John F. Woods
Chief Financial Officer at Citizens Financial Group
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 tailwinds, 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 drive strong momentum in 2025 and performance over the medium term.
First, I'll start with some highlights of the third quarter financial results, referencing slides five and six. We generated underlying net income of $392 million for the third quarter, EPS of $0.79 and ROTCE of 9.7%. This includes a negative $0.11 impact from the noncore portfolio, which will continue to steadily run 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 CET1 at 10.6% at September 30th, or 9.2% adjusted for the AOCI opt out removal, and we executed $325 million in stock buybacks during the quarter. We also maintained a strong funding and liquidity profile. Our pro forma LCR is 122%, which is well in excess of the large bank category 1 requirement of 100% and our period end LDR is 80.8%. Our ACL coverage ratio of 1.61% is down 2 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 the loan portfolio. We increased our general office reserve to 12.1%, up from 11.1% in the prior quarter.
Now I'll talk through the third quarter results in more detail, starting with net interest income on slide 7. NII is down 2.9% linked quarter, primarily reflecting lower NIM and slightly lower interest earning 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 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 year. Year-on-year, however, capital markets 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 to 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. 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 $30 billion.
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 nine program is on target to deliver $135 million pretax 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 on our next earning call.
On slide 10, period-end loans are broadly stable and average loans are 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. 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-end 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 corporates continuing to issue in the debt markets, exits of lower returning credit only relationships and generally lower client loan demand.
Next on slides 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 pay down of higher cost treasury deposits tied primarily to non-core rundown. This was partially offset by $1.6 billion of attractive growth in private bank deposits.
Our interest-bearing deposit costs were up 4 basis points linked quarter. However, total deposit costs were up only 2 basis points, while total cost of funds were stable. DDA balances were effectively flat linked quarter with growth in the private bank being offset by lower commercial. 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 uprate cycle with the terminal interest-bearing deposit beta 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.
Moving to credit on slide 13, net charge offs rose 2 basis points to 54 basis points, primarily reflecting seasonal impacts in auto, a decline in commercial real estate charge offs was offset by the resolution of several nonperforming credits in C&I. Nonaccrual loans increased 10% linked quarter, primarily reflecting an increase in CRE General Office as we proceed with workout actions on a handful of loans. We believe we are near the peak of NPAs, as criticized, classified loans have been broadly stable for four quarters, and loans in workout get resolved.
Turning to the allowance for credit losses on slide 14, our overall coverage ratio stands at 1.61%, which is a 2-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 loss content originations in retail, real estate, secured and commercial categories. 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 coverage level. While rate cuts may be beneficial at the margin, we continue to expect this 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.
Additionally, since the second quarter of 2023, we have absorbed $364 million of cumulative losses in the general office portfolio. When you add these cumulative losses to the reserve outstanding, this represents an almost 20% loss rate based on the March 2023 balance of $4.1 billion. Over the past six quarters, 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 paydowns of about $600 million in addition to the charge offs I just mentioned.
Moving to slides 15 and 16, we have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.6%, which compares with 10.7% in the prior quarter. And if you were to adjust for the AOCI optout removal under the current regulatory proposal, our CET1 ratio increased from 9% to 9.2%. Both our CET1 and PCE 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 returned a total of $516 million to shareholders in the third quarter.
Moving to slide 17, our strategy is built on a transformed consumer bank, the best positioned commercial bank among 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 substantial wealth 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 in high growth sectors of the economy. Our investments over the years in capital markets capabilities and coverage of the private capital space have positioned us well to take advantage when market activity picks up. With the Fed beginning to ease and fears of a recession subsiding, the mood in 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 sits atop the middle market lead tables, holding the number one sponsor middle market book runner position on a trailing 12-month basis.
Moving to the private bank, I'm 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 of attractive deposits. This is a $1.6 billion increase from the prior quarter with roughly 34% noninterest bearing. 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. You should expect to see us opportunistically adding talent to bolster our banking and wealth capabilities. Notably, our private bank revenue grew 64% to $49.7 million in the third quarter [Technical Issues].
Moving to slide 18, we provide a guide 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 5-basis point improvement in net interest margin, reflecting the benefit of swaps, given lower rates, deposit repricing, non-core runoff and favorable front book, back book dynamics, partially offset by lower asset yields. 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. Our deal pipelines are robust, and we expect to see a strong finish to the year. We also expect modest improvements across other key categories. Noninterest expense is projected to be up about 2%, and we expect to achieve positive operating leverage. Net charge offs are expected to be broadly stable, while the ACL should continue to benefit from noncore runoff and improving loan mix.
Our CET1 ratio is expected to be broadly stable with about $200 million to $250 million of share repurchases. I call your attention to an updated slide in the appendix on our medium term NIM 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 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 multiyear 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. With that, I'll hand back over to Bruce.
