Citizens Financial Group (CFG) Q3 2026 earnings call transcript

Now, I will turn the call over to Chris Emerson, Head of Investor Relations. Chris, you may begin. Thank you, Denise. Good morning, everyone, and thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Zong, and our CFO, Onoi Banerjee, will provide an overview of our third quarter results. Brendan Coughlin, our President, and Ted Swimmer, our Head of Commercial Banking, are also here to provide additional color. We will be referencing our third quarter presentation, which is located on our Investor Relations website. After the presentation, we'll be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.

These are outlined for your review in the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results in the presentation and the reconciliations in the appendix. And with that, I will hand over to Bruce.

Thanks, Chris, and good morning, everyone. Thanks for joining our call today. We delivered another good quarter in Q3 as our strong momentum continues. EPS growth was 8.5% sequential quarter, 34% year-on-year, and ROTCE improved to 15.1%. We continue to deliver strong positive operating leverage, 1.8% sequential quarter, and 5.3% year-on-year. Total revenues hit a record in Q3, paced by NII growth of 2.7% sequential quarter and up 13% year-on-year.

Notwithstanding some interest rate movement and volatility during the quarter, we saw our NIM meet expectations with two basis point increase to 3.19%, which positions us for strong NIM expansion in Q4. Loans and deposits were broadly flat, as expected, given some loan pull forward into Q2 and seasonality on deposits, which will turn favorable in Q4. Fees were down slightly, given volatile capital markets conditions, which resulted in some deals pushing into Q4. We still believe that market conditions remain healthy as we enter Q4, and our pipelines are very strong, particularly in M&A, which is at record levels.

We do not see the current level of rates introducing any real stress on our various loan portfolios. Credit metrics remain broadly positive. Our capital, liquidity, and funding positions remain strong. Given our consistent growth in earnings, the Board authorized an increase in our dividend of 13% to $0.52 per share. In addition, the Board also increased the capacity of the company's Common Share Repurchase Program to $1.95 billion, an increase of $1.3 billion. Notwithstanding lower AOCI adjusted set one ratio in the quarter, we are comfortable operating with our gross set one a little above our 10 to 10.5% target range, which will still allow for at least $200 million in Q4 share repurchases. We continue to progress our strategic initiatives with good, consistent progress across the private bank and wealth buildout, reimagined the bank, our consumer next branch project, attracting talent to the commercial bank, and growing our New York Metro presence.

We have significant resources dedicated to leveraging AI and to driving a strong cybersecurity framework and capabilities. Overall, there's lots to do, but we feel we are prioritizing and executing well. We feel good about our outlook for Q4, and we feel we are positioned well for 2027 and the medium term. Our view of the macro fundamentals remains positive, though we expect uncertainty and volatility to remain high.

With that, I'll turn it over to Anoy for the financial details. Anoy?

Thanks, Bruce. Good morning, everyone. As Bruce mentioned, we delivered strong third quarter results. Record revenue performance and expense discipline drove more than 500 basis points of positive operating leverage year over year. Referencing slides three and four, we delivered EPS of $1.41 for the third quarter, an 11 cent or 8.5 percent improvement over the second quarter. And we saw solid improvement in Roxy to 15.1%, up from 13.9% in the second quarter.

PPNR was up 4.5% in the quarter and up about 19% year-over-year. Third quarter results reflect higher NII given continued net interest margin expansion, slightly lower fees, and good expense discipline. With respect to our balance sheet, we continue to maintain robust capital, strong liquidity levels, and a healthy credit reserve.

Turning to slide 5, I will cover our third quarter results in more detail, starting with net interest income, which was up 2.7% linked quarter, given a 1% increase in interest earning assets and a higher net interest margin. Our net interest margin continued to expand, increasing two basis points for a 19 basis point lift compared with the same quarter last year. In the third quarter, the time-based benefit from terminated swaps contributed two basis points, while the benefits of fixed rate asset repricing and improved asset yields were essentially offset by funding costs as rates moved higher during the quarter. Importantly, average demand deposits were up 2%, which helped mitigate the increase in overall deposit costs, which were up three basis points.

Moving to slide six, fee income is down 1% link quarter and up 3% year-over-year. Capital markets had a very strong third quarter, with fees down slightly compared with the strong second quarter, and lower than the exceptional third quarter last year, which benefited from deals being completed following market volatility earlier in the year.

M&A fees were significantly linked quarter, and our pipeline heading into the end of the year is very strong. Loan syndications, bond and equity underwriting fees were slightly lower given market volatility. We continue to maintain strong market share, ranking as the number two middle market sponsor book runner for the last 12 months.

Wealth delivered another record quarter, with fees up 7% linked quarter and 17% year-over-year, reflecting higher advisory fees driven by AUM growth in the private bank and in our retail network. Mortgage fees were lower, primarily due to the negative net MSR valuation result of $13 million, given high volatility in mortgage rates, though servicing revenue provided a partial offset. On slide 7, expenses were well-managed and stable linked quarter, and our efficiency ratio improved to 60%. We delivered positive operating leverage in the quarter of 5.3%, with year-to-date at 6.3%.

Moving to loans on slide 8, average and period-end loans were both up slightly linked quarter, faced by growth in private bank and retail. Private bank period end loans were up $2 billion linked quarter, reflecting higher commercial line utilization and strong originations in high-quality residential mortgage and multifamily lending. Commercial period end loans, excluding the private bank, were down $1.5 billion, or 2% linked quarter, given some loan pull forward into the second quarter. Third quarter results were driven by continued planned reductions in CRE, primarily given multifamily and general office paydowns, as well as lower CNI line usage.

Growth in period and retail loans ex-non-core was $565 million, led by real estate secured categories. This was partially offset by non-core portfolio runoff of roughly $300 million for the quarter.

Next, on slides 9 and 10, we continue to do a good job on deposits, despite some seasonality, which should reverse in the fourth quarter. Average deposits were stable linked quarter, primarily driven by growth in commercial, largely offset by lowered consumer. Spot deposits were also stable linked quarter, reflecting growth in the private bank, which reached $18.5 billion at the end of the quarter, and growth in commercial, partially offset by a decrease in consumer.

Our consumer deposits represent 63% of our total deposits, which compares favorably to a peer average of about 57%. Additionally, our mix of total interest-bearing and low-cost deposits was stable at 42% of total deposits.

Moving to credit on slides 11 and 12, credit continues to be broadly favorable, with net charge-offs stable at 37 basis points compared with the prior quarter. On slide 12, you will see that we had a modest reduction in the allowance, along with the slight reduction in ACL coverage ratio to 1.47%. We continued to improve our portfolio mix with the reduction in general office and multifamily balances, and strong originations of lower loss content CNI, residential real estate secured, and high-quality private bank loans. The economic scenario we used was a little more conservative this quarter, deflecting the higher rate environment. As we look broadly across the portfolio, the credit outlook remains positive, though we continue to carefully monitor the macroeconomic environment.

Moving to slide 13, we maintained excellent balance sheet strength, ending the quarter with CIT1 at a healthy 10.5% at the top end of our medium-term target operating range. We returned about $322 million to shareholders in the third quarter, with $197 million in common dividends and $125 million of share repurchases. Cumulatively, we have now returned $1.24 billion to shareholders in dividends and share repurchases through the first nine months of the year.

Our AOCI adjusted CET1 ratio and TCE ratio ended the quarter at 8.7% and 6.7% respectively. Notwithstanding these AOCI impacts, we remain confident in our capital strength and capital generation capacity.

Moving to slide 14, the private bank continues to make excellent progress. The private bank again delivered strong deposit growth, ending the quarter at $18.5 billion. Importantly, the overall deposit mix and cost continues to be very attractive. The private bank also delivered solid loan growth in the quarter, adding $2 billion of loans to end the quarter at $11.7 billion. The loan portfolio maintains a healthy spread of approximately 4% over deposit costs. Client assets increased by $1.2 billion to end the quarter at $12.4 billion. We added another strong team in Tampa and additional bankers in Philadelphia this quarter, and we plan to continue to adding top-quality teams in key geographies.

Moving to slide 15, we are making very good progress executing our Reimagine the Bank program as we continue to leverage a host of new, innovative technologies across the bank to simplify our business model, reshape our customer experience, and drive a meaningful improvement in productivity and efficiency. Our key work streams are well underway, and we expect to hit our financial targets for the program with minimal net costs this year. We expect to exit 2026 with about $100 million of annualized pre-tax benefits, then more than double that to $225 million by the end of 27, a little ahead of our original plan. And then target at least $450 million of benefit as we exit 2028.

Moving to slide 16, we provide our outlook for the fourth quarter, which contemplates that the Fed raising its target rate by 25 basis points in December. We expect net interest income to be up about 2.5 to 3%, driven by continued margin expansion to a range of 323 to 3.26%. Non-interest income is expected to be up approximately 4 to 5%, led by capital markets and wealth. We are projecting expenses to be up about 1%. This puts us on track to deliver over 600 basis points of positive operating leverage for the full year. The charge-off level is expected to be stable to down slightly, and we should end the year with CIT1 at approximately 10.6% to 10.7%, including expected share repurchases of $200 million in the quarter.

Looking out further, we continue to see a clear path to achieving our 16% to 18% ROCSI target by the end of 2017. Slide 17 provides incremental details on our net interest margin progression to the end of 27. We continue to improve our net interest margin, and we project to deliver a 4Q26 NIM in the range of 323 to 326%, and in the range of 330 to 350% in 4Q27. This projected margin expansion, combined with the increasing contributions from the private bank, our diversified capital markets businesses, and normalizing credit should drive our ROCSE into our target 16-18% range.

To wrap up, we delivered strong third quarter results, highlighted by record revenue and a robust level of positive operating leverage. Notwithstanding the continuation of volatility and uncertainty in the macro environment, we have a positive outlook for the fourth quarter, with good momentum across our businesses, continuing to drive strong earnings growth and solid operating leverage. We will continue to focus on progressing our strategic initiatives and delivering for our stakeholders.

With that, I will hand it back to Bruce.

Okay. Thank you, Anoy. Operator, let's open it up for Q&A.

Sure. So I would say the outlook continues to be positive that we have a number of drivers that are going to work for us regardless of what happens in the rate environment. The so-called time-based benefits, as we described them, with legacy swaps, accounting drag kind of rolling off every quarter. We have a big slug of that in the fourth quarter, and that continues a bit into 2027.

We also have a front book, back book dynamic that is pretty, you know, we're pretty confident it's going to be there, I will say that the yield curve should continue to stay relatively steep, and that provides further lift. Beyond that then a lot of the remaining kind of variability is what happens with how we managing the balance sheet I think we have a lot of confidence You can see the level of non deposits has held steady through kind of the last period with a lot of volatility We really focused on growing low cost and deep relationships across consumer and private bank in particular So that positive for the cost of funds And, you know, I'd say more broadly, we're kind of have three basic segments that we can optimize in terms of where we're taking our interest-bearing deposit funds.

And so I think we're doing a good job there as well. If you look at the quarter relative to others, the total deposit costs are only up 3%, which is kind of certainly on the good side of others. So I feel good about that. And then on the loan side, we continue to focus on deeper relationships and using our balance sheet in places where we can really be relevant to the customer, whether it's in commercial, consumer, or the private bank. And we see, I think, good opportunities there to grow our market share. We're focused on commercial and lead-left relationships and focusing in the right sectors where we think we can get decent spread and decent cross-sell.

The private bank also continues to grow loans at a good clip, and the mix is pretty attractive from an overall yield standpoint. It's accretive to overall NIM. So those are the things I would say, Scott, that we feel good about our ability to drive upwards into that range. And, you know, we are, lastly, I would say we are asset sensitive. And so assuming that the Fed goes another hike or two, that will be accretive to the NII outlook. So anyway, overall feeling quite confident. I don't know if any of my other colleagues, Anoy, if you want to add anything to that.

No, Bruce, I think you covered it. The only thing I would say, Scott, is you have seen our past performance, and we have grown in by 19 basis points since the last – well, since 3Q of last year. So that augurs well for this performance to continue.

Anything from you, Brandon, on deposit? You know, I just – not a lot to offer. I mean, one or two quick details to put some color on it, but the private bank, you know, we're up $6 billion year over year, and it's remarkably consistent of a billion and a half On average, we have some quarters a little bit better, some quarters a little bit lower. But when you even look at an eight-quarter view, a billion and a half of growth with the mix being consistent of 33-ish percent DDA and mid-40s of low cost. And we see that continuing to the future. So that's idiosyncratic to us, and it's helping us keep DDA in a good position and outperform, which should help deposit costs.

You know, consumer, you know, while spending is still high and, you know, the average consumer is still really, really healthy overall, we continue to see our metrics outperform peers, and that's been a trend for seven, eight, nine years at this point, and we expect that to continue. So that's the majority of our deposit books. I feel pretty good about that, and we're allocating loan capital, as Bruce mentioned, to the right places with yields that will drive NEMA creative activities on all sides of the business.

Great.

Sure. I'll start and quickly hand it off to Anoy. But I would say, Scott, it's always – it's any quarter we talk about, it's always going to be competitive for deposits. And so the question is really, where's your focus and, you know, what are the areas that you think you can lean into and develop good deposit performance and trajectory? So I wouldn't call that out as something that we haven't seen before. It's intensifying. I think it's kind of level and steady with what we've seen before. And we've been kind of through an up cycle, and then we started going through a down cycle, and now we've stopped and we've gone flipped back to an up cycle.

And so when I think about it, there's no reason why this upcycle, if it's two or three hikes, shouldn't really retrace what we saw coming down or what we saw the last time it went through 375 to, you know, 4.25 or 450. And those were really kind of deposit betas in the high 40s. So I don't think I'd call out anything different than that. That would be our expectation. And then I'll let Anoy and Brendan again talk more about some of the deposit trajectory, but the confidence in that non-interest ability to grow that, particularly in the private bank, but also in consumer. And then we have some strategies to grow it in commercial, but we're not counting on that as much, but I feel really good about that.

So, Anoy? John, I would say we are pleased with our deposit performance. As Bruce mentioned, when rates were coming down, we were roughly around in the high 40s beta, so as rates raise back up, we expect to be in that level. And as you have seen, our deposit cost performance, total deposit cost performance this quarter is only three basis point increase. And even in the last quarter, we also had a very good deposit cost performance. So we are actually growing deposits with our clients and making sure that we get the operating balances that's there.

I think 3Q has some seasonality in deposits, low seasonality, which we will trace back in 4Q. So 4Q deposit growth across our three businesses should be quite solid. And then, as Brendan mentioned earlier, the private bank with over 30% of DDA balances is growing nicely, and we have been growing nicely every quarter. And that gives us a lot of confidence, and we have good pipeline against that.

Just competitively, just to reiterate Bruce's point that while things are competitive, it's not any more competitive than what we saw the last four to six quarters. So we're seeing deposit yields come up in terms of lead offers from a lot of the banks, but in line with what you'd expect with the rate forward outlook. I would just say we have, and I've mentioned this on prior calls a few times, but I think we have a more diverse set of levers to manage our deposit costs than our peers. Obviously, the private bank being idiosyncratic to us and the growth that we're seeing in the outsized mix of DDA and low cost is one very big one for us that's helping us manage deposits And I think giving us more flexibility than maybe we've seen some other peers.

But when you unpack the retail book, which is still the majority of our deposit business, you've got $8 billion or so in CD rollovers every quarter. We tend to get about 100 basis points of net benefit in deposit yield, and we retain 85% to 90% of those balances in various different ways that should sustain into the future. That gives us a positive offset to increasing costs in other parts of the book. We have Citizens Access that is a lever that allows us to make smart in-quarter choices on how to best optimize our deposit yield, whether it's better to put some in Citizens Access or whether it's better to give it to kind of the core retail bank or commercial or private bank.

We've got that as a lever as well. And then, you know, our outsized performance on DDA obviously gives us some flexibility on when and how we put interest-bearing costs back into the system. So, anyway, I feel really good about the diversity of our business model and the levers that we have, and I think you see that this quarter. And I know I had Bruce pointed out in our interest-sparing and total deposit costs being better than what you're seeing in other prints, and I think that should continue.

Ted?

At this point, we haven't. Loan demands, actually, in the last couple of weeks, started to pick up a little bit as we got entered the fourth quarter. So it's certainly a lot of conversations we're having with our customers, but up to this point, our customers have really not changed their desire to borrow money.

And I would just add some color on that, too. You know, this whole AI ecosystem build out is kind of full on. So it's a very strong dynamic, and that kind of cascades into a lot of the supply ecosystem that kind of gets those centers built. But even with higher rates, the desire to get the compute power in place, the players aren't really batting an eyelash. The Pup 25 or the back end of the curve is moving up a bit.

So I think that's relatively inelastic to pricing. I think there will be kind of some other sectors maybe, you know, you get another couple of hikes and then maybe some of the PE and leverage sector, you know, starts to become a little more circumspect, but we haven't seen that as of yet.

Sure. We feel very strongly about where we are on the capital market side right now. Our pipelines, especially on the M&A side, have never been higher than they are today. And not only that, the quality of the deals that we're looking at and executing now just continue to get stronger. Our fees per average transaction continues to go up. And we have a really huge backlog as we think about the fourth quarter and really into 2027. The DCM or the debt capital market side of our business, we had a couple of deals slip from the third quarter to the fourth quarter. So we started off the fourth quarter on a really good start. And the pipeline continues to grow there.

I think the only offset of that could be if rates go up higher in the fourth quarter that you may see some of the opportunistic bond refinancing to push out. But at this point, we haven't seen that occur. And then the equity business, the backlog for all of us is pretty strong on the equity side. We're waiting to see some big transactions clear the market. If they do, I think that's going to be a very good quarter for equities. So all in all, we feel very, very strongly about where we are entering the fourth quarter.

Yeah, and I would also point to, you know, it's not just a capital market story. We've had kind of nice growth, particularly in wealth. We usually get some seasonality in some of the consumer fee categories, so feel good overall about that guide.

I would say no. There was obviously a drop-off in the second quarter when there was more noise around private credit. We saw private credit come down a little bit on leverage, come down a little bit on the size of their commitments, but that's kind of stabled off or leveled off in the third and fourth quarter. Private credit still anxiously, still trying to put money to work, and we're kind of indifferent to it from our side. If private credit is more aggressive, it tends to help our CCS business, and if they do less, it helps our syndication business. So both ways we feel relatively comfortable, but we really haven't seen much of a difference in their behavior over the last two quarters.

Sure. There's a number of them. I would say first is our brand is continuing to scale in the markets that we're in, both in terms of visibility but also the number of boots on the ground. So when we started the build out, we started with 150 people back in 2023. We're now up to almost 700 people. We're expanding markets, as you heard from us this week. We've built into Southern California. We're continuing to take density in Northern California or Boston and New York, and Florida markets are expanding. We opened a new office in West Palm Beach. We just opened a small office in Philadelphia this week, which was the news. We opened a small office in Tampa, and we're now up to 12 wealth teams that are both bringing assets under management, but also referring banking over.

And we expect that to continue. We have 10 PBOs. We expect six more to open into 2027. And we continue to add relationship managers and wealth managers as we find high-quality folks that can join the platform and meet the bar that we hold for the business. The other point I would make is that the folks that we brought over early have a lot of client followership from their old place. And while we've seen an enormous amount of their clients follow over, there's still a lot more to go. I'd say, you know, their books of business are at, call it the 50 to 60 percent level on average on what they were prior at the old institution.

And so we're seeing a slow, steady drip of new client activity coming over that knew them in the past. And so the whole process of reassembling their book story is not complete. And then lastly, the value that the commercial bank in particular is driving for the private bank in terms of referrals and our one citizens mantra has ever been increasing. As we put our capital markets business, our IPO capabilities, our M&A advisory capabilities, liquidity events that are happening, and the partnership amongst the teams is driving a new source of business for the teams that they didn't have before. And so all of those factors are increasing and continuing to fire on all cylinders. So we expect the forward outlook of the business to be steady at the level of growth, and you've seen that from us.

We haven't seen it deteriorate at all. And, in fact, probably you see the loan book is actually accelerating with two quarters in a row at $2 billion in growth in linked quarter. If we were talking last year, we were probably at a billion linked quarter loan growth. So we're seeing some dimensions of not only steady but also accelerating momentum. And there's nothing that we see in the near-to-medium term that would suggest that would slow.

And I would just add one thing is, you know, not only are we getting the growth, we're sustaining the returns on the business, which is important. So it's kind of acting as a locomotive to pull the overall ROTC higher for the company as it grows.

Yeah, so we have a good position in this space, partly because we went out, and sometimes it's better to be lucky than good, I'll just say, but our timing on acquiring DH Capital, which was a digital infrastructure lead advisor, really got us a great position in understanding kind of what was happening and owning key relationships And having kind of that front row seat to really see that it was flipping from just a pure, more advisory business to a financing business. And so under Ted's leadership, we've kind of brought a strong financing team to work with DH Capital and really participate in a lot of those financing transactions. We are disciplined on kind of what we want to hold ultimately on our balance sheet.

So the objective ultimately is to participate in some of that early construction lending opportunity, but then actually move it on into more permanent financing like the bond market. And there a lot of fees that can be made through that whole process and also some spread income We have well buckets as to how much we want to hold and we also hedging some of those exposures as well because even though it seems like you can miss right now in the data center space you kind of always wondering does the pin go in the bubble someday And so we have to think about those scenarios as well But I think we played it exceptionally well I turn it over to Ted for any more color The only thing I would add is the vast majority of our exposure to this space is in with companies that are lessees, are first of all in the development companies of the data center build-outs, and the lessees are a vast majority of them are investment-grade lessees.

The hyperscalers. The hyperscalers. So we feel very good about what exposure we've taken there, and we're not relying a lot on speculative stuff. We're doing most of it with committed power, committed building, and regulatory approval already. So we're not doing the more risky – the vast majority of our stuff is not the more risky stuff that you're seeing being done out there.

Well, first off, Erica, we are not going to give 27 guidance yet. We do that on the January call, so nice try on that one. I had to. But, you know, I feel that the one thing that you might not grow, and I'm not saying that that's where it's going to land, but why the consensus may be less is because we were front-loaded with our time-based benefits. And so that was very significant NIM expansion. And so, you know, as Inouye said, you know, up 19 basis points here today, the big fourth quarter. Are we going to repeat that? We don't have as much time-based when you look out into 27. And so I think we'll still have solid NIM expansion, but it won't be as much.

And, you know, the balance sheet dynamics we feel really good about. So, you know, if in fact it turned out to be kind of around 10 percent instead of over 12 percent, that's still pretty damn good. And that still creates, you know, a very positive dynamic around overall revenue growth, positive operating leverage, strong EPS growth, and ROTC improvement in getting us to that 16 to 18 percent. So all of that is set up very well. That's what gives us a high degree of confidence that not only are we going to have a strong Q4, but we're going to have a good 2027.

And you, and correct me if I'm wrong, but you had that ROTC target, but before you introduced the concept of reimagined the bank, it was reimagined the bank always sort of part of the plan in terms of getting you to 16% to 18%, Or could that be sort of, you know, accretive in terms of where you could land in the range?

So we always held that outside. That wasn't built into getting the 16 to 18. We're doing that kind of through the NII tailwinds, through the business initiatives that we have, like private bank, and, you know, continued improvement in the credit as we burn off the drag from the office charge-offs. And, you know, the capital buybacks, et cetera. So anyway, we can get there without that. It's incremental. And we'll, you know, have an opportunity to make some decisions. That's one of the things I think we'll focus on in January. You may have noticed, but we had initially when we unveiled Reimagine the Bank, we said we'd hit a 200 run rate by the end of 27 fourth quarter.

We bump that up a bit to 225. Maybe there's a chance to do more, but whatever in-year benefits we have in 27, first they have to cover one-time costs, but then there's something that will flow through the bottom line. And the question is, do we let it flow all the way through, or do we turn around and say, let's go a little faster with the private bank, or let's go a little faster with our next initiative. Let's let Ted go out and hire a few more commercial bankers who are beating the door down, by the way, to get on the platform, which is a good place for us to be.

But, you know, typically when you've seen us run things like Top, we just meld that into overall operating leverage. And so there is some flow through the bottom line, but you also can look at what are the things that we really prioritize in terms of our investments. You know, you're seeing across the industry a lot of folks are growing expenses kind of high single digits at this point, and we're still kind of locked in around, you know, let's keep it under five, even with strong revenue performance.

That's going to put a little upward pressure on the four-and-a-half target at the beginning of the year. We're still managing it to under five, and I think having that discipline, you know, results in that operating leverage, Which results in the high EPS growth and getting to the ROTC promised land. It's unlikely that we'll, you know, when we give you the guide, that we'll be relaxing that discipline. I think it's still important to set priorities and to stretch some of that investment out over time so that we can land the plane in the 16% to 18% territory.

Bruce, the only thing I would add, Erica, to that is, you know, Bruce's point around the one-time cost. So this year in Reimagine the Bank was essentially break even. Next year, we will see some benefits flow to the bottom line, but there's still a meaningful amount of one-time costs. So when you start to think about the impact to ROTC and the reason why RTB wasn't contemplated really in our guide is because we're talking about 2027. So when you think about 28, 29 and beyond, when the one-time costs dramatically reduce, that's when you're really going to start to see the net impact of that, whether it's the fuel reinvestment on ROTC accretive activities or whether we're going to drop some to the bottom of the year.

The Citizens Financial Gould are likely a hybrid of both. So anyway, that's one way to think about it as well, is think a little bit further past the 2027 when you think about the long-term implications of reimagining the bank.

Sure.

Yeah, I think the other wild card that you didn't mention is really the AOCI impact, which kind of hurts your tangible equity. But in terms of giving you a little tailwind in the ROTC calculation, it certainly does that. So anyway, I wouldn't, you know, rates are going to move around, and we'll see where we are in January when we give you the guide. It's possible that that, you know, could pull in, and we don't have to wait all the way to the fourth quarter.

Yeah, we called out in the prepared remarks that we're monitoring those ratios, the adjusted ratios, and so as a result, we may let the set one gross ratio move up a bit above the high end of our range, 10.5. We had been operating kind of 10.6, 10.7. It's likely that's where we'll be at the moment. But there's a lot of cross-currents taking place that would factor into our decision-making. One is when the Basel III comes into effect and we get RWA relief, that's about 110 basis points. And so the fully phased-in CALP right now with AOCI from a regulatory standpoint, it actually would come in over time. But if you want to take the hit on the AOCI, you should get the benefit of the RWA.

And so, you know, what's an 8-7 ratio with the RWA overlay on that? It goes back up to, you know, 9-8. So that's just one thing to think about there. And then, you know, you look at what happened back in 23, the overall industry kind of adjusted ratios were much lower. And so we have kind of built capital over time. And so we feel we can certainly operate at these levels. And, you know, I think the latest kind of SCB indicative calculation that the Fed did showed that we've done some really good work on the balance sheet in terms of running off auto and running down CRE and things like that. So, anyway, we feel confident that, you know, we can operate at these levels, and we'll take a little bit of precaution and let the gross ratio drift up a little bit.

But I want to be in the market buying back the stock. I think the stock is cheap. I may sound like a broken record on that, but I think the stock below is fair value, so we're going to take advantage of that.

And the only other thing I would add, Chris, is like, look, we are generating a lot of capital. Our capital capacity generation is quite high. So, yes, we did the AOC. It was a pretty violent move in rates in the third quarter. So that we lost 60 basis points, but we generate more than 30 basis points of capital every quarter through our net income generation. So if you think, put that into context of that.

Yeah, I think it's another thing to look at. It's not a binding ratio, but I'd say the market stakeholders look at that, and I'd say 7% as a kind of level that you'd like to be at or above would be a reasonable level that you pointed out. So we're a tad below that, but to a noise point, we're building capital, and we are going to retain some of that to get our capital position a little higher. So I don't think that's going to be a problem to get there and to operate there. And if we're a little bit below it, there's plenty of banks that are kind of between six and a half and a seven.

And so I don't see it as a relative issue compared to others.

Yeah, so Matt's been an excellent add to the team, and you've seen us reload the entire leadership team in many ways over the last 12 to 18 months, and Matt certainly has been no exception to that, and he's had a huge impact. As you know, our history around the consumer bank, transforming it from a makeup of a bunch of acquired thrifts to one that has a really well-fortified foundation with a strong deposit base was our principal objective over the last 10 years, and we did that. And then we turned our attention to the other side of the balance sheet to make sure the loan book was relationship-oriented, higher yielding, and driving accretion across all the other products and services.

And we've done that, too, as we run down all the non-core parts of consumer that were helpful in our early days, And now we're pivoting to more durable, sticky revenue streams. And now when you look at the revenue streams coming in from consumer, you're seeing the quality of the deposit franchise. And now you're starting to see incredible growth in wealth management. We talk a lot about the private bank for wealth management. What we probably don't talk enough about is still about 65% of our revenue streams in wealth management are coming from the part of the business that's connected to retail. And that business's sales are up 30% to 35% year over year. And that's directly as a result of the flight to quality and the focus on the consumer business on getting net primary banking households, the right mass affluent mix, which we skew 3% to 4% to 5% higher.

So as Matt takes a look at the business, I think we've got an incredibly strong foundation, but one that still has a tremendous amount of opportunity. And that's where Next really comes in as we're thinking about – we talked a little bit about this last quarter, but there's a couple of lenses to it, three real lenses. One is adding specialty job families that drive revenue accretion for mass affluent and affluent customers. So we're adding business bankers to the platform. We're adding private client bankers to the platform, which is really our version of private banking light, if you will, for the mass affluent customer that sits in the retail business. And adding wealth managers to the platform, we continue to do that every quarter, adding 10 or so new wealth managers a quarter.

And our sales force is up to approximately 450 wealth managers that sit in the retail branches. We're going to continue to do that and drive revenue appreciation depth and share of wallet. And then on the physical side, really, there's two big things. And the goal here is to position us for long-term outperformance on deposit growth, particularly low-cost and household market share capture. So we're going to really do some further surgery to put the business in a position to get that growth. We're going to take down some of our in-store franchises or physical points of presence, replace those with much more impressive standalone branches that are more oriented towards the massive, fluid, and affluent customer base that we have in retail.

And then in some of our markets, I think we have the ability to densify as a post-COVID world settles, and you'll see us take the expense out of the in-stores and replace that with an investment in physical branches that will give us further operating leverage and outsize deposit growth down the road. So the mindset in the retail franchise is incredibly proud and confident in the foundation we've built, but that positions us for the next round of growth going forward, which we equally have confidence in. But you'll see us pull some different levers that should build a sticky, durable set of revenues that we hope to have multiple accretion over time and allow us to do things in the commercial bank and the private bank to continue to have outsized growth in consumer with that granular deposit business.

And I would say you can already see it in some of our numbers, the wealth feed line that has been grown with the retail network in place, and similarly on the deposit side, the structural deposit benefit that we get with the DDA percentages, that's really helpful. So you can see it already in our numbers coming through.

But, you know, the fourth quarter, Ken, has always been seasonally strong for us, always in the commercial space. And so we think commercial will have very significant growth consistent with prior years. We also have, you know, the private bank, as Brendan mentioned, is growing at a good clip every quarter. That will be additive. And then consumer, I think, also has a nice slug of seasonality in that. And so we would expect very strong spot deposit growth in Q4. And as I had said on a prior call, by the end of the year, we'll have that FHLB advance number, I think, meaningfully reduced. And so I think that can come down into a kind of low to mid-single-digit billion from seven-ish today.

So that's kind of the overall headlines is expect strong growth across all three. Quite confident in that. We have good visibility into that.

Yeah, I think, Kent, if you go back on the seasonality, you can see that in every last few years, you have seen the drop in seasonality in deposits in the third quarter in the consumer business, and it comes back. Obviously, as Bruce mentioned, commercial comes back very nicely as we have year-end deposit from our clients. The biggest thing I would say is both under all the three businesses, we are gathering more operating accounts. They are not really just a rate-driven exercise. So we are getting the actual operating and transactional accounts in our businesses. That actually helps to keep our deposits costs right. It actually helps to grow our DDA and low-cost deposits. And as we have seen, our low-cost plus our DDA balances have been at 42 percent, very steady as we have gone through.

And that's what we expect to do as we go through. And that keeps our deposit costs also in check as well.

Yeah, so let me take the Daniel. So on the overall credit, if you see our credit mix, the allowance is really driven by the mix shift that we have had in our book. So as we roll down CRE, that has been coming down nicely, and what we have done is lower loss content, CNI, or residential security. So if you go back to some of our credit pages, you will see that underlying that it's just really the mix that is driving the ACL coverage ratio. So there's nothing that – and that, as we'll see how the mix evolves as we go through it, but that's how the driver will be. On the early stage delinquency on commercial, there are some probably some idiosyncratic issues on some model base, but there's nothing.

We don't see any widespread or any broad-based credit issues.

I would say on our real estate book, it's going just as we planned to. We're seeing some significant paydowns quarter over quarter as some of these deals mature and get refinanced out. But there's really no change in our real estate book versus where it was last quarter. And on the retail side, there's not a lot of new news to share. Delinquencies are flat, no signs of stress. NCOs continue to modestly tick down over a longer-term trend line, and there's no signs of anything emerging that would take us off that track.

Yeah, so to your point about where does this go, I think we've seen a steady decline in charge-off rate as we've worked through the CRE office book.

I like to say the pig is almost through the python, but there's still a little more to go on that. So that will help drive the net charge off rate lower than it is now. So we expect that in Q4 and into 27, even though I promised Eric I'm not giving guidance on 27. But, you know, we anticipate that trend to happen. And then the allowance should follow that. There should be an ability for the allowance to continue to dip a bit with the kind of mixed shifts that Anoy described, plus kind of the improvement in overall asset quality as we work through some of the remaining tail of that office book.

Do you have to start to match the loan growth to the deposit growth more as you get further along with the growth of the private bank? One of the things that we're doing with the business is running it with a much lower loan-to-deposit ratio than the way when it was set up at First Republic. This is kind of more discipline around credit and making sure it's to deep relationships and that we've changed that the product we're selling more is, you know, the white glove service as opposed to we're offering discounted credit. And so, you know, that I think has helped set the stage for a much higher kind of ROE business than what First Republic achieved overall in their ROE.

There is kind of catch-up growth now. So, you know, we brought over deposits initially. Let's bring over D&I. And then eventually, you know, some of the lending will pick up, and we've seen it pick up. And so when you're using more capital, that can, has the potential to lower the ROEs a little bit. And then also, we're making a lot of investments that, you know, follow a J-curve. So when we're hiring all these people and bringing these teams in, you know, at the outset, that's, you know, harmful to the return level. But then as the revenues come in, that creates the kind of overall positive dynamic in terms of those returns. And so just being kind of very measured in terms of looking at, you know, we don't want to have too many J-curves going because that can depress our profitability.

But we're going to stage them very thoughtfully and prioritize things well. I think that's been the secret as to how we've been able to get off to a high start and then sustain those levels. But at this point, we don't see anything that would take us out of a 20 to 25 zone. But so it's possible that it drifts down a little bit with kind of more a bigger lending book and kind of continued build out, particularly in markets like Florida and the Northeast, where we still have more building to do. But in any case, I think the discipline that we've had to run it with positive operating leverage be make tough choices, set the right priorities, stage things so that we keep returns high.

That's been on full display.

Brendan? Only two points I would make is, in addition to Bruce's, is that we expect through the medium term for the business to still be self-funding. And so while LDR is tightening a little bit, the business is still self-funding itself both from an LDR standpoint and an LCR standpoint. We look at lendability of deposits. So to Bruce's point, perhaps the ROEs will tighten a tiny bit. It was a little maybe when we were outside the 25 range in the 26 and 27, maybe it was a little artificially high. Even with that tightening dynamic, there's nothing we see that will take us out of that range of 20% to 25%. The other point number two that I would make is as the wealth business catches up to scale, that is a low capital, intense business.

And when we built the private bank, we started with a heavier set of bankers, and now we're starting to see the wealth managers come on the platform. And that should only accelerate in the future as we put greater focus on building out the wealth business and catching up to the growth that we've had on the banking side. Any tightening you see on the balance sheet should get offset. Now, we'll have some efficiency ratio tightening, right, because the wealth business is going to be a 75% to 80% efficiency ratio business, It's a very capital light and will drive ROTC accretion for the segment and for the company overall.

Yep. Good point.

Sure.

Yeah, thanks, Jared. It's Brendan. We expect wealth to grow in an outsized way, and that will be the primary driver of fee income coming through the private bank, as you would expect. We've got maybe a high-class problem, quote-unquote, to have here where the balance sheet and the attractiveness of the banking side of the business has been so attractive to these clients that we've grown that so fast. So you're seeing even though we're driving fee income up at a pretty healthy clip, it's been, from a mixed standpoint, consumed by very, very strong balance sheet growth. So we're not going to be overly focused on managing to mix a revenue. If it's good business, we're going to do it.

But I do think over the medium to long term, you should expect the wealth business to play an even bigger role in there. We should see the fee proportion start to improve modestly over time, which kind of back to the last question, has a positive improvement to ROTC that will offset some of the tightening LDR dynamics. So, yeah, I do expect it to improve, but the strength of the banking business is so strong over the next 12 to 24 months, I wouldn't expect radical improvements, but you should see steady growth in fee income in line or better than the banking balance sheet over time. So anyway, we're very focused on the wealth piece of that business.

And there's a natural progression, too, here when you have a bank-owned private bank that you typically earn the client's relationship first on the banking and credit side, And then through earning that trust and starting to do financial planning, the wealth comes as a fast follower. And so that is a natural progression of client behavior and also our hiring practices as we built the wealth business. So it's a heavy focus, and we project to see steady progress there. And wealth has a broader halo effect across the franchise. So we are also seeing that in our consumer business as well through a retail network as well.

So to Bruce's point earlier, there's always stiff competition whenever we do a transaction. We are continuing to focus on being the left lead, the primacy of the account. And where we can't get that business, we tend to shy away. In the third quarter, in our corporate credit business, we moved out of $400 million of assets because we just couldn't make a good return, and we're not building loans just for a loan growth perspective. We're seeing plenty of opportunities now with what we developed throughout our entire commercial bank to have opportunities to not win on price but to win on advisory work and win on providing good, strong advice to our company. So competition is stiff.

It will remain stiff, but I don't think it's going to have a material impact on what we're doing.

Jared, I would say spread slow. The last couple of quarters have stabilized.

To this point, it has not. We've done an analysis of our real estate book of where we think the higher rates can impact us. I think, long story short, we think somewhere in the neighborhood of $400 million after all the analysis we did, maybe, but that's about as much as we see potentially being delayed because of higher rates at this point. We don't think it's going to have a material impact otherwise.

Yeah, so as I said, if you think of it, deposit cost with one more rate hike, probably more in towards the December range, if you think of the Fed rate hike. Some of the rate hikes, it depends on which part of the book of deposits get repriced. So commercial gets repriced almost immediately. It's contractual. So on the private bank as well as consumer gets over time. So there's a little bit of lag we see. Now what happened is you also saw the rate hike in the third quarter happened in September, so that will catch up. You also see loans catching up. Most of our loan book is floating rates, so loans will catch up as well as we go through.

Loans are generally on a lag. So all these things start to layer in. So I think it's hard to pinpoint on period ends, but I would say like that.

I think we go back to the earlier answer where, you know, on the retracement up, if there's three hikes, that was kind of a 49 or high 40s beta, first on the way down, then on the way up, and then on the way down. And so in that ballpark is something that we would manage to, I think, over the next however many hikes there are. But, you know, I did, you know, at a conference in September, I mentioned the timing of the hike would start to move deposit costs higher, but commercial loans would, as Anoy said, reprice right away. But then some of the consumer loan categories are tied to rates and don't move until the fourth quarter.

So given that we're asset sensitive, notwithstanding the fact that your deposit costs are going to go up, your loans are going to go up more. And I called that out at probably a one basis point tailwind to Q4, which I think is still kind of in the ballpark. So a lot will depend exactly kind of when the hikes happen. But being asset sensitive, you know, we'll see a net benefit from the upcoming moves.