John Woods
Chief Financial Officer at Citizens Financial Group
Thanks Bruce and good morning everyone. Let me start with the headlines for the second-quarter referencing slide 5. For the second-quarter, we generated underlying net income of $531 million and EPS of $1.04. Our underlying ROTCE for the quarter was 13.9%. Net interest income was down 3% linked-quarter, and our margin was 3.17%, down 13 basis-points with funding costs outpacing the increase in asset yields. We delivered very strong deposit growth in the quarter, reflecting the strength of the franchise with spot deposits up 3% or $5.5 billion.
Period-end loans and average loans were down 2% quarter-over-quarter reflecting the impact of our balance sheet optimization efforts, including our ongoing runoff of auto. These dynamics improved our period-end LDR to 85% and our liquidity position remains very strong. We reduced FHLB borrowings by about $7 billion to approximately $5 million outstanding at quarter-end and we increased our available liquidity by 19% to about $79 billion. Our credit and overall position remain solid.
Total NCOs or 40 basis-points are up six basis-points linked-quarter as expected, primarily reflecting higher charge-offs in pre-general office. We recorded a provision for credit losses of $176 million and a reserve build of $24 million this quarter, increasing our ACL coverage to 1.52%, up from 1.47% at the end-of-the first quarter, with the increase directed to the general office portfolio. We repurchased $256 million of common shares in the second-quarter and delivered a strong CET1 ratio of 10.3%, up from 10% in the first-quarter and our tangible book-value per share is down 2% linked-quarter, reflecting AOCI impacts associated with higher rates.
On the next few slides, I'll provide further details related to second-quarter results. On slide 6, net interest income was down 3%, primarily reflecting a lower net interest margin, which was down 13 basis-points to 3.17% with the increase in asset yields, more than offset by higher funding costs, given the competitive environment and migration from lower-cost categories. With debt funds, increasing 500 basis-points since the end of 2021, our cumulative interest-bearing deposit data is 42% through the second-quarter which has been rising in response to the rate and competitive environment and is generally in the pack with peers. Our asset sensitivity, at the end-of-the second-quarter is still approximately 1%, which is broadly stable with the prior quarter.
Our received fixed cash-flow swap position is similar to the prior quarter, as we held off on adding further protection as rates continue to rise during the quarter. Moving on to slide 7, we posted a solid fee performance in a challenging market environment. Fees were up 4% linked-quarter with card fees showing a seasonally strong increase from higher transaction volumes and increases in wealth and mortgage banking fees. FX and derivatives revenue was modestly lower. Capital markets fees were stable with market volatility through the quarter, continuing to impact underwriting fees, largely offset by increased syndications and M&A advisory fees despite a few deals being pushed into the third-quarter. We continue to see good strength in our deal pipelines and are hopeful that deal flow picks up in the second-half.
Mortgage fees were slightly higher as production fees increased with market volumes, partially offset by lower margins and lower servicing fees. And finally, wealth fees were also up slightly reflecting growth in AUM. On slide 8, expenses were broadly stable linked-quarter as seasonally lower salaries and employee benefits were offset by higher equipment and software costs, as well as higher advertising and deposit insurance costs. On slide 9, Average and period-end loans were both down 2% linked-quarter, reflecting balance sheet optimization actions in C&I, as well as the impact of planned auto runoff. Education is lower given the rate environment, but this was offset by modest growth in mortgage and home equity.
Merchant utilization is down a bit, as clients look to deleverage, given higher rates and we saw less M&A financing activity in the face of an uncertain economic environment. On slide 10, period-end deposits were up $5.5 billion or 3% linked-quarter with growth led by consumer of $3 billion in Commercial of $2 billion. Our interest-bearing deposit costs were up 47 basis-points, which translates to 101% sequential beta and a 42% cumulative beta. Strong deposit flows and a very successful auto loan collateralized borrowing program initiated during the quarter contributed to reducing FHLB levels by about $7 billion. Given our BSO objectives, we grew deposits, which drove a favorable mix-shift away from wholesale fundings. As a result, our total cost of funds was relatively well-behaved up 38 basis-points.
Next, I'll move to slide 11 to highlight the strength of our deposit franchise. With 67% of our deposits skewed towards consumer and highly-diversified across product mix and channels, we are able to efficiently and cost-effectively manage our deposits in a rising rate environment. We increased the portion of our insured and secure deposits from 68% to 70% linked-quarter and when combined with our available liquidity at $79 billion our available liquidity as a percentage of uninsured deposits increased to about 150% from around 120% in the first-quarter. As rates grew another 25 basis-points in the second-quarter, we saw continued migration of lower-cost deposits to higher-yielding categories, primarily in commercial with non-interest bearing now representing about 23% of the book.
This is back to pre-pandemic levels and should stabilize from here. Moving on to slide 12, we saw good credit results in retail again this quarter and higher charge-offs in commercial. Net charge-offs were 40 basis-points, up six basis-points linked-quarter, which reflects an increase in the general office segment of commercial real-estate partly offset by a slight improvement in retail, primarily due to the strength in used-car values. Nonperforming loans are 79 basis-points of total loans, up 15 basis-points from the first-quarter, reflecting an increase in general office, which tends to be lumpy. It's also worth noting that overall delinquencies were lower sequentially with retail and Commercial both improving slightly. Retail delinquencies continued to remain favorable to historical levels.
Turning to slide 13, I'll walk through the drivers of the allowance this quarter. We increased our allowance by $24 million, which includes a $41 million increase in pre-general office, even after covering charge-offs of $56 million. Our overall coverage ratio stands at 1.52%, which is a five basis-point increase in the second-quarter. The runoff of the non-core portfolio primarily auto, facilitated the reallocation of reserves to free. The reserve coverage in general office was increased to a strong 8%. On slide 14, you'll see some of the key assumptions driving the general office reserve coverage level, which we feel represents a fairly adverse scenario, and is much worse than we've seen in historical downturns.
As mentioned, we built our reserve for the general office portfolio to $313 million this quarter, which represents coverage of 8%. In addition to running a number of stress scenarios across the general office portfolio, we continuously perform a detailed loan-level analysis that takes into account property-specific details such as location, building quality, operating performance, and maturity. We have a very experienced CRE team more focused on managing the portfolio on a loan-by-loan basis and engaging in ongoing discussions with sponsors to work through the property and borrower specific elements to de-risk the portfolio, and ultimately minimize losses.
Our reserves reflect this detailed view of the portfolio, as well as the key macro factors we set out on the page. The property value default rate and loss severity assumptions we are using to set the reserves are adequate for the risks we currently see and are significantly more conservative than what we've seen in previous three downturns. It's worth noting that the financial impact of any further deterioration behind what we expect would be very manageable, given our strong reserve and capital position.
On the following slide 15, there are some additional disclosures, we are providing this quarter to give more detail on the type and location of the general office portfolio. You can see, of the $3.9 billion general office portfolio, 94% is Class-A or B with the majority in suburban areas, which seem to be performing better than central business districts. On the bottom left hand side of the page, it highlights that the portfolio is quite diversified across geographies, as well as the top 10 MSAs, listed on the bottom-right hand side. Broadly for New York MSA, we are starting to see return to office trends picking-up and more than 80% of the portfolio is outside Manhattan where property dynamics tend to be more favorable.
Washington DC is 100% class A&B and 95% suburban. Moving to slide 16, we maintained excellent balance sheet strength, our CET1 ratio increased to 10.3% as we look to add capital given the uncertain macro and regulatory environment. We returned a total of $461 million to shareholders through share repurchases and dividends. Turning to slide 17, you'll see that our CET1 ratio is among the highest in our regional bank peer group. This strong capital level reflects a relatively conservative approach since the IPO in maintaining a robust capital levels. If you incorporate the removal of AOCI opt-out our adjusted CET1 ratio would be 8.5%[phonetic] and we also expect that this would place us near the top of our peer group again this quarter.
We expect to maintain very strong capital levels going-forward with the ability to generate roughly 20 basis-points of CET1 ratio post-dividend each quarter [indecipherable] before share buybacks. So as you see, we've been focused for a while on playing really strong defense with a focus on capital, liquidity, funding, and maintaining a prudent credit risk appetite. And that's the job one, even long before the turmoil we saw in the first-quarter. But we also recognized the need to continue to play offense, we need to be selective, investing in initiatives that will grow the franchise, where we have a right to win.
Over the next few slides, I'll spotlight, a few of the exciting things we're doing to be sure that we can deliver growth and strong returns for our shareholders. First on slide 19 and 20, we were excited to announce a few weeks back, that we have hired about 50 senior private bankers and 100 related support professionals who were with First Republic.
As many of you know, for a number of years, we've had an interest in growing our wealth business both organically and inorganically. So we made a number of investments on the organic side, hiring the financial advisors and converting that business from a transactional business to a very customer-centric, financial planning approach. It has been a slow and steady build over the years and then we supplemented that with the Clarfeld acquisition a couple of years ago and that's gone incredibly well. So with our customer-centric culture, our financial strength and the full range of products and services we offer we were the perfect fit for these bankers.
We really admire their approach to delivering the bank, their customers in a unique way with white glove service. This is really a coast-to-coast team with a presence in some of our key markets like New York, Boston, and places where we'd like to do more like Florida and California. In fact, we think the overlap with JMP and San Francisco is extremely complementary. These bankers serve the types of customers we are seeking to attract to the bank, high and ultra-high net-worth individuals and families, often with strong connections to middle-market companies with a particular focus on private-equity and venture capital firms, serving the innovation economy.
We have a great deal of work ahead of us to integrate these teams and to ensure that they are positioned to deliver that bank to their clients. We are planning to open a few private banking centers in key geographies and build appropriate scale in our wealth business which[phonetic] clocked out as the centerpiece of that effort. We think this is going to be extremely attractive from a financial perspective. These teams and their staff, about 150 people in total on-boarded late in the second-quarter with revenue beginning to ramp in the fourth-quarter. Financial impact in the second-half will be $0.08 to $0.10 of EPS, plus an initial notable cost of about $0.03 for 2023. These factors have hit the ground running and are working to build their book of business and we expect the effort to breakeven around the middle of 2024.
By 2025 we expect EPS accretion of roughly 5% to 2025 year end projections of about $9 billion in loans, $11 billion of deposits, and $10 billion of assets under management. So overall, a very exciting advance for us. Now let's go to slide 21, and I'll walk you through how we'll be managing our balance sheet over the next few years. Since the IPO, we prudently growing our balance sheet while managing the mix of assets and funding with an eye towards maximizing returns.
With the increase in rates since the end of 2021, plus the advent of quantitative tightening and more recently, the heightened competition for deposits, we are entering the next-stage of the journey with a plan to focus on attractive relationship lending, while lowering our LDR, which will improve our liquidity profile and benefit returns. In order to make this effort clear and show the benefits we extract, we've established a $14 billion non-core portfolio, which is comprised of our 10 billion shorter-duration indirect auto portfolio and lower relationship purchased customer loans -- consumer loans.
This portfolio will run down fairly quickly with about $9 million of run-off expected by the end of 2025. Moving to slide 22 and 23, you'll see that as the non-core loan portfolio runs down this allows us to pay-down higher-cost funding and redeploy capital into more strategic lending and our investment portfolio.
We will also be growing relationship-based lending to the private bank and raising deposits to self-fund that growth. Despite the size of the run-off portfolio, we expect to see modest loan growth in 2024 picking up in 2025 driven by opportunities across retail and C&I as well as our private bank effort. The net result of these actions is an improved liquidity profile with a better loan and funding mix and higher returns. Next on slide 24, a quick update on our entry into New York Metro, where some really exciting things are happening.
With the branch conversions behind us, we are full steam ahead working to serve our customers and capitalize on opportunities. We continue to be encouraged by our early success. We've seen strong sales in the branches as we leverage our full customer service capabilities to drive some of the highest customer acquisition and sales rates in their network. Most importantly, we have seen a steady improvement in our net promoter scores. On the commercial banking side, we've got a strong new leadership team in place with local talent joining from larger firms, and we are seeing some early success leveraging our new visibility to build pipelines with middle-market firms. And we are looking forward to what we can do with our new private banking capabilities in the market.
On slide 25, we have a great opportunity to build on Citizens Access, our national digital platform that has been focused on deposits for the last few years. We moved to a modern fully cloud-based core platform and we are trying to add checking capabilities later this year. Down the road, we plan to converge our legacy core system with this modern platform. We are confident that a single integrated platform will be more cost-efficient and flexible in meeting our clients needs.
We aim for this to be a complete digital bank experience to serve customers nationwide with a focus on the young mass-affluent market segment. And on the right-side of the page is Citizens Pay, where we have been very innovative in creating distinctive ways to our customers. Citizens pay has been the top customer acquisition engine for the bank with very-high promoter scores and this has been a great performer from a credit perspective. We have had some fantastic partners on the platform for a while, such as Apple, Microsoft, Best Buy, BJ's, and Vivint and we are always very excited to welcome new partners like Peloton, Trek, The Tile Shop, and Wisetack to platform.
On Slide 26, I'll highlight how we are positioned to support the significant growth in private capital. Over the last several years, private capital fundraising had led -- has led to record deal formation, M&A activity, and substantial fees. The activity has been relatively muted recently and many sponsors have not deployed meaningful amounts of capital. So there is a tremendous amount of pent-up demand for M&A and capital markets activity. We have been executing a consistent strategy to serve the sponsor community with distinctive capabilities for the last 10 years and we've done a great job moving up to the top of the sponsor lead tables, particularly in the middle market. We have made significant investments in talent and capabilities, including five advisory acquisitions since 2017 and our new private bankers significantly expand our sponsor relationships and capabilities.
Our success supporting private capital has been a large part of our strong capital markets performance over the last few years and we are poised to capitalize on the next wave of sponsor activity as the path of the economy becomes clearer. Let's move to Slide 27 for an update on our TOP program. Our latest TOP8 program is well underway and progressing well. Given the external environment, we have decided to augment the program to protect returns as well as ensure that we can continue to make the important investments in our business to drive future performance. We have increased our target benefit by $15 million to $115 million by accelerating some of our other efforts and to further rationalize our branch network and reduce procurement costs.
We have also begun planning for our TOP9 program, looking for efficiency opportunities driven by further automation and the use of AI to better serve our customers. We are also looking at ways to simplify our organization and find even more savings in procurement. Continuous improvement is part of our DNA and I'm very confident that we'll continue to deliver these benefits to the bank. Moving to Slide 28, I'll walk through the outlook for the second quarter for Citizens, which excludes the impact of the Private Bank and I will also provide some comments for the full year.
The outlook takes into account another rate increase, followed by Fed on hold for the remainder of this year. For the third quarter, we expect NII to decrease about 4%. Noninterest income to be up by approximately 3%. Non-interest[phonetic] expense should be broadly stable. Net charge-offs are expected to be broadly stable to up slightly. Our CET1 is expected to rise modestly from 10.3% with additional share repurchases planned, which will depend upon our ongoing assessment of the external environment. Relating to the full year, our liquidity position is quite strong and given the BSO actions I discussed earlier, we will continue to build on this, targeting an LDR of low to mid 80s by the end of the year, positioning us well for anticipated regulatory changes.
Worth noting we are already -- we already are fully LDR compliant with Category 3 bank requirements. Based on the forward curve, we are expecting a terminal interest-bearing deposit beta of 49% to 50%. Our net interest margin should begin to stabilize in Q4 as the Fed is expected to reach the end of the rate hike cycle. We are off to a great start in building up the private bank, and we expect the EPS impact of this to be $0.06 in the third quarter and $0.02 to $0.04 in the fourth quarter. So we really think of this as a capital investment.
To wrap up, our results were solid for the quarter as we continue to navigate a turbulent external environment. We are focused on positioning the company with a strong capital, liquidity, and funding position, which will serve us well as we continue to navigate a challenging environment ahead. Our balance sheet strength also positions us very well to focus on our strategic priorities to continue to strengthen the franchise for the future and deliver attractive returns. With that, I'll hand back over to Bruce.
