John F. Woods
Vice Chair and Chief Financial Officer at Citizens Financial Group
Thanks, Bruce and good morning everyone.
As Bruce mentioned, the year is off to a good start. First quarter results were solid against the backdrop of a more constructive macro environment, which supported an improvement in capital markets, stability in our margin and credit performance that continues to play out largely as expected.
We continue to maintain a strong balance sheet with capital levels near the top of our peer group, excellent liquidity and a healthy credit reserve position. Importantly, this positions us to execute well against our multiyear strategic initiatives, including the buildout of our Private Bank.
Let me start with some highlights of our first quarter financial results, referencing Slides 3 to 6, before I discuss the details. We generated underlying net income of $395 million for the first quarter and EPS of $0.79. This includes a negative $0.03 impact from the Private Bank, which is a significant improvement from the $0.11 impact last quarter as we start to see revenues pick up and we progress to our expected breakeven in 2H '24. It also includes the impact of the non-core portfolio which contributed a $0.13 negative impact. While our non-core portfolio is currently a sizable drag to results, it is steadily running off, creating a tailwind for performance going forward.
Our notable items this quarter were $0.14, which primarily consists of an adjustment to the FDIC special assessment and TOP and other efficiency-related expenses. Excluding these notable items, our underlying ROTCE for the quarter was 10.6%. Playing prudent defense remains at the top of our priority list and we ended the quarter with a very strong balance sheet position with CET1 at 10.6% or 8.9% adjusted for the AOCI opt-out removal.
We also continued to make meaningful improvements to our funding and liquidity profile in the first quarter. Our pro forma LCR strengthened to 120%, which is well in excess of the large bank Category 1 requirement of 100%, and our period-end LDR improved to 81% from 82% in the prior quarter.
On the funding front, we reduced our period-end FHLB borrowings by about $1.8 billion linked quarter to a modest $2 billion. We also increased our structural funding base with a very successful $1.25 billion senior issuance and another $1.5 billion auto collateralized issuance during the quarter. And we have another $1 billion of auto-backed issuance expected to settle this week. This is our fourth issuance and it was executed at our tightest credit spreads to date. In addition, we expect to be a more programmatic issuer of senior unsecured debt going forward.
Credit trends have been performing in line with our expectations, with NCO's coming in at 50 basis points for the first quarter. Our ACL coverage ratio of 1.61% is up 2 basis points from year end. This includes a 10.6% coverage for general office, up slightly from 10.2% in the prior quarter. We are well positioned for the medium term with expected tailwinds to NIM that support a range of 3.25% to 3.4%.
Regarding strategic initiatives, the Private Bank is doing very well. We continue to make inroads in the New York Metro and our latest TOP program is progressing nicely. In addition, we are poised to benefit from an improving capital markets environment with our investments in the business and synergies from our acquisitions positioning us to capitalize as activity levels continue to pick up.
Next, I'll talk through the first quarter results in more detail, starting with net interest income on Slide 7. As expected, NII is down 3% linked quarter, reflecting a stable margin on a 2% decrease in average interest earning assets, given lower loan balances and day count. As you can see from the NIM walk at the bottom of the slide, our margin was flat at 2.91% as the combined benefit of higher asset yields and non-core runoff and day count were offset by higher funding costs and the impact of swaps. As expected, our cumulative interest-bearing deposit beta remains in the low-50s at 52% and although we continue to see deposit migration, the rate of migration is slowing. Overall, our deposit franchise has performed well with our beta generally in the path [Phonetic] of peers.
Moving to Slide 8. Our fees were up 3% linked quarter, given a notable improvement in capital markets and good card results. The improvement in capital markets reflects a nice pickup in M&A activity and strong bond underwriting results. Our capital markets business consistently holds the Top 3 middle market sponsor book runner position and this quarter, we achieved the Number 1 spot. Our deal pipelines remain strong and we continue to see positive early momentum in capital markets this quarter with strong refinancing activity continuing in the bond market.
In card, we had a nice increase, primarily driven by the benefit of a strategic conversion of our debit and credit cards to Mastercard. Our client hedging business was down a bit this quarter with lower activity in commodities and FX. The decline in mortgage banking fees was driven by a lower benefit from the MSR valuation net of hedging and a modest decline in servicing P&L, partially offset by higher production fees as margin improved while lot volumes were stable.
On Slide 9, we did a nice job managing our underlying expenses which were stable. We will continue to execute on our TOP program, which gives us the capacity to self-fund our growth initiatives.
On Slide 10, period-end and average loans are down 2% linked quarter. This was driven by non-core portfolio runoff and a decline in commercial loans, given paydowns and generally lower client loan demand, our highly selective approach to lending in this environment along with exits of lower-returning credit-only relationships. Commercial loan utilization continued to decline this quarter as client remains -- clients remained cautious and M&A activity was limited in the face of an uncertain market environment.
Next on Slides 11 and 12, we continued to do well in deposits. Year-on-year period-end deposits were up $4.2 billion, driven by growth in retail and the Private Bank. Period-end deposits were down slightly, linked quarter, given expected seasonal impacts in commercial, largely offset by growth in the Private Bank and retail branch deposits.
Our interest-bearing deposit costs were well controlled, up 6 basis points which translates to a 52% cumulative beta. Our deposit franchise is highly diversified across products, mix and channels. About 68% of our deposits are granular, stable consumer deposits and approximately 70% of our overall deposits are insured or secured. This attractive deposit base has allowed us to efficiently and cost effectively manage our deposits in the higher rate environment. With the Fed holding steady, we saw the migration of deposits to higher cost categories continue to moderate and with the contribution of attractive deposits from the Private Bank, noninterest-bearing deposits are holding steady at about 21% of total deposits.
Moving on to credit on Slide 13. Net charge-offs were 50 basis points, up 4 basis points, linked quarter. This includes increased commercial charge-offs related to CRE general office, which were in line with our expectations. In retail, we saw a modest seasonal improvement. Nonaccrual loans increased 8%, linked quarter driven by CRE general office. The continued runoff of the auto portfolio drove a modest decline in retail, while other retail categories were stable.
Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.61%, which is a 2 basis point increase from the fourth quarter, reflecting broadly stable reserves with lower loan balances, given non-core runoff and commercial balance sheet optimization. The reserve for the $3.4 billion general office portfolio represents 10.6% coverage, up slightly from 10.2% in the fourth quarter.
On the bottom left-side of the page, you can see some of the key assumptions driving the general office reserve coverage level. We feel these assumptions represent a severe scenario that is much worse than we've seen in historical downturns. So we feel the current coverage is very strong.
Moving to Slide 15, we have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.6% and if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio would be 8.9%. Both our CET1 and TCE ratios have consistently been among the top of our peers and you can see on Slide 16 where we stand currently relative to peers in the fourth quarter. Given our strong capital position, we resumed common share repurchases and including dividends, we returned a total of $497 million to shareholders in the first quarter.
On the next few pages, I'll update you on a few of our key initiatives we have underway across the bank, including our Private Bank. First, on Slide 17, we have a strong transformed consumer bank with a robust and capable deposit franchise, a diverse lending business where we are prioritizing relationship-based lending and a meaningful revenue opportunity as we scale our wealth business. Importantly, we continue to make great progress taking deposit share with retail deposits up 20% year-on-year as we continue building our customer base in New York Metro.
Slide 18, let me update you on our progress in building a premier Private Bank taking the opportunity to fill the void left in the wake of the bank failures last year. Our buildout is going very well and gaining momentum. We are growing our client base and now have about $2.4 billion of attractive deposits with roughly 30% noninterest-bearing. Also, we are now at just over $1 billion of loans and $0.5 billion of investments and continuing to grow. We just opened our newest private banking office in Palm Beach, Florida and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Clarfeld wealth management business as the centerpiece of that effort.
Next on Slide 19, we have built a formidable full service commercial bank which consistently punches above its weight. Our multiyear investments in talent, capabilities and industry expertise put us in an enviable position to provide lifecycle services to middle market, mid corporate and sponsor clients in high growth sectors of the U.S. economy. In particular, we are uniquely positioned to serve the private capital ecosystem. As evidenced by our consistent standing near the top of the sponsored lead tables, we are well positioned to take advantage of a more constructive capital markets environment and we are excited to start seeing the synergies from our acquisitions coming through in our results this quarter.
Moving to Slide 20, we provide the guide for the second quarter. We expect NII to decrease about 2%. Noninterest income should be up approximately 3% to 4%. We expect noninterest expense to be stable to down slightly. Net charge-offs are expected to be about 50 basis points and the ACL should continue to benefit from the non-core runoff. Our CET1 is expected to come in at about 10.5%, with approximately $200 million of share repurchases currently planned. We are broadly reaffirming our full year 2024 guide. We expect NII to land within the range of down 6% to 9%, consistent with our January guidance, with margin coming in a little better than expected, offsetting the impact of lower loan demand.
The other components of PPNR are also tracking to our January guidance. In addition, NCO's are trending in line with our expectations of approximately 50 basis points for the year. Our target CET1 ratio for 2024 is approximately 10.5% and the level of share repurchases will be dependent on our view of the external environment and loan growth.
Given the changing rate outlook, I wanted to update you on how the swaps and our non-core portfolio are expected to impact NII and NIM as we look out further in 2024 and beyond. We've included Slide 25 in the appendix, which shows the expected swaps and non-core impact through 2027. By 4Q 2024, we expect higher swap expense to be partly offset by the NII benefit from the non-core rundown. Looking out further, we expect a significant NII tailwind and NIM benefit from the impact of non-core and swaps over the medium term, given runoff and lower rates. This will be partially offset by the impact of the asset-sensitive core balance sheet, resulting in a medium-term NIM range of 3.25% to 3.4%.
To wrap up, we delivered a solid quarter, featuring stable NIM, strong fee performance led by capital markets and cards, tight expense management, and in-line credit performance. We have a series of unique initiatives that are progressing well. Our consumer bank has been transformed. Our commercial bank is exceptionally well positioned and we aim to build the premier bank-owned Private Bank and wealth franchise. We enjoy a strong capital liquidity and funding profile that allows us to support our customers while continuing to invest in our strategic initiatives. Given several tailwinds combined with continued strong execution, we are confident in our ability to hit our medium term 16% to 18% return target.
With that, I will hand it back over to Bruce.
