Citizens Financial Group, Inc. (CFG) Earnings Call Transcript & Summary

We'll get started now with Citizens Financial Group. Many of you know John. John Woods is the Chief Financial Officer. First Citizens, he joined the company in 2017. He currently, in addition to being Chief Financial Officer, is also Vice Chairman of the organization. John had spent a number of years back at Mitsubishi Union Bank of California for some time. And Citizens, as you know, is obviously one of our largest regional banks in the country, 11th largest in asset size, with over $220 billion in assets, has a market cap of about $20 billion, in the stock trades at a discount to book and about 1.5% times tangible book. But John, welcome. Thank you for joining us.

Yes. Nice to be here.

So maybe we could start off with some big picture questions, if you don't mind. It's been -- we're just talking and it's kind of been longitude since the IPO. Obviously, if I recall, it's 2014?

'14, settled down in '15.

So maybe for those that are maybe less familiar with the Citizens' story, can you really quickly take us through some of the most important changes since the IPO?

Yes. I mean I think -- yes, there's been a lot. I mean, just starting top of the house, just culturally, being a subsidiary of a foreign bank, and migrating to -- aspiring to be a top-performing independent public bank, it's been quite a journey, right? And so along the way, top of the house, some of the bigger things we've been working on are basically culture, just transforming the organization into a mindset of continuous improvement, really upscaling talent across the board, trying to transform our technology platforms to be really completely modern. Have been kind of the enterprise level within the businesses within consumer, I would say, the top issue that we've addressed there is really the deposit platform. When you think about -- through the last tightening cycle, we were distinguished on the high side in terms of deposit betas. And this time around, we're performing quite well and expect to be more pure like. We're driving capabilities in the wealth space and consumer. We're at scale in mortgage. And then I shouldn't forget commercial. I mean we've completely migrated from basically providing just bread and butter syndications around the IPO. And we have a full product suite for the entire life cycle of a commercial client and [planned] coverage. We've expanded out of our Northeast routes, Mid-Atlantic routes, into the South and the West. So full product suite, national coverage and legitimate competitor. It was quite a lift. And so we're proud of how far we've come, but we've got a lot more to deliver.

Sure. Since the IPO, you mentioned, yourself included, executives coming in from different organizations to take this company forward. Are you now at a level where the senior executives, that's the group. There's really no holes to fill because you've got them all filled?

Yes. I mean we've been together for quite a while now. I mean it's been -- I'm almost 6 years in and -- with the similar management team. And you really get used to figuring out how to partner on strategic initiatives and really being forward-leaning and innovative, while taking care of the important stuff like risk management. So yes, this management team has been -- is really jamming.

So when you take a look at Citizens from the IPO, you just described for us quickly what you've done. Now for the next 2 or 3 years, how are you going to try to differentiate yourself from some of your peers as we move forward?

Yes, and that's the job we have every day, right? So I mean, when I think about the enterprise level of things that we're doing, we've launched a next-gen technology transformation. I guess try to think of the number here. I think we're north of 75% -- 85% of all of our delivery now is through agile. All technology deliveries through agile, migrating from a waterfall methodology. We have a fully cloud-enabled platform that the organization operates in from the standpoint of internal software development. We've migrated, I think, over 1/3 of our applications to the cloud. Over the next, call it, 3 years or so, we expect to be fully cloud -- fully in the cloud, both a hybrid public and on-premise private cloud, such that we could exit all of our data centers. Yes, I mean, I think that from the enterprise level, the technology aspects, creating a platform to be able to innovate was one of the -- is one of the areas where we want to distinguish ourselves. I'll bring up a second item an oldy but a goody, which is our top programs. I mean that's been the self-help story for us for a number of years. We're working on -- we're finishing up top 7, and we updated and upscaled that just recently, and we're working on top 8. And we've joked that the fruit is higher on the tree, but nevertheless, it's just a suite. And we have to go get it, and we're building that portfolio and we'll put more contours and details around that in the coming months. But that's a big part of how we want to continue to distinguish ourselves because what we do with those funds as we invest them in the businesses and consumer is a good example. So we just launched Citizens Plus, which is our new value proposition, across mass affluent and affluent and wealth. It's kind of the more you do and the more you deepen with Citizens, the more value you get in the products that we deliver to you. So that's exciting in terms of how we want to distinguish ourselves in consumer. We've -- consumer also has New York Metro. We've got -- we closed on HSBC branches. We're going to go ahead and integrate ISBC branches in February. But the New York Metro initiative in consumer is a place where we're going to try to differentiate. We've got, I don't know, it is 25%, 30% share in Boston and Philly, and we're taking that playbook. By the way, go Phillies. Citizens Bank Park grew up in Philadelphia. So it's 8 0 3 tonight. But -- so what we're looking to do is to try to bring that go-to-market strategy to New York, and we've got single-digit share in New York. And we don't believe that, that's going to change overnight, but we're going to migrate that share over time on the consumer side. Commercial, the geographic expansion has been going extremely well in the South and in the West. A lot of our loan growth that you'll see in the coming months and going forward are going to come out of our expansion markets of the South, the West and New York City regions that are all expansion markets for us. And the product suite, as I hinted at earlier, I mean, we have a fantastic M&A advisory offering. We have a valuation offering now, all branching out from syndications. We've got a debt capital markets capability that's excellent. Just recently with our JMP acquisition, we have equity capital markets. And so just throughout the entire life cycle and then closing it all out, if we help you sell your company, we now have a great -- a high net worth offering that we have integrated with our commercial businesses. So those are a number of the areas where we want to distinguish ourselves going forward, and we're excited about trying to execute on this.

Very good. When you look out over the next maybe 6 to 12 months, obviously, the Fed is fighting inflation. We saw what they did yesterday. What are your clients telling you? You're both commercial and maybe some consumer, but really the commercial side, are they able to pass on their higher funding costs to their customers because inflation is still somewhat elevated? So what are you hearing from them?

Yes. I think early in the tightening cycle, I think that was true. I think it's still -- I think you're starting to see margins begin to get squeezed a bit now.

Your customers' margins?

Yes. Our clients' margins are starting to get squeezed. So that the pricing power was very strong early in the tightening cycle. I think it's still there, but you're starting to see margins starting to compress. What we're watching is where releveraging starts to take place. And so you're seeing our utilization levels start to rise, and they're grinding higher, but are all still below the historical levels pre-pandemic. So -- and that's true across most of our sectors. And so we're not seeing any real signs of accelerated leveraging, which is something we keep an eye on. That's also true on the consumer side. I mean the consumer still is more liquid than they were pre-pandemic, although we are seeing signs of additional leveraging there in our card business and in terms -- and payment behaviors in terms of payment in full, that's starting to moderate. But again, all of this is still superior to pre-pandemic. So, so far, so good. Delinquencies are hanging in there. No real significant alarms on -- in the nonaccrual or NPA space, but we are watching a number of sectors. I mean Cree office is an area that we're keeping a close eye on some of the C&I sectors, like automotive and not-for-profits are areas that we're watching. But -- I mean I think the big takeaway that was we were very well diversified across all of these sectors and feel good about where we sit at the moment.

When you look at your return on common -- tangible common equity, last quarter, I think it was about 18%, which is obviously quite high. Can you share with us how much of that maybe attributed to the AOCI marks, of course? And then just where you think a normalized ROTCE will be for this company in the next couple of years? Can it exceed 18%?

Yes. I mean I think it's going to be environment-dependent in some ways. But I mean, I think -- so to answer the first question and to put it into some context, I mean, we started this journey at 4%, ROTCE. So to get it to something that's in the teens is quite remarkable, and we're proud of that. But we're not -- but we're hungry. We're not done. And so the 18% this quarter, about 200 basis points or so is attributable to AOCI. So you would put us closer to 16% ex that. And the AOCI I'm talking about is the AOCI that is rate sensitive. And so that's about where we are. If you recall, just before the pandemic, which was interesting timing, we put a big goal out there in terms of ROTCE of 14% to 16%. And even when you correct for AOCI, we're right there at the upper end of the range. We've also said that heading into the fourth quarter, we're going to be well above where we were in the third quarter and above the upper end of our 14% to 16% range. We tend to take a look at this every year, right? And so we're -- we see opportunities to consider potentially taking another look at that range and possibly ticking that up a bit, but that's something we'll look at in January and we'll be back to talk to you all about it. But there are lots of opportunities to drive ROTCE higher. I think our net interest income and net interest margin are performing quite well. And as expected, we're trying to balance the hedging, the downside to rates, but also maintaining upside with asset sensitivity that actually increased from second quarter to third quarter. So we're trying to be sort of balance that, being able to perform in both environments. And that's 70-some percent or more of our revenue. So that's a big part of it. We continue to invest in fees, and we remain disciplined on expenses, and you keep that positive operating leverage going and that will drive ROTCE higher.

Absolutely. Talking about expense being very disciplined, and you mentioned the TOP programs a moment ago. Just to go back there for a second. TOP 8, is that something for we could hear about maybe in the fourth quarter earnings? Or is that no further just down the road?

Yes. I think we're teed up to give you an update on that early next year. We're busy working on building the portfolio. That's our typical cadence that we build the portfolio and get it to a point where it's ready for external consumption, and that's -- you'll get some updates on that clearly in January. And what we're working on is, just to give you a little insight there is, I mean, we have the traditional areas where we're constantly looking at simplifying our organization, and that's a never-ending sort of bread and butter thing that we do. We look at third-party spend, and that's important to keep an eye on, particularly in the inflationary environment that we're in. And so those are the traditional areas that always contribute. But then we're always every year looking for new areas to engage in. And so some of those areas include data analytics use cases, rationalizing our data marts and a number of other areas that are going to be potentially new to the portfolio this year. And so that's something that we like to do every year.

Have I mentioned internally, employees from top 1, top 2, when it was all new to them now going on top 8. Have they embraced this kind of culture or do they think know here comes another root canal?

No. It's a little bit of both. But I mean, I would say it this way, I mean, top 4 was, after having only done it 4x and I was around right on that, it's easier. Everybody's gotten the -- this is our culture, this is who we are. Every year, we're going to look for -- you're going to start off, not sure whether you can do it again. And then by the end of it, you say, "Wow, we were able to deliver yet another portfolio." And I think the way we bring folks along is we basically have a self-funding mindset. We have -- it's very easy for everyone to say this is where we want to spend money on behalf of our customers and clients. And that's a rich list that we often don't have to catalyze, which is great. That's an innovative culture that we're very happy about, very customer-oriented. It's then, okay, fine, let's go self-fund that. And let's go ahead and create a top 8 portfolio, and that will help us calibrate how much money we have to spend, and we get very energetic about making that top program as big as it can be so that we can fit enough into that in terms of the go-to-market strategies that we want to fund and still be able to deliver the financial returns that we're committing to investors.

We'll be asking for some questions in the audience in a minute. So if you can think of some. But before we do that, when you look at the growth of the balance sheet and loans and securities, how do you see that unfolding over the next 12 to 18 months? And then more importantly or as importantly, what about the funding side of that guidance?

Yes, I mean, on the loan side, I'd say we began a rotation broadly out of term consumer retail lending into C&I, I would say, about a year ago. And so that's a broader construct where slower growth in retail, higher growth in commercial. But if you double-click in each one of those, so inside retail, you've got a couple of areas that we are growing in. Home equity is a place where we've distinguished ourselves. We incubated a fintech style experience with our fast line product in home equity that has accelerated close capabilities, and it's taken off extremely well. And so that's an area that we want to grow going forward in retail. We've got our legacy in-school student lending product, which is a great deepening opportunity for our customers and Citizens Pay. So those are areas that we still are in. Of course, relationship mortgage will always drive relationship mortgage. But the areas we're pulling back on are just being very careful about areas like auto that we're in -- we've put in rundown. So we've got $13 billion or so of auto, that's probably headed to single-digit billions over the next -- you can call it, over that horizon that you just talked about, given that that's a 2, 2.5-year product. So that's what's happening on the retail side of things. In commercial, I'd call it, expansion markets are growing quite well. So the West, the South and New York Metro are basically areas that we're growing. And we're excited to see that on the commercial side. CRE, not as much. You're seeing us be a bit selective in the CRE space. in CRE, we're still good with kind of supporting credit tenant type of activity will support life sciences type stuff, multifamily, but other stuff is more in run down kind of retail and hospitality we're pulling back on and office.

One more question before we go to the audience.

Yes, I didn't get the funding. So I that would you want please.I mean, on the funding side, I should hasten to add. I mean, I think there we've had just multiple years of idiosyncratic investments to catch up our deposit franchises on both the consumer and the commercial side. And in consumer, that continues into '23 and beyond where we've just launched Citizens Plus that's a mass affluent and wealth offering that we're very excited about. So that value proposition will carry over, over the next 12 to 18 months. You've got Citizens Access, which is -- this is the period in the cycle where you see growth coming out of that platform. And that platform is also going to be -- right now, it's a couple of deposit products, but we're going to be adding products to the Citizens Access channel. The national digital bank over the next year or 12 to 18 months, you're going to have a full checking account, et cetera. There's going to be a full suite of offerings. We're very excited about that. And one final point there is that we're actually -- it's a fully cloud-enabled core. It is a 100% cloud-enabled Bank core, and it's operating and it has many customers. And there's not a lot of banks that can say that. That is going to be the convergence opportunity for us over time. We have a several decade of core like all banks do and everybody has a program. But we're kind of out in front. We've got customers and a cloud-enabled core and we have a convergence road map to basically migrate customers to it. On the commercial side, same situation, deepening across our regions and our full product suite really creating the ability to have conversations with our clients to grow that funding. And we've invested in our Treasury Solutions capabilities. So just wanted to sneak that in that we got -- we've got a very specific funding plan for that growth over the next 12 to 18 months.

You and your peers have benefited very nicely with the rise in short-term interest rates. Everybody's net interest margin has moved up quite meaningfully as with net interest revenue. You kind of stood out in the last quarter by going out, indicating that you thought your margin by the end of '23 would be around 3.5%. Maybe you can share with us some color what gives you the confidence to go out there with that kind of guidance?

Yes. I mean maybe just to level set on the assumptions behind. So that was end of September yield curve, right? So that was the first thing to keep in mind, right? And that I think it is initially even a little higher now. And we also are looking out to what the -- one of the big underpinnings of all of this is looking at the cumulative loan betas that we expect and over time. And so over the last cycle, our cumulative loan betas were actually in the 60s. We didn't hedge as much. And so that was the reason. So we've hedged the downside to a bit more this time around or actually a fair bit more this time around. So our loan betas are going to probably be in the low to mid-50s, cumulatively over the cycle. And then when you look at our deposit betas, which were in the 40s, we were at mid-40s last time around. So we had higher loan betas, higher deposit betas last time around. Both of those are going to be lower this time around. And we're seeing that tracking well through the third quarter with a cumulative beta of 18%. We think it's likely just given the increasing Fed hikes that have been baked in. We think it's likely we'll get to the upper 30s, but we do think that's going to be peer like, whereas last time around, we were on the high side versus peers. So that's what gives us a fair bit of confidence on the loan side. When you just kind of take a snapshot as well and I also went deeper on this, you have the cumulative aspect, but it also matters what's going to happen over the next 5 quarters, right? And so when we've done the modeling on that as well, which is when you look at the incremental betas for loans from the fourth quarter, the 5 quarters through the end of '23 and compare that to the funding of that -- of those loans. The incremental betas over those 5 quarters are also sufficiently favorable. And we've done the same analysis for the securities book and how we get all of our investments and how they get funded, which is with wholesale funding as well as noninterest-bearing funding. And so we're reasonably confident that we've been able to put together a balance sheet that will have -- that has already delivered with nice NIM uptake, but we'll also continue to deliver NIM increases to a diminishing degree as you get closer to '23. You've got -- you had a big jump in 3Q. We're going to have a nice jump, but smaller in 4Q. It will probably be similar as you get to the 4 quarters that it will be. But nevertheless, continuing to rise even when you get into the end of '23.

Very good. We'll start with any questions from the audience. Yes, right up here. If you would.

Can I please ask about the relationship between the absolute level of Fed funds rate and effective eventual cumulative deposit beta? I mean, effectively, the higher the Fed funds rate, presumably the higher, the better. And somebody who was sitting in your seat earlier said 3% was quite a key psychological level that would get people to switch out of noninterest bearing deposits and to interest-bearing anymore from interest-bearing to MMF. Any thoughts on key levels?

Yes. I mean there's a number of factors that you have to consider. I mean I think what -- the assumption that we've got built in to the work that we did to get us to our 350 beyond the yield curve, the yield curve at the end of September implied that the Fed funds was going to get north of 4. It was going to get to 420. I think it was 425 or so. So we're already dealing with the accelerating betas as you get north of 4% on Fed funds. We've built in an assumption of $3 billion to $5 billion of migration from a deposit perspective out of noninterest-bearing -- so that's something that's built into that 350-plus assumption or outlook that we gave. But I mean, I think when you step back, the level of rates does have an impact, but more importantly, your relationship with those customers and ensuring that you're providing value for that relationship is a bigger driver of keeping betas under control. Nevertheless, betas will be higher. I mean we had an assumption that our beta would be around 35% or so, and we've raised that to the upper 30s to deal with the fact that Fed funds are going to be higher going forward.

Questions? Yes. Over here.

You spoke about how pricing power is weakening amongst the commercial clients and how margins addressing there. Can you talk about how you're stress testing that portfolio in terms of like what level of inflation you're stress testing that portfolio? And what level of weakening margins that portfolio can sustain?

I missed the first part. Which portfolio are we talking about?

The commercial portfolio. You mentioned that margins are coming down.

Yes. I mean I think we stress test that in a number of ways. Internally, we've used a stagflation scenario to combine high inflation against very kind of weak economic activity. And so yes, you end up generating meaningfully higher in a hypothetical stagflation that's reasonable extreme just like you do in the CCAR stress tests, you get meaningfully higher credit losses. But in that scenario, you also end up with much higher NII, given what's going on. We're still asset sensitive. And so you end up with PPNR generation that adequately mitigates the impact of higher credit losses. But we have to look at it in a number of different ways. So we run the CCAR test, we've run internal stagflation scenarios with high inflation. And all of that is -- and we use that to inform our willingness to continue to lend in certain sectors and those kinds of things. And we've started to look at a few sectors that we're being more selective in as a result of those stress tests internally.

Any other questions? Right here. Sorry I didn't see you.

Within your 3.5% margin framework, can you talk about how you're thinking about replacing maturing swaps over the medium-term future and how much more you'd like to do on hedging as we move forward?

Yes. I mean, so we've got about a little bit north of $30 billion or so of receive-fixed swaps that sort of are distributed across '23 through '28, I think, actually. And with a concentration in '24 and '25 and it starts to trail off in '26 and a little bit more in '27. So I mean, I think our asset sensitivity is 3.3%. Most of that is attributable to the short end. If we were to just snap our fingers and bring that short end to neutral, that would require about $10 billion to $15 billion of additional swaps. We've -- post September 30, we've done a fair bit of hedging in the third quarter. We did -- we had $8.5 billion of received fixed swaps that we put on in the third quarter. We really haven't done much this quarter, and we're kind of just letting things play out and ensuring that we try to hold on to that asset sensitivity for a bit before we lock that in. As I said, we're trying to balance, continuing to participate in the upside, but wanting to protect -- as NIM gets higher and higher, can you protect it on the downside. So I think there are opportunities to try to protect that and consider whether we would find ourselves with a higher base case forecast, which we'll look at. The positive aspects, higher rates are good. What we have to keep an eye on is the power of deposit migration and higher deposit betas with an interest-bearing and ensure that those still continue to be net positive to the net interest margin. And from this point, we -- from what we can see, it is still positive. But again, I think if the key question, it's 10 to 15. We will likely continue to consider hedging opportunities as you get through this quarter and next to decide whether it's time to continue to lock in that downside.

John, maybe just speaking of hedging and net interest margin type questions. What would be the ideal interest rate environment for your organization the way you're positioned today maybe over the next 18 months? And then what would be an interest rate environment that would really not be ideal and won't work against it?

Well, yes, I mean, I think that maybe not too dissimilar to we have a very diversified portfolio. So we've got a very -- we're about 50-50 commercial and retail in terms of our loan book. What I think is desirable as we -- banks provide maturity intermediation over the decades, right? And so an upward sloping yield curve is beneficial, and it's not right now. So it's not perfect. We'll take the rising rates on the short end. We're still mostly connected to the short end. But I think a natural stable, upward sloping yield curve over time, is a healthy environment to be operating in. And so I think that would be preferable. And that's in terms of the shape, in terms of the level, having a meaningfully around neutral-ish, so call it no less than 250 or so on Fed funds. I don't think it's natural really to be operating for long periods of time under those levels. So that will give you a sense. I mean my quick reaction would be a reasonably solid slope to the yield curve upward sloping with at least 250 on the short end, durable and stable over time.

Moving over to capital for a moment. There's been a lot of consternation about these tangible common equity ratios. You're not in an advanced approach bank. So you don't have to worry about CET1. But -- and your TCE ratio is not as low as some of your peers by a wide margin. But how do you guys think about the TCE ratio? Some of your peers, I'm not saying they disregard it, but they just don't worry about it. What are your thoughts?

Yes. I mean we look at it. I mean, we're top quartile in TCE and we're top quartile in the risk-based measures set on. So we care about it. We think about it I would say, though, the one thing to keep in mind, the TCE ratio does have a pretty significant accounting sort of impact to it. So there's some artificiality to the TCE ratio. You've got to keep in mind if one bank has all of the securities in AFS and another bank has them all in HTM and they have the exact same economic profile, one will look much worse than the other even though they had the same economic profile. So that's something just to think about that you just kind of unpack the accounting aspects of it, and it's not a regulatory ratio that typically comes into play unless it gets really, really low things start to happen. But the way we think about it is more on the liquidity side because what's happening is you're not marking to market the funding side of the balance sheet, and that's real. You're just marking to market the securities side of the balance sheet, right, and swaps to. But -- so -- but what does matter is what the fair value of the securities book is because if there is a liquidity need, that's where the source will come from the mark-to-market of your securities book, not the held to maturity book value. So we think about it mostly as a lens into ensuring that we're maintaining the right level of asset liquidity and TCE/TA happens to be a measure that starts to tell you that, hey, your asset liquidity is starting to deteriorate. It's not as good a solvency measure in our view as CET1, but we're top quartile in both. So we're feeling good on both measures. And -- but we don't completely ignore it, but it is a secondary measure.

You were just talking about available for sale to hold to maturity securities. What's your view on moving more securities into held to maturity versus where they are today? And we've asked others, what's your view about -- can you ever sell out of the hold to maturity? What prevents you from doing that, some color?

Yes. So I mean I think we -- so we've moved it up. We were at single digits at the beginning of the year percentages. Now we're up to 30% at held to maturity. We look at that every quarter, and it seems reasonably stable where we are now. I mean, I think the risk reward on that is, you put a bunch of stuff into held to maturity, just when -- is it possible that rates will eventually fall? Maybe they won't. But you don't want to have a lot of stuff stuck in hold to maturity, and then it will take half a decade for it to amortize back out again in terms of that. So that's certainly something that we think of. And sorry, the second part of that question was?

Just your view of potentially selling out hold to maturity.

The ultimate treat I mean it's interesting, you can sell whatever you want, whenever you want. There's just an acting implication, right? So you can sell -- if you need to sell to maturity, the FAS meals and stopping from selling, they just say that you can't -- you have to mark it to market, and then you can't use the held-to-maturity portfolio for a while, a couple of years ago into a penalty box. And then there are accounting categories that If there's credit deterioration, you can sell out of held to maturity without any accounting impacts. If there are changes in the regulatory environment, in terms of RWA treatment of securities, you can sell out of held to maturity and without any kind of consequences. So I mean I think the reasons that you might think you would want to sell out of held to maturity, you really -- you do have an opening, right? If you see something that, hey, there's a credit concern in a security and it's going to get worse. Then you're perfectly fine doing that. In our case, we're almost virtually all agencies and AAA type of stuff. The stock doesn't really play into the citizens arena quite as much. But if you have credit sensitive securities, then that could be an area that people would focus on, but it doesn't really apply to us.

Got it. Any other questions?

Yes, right here. Just a quick question. You made the comment about the funding base hasn't been mark-to-market, obviously, the securities. How do you think about that in terms of the loan book as well? Because obviously, that's not marked in the same way the securities book is. So if you really think about it is probably net neutral on the loans and if you're 100% loan-to-deposit ratio, but then you also have the securities getting marked?

Yes. I mean, yes, I mean, like theoretically, if we were in a mark-to-market world, we would be marketing the loans as well. It's something we look at really, again, it's back to liquidity. The collateral that you post with the Federal Home Loan Bank that gets marked. Your securities get marked. And so when rates rise, your -- the capacity that you have under your repo lines that you have and under your Federal Home Loan Bank relationships that's impacted when rates rise. So that's how we think through it. It's primarily a liquidity-related conversation and not quite as much on the capital side of things. And what we do is we react to any diminution in asset liquidity by maintaining a minimum amount. So we'll leave more in cash or we'll take down some liquidity from off-balance sheet and bring it on balance sheet to ensure that our liquidity metrics stay stable notwithstanding rates rising, and we've been taking those actions all throughout the year as rates have been rising. We've been taking liquidity actions to keep our liquidity metrics stable and flat, which is what they've been even in the context of rates rising.

John, maybe touching -- I'd like to get this in before we run out of time here, about your noninterest income, your fees. It's an area that, since the IPO, you guys have worked very hard in growing that percentage of total revenue through some acquisitions to help achieve those goals. Can you share with us -- I think on the earnings call, I think you guys pointed out fourth quarter capital markets revenues should be pretty decent. But of course, mortgage banking revenues could suffer. So maybe you can talk about that. But then second, when you look at mortgage or look at total fee revenues, do you have a targeted level that ideally you'd like to get to in the next 2 years, 3 years?

Yes. I mean so maybe just starting with the last part first, and I'll go into the fee sources. But I mean, I think it's rate dependent, right? Because as net interest margin rises, then your fee ratio falls. And everyone's fee ratios are falling. But on a -- and ours was north of 30%. And when it was north of 30% before rates started to rise. We had a -- we had an aspiration to get to the mid-30s or better. So over time, and that's part of the journey from the IPO till now migrating from a transactionally-oriented company to an advisory based delivery to our customers and clients on both the commercial and consumer side of things. So that's absolutely the goal. And it's what energizes us to continue to deliver these initiatives that are primarily focused on deepening and advisory-related relation. So yes, we do have an aspiration to raise our fee percentage by several hundred basis points over the medium term. And so just -- but coming back into the near-term capital markets, we've diversified that completely. We were, as I mentioned earlier, basically a syndication shop without a lot of breadth. Now we've broadened syndications. We have a national M&A advisory capability. We've got significant high-yield debt capital markets capabilities. And with the advent of JMP, we now have a meaningful equity capital markets ability as well as valuation services. I mean just the full life cycle. It's exciting to see that we're fully diversified inside capital markets. We've also incubated a client hedging capability that's state-of-the-art in rates, FX and commodities. And so those are going to be the areas we're going to be leaning on not only in the near term but over into '23. And just flipping over into consumer for a second with wealth. Wealth is an area we've been investing in the last several years. Had an acquisition, lots of organic investments, we're hiring advisers. If you set aside the market for a moment, our adviser productivity is increasing. Our AUM is increasing in terms of sales on a net basis. And so we're excited about the opportunities in wealth. And then in mortgage, you asked about mortgage. So gain on sale has been pressured, right? So -- but we're starting to see signs of capacity coming out. And we're starting to see some signs of maybe gain on sale improving as we get in here to the fourth quarter and into the early part of next year. And so that's what you really need to see. Volumes are going to be under pressure, and this is all in production. And then -- but the servicing operating fees are performing quite well. That's the seesaw there. When rates rise, we're seeing a much bigger contribution. Majority of our mortgage fees now are coming from the servicing book, not production. So we're at scale there. We're diversified across channels. And I suspect that you'll see some gain on sales starting to converge back to more historical levels as you get over the next couple of quarters.

With that, we've run out of time, John. But I really appreciate you coming. Please join me and around the applause. Thank you, John and Citizens.