John F. Woods
Vice Chair and Chief Financial Officer at Citizens Financial Group
Thanks, Bruce, and good morning, everyone. As Bruce mentioned, second quarter results were very solid in a number of key areas, starting with the excellent fee performance driven by strong capital markets fees and record results in wealth and card. Also, we manage our deposits portfolio quite well with stable balances and lower interest-bearing costs in a competitive environment, which positively impacted NII and NIM.
Rounding out quarterly results, expenses and credit came in largely as expected. With respect to balance sheet strength, we continue to maintain a healthy credit reserve position and capital and liquidity levels near the top of our peer group. And importantly, we are executing well against our various multi-year strategic initiatives, including the buildout of our Private Bank.
I'll summarize further highlights of the second quarter financial results, referencing Slides 3 to 6. We generated underlying net income of $408 million for the second quarter, EPS of $0.82 and ROTCE of 11.1%. Maintaining a strong balance sheet position is a top priority and we ended the second quarter with CET1 at 10.7% or about 9%, adjusted for the AOCI opt-out removal. We also maintained our strong funding and liquidity profile in the second quarter. Our pro forma LCR is 119%, which is well in excess of the large bank category 1 requirement of 100% and our period-end LDR improved to 80.4%.
On the funding front, we reduced our period-end FHLB borrowings by about $1.5 billion linked-quarter to $553 million. We continued our programmatic approach to increasing our structural funding base with a successful $750 million senior debt issuance during the second quarter, and we added about another $1 billion of auto-backed borrowings. That was our fourth issuance, essentially completing our auto program, and it was executed at our tightest credit spreads to-date.
We also refinanced preferred stock in the second quarter by issuing $400 million of new preferred and redeeming $300 million of higher coupon floating rate preferred on July 8. Credit losses of approximately $180 million were in line with our expectations. The NCO rate rose a little to 52 basis points, reflecting loan balances coming in a little lower than expected. Our ACL coverage ratio of 1.63% is up 2 basis points from the prior quarter. This includes an 11.1% coverage for General Office, up from 10.6% in the prior quarter.
Regarding our strategic initiatives, the Private Bank is doing very well, having generated $4 billion of deposits and $3.6 billion of AUM through the second quarter. Also, our investments over the years in the private capital and capital markets space are playing out nicely, as demonstrated this quarter. Finally, we are excited about our top-of-house initiative, including the ongoing benefits from BSO and TOP, as well as growing contributions expected from data and technology-related initiatives such as Generative AI and cloud migration.
Next, I'll talk through the second quarter results in more detail, starting with net interest income on Slide 7. As expected, NII is down 2% linked-quarter reflecting lower net interest margin and loan balances. With respect to NIM, as you can see in the walk at the bottom of our slide, our margin was down 4 basis points to 2.87%, reflecting a 6 basis point increase in swap expense due to the 60 basis point decline in average receive rate in the quarter.
This was partly offset by a net increase in NIM of 2 basis points from all other sources, including higher asset yield, non-core runoff and good deposit cost performance with interest-bearing deposit costs down 3 basis points. Overall, our deposit franchise continues to perform well in a very competitive environment with our interest-bearing deposit beta at 51%, which was down from 52% in Q1.
Moving to Slide 8. Our fees were up 7% linked-quarter given strong results in capital markets and record card and wealth results. Our capital markets business improved 14% linked-quarter with higher bond underwriting and loan syndication fees, given strong refinancing activity.
M&A advisory fees were down slightly off a strong first quarter. However, our deal pipelines remained strong and we expect to see positive momentum in the second half of 2024. It's great to see our capital markets business holding the number one middle-market sponsor book runner position for the second quarter in a row. This reflects the benefit of the investments we've made in our capabilities since the IPO and demonstrates the diversification of the business.
Card fees were a record, primarily given the full quarter benefit of the first quarter transition to a new debit card platform as well as seasonally higher purchase volume. We delivered record results in wealth driven by increased sales activity as well as higher asset management fees, given the constructive market environment and contribution from the Private Bank, which will continue to grow given the AUM increase in the second quarter from our wealth team hires. Mortgage banking fees are up modestly, with a benefit from the MSR valuation, net of hedging, and an improvement in servicing P&L. Production fees were down slightly given a decline in margins.
On Slide 9, underlying expenses were down slightly as we saw the normal seasonal benefit in compensation and we did a nice job managing our expenses while continuing to invest in our strategic initiatives. Our TOP9 program is progressing well and we continue to expect to deliver a $135 million pretax run rate benefit by the end of the year. We've commenced work on our TOP10 program and we'll provide more details later this year.
On Slide 10 period-end and average loans are down 1% linked-quarter as we continue to optimize our balance sheet and prioritize relationship-based lending. The linked-quarter decline was driven by the runoff of our non-core portfolio of $1.1 billion. Core loans were broadly stable with a slight reduction in commercial balances, largely offset by an increase in retail. The decrease in commercial loans reflects paydowns and exits of lower returning credit-only relationships, lower client loan demand and corporates continuing to issue in the debt markets.
Next on Slides 11 and 12, we continue to do an excellent job of deposits in an extremely competitive environment. Period-end deposits are broadly stable linked-quarter as seasonally lower retail deposits was offset by strong growth on the Private Bank. We continue to see a slowing rate of migration from demand and lower cost deposits to higher cost interest-bearing accounts with the Fed holding steady as well as the benefit of deposit market share gains with the private bank. As a result, non-interest-bearing deposits are stable at about 21% of total deposits.
Our deposit franchise is highly diversified across product mix and channels. About 69% 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 funding costs in the higher rate environment. Our interest-bearing deposit costs were down 3 basis points linked-quarter, given proactive management of our pricing strategy.
Moving to Credit on Slide 13. Net charge-offs were 52 basis points, up 2 basis points linked-quarter, reflecting broadly stable charge-offs and lower average loans. The commercial charge-offs in the quarter were largely driven by CRE General Office and the fact that C&I recoveries were higher in 1Q versus 2Q.
This increase in commercial was largely offset by a decrease in retail, primarily due to seasonal trends in auto and run-off. Non-accrual loans increased 4% linked-quarter driven by increases in CRE General Office and multifamily, which has been reflected in the reserve level for the quarters.
Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.63%, which is a 2 basis point increase from the first quarter, reflecting broadly stable reserves and lower loan balances given non-core runoff and commercial paydowns and balance sheet optimization. A reserve of $369 million for the $3.3 billion General Office portfolio represents 11.1% coverage, up from 10.6% in the first quarter.
Additionally, since the second quarter of 2023, we have absorbed $319 million of cumulative losses in the General Office portfolio. When you add these cumulative losses to the reserves outstanding, this represents roughly a 17% loss rate based on the March 2023 balance of $4.1 billion. Over the past six quarters, the General Office portfolio is down roughly $900 million to $3.3 billion at June 30, given paydowns of about $500 million and the charge offs, I just mentioned.
The loss experienced so far has been concentrated in the central business district properties, with approximately 2 times the loss rate of suburban properties. Suburban exposure is 70% of our total at this point. On the bottom left of the page, you can see some of the key assumptions driving the General Office reserve coverage level, which we believe represents 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 10.7%, up 10 basis points from 1Q. And if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio would be 9%. Both our CET1 and TCE ratios have consistently been among the top of our peers.
You can see on Slide 16, where our CET1 stands currently relative to peers. Given our strong capital position, we repurchased another $200 million in common shares. And including dividends, we returned a total of $394 million to shareholders in the second quarter.
Moving to Slide 17, our strategy is built on a transformed consumer bank, the best position commercial bank amongst our regional peers and our aspiration to build the premier bank-owned private bank and wealth franchise. First, we have a strong, transformed consumer bank with a robust and capable deposit franchise grounded in primary relationships and high-quality customer growth.
Notably, the transformation of our consumer deposit franchise is the chief reason our deposit performance has dramatically improved from the last uprate cycle. We are much more meaningful [Phonetic] in our deposit raising capabilities now with more levers to pull and better analytical tools; and where our beta performance lagged our regional peers last time, so far this cycle, we are better than peer median.
We also have a differentiated lending platform where we are prioritizing building durable relationships with our customers and we are focused on scaling our wealth business. Importantly, we continue to make great progress, improving digital engagement with our customers and increasing deposit share as we build our customer base, particularly in New York metro.
Next, we believe we have built the leading commercial bank amongst the super-regional banks. We are focusing on serving sponsors and middle-market companies in the high growth sectors of the economy, and we have full set of product and advisory capabilities to deliver to our clients. In particular, we are uniquely positioned to serve the private capital ecosystem, which appears poised for a strong recovery after one of the slowest dealmaking periods in decades.
We are starting to see a more constructive capital markets environment develop, and our consistent position near the top of the middle market and sponsor league tables gives us confidence that we have a right to win, as activity picks up. Finally, we're building a premier private bank and that is going very well and gaining momentum. We are growing our client base and now have about $4 billion of attractive deposits, a $1.6 billion increase from the prior quarter with roughly 30% non-interest bearing.
Also, we are now at $1.4 billion of loans and continuing to grow. We recently opened private banking offices in Mill Valley, California and Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Citizens Wealth Management business as the centerpiece of that effort.
We added two exceptional asset management teams in the second quarter, one from San Francisco and the other from Boston, bringing the total private bank AUM to $3.6 billion; well on our way to hit our $10 billion target by the end of 2025. Importantly, our private bank revenue increased 68% to about $30 million in the second quarter, and we are on track to break even on the bottom line later this year.
Moving to Slide 18, we provide the guide for the third quarter. This outlook contemplates a 25 basis point rate cut in each of September and December. We expect NII to be down 1% to 2%, driven by one last step up in swap cost this cycle. Non-interest income should be up slightly, reflecting seasonally lower capital markets, more than offset by a pickup across other categories. We expect non-interest expense to be stable.
Net charge-offs are expected to be down modestly, and the ACL should continue to benefit from non-core runoff. Our CET1 ratio is expected to come in about 10.5%. With approximately $250 million to $300 million of share repurchases currently planned.
With respect to the full year 2024 guide we provided in January, we feel good about the overall level of PPNR. Revenues are tracking broadly in line with some puts and takes. NII is expected to come in at the upper end of the down 6% to 9% range, reflecting lower loan balances, with NIM trending modest better. Fees should come been modestly above a range of 6% to 9% originally expected.
You should expect us to continue to do well on expenses which will be broadly in line with the January guide. We expect NII and net interest margin to rebound in the fourth quarter given swap costs have peaked in the third quarter with a return to positive operating leverage in the fourth quarter. In addition, net charge-offs are trending in line with our January expectations. We continue to expect to end the year with a target CET1 ratio of approximately 10.5% and the level of share repurchases will be dependent on our view of the external environment and loan growth.
To wrap up, we delivered a strong quarter with good momentum in capital markets, record results in wealth and card, and credit performance that continues to play out largely as expected. Our capital levels are strong, near the top of our peer group and we are maintaining robust liquidity and funding. Our unique multi-year strategic initiatives, including the build-out of our private bank, are progressing well and our consumer and commercial banking businesses are well positioned to drive strong performance over the medium-term.
Given these tailwinds, combined with strong execution and tight expense management, we remain confident in our ability to hit our medium-term 16% to 18% return target.
And with that, I'll hand it back over to Bruce.
