I think the second.
There are similar themes, but the second question was.
Speaker Change: Kick me out to the fourth quarter of 'twenty, five and Youre right. If you look at the $2, 77% and <unk> you add the 18 basis points, that's really time based and it's just really baked in we will get to 295.
Speaker Change: There is another call it I'd say in the neighborhood of five ish basis points of benefit that we can really expect such that we can get in that neighborhood of 3% NIM in the fourth quarter of 'twenty five and the drivers are very similar.
John Woods: The tailwinds related to the growing front buckback buck, and you know, when you think about our fixed long portfolio and securities as that turns over under a wide range of rate scenarios, which is more, you know, kind of focused on longer end rates, where the 10 years going to end up in five-year rates, we end up with anywhere from two to 300 basis points, a front buckback buck benefit for, you know, as that turns over every quarter. So, over the next five quarters, that's a driver that we feel very good about, you know, our strategic initiatives on the deposit side with respect to private bank and New York Metro will continue to contribute, and when you add all that up, we get, we end up with what we think is something nearing 3% by the end of 25.
Speaker Change: The tailwind related to the growing front book back book and when you.
Speaker Change: Think about our fixed loan portfolio and securities is that turns over under our under a wide range of rate scenarios, which is more kind of focused on longer and rates with the 10 year is going to end up in five year rates.
We ended up with anywhere from two to 300 basis points of front book back book benefit for as that turns over every quarter. So over the next five quarters. That's a that's a driver.
Speaker Change: We feel very good about.
Speaker Change: Our strategic initiatives.
Speaker Change: On the deposit side with respect to private bank at New York Metro continue to contribute and when you add all that up.
Speaker Change: We ended up with what we think is something nearing 3% by the end of 'twenty five and.
John Woods: And we saw a lot of down-re protection on. Keep in mind we've got our swap portfolio as largely intact through the middle of 2026, so we remain pretty well protected and slightly as sensitive, but all those other factors offset it and give us a net positive as you get into the end of 25. All right, one other thing is to the fourth quarter lift, and then we'll add to that target as well.
Speaker Change: And we saw a lot of downward protection on keep in mind, we've got our swap portfolio is largely intact through the middle of 2026. So so we remain pretty well protected and slightly asset sensitive, but all those other factors offset it and give us a net positive as you get into the end of 'twenty five.
Speaker Change: Alright.
Speaker Change: The one other thing is to the fourth quarter lift in NIM would add to that target as well.
Scott Siefers: Okay, thanks. Perfect. Yeah, that's a lot of good going. Thank you very much.
Speaker Change: Okay. Thanks, Scott perfect, Yes, that's a lot of good color. Thank you very much.
Matt O'connor: Your next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is now open.
Speaker Change: Your next.
Speaker Change: Next question comes from the line of Matt O'connor with Deutsche Bank. Your line is now open.
Matt O'connor: Good morning. I guess just a drill down in the interest income coming in weaker than kind of thought maybe a month ago. Was that, you know, a bigger fat cotton and a little bit less low growth, and that's kind of good?
Good morning, I guess, just drill down on the net interest income coming in weaker than.
Speaker Change: And have you thought maybe a month ago was that.
Speaker Change: Bigger fed cut.
Speaker Change: Little bit less loan growth.
John Woods: And then all the positive trends that you said is what we should expect from here, or was there something else to throw it off of the kit? Yeah, and I'd say, you know, we are slightly as sensitive, so, you know, 50 maybe a little bit more, you know, kind of than we expected. But I'd say that, you know, the fact that probably trends in 3Q, the trajectory of low cost migration came down during the quarter, but maybe a little bit less than we expected. And so I think we got to the end of the quarter where we expected, but the average for the quarter in terms of migration was a little higher than we were thinking.
Speaker Change: Rather than all the positive trends that you saw there is what we should expect from here or was there something I'll throw it out there too.
Speaker Change: Yes, I would say we are slightly asset sensitive so 50%, maybe a little little bit more kind of than we expected, but I would say that.
Speaker Change: The deposit trends in <unk>.
Speaker Change: Trajectory of low cost migration came down during the quarter, but maybe a little bit less.
Less than we expected and so I think we got to the end of the quarter, where we expected, but the average for the quarter in terms of migration was a little higher than we were thinking but but as I mentioned that has that is now flipping around and and as you look at the late September early October trends that.
John Woods: But, as I mentioned, that has now flipping around. And as you look at the late September, early October trends that, you know, it was almost, you know, the bell went off there. When the Fed pulled the 50 basis point lever, we really are seeing that low cost migration really flipped to more of a neutral to slight positive. And so that's really what you can see going into 4Q. And then on volume 2, I think we anticipated a little more loan growth that, you know, I'd say we had nice loan growth in the private bank, but not maybe quite as much as we thought.
Speaker Change: It was almost like the belt went off that when that when the fed.
Speaker Change: The 50 basis point lever, we really are seeing that low cost migration really flip to more of a neutral to slight positive and so that's really what you can what you can see going into <unk>.
Speaker Change: And then on volume two I think we.
Speaker Change: We anticipated a little more loan growth.
Speaker Change: I'd say, we had nice loan growth in the private bank, but not maybe quite as much as we thought I think thats really just timing and as rates come down that'll that'll continue to pick up.
John Woods: I think that's really just timing, and this rates come down, that will continue to pick up similarly on commercial bank. We thought we'd see a little faster rebound in line utilization, particularly on the sponsor side. We're starting to see that. So again, I think that's kind of on the come and should. That's why we have an outlook in the guide that fourth quarter, which starts to see slight growth in our spot month.
Speaker Change: Similarly on commercial bank.
Speaker Change: Thought we'd see a little faster rebound in mind utilization, particularly on the sponsor side, we're starting to see that so again, I think thats kind of on the come and should.
Why we have an outlook in the guide that fourth quarter, we should start to see slight growth in our in our spot months.
John Woods: College, even comprehending the non-core rundown.
Even even comprehending the noncore rundown.
John Woods: Okay, and then separately, how do you think about operating leverage kind of more medium-term? Obviously, like that just went on to be a big go driver, dollar-wise. If we just took a fourth quarter to kind of frame it, you're gotten to revenue up about 3.5% versus cost up to 150 bits of operating leverage, but that's more driven by fees.
Speaker Change: Okay, and then separately how do you think about operating leverage kind of more medium term, obviously not just when it comes it could be a bigger driver.
Otherwise if we just look at fourth quarter to kind of frame that youre guiding to revenue up about three 5% versus cost up to <unk>.
Speaker Change: 150 bps of operating leverage, but thats more driven by fee.
John Woods: So it just thoughts on medium-term, you know, how much operate leverage would you envision? Yeah, I mean, I think we're, we'll talk more about this in January, but I mean, I think we have significant opportunity for operating leverage when you look at the net interest margin, reflating to that 3.25 to 3.40 range provides significant tailwinds and consistent operating leverage over time.
Speaker Change: Just thoughts on the medium term.
Speaker Change: How much operating leverage would you envision.
Yes, I mean, I think I think we were.
Speaker Change: We'll talk more about this in January but I mean, I think we have significant opportunity for operating leverage when you look at the net interest margin.
Speaker Change: <unk> to that $3 25 to $3 40 range provides significant <unk> and and consistent operating leverage over time will will will will come back in January and frame that for you a little more in terms of what we expect in 2025, the nice thing about the NIM.
John Woods: We'll come back in January and frame that for you a little more in terms of what we expect in 2025. But that thing about the NIM reflation is there's no real cost of goods sold in terms of the impact on expenses, so that pretty much drops straight through. I think there's clearly going to be continued growth in fees led by capital markets, some of the things we're doing in the payments business, some of the exciting developments in our wealth business, but those usually come with payouts and investments on the expense side. But nonetheless, I think the operating leverage should be quite positive when we look out over that 25 to 27 period.
Reflation as Theres no real cost of goods sold in terms of.
Speaker Change: <unk> on expenses, so that pretty much dropped straight through.
Speaker Change: I think theres clearly going to be continued growth in fees led by capital markets. Some of the things we're doing in the payments business some of the exciting developments in our wealth business.
Speaker Change: Those usually come with payouts and investments on the expense side, but nonetheless, I think the positive operating leverage should be quite positive. When we look out over that 25 to 27 period, Brendan maybe you could add.
Brendan Coughlin: Brendan, maybe you could add a few people to me. Well, there's one other comment I'd mention on the private bank: just remember that the cost base that we're working our way through right now is fixed on the short-term basis with the comp guarantees that we've given to the team. So, as the revenue grows, we're kind of earning our way through the comp guarantees, so that's all straight positive operating leverage. Link quarter where the revenue is coming without necessarily incremental expenses, because we've essentially put that in. And then, you know, at the time, that will work their way through the guarantee. We get the right scale.
Brendan Coughlin: Well the one other comment I'd mentioned on the private bank is just remember that the cost base.
Brendan Coughlin: That we're working our way through right now is.
Brendan Coughlin: Yes fixed on the short term basis with comp guarantees that we've given to the team. So as the revenue grows or kind of earning our way through the cop guarantees. So that's all straight positive operating leverage linked quarter, where the revenue is coming without necessarily incremental expenses, because we've essentially put that in the time that that will.
Brendan Coughlin: Work their way through the guarantee and we get the right scale grow with further linkage together, but right now it's just straight revenue growth on top of our fixed expense base, yes. Good point.
Brendan Coughlin: They'll grow with further linkage together, but right now it's just straight revenue growth on top of the fixed expense base. Yep. Good point.
Unknown Executive: Okay.
Speaker Change: Okay. Thank you.
John Pancari: Thank you. Your next question will come from the line of John Penn-Cari with Evercore.
Speaker Change: Your next question will come from the line of John <unk> with Evercore.
John Pancari: Your line is now open. Morning.
Speaker Change: Your line is now open.
Speaker Change: Good morning.
Bruce Saun: Hi. Great. She just talked about the loan growth dynamics a bit. And maybe if you could just elaborate a little bit more on your confidence in that you're seeing this inflection in demand here that should drive a modest growth in the fourth quarter. What is the bigger catalyst? Is it the rate cut? Is it clarity you expect around the election? And then can you maybe help us think about where, like, the type of acceleration overall loan growth that you expect you could see going into or as you look at 2025. Thanks. Yeah.
Speaker Change: Good morning.
Speaker Change: Bruce you just talked about the loan growth dynamics.
Speaker Change: And then maybe if you could just elaborate a little bit more on your confidence in that Youre seeing this inflection.
Speaker Change: In demand here that should drive modest growth in the fourth quarter. What is the what is the bigger catalyst it's at the right time.
Speaker Change: Clarity you expect around the election, and then can you maybe help us think about where the type of acceleration in overall loan growth that you expect you could see going into or as you look at 2025. Thanks, Jeff Let me, let me start and then I'm going to pass it to Don and Brendan to talk about their segments and their outlooks, but.
Bruce Saun: Let me, let me start. And then I'm going to pass it to Don and Brendan to talk about their segments and their outlooks. But, you know, we're not calling for any heroics here in the fourth quarter. So I think the guide is pretty much deep risk from meeting significant stuff up in loan growth. But it is, I think, worth noting that we're starting to see things build a bit. We said our biggest quarterly increase in the private bank, and the pipelines looking pretty good. So I think that will continue. And I think there, as rates come down, you know, folks are willing to transact and borrow.
Speaker Change: We're not calling for any heroics here in fourth quarter. So I think the guide is pretty much derisked from meeting a significant step up in loan growth, but but it is I think worth noting that we're starting to see things built a bit we said our biggest quarterly increase in the private bank in the pipe.
Speaker Change: Your line is looking pretty good. So so I think that will continue and I think there as rates come down.
Speaker Change: Folks are willing to transact and borrow I think it's a similar thing.
Bruce Saun: I think it's a similar thing in the commercial bank where, you know, there's lots of interest in private equity, kind of starting to realize some exits and put some money to work. That's, so we see it by the amount of conversations that we're privy to with clients. But it's starting to build. But really, the dam has not broken yet. And so I think we'll see that trend continue to flex off.
Speaker Change: The commercial bank, where theres lots of interest in private equity.
Kind of starting to realize some exits and put some money to work.
Speaker Change: So we see it by the amount of conversations that we're privy to with clients but.
Speaker Change: It's starting to build.
Speaker Change: Really the dam has not broken yet and so I think we will see that trend continue to flex up but let me start first with Don and then maybe Brendan you can pick up a second.
Don Mccree: But let me start first with Don, and then maybe Brandon, you could pick up second. Yeah, I think I think you said the leader in the clubhouse. Services, subscription lines where we saw some very strong, broad, late quarter, and we're continuing to see it into the fourth quarter. And that's not really leveraged by us that we're doing. It's just activity in the private equity space that we're seeing the old, and we've seen a pretty nice utilization bump in that business. We haven't really seen it in C&I yet, but the conversations we're having with our core C&I clients, particularly in the middle market, with the economy kind of stabilizing, rates coming down.
Speaker Change: I think I think you said it brought us the leader in the clubhouses subscription lines, where we saw some very strong.
Speaker Change: Late quarter, and we're continuing to see it into the fourth quarter and that's that's not really leverage by US that we're doing is just activity in the private equity space that we're seeing build and we've seen a pretty nice utilization bump in that business, we haven't really seen it in C&I, yet, but the conversations we're having with our core C&I clients, particularly in the middle market.
Speaker Change: With the economy kind of stabilizing rates coming down there is just a general level of confidence that the business environment is going to be better as we get into 'twenty five and that will result in more working capital utilization more investment in their businesses and remember one of the things John said one of the Downdrafts, we've had against kind of core loan growth has been.
Don Mccree: It's just a general level of confidence that the business environment is going to be better as we get into 25. And that will result in more working capital utilization, more investment in their businesses. And remember, one of the things John said, one of the down drafts we've had against kind of core loan growth has been a lot of activity where companies have been refinancing in the public securities markets. So we've seen stuff that's been on our balance sheet being refinanced and good for our fee lines, but it's put a little bit of pressure on core asset levels.
Speaker Change: A lot of activity where companies have been refinancing in the public securities markets. So we've seen stuff that's been on our balance sheet being refinanced and good for our fee lines.
Speaker Change: It's put a little bit pressure on core asset level. So we think a lot of as.
Don Mccree: So we think a lot of that is behind us now. So the net growth we'll see in the core book should begin to grow as we get into 25.
Is behind US now so the net net growth, we'll see in the core book should begin to grow as we get into 'twenty five Brendan Yes, I'll quickly hit on consumer and then private banking on the consumer side.
Brendan Coughlin: Yeah, I'll quickly hit on consumer and then private banking on the consumer side. It just would remind folks that the pace of rundown on non-core is turning into a net positive. So last year at this time, we were running off a billion to a billion, three and a quarter. And now we're in the consumer book, and now we're in the 800 to 900 million. So that's the linked quarter rundown is slowing a bit, and that will continue into the future. Then we look at the growth portfolios; we're seeing decent growth in mortgage and home equity.
Speaker Change: Remind folks that the pace of rundown on noncore is turning into a net positive. So last year. At this time, we were running off a $1 billion to $1 billion three a quarter and now we're in the in the consumer book and now were in the $800 million to $900 million. So thats the linked quarter rundown is slowing a bit that will continue into the future and we look at that.
Speaker Change: Growth portfolios, we're seeing decent growth in mortgage and home equity and as rates pull back a little bit we expect to see a modest pickup in mortgage origination originations activity, but as everybody knows.
Brendan Coughlin: And as rates pull back a little bit, we expect to see a modest pick up in mortgage originations activity. But, as everybody knows, the majority of the country is locked into 3%-ish mortgage rates. And so our he-lock business is incredibly well positioned. We've got a real strength in that business where we're at the very top of the league tables and national he-lock originations in the super prime space. And you'll continue to see that grow, and I believe that product. It will be a main lever for US consumers as the economy gets more confidence and footing for consumers to borrow against record equity in their homes that's been built up over the last five or six years.
Speaker Change: The majority of the country is locked into three.
Speaker Change: 3% ish mortgage rates and so our HELOC business is incredibly well positioned we've got a real strength in that business, where we're at the very top of the league tables in national HELOC originations in the Super Prime space and Youll continue to see that grow and I believe that product it will be.
Our main lever for U S consumers as the economy.
Speaker Change: It gets more confidence and footing for consumers to borrow against record equity in their homes.
Speaker Change: <unk> built up over the last five or six years.
Brendan Coughlin: So we expect that to continue. The other tailwind, headwind moving to a tailwind is likely student in a modest way with high rates. The student loan refinance product has been all but sidelined. And now, with the federal government not collecting payments again on that portfolio and rates coming back down. We should see more late 20s, early 30-year-olds who have great credit coming back in the money that see value in restructuring their student loan debt. So we're expecting that to modestly pick up as we get into next year.
Speaker Change: So we expect that to continue the other.
Speaker Change: Tailwind.
Speaker Change: Headwind moving to a tailwind is likely student in a modest way with high rates of the student loan refinance product has been sidelined and now that the federal government not collecting payments again on that portfolio on rates coming back down we should see more.
Speaker Change: Late twenties early 30 year olds, who have great credit coming back in the money that see value in restructuring their student loan debt. So we're expecting that to modestly pick up as we get into next year.
Brendan Coughlin: On the private bank side, it's a little bit of the same story. Rates pulling back should really put more customers and attractive slice to use credit. And right now we're seeing a lot of cash transactions, whether it's on the resi side or businesses sitting on sidelines. And we're hearing very strong feedback that, as rates pull back, they'll be more comfortable using credit versus just going cash temporarily on whether it's an investment home or facilitating business growth. Given the high network and ultra high network profile of that customer base. So we've got a good confidence that the rate dynamic should drive a decent amount of embedded demand.
Speaker Change: The private bank side.
Speaker Change: Little bit of the same story rates pulling back should really put more customers and attractive place to use.
Speaker Change: Credit Ed right now, we're seeing a lot of cash transactions, whether it's on the resi side. Our business is sitting on the sidelines and were hearing very strong feedback that as rates pullback.
Speaker Change: There'll be more comfortable using credit versus just going cash temporarily on.
Speaker Change: Whether it's an investment how long work facilitating business growth given the high net worth and ultra high net worth profile of that customer base. So we've got good confidence that the rate dynamics should drive a decent amount of embedded demand and as everybody knows. We've also went to market very strong on the deposit side and we've been very focused on getting the operations up there.
Brendan Coughlin: And as everybody knows, we've also went to market very strong on the deposit side, and we've been very focused on getting the operations up. There's a progression here on earning the customer's full wallet of do the day-to-day banking really well. Now they'll come from borrowing needs, and then we'll be able to dislodge wealth. So there's a natural sort of earned wallet share gain that we anticipate getting as we get it to next year on the private banking side. It will be supported by the rate environment. Good.
Speaker Change: A progression here on earning the customers' full wallet of do the day to day banking really well now they'll come from borrowing needs and then we will do build to dislodge wealth. So theres a natural sort of earned wallet share gain that we anticipate getting as we get into next year on the private banking side that will be supported by the rate environment.
Bruce Saun: Okay, great. So then in the quick second one on credit, you just talk about the confidence that I believe you indicated that you've seen. You've seen MPAs are peaking here at this quarter. Maybe your confidence there, what gives you that? And then also on the confidence and the broadly stable charge-offs with the third quarter. As you look at fourth quarter, I know your auto delinquencies are up pretty sharply year of a year, so that would be beyond the seasonality. So I'm interested in what's real bad and then thoughts on the reserve going forward. Thanks.
Speaker Change: Okay, great. Thanks, and then a quick second one on credit can you just talk about the comp.
Speaker Change: Confident I believe you indicated that you've seen.
Speaker Change: MPS are peaking here this quarter.
Speaker Change: Maybe your confidence there what gives you that and then also on the confidence in the broadly stable charge offs.
Speaker Change: With the third quarter as you look at fourth quarter, I know, you're all new delinquencies were up pretty sharply year over year.
Speaker Change: So that would be beyond the seasonality. So I'm interested in what drove that and then thoughts on the reserves going forward. Thanks.
Bruce Saun: Yeah, maybe I'll start, and then we'll pass it around. Whoever wants to jump and feel free. But, yeah, I'd say the big issue that's well known that we've been managing through is the general office portfolio. And that one is going to, it's a multi-quarter workout that has commenced in 23. It's with us all through 24. It'll be with us for a good chunk of 25. And we think we've got our arms fully around that. We've got very heavy reserves there. We've got our best people working with borrowers to try to come up with mutually satisfactory outcomes.
Speaker Change: Yes, maybe I'll start.
Speaker Change: Then we'll pass it around whoever wants to jump in feel free but.
Speaker Change: Yes, I would say.
The big issue.
Speaker Change: Well known that we've been managing through us.
Speaker Change: <unk> office.
Speaker Change: Portfolio and that one is going to.
Speaker Change: The multi quarter workout that commenced.
Speaker Change: Commenced in 'twenty three it's with US all through 'twenty four it will be with us.
Speaker Change: For a good chunk of 25.
Speaker Change: And we think we've got our arms fully around that we've got very heavy reserves. There. We've got our best people working with borrowers to try to come up with mutually satisfactory outcomes, but the timing of when you recognize the charge offs.
Don Mccree: But the timing of when you recognize the charge-offs and when something might go NPA moves around of it. And it's not always in our control if a borrower decides to put a property up for sale. Then there's certain actions we have to take in terms of NPA recognition or charge-off recognition. So this quarter we were on the low end of CRE charge-offs, and we had a blip in CRE NPAs. But having said that, the problem alone, population that we're managing is pretty consistent. And so one of the things we take comfort in is when we look at criticizing classified loans across the board and commercial, they've been pretty stable now for four quarters.
Speaker Change: When something might go NPA moves around a bit and it's not always in our control.
Speaker Change: <unk> decides to put a property up for sale and then there are certain actions we have to take in terms of NPA recognition or charge off recognition. So this quarter, we were on the low end of <unk>.
Speaker Change: <unk> charge offs, and we had a blip in CRE and <unk>.
Speaker Change: But.
Speaker Change: Having said that the problem loan.
Population that we're managing is pretty consistent.
And so one of the things we take comfort in is when we look at criticized and classified loans across the board and commercial they've been pretty stable now for four quarters.
Don Mccree: So that's the big thing.
Speaker Change: So that's the big thing.
Brendan Coughlin: I'll see Don, if you want to add any color on the CRE, and then Brandon, anything on the delinquencies. I think that's exactly right. We've seen zero surprises in our credit books for the last four quarters. And it's playing out exactly as we thought it was going to play out. And as Bruce said, we'll have charge-offs going through the general office portfolio for the next several quarters, but it's pretty much playing out as we expected. We had a little bit of a blip in CRE and I charge-offs this quarter, which was things that have been in the workout teams for literally five, six, seven years.
Speaker Change: I'll cede Don if you want to add any color on the.
Speaker Change: CRE and then Brendan if anything on the delinquencies I think I think that's exactly right for this I think that we've seen like zero surprises in our credit folks for the last four quarters and it's playing out exactly as we thought it was going to play out and as Bruce said, we'll have charge offs coming through the general office portfolio for the next several quarters, but.
Speaker Change: It's pretty much playing out.
Speaker Change: As we expected we had a little bit of a blip in C&I charge offs. This quarter, which was things that have been in our workout teams for literally 567 years and it just happened to resolve this quarter. So.
Don Mccree: It just happened to resolve this quarter. So I don't worry a lot about NPA moves. What I focus on is the CRE class levels and the fact that those have been stable. The other thing we're seeing in the general real estate area is not in general office, but in general real estate, there's a lot of liquidity coming back into the marketplace. So it's accelerating our ability to move down the overall exposures in a book, which you know is a strategic matter or something that I want to do. And we're seeing nothing in the CNI book, and broadly that is disturbing to us at all.
Speaker Change: I don't worry a lot about NPA moves what I focus on is the crit class levels and the fact that those have been stable. The other thing we're seeing in the general real estate area.
Speaker Change: Not in general office, but in general real estate Theres, a lot of liquidity coming back into the marketplace. So it's accelerating our ability to move down the overall exposures in our book, which you know is a strategic matter of something that I wanted to do and we're seeing nothing in the C&I book and broadly that is disturbing to us at all it's quite quite healthy.
Brendan Coughlin: It's quite healthy from the overall credit standpoint. Yeah, consumer is broadly normalized and pre-COVID, we're between 50 and 55 basis points and net charge-offs. And that's where we are now. And while there's always a little bit of puts and takes, there's nothing that we're observing in the portfolio that's making me lose any sleep.
Speaker Change: From a from a overall credit standpoint consumer is broadly normalized pre COVID-19. We were between 50 to 55 basis points of net charge offs and that's where we are now and while there's always a little bit of puts and takes there is nothing that we're observing in the portfolio, that's making me lose any sleep.
Brendan Coughlin: And your question on auto, a couple of comments. One would be, you know, last quarter was on the charge-off side was very low, seasonally impacted. But also we had a very strong recovery month and used car values. So this quarter was much more just a reversion to the mean. The other dynamic I would mention in auto, it's tough to read into published to liquids and numbers, even though, you know, the liquids is relatively in check. But when you're not originating anymore, it takes 12 to 18 months for a vintage curve to build up to its appropriate steady state and delinquency.
Speaker Change: Your question on auto a couple of comments one would be the last quarter was on the charge off side was very low seasonally.
Speaker Change: Impacted but also we had a very strong recovery month end used car value. So this quarter was much more than just a reversion to the mean.
Speaker Change: Other dynamic I would mentioned in auto it's tough to read into published delinquency numbers, even though delinquency is relatively in check, but when youre not originating anymore. It takes 12 to 18 months for a vintage curve to build up to its appropriate steady state and delinquency. So when you shut the spigot off on new originations.
Brendan Coughlin: So when you shut the spick it up on new originations, it's just a denominator issue that you've got other originations introduced that are normally progressing along their lines to our ultimate expected loss number. And you're not getting the denominator benefit of a bunch of new flow coming in as zero delinquencies. So, when you decompose all that, there's really nothing that we're worried about whatsoever in the auto portfolio. It's performing exactly as we priced it and exactly as we've expected it to. Thank you.
Speaker Change: It's just a denominator issue that you've got other origination vintages that are normally progressing along their lines to our ultimate expected loss number and youre not getting the denominator benefit of a bunch of new flow coming in as zero delinquencies. So when you decompose all of that there's really nothing that we're worried about whatsoever in the auto portfolio.
Speaker Change: It's performing exactly as we priced it in exactly as we'd expected it to.
Speaker Change: Okay.
Speaker Change: Thanks.
Unknown Executive: Great, thank you.
Speaker Change: Great. Thank you.
Erika Najarian: Your next question will come from the line of Erika Najarian with UBS.
Speaker Change: Your next question will come from the line of Erika Najarian with UBS. Your line is now open.
Erika Najarian: Your line is now open. Hi, good morning.
Speaker Change: Hi, good morning.
Erika Najarian: My question is for you, John. On the 10Q, you had 30 billion of notional. Received six pesos for swaps from both 3Q and 4Q, and 30.9 billion for 2025. Obviously, slide 24 would indicate more notional.
Speaker Change: As for you John.
Speaker Change: On the 10-Q.
Speaker Change: 30 billion of notional received fixed peso for swaps are most breakeven for Q and $30 9 billion for 2025, obviously slide 24 would indicate lower notional.
John Woods: Could you give us an update on whether you terminated those swaps and maybe confirm the accounting for the swaps in that you would just, you know, those losses are crystallized and they would be, you know, in your NII for the duration of the swap life. And then, as a follow-up, you mentioned a 3% NIM by 4Q, 25. How many rate cuts would you need to, you know, ensure yourself of getting to that 3% level? Yeah, I'll take those. So, yeah, I think during the third quarter, as you may recall, the, you know, there was a period of time when the yield curve was just counting as many as seven or eight cuts over, you know, through the second quarter of next year, was pretty aggressive, you know, expectation of the pace of said rate cuts.
Speaker Change: Could you.
Speaker Change: Give us an update on whether you terminated those swaps.
Speaker Change: Maybe confirm the accounting for the swaps and that you would just.
Speaker Change: Those losses are crystallized and they would be in your NII for the duration of the swap lives.
Speaker Change: And then just as a.
A follow up you mentioned, a 3% NIM by four to 25.
Speaker Change: How many rate cuts would you need to ensure.
Speaker Change: Ensure yourself with getting to that 3% level.
Yes, I'll take those so.
Speaker Change: Yes, I think during the third quarter.
Speaker Change: As you may recall.
Speaker Change: There was a period of time when the yield curve was discounting as many as seven or eight cuts over through the second quarter of next year is pretty aggressive.
Speaker Change: The expectation of the pace of fed rate cuts, we happened to have about $4 billion of short dated receive fixed swaps that were maturing in may of 'twenty five and.
John Woods: We happen to have about $4 billion of short dated receiving swaps that were ensuring in May of 25. And so what we, what we opportunistically chose to do was to terminate $4 billion of swaps during the third quarter in an environment where there were approximately seven or eight cuts that we locked in that benefit given the swaps are very short dated. And really, we're only providing down rate down rate protection through May. We felt like that, that the, that that was good risk reward to, to, to lock in that benefit and, and lock in the contribution to, and protection against lower rates that the swaps were there to cover in the first place.
Speaker Change: So what we what we Opportunistically chose to do was to terminate $4 billion of swaps during the third quarter in an environment, where there was approximately 7% of rate cuts and we locked in that benefit given the swaps are very short dated and really we're only providing downgrade downright protection through may.
Speaker Change: We felt like that that the.
Speaker Change: That was good risk reward.
Speaker Change: Turning to lock in that benefit and.
Speaker Change: And locking the contribution to.
Speaker Change: In protection against lower rates that the swaps were there to cover in the first place out the window. There are fewer cuts through may so at least at this point.
John Woods: Out the window, there are fewer cuts through May. So, you know, at least at this point, that was, that was a round trip positive for us to move on from those swaps, and they did exactly what they were intended to do: to create that protection. The accounting aspects of it are that we, we amortize the impact of that over the remaining life of the swaps through May. So that'll, that'll, that'll be amortized through, but that impact will be, again, a lower impact or a more favorable impact than otherwise would be the case if we were to have held the swaps.
Speaker Change: That was that was a round trip positives for us to move on from those swaps and they did exactly what they were intended to do was to create that protection.
Speaker Change: The accounting aspects of it.
Speaker Change: Our that we amortize the impact of that over the remaining life of those swaps through may so that'll that'll that'll be amortize through but that impact will be again, a lower impact.
Speaker Change: Our favorable impact than otherwise would be the case, if we were to have helped the swaps and so that was the point of the terminations.
John Woods: And so that was the point of the terminations.
John Woods: So that's that one. And I think the second question was about three, about the three percent, and the rate environment that we would, that we would need, you know, there's a range of rate environments that would still be consistent, you know, with that. I mean, I would say that, you know, we have a slightly asset position, asset sensitive position. So net interest margin is stable across a range of rate environments into 25 given the swap portfolio doesn't begin to drop off until mid 2026. So, you know, I mean, the forward curve out the window implies getting to around 350 by the end of 25, but we would be able to achieve that 3% at rate environments that would be below that level as well.
Speaker Change: So that's that one.
Speaker Change: And I think the second question was about was about 3%.
Speaker Change: How many cuts and the rate environment that we would that we've been theres a range of rate environments that would still be consistent.
Speaker Change: With that I mean, I would say that.
Speaker Change: We have.
Speaker Change: A slightly asset because its asset sensitive position. So net interest margin is stable across a range of rate environments into 25, given the swap portfolio doesn't begin to drop off until mid 2026.
Speaker Change: So.
Speaker Change: The forward curve out the window.
Speaker Change: Implies getting to around $3 50 by the end of 'twenty, five, but we would be able to achieve that 3% at rate environments that would be below that level as well.
Erika Najarian: And my follow-up question is twofold.
Speaker Change: Got it and my follow up question is twofold.
John Woods: First, could you explain the more favorable impact? I think I was thinking that, you know, as I amertized that impact of the terminated swap, it would just be the difference between the sofa and receive fixed rate.
Speaker Change: Could you explain.
Speaker Change: The more favorable impact I think I was thinking that amortize.
Speaker Change: Amortize that impact of the terminated swap it would just be the defer entertainer stofer and received six straight.
John Woods: Through May 2025, so John, maybe give us some insight on what more favorable treatment would be. And then just secondly, just wanted to follow up.
Speaker Change: Through May 2025, so John maybe give us some insight on what more favorable treatment would be and then just secondly, just wanted to follow up I think that there are a lot of questions over being able to achieve that NIM expansion.
John Woods: I think that there are a lot of questions over being able to achieve that NIM expansion for next quarter, which you explained well. I just wanted to sort of nail down what kind of deposit data you are assuming in that, in that, you know, two 82 number for next quarter. Yeah, so again, so when you terminate the swap, you basically terminate based upon the forward curve that's assumed at the time. And so the forward curve at that time. That's the difference.
For next quarter, which you explained well.
Speaker Change: Wanted to sort of nail down what kind of deposit beta you are assuming in that.
Speaker Change: In that 282 number for next quarter.
Speaker Change: Yeah. So again, so when you terminate terminate the swap you basically terminate based upon the forward curve Thats assumed at the time and so the forward curve at that time that difference got it okay, yes, yes I understand.
John Woods: Got it. Okay. Yeah, yeah. And so, yeah, got it.
Speaker Change: Yeah got it and then the on the NIM on the NIM expansion into the fourth quarter highly proactive focus on this as kind of get our deposit beta.
John Woods: And then on the NIM expansion into the fourth quarter, highly proactive focus on this is going to get our deposit data to be up to around nearly 40% by the end of the quarter. You've got all of the 100% beta stuff in commercial leading the way, but we're being highly proactive in consumer as well. And just really taking all the learnings over the cycle over the last many years and applying that to how we continue to be able to drive solid deposit growth at a really attractive cost of funds. So that's that's the number that's baked in about 40% deposit data in fourth year.
Speaker Change: Up to a round nearing 40% by the end of the quarter, you've got all of the 100% beta stuff in commercial.
Speaker Change: Leading the way, but we're being highly proactive in consumer as well.
Speaker Change: And just really taking all the learnings over the cycle over the last many years and applying that to how we continue to be able to drive.
Solid deposit growth at a really attractive cost of funds. So.
That's the number that's baked in about 40% deposit beta and <unk>.
Erika Najarian: Got it. Thanks so much for the straightforward answers.
Speaker Change: Got it thanks, so much for the straightforward answer appreciate it.
Erika Najarian: Appreciate it.
Manan Ghasalya: Your next question will come from the line of Manan Ghasalya with Morgan Stanley.
Speaker Change: Your next question will come from the line of Manav <unk> with Morgan Stanley. Your line is now open.
Manan Ghasalya: Your line is now open. Hey, good morning.
Speaker Change: Hey, good morning.
Manan Ghasalya: I wanted to follow up on the deposit beta question. Do you have any more specifics on what your spot deposit rates are? Now that we're a month past the Fed rate cuts and you know, how you expect that deposit data to project as we get into further into the Fed rate cuts cycle, right? As we get, as we get more fed rate cuts are behind us. Does that make it easier or more difficult to continue to drop your deposit rates going forward? Well, I mean, I think you think you, if you kind of do the math there, if you based on the fork from the the forward curve, that will have two more Fed cuts in four Q.
Speaker Change: I wanted to follow up on the on the deposit beta question.
Speaker Change: Do you have any more specifics on what your spot deposit rates are now that we're a month past the fed rate cuts and.
Speaker Change: How you expect that deposit beta to Jack because we get it to.
Speaker Change: Further into the fed rate cut cycle right. So as we get.
Speaker Change: As we get more.
Speaker Change: More fed rate cuts are behind us does that make it easier or more difficult to continue to drop your deposit rates.
Speaker Change: Forward.
Speaker Change: Well I mean, I think I think you if you just kind of do the math there based on the forward curve for me.
Speaker Change: The forward curve that we will have two more fed cuts in <unk> and we are using a curve that was after non farm payrolls from a week or two ago, but after non farm payrolls, you've got that you've got the two cuts.
John Woods: And we're using a curve that was after non-farm payrolls from, you know, a week or two ago, but after non-farm payrolls, you got that you got the two cuts based on that curves. And if you apply a 40% beta, you know, to what you think the average sofa rate would be in four Q versus three Q. You can come up with a decline and interest in transferring deposit costs, you know, on that basis.
Speaker Change: Based on that curve and if you apply a 40% beta to what you think the average sofa rate would be in <unk> versus <unk>, you can come up with the decline in interest or interest bearing deposit costs.
Speaker Change: On that basis.
John Woods: And second question. What was the second part of that question? The second part of the question was just seen as we get into, you know, as we get into the middle of next year and we have a series of Fed rate cuts behind us. Does that make it easier to continue to drop deposit rates, or does it make it harder to drop deposit rates because there's fewer cuts in the forward curve from there? I think the way to think about that is the longer the down cycle lasts, the more you can continue to, you know, contribute to ongoing lowering of deposit costs.
And second question was what.
Speaker Change: The second part of that question.
Speaker Change: The second part of the question was just as we get into.
Speaker Change: As we get into say the middle of next year, and we have a series of fed rate cuts behind us.
Speaker Change: Does that make it.
Easier to continue to drop deposit rates or does it make it harder to drop deposit rates because there's fewer cuts.
Speaker Change: It goes from there I think the way to think about that as the <unk>.
Speaker Change: The longer the cycle down cycle lasts the more you can continue to.
Speaker Change: No.
Contribute to ongoing lowering of deposit costs, but broadly I think what we've said in the past was that our down cycle betas are going to approximate our up cycle betas, so around $50 to 55, and so we're going to be around 40 by the end of the fourth quarter and it'll gradually migrate to that $50 to 55 over the cutting cycle.
John Woods: But broadly, I think what we've said in the past was that our down cycle betas are going to approximate our up cycle betas. So around 50 to 55, and so we're going to be around 40 by the end of the fourth quarter, and it'll gradually migrate to that 50 to 55 over the cutting cycle that's going to proceed over the in the coming years. And so you can kind of think about that gradual improvement in that way, I think. Yeah, but there was acceleration in the up cycle towards the later part of the cycle, which I think you mirror that on the down side.
Speaker Change: That's going to proceed over the over the coming years and so you can kind of think about that gradual improvement in that way I think but there was acceleration in the up cycle towards the later part of the cycle, which I think you mirror that and on the downside, yes, that's right exactly.
John Woods: Yeah, that's right. That's what I was getting to.
John Woods: That's really helpful. And then maybe just on the front book back book, I think you noted the 200 to 300 basis point spread benefit. Can you talk about what balances we should apply that to? You know, what are the six rate securities and loans coming deal with the next year or so? And is there any rules? To use some of the excess capital for any securities repositioning from here? Yeah, I mean, I think I think that's a good, a good metric to use; that this will be growing over time. So when you see, when you see that, you know, the activity and long growth picking up over time, you're going to see this being a contributor over the next couple of years.
Speaker Change: That's what I was getting to that is really helpful.
Speaker Change: And then maybe just on.
Speaker Change: The front book back book I think you noted that 200 to 300 basis point spread benefit can.
Speaker Change: Can you talk about the what balances we should apply that to.
Speaker Change: Fixed rate securities and loans coming due over the next year or so and is there any room to use some of the excess capital for any securities repositioning from here yes.
Speaker Change: I mean I think.
Speaker Change: I think thats a good.
Speaker Change: <unk> a good metric to use that this will be growing over time. So when you see when you see that.
Speaker Change: Activity in loan growth picking up over time youre going to see this being a contributor over the next couple of years.
John Woods: You know, I mean, I'd say that the what turns over in the back book quarterly basis in ready mortgage, call it, call it around 750 million a quarter. And that's that's a similar that's a similar number for securities as well.
Speaker Change: I'd say that.
Speaker Change: What turns over in the back book on a quarterly basis in resi mortgage call it call it around $750 million a quarter.
Speaker Change: And and and.
Speaker Change: That's a similar and Thats a similar number for securities as well when you talk about what what turns over those of the balances that you would apply to us.
John Woods: When you talk about what what turns over, those are the balances that you would apply it to is for the front book back book, but that'll continue to contribute and build and build on itself over the over the next couple of years.
Speaker Change: Front book back book, but that will that will continue to contribute and build.
Speaker Change: And build on itself over the over the next couple of years.
John Woods: That's where the would you do as securities repositioning from here? Is there any room for that? You know, not me. That's not in our plans. I mean, you know, we'll look at we we actively manage the securities portfolio. And you know, we on an ongoing basis, but we don't have a large single repositioning.
Speaker Change: That's great and then what do you do as securities repositioning from here is there any room for that.
Yes.
Speaker Change: That's not in our plans.
Speaker Change: We'll look at we actively manage the securities portfolio.
Speaker Change: Yes.
Speaker Change: We on an ongoing basis, but we don't have a.
Speaker Change: A large single repositioning.
John Woods: And I would also just point to the slide 23 and some of the built-in momentum that we have to raise them so that the need to expend capital to shift the timing on that nim walk is not something that we need to avail ourselves of. I appreciate it.
Speaker Change: Also just point too.
Speaker Change: Slide 23, and some of the built in momentum that we have to raise them. So that the need to expend capital to shift the timing on that NIM walk is not something that we need to avail ourselves of.
Speaker Change: I appreciate it thank you.
Unknown Executive: Thank you.
Unknown Executive: And at this time, you have no further questions in queue. Okay, great.
And at this time you have no further questions in queue.
Speaker Change: Okay great.
Unknown Executive: Well, thanks again, folks, for dialing in today. We appreciate your interest and support and citizens.
Speaker Change: Thanks, again folks for dialing in today, we appreciate your interest and support and citizens have a good day.
Unknown Executive: Have a good day.
Unknown Executive: Ladies and gentlemen, that concludes our conference call for today. Thank you for your participation. You may now disconnect. We're sorry, your conference is ending now.
Speaker Change: Ladies and gentlemen that concludes our conference call for today. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: We're sorry.
Speaker Change: Your conference is ending now please hang up.
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