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

All right. Well, thank you, everyone, for joining. I'm delighted to have Bruce Van Saun as Chairman and CEO of Citizens, a role he's held for about 10 years now. Prior to that, he was CFO of RBS for a number of years as well as CFO of Bank of New York. He led the successful IPO of Citizens out of RBS in 2014 and has been running the company ever since. He's also on the number of boards, including Moody's, the Federal Reserve Bank of Boston and the Bank Policy Institute. It's the 5th straight year, Bruce has [indiscernible] our conference, and we're delighted to have him. So thank you for taking the time once again.

It's my pleasure.

Maybe let's start with the big picture. I mean, obviously, there's been some turmoil in the banks tactically in the near term, what risks and opportunities does that present? And then as you look more to the medium and long term, any change in your thinking about strategy and how you run the bank coming out of this?

Yes. So I'd say what we've been focused on for at least 6 months, even before the situation with the idiosyncratic bank failures is just playing really strong defense, focus on capital, liquidity, funding, credit risk appetite. And so that's been job one. I think we've acquitted ourselves well on that. And then we also recognize that you need to continue to play offense. You need to be selective, but the things that you're investing in to grow the franchise and where you have right to win are super important to keep investing. And so I think we've been good at that as well as just making sure that our people are focused on driving some of those initiatives, which will pay off in the medium term. So we've been able to protect that. And I would say, when you look kind of further out, clearly, I think the balance sheet profile, you're going to be more selective. We've been engaged in balance sheet optimization now for a number of years, but the intensity of that is going way up. So we announced last year already that our auto portfolio had been a shock for the place where we put capital in low duration assets. So we ran a -- somewhat lighter securities book and had auto as kind of a very safe portfolio, but that had hit $14 billion. We have it down to $10 billion. It's on its way to $5 billion. And so really thinking about where is our loan capital invested, we're pulling back on some nonstrategic corporate relationships, the flow agreements that we had with some of the fintechs. We ceased those 1 year, 1.5 years ago, and so those are in rundown mode. So we have a number of things that I think will ultimately lower our LDR and improve our liquidity and funding even further. And I think those are all smart because if the cost of funding now is different than it was if you go back 3, 4 years ago, it's now in a higher rate environment. Deposit competition is higher. If you run off some of those portfolios and run off some of your higher cost funding, the impact to earnings is pretty de minimis. And in fact, you free up capital and then you can have the opportunity to buyback stock or deploy that capital. So those are some of the things that we're thinking about.

And you touched on a couple of things I'd mark to ask later, but maybe I'll just follow up now. Selective offense, you mentioned still investing even in a difficult environment. What are 2 or 3 things you view as untouchable right now where you really want to make sure you invest regardless of a little bit of headwinds on the revenue side?

So I would say we're here in New York City, and you...

[indiscernible].

We're here.

Is that where you're investing through the office?

No. Our New York Metro play. I'm sure as you go around New York, you can see all our new branches and signage in Citizens. So we have kind of a meaningful presence now in the New York Metro area for the first time after acquiring HSBC, East Coast branches and Investors Bank. So now we have 200 branches in this region and top 8 deposit market share and almost 1 million new customers. And so I think that is really important to us to get that right. So we've already nailed the expense synergies, the funding synergies, the big prize is to actually scale those operations up across everything, across consumer, small business and corporate and take advantage of the investment that we made to better serve their existing customers and just to use our proven techniques on how we acquire customers and grow households who gain share here in this. So to me, that's really at the top of the list. We made a bet on ourselves that we could come into a heavily competitive market and succeed as we've done in other big East Coast cities. I'd say another thing is, we're continuing to invest in the wealth business and our capabilities in wealth. If we look at where we are in terms of penetration of the opportunity, we have a relatively affluent customer profile but we're not getting sufficient penetration, the opportunity yet. We've made some nice strides. So I think our revenues are up about $100 million from kind of back at the time of the IPO. But there's -- we should be able to double that, and that's another $250 million, say, on top of that. And I think we're looking for investments in people and technology and different capabilities that could help us to achieve potential. So that's another big one. On the consumer side, the other one I'd point to is Citizens Pay, where we continue to win a high-profile business with some very attractive partners. And that's kind of a business that you work with your partners, but you can also go direct to consumer. And so we're building out the ability to go direct to consumer there. And then on the commercial side, I think we've built a commercial operation, really is the class of our peer group just in terms of the capabilities we have, the quality of people we have, we were #5 in middle market loan syndication last year, #3 in leverage. So we're doing a great job with private capital in serving that community, which increasingly owns more of corporate middle market America. And I think we're invested in the right verticals and kind of we've gone upmarket to cover midsized companies, and we can go toe to toe with the mega banks and win business. So unfortunately, the environment has been a little bit tepid for maybe the last 4 or 5 quarters, but we're starting to see signs that activity is picking up. And so I think you'll be able to see the quality of what we've built, start to come through in higher fee revenues there on the commercial side.

Activity picking up in capital markets or commercial?

In kind of both, I think the M&A pipelines are good and I think there's kind of financing that goes with deals is picking up a bit. So I think we'll see kind of certainly a little bit of progress in the second quarter, but the second half is setting up to be pretty good.

And maybe that's a little bit of a different message from some of the large investment banks. Is it just that small and middle market that help...

The deals that they don't require the big financing -- some of the big deals, but deals kind of more in the middle market sweet spot up to some mid-corporate sized deals. Those -- so I think are -- the activity is picking up, and you'll start to see pipelines converting into volume?

And then on balance sheet optimization, and I should say for context for anyone as to know you as well, this is not a new thing. This is [ much ] you do every year. But in the current environment, when you talk about lowering the loan-to-deposit ratio in an environment where funding is more expensive and scare. Is there a specific target in your mind, is it more just dynamic based on what the deposit market looks like?

Yes. I'd say if you just play out -- that we have in motion on auto and some of these nonstrategic corporate relationships, we could see the loan-to-deposit ratio trending down towards kind of low 80s, low to mid-80s over the course of this year. So we're already 89. I think you'll see in the second quarter so far, we're still up on our deposits, and we're doing the kind of rundown on certain of the loan portfolio. So we're kind of good on both sides of that equation. So I think that's important over time to kind of get that kind of balance correct. And probably have a bigger investment in cash and securities and a little less in loans. But as I said, I don't think that's significant in terms of NI impacts or NIM impacts at this point.

Okay. Maybe before diving into more specifics, another general question I wanted to get on, it's a more generalist conference. We try it for it to be. And one thing I hear a lot from generalist over time is regional banks feel more similar than they feel different. How do you really differentiate? It's more a cycle call. When you think about that, when you get some of that same feedback, what would you highlight to generalists? What sets Citizens apart and what makes you different from an investment standpoint?

Yes. I mean I'd say our -- the quality of what we've been able to build in the consumer bank and then the commercial bank and the relative balance that we have, many regional banks, I think tilt more to commercial and don't have as strong and solid consumer business as we do. So I like the fact that 2/3 of our deposits are consumer. I like the fact that we have segmented the market well, and we have value propositions for the mass customer, but mainly mass affluent and affluence where we really focused and grown households and then also the high net worth and ultra high net worth. But the sweet spot has been mass affluent and affluent. And we've really linked our products in kind of great ways. We call it Citizens Plus, like basically do more, get more, the more business you do with us, the more value we'll deliver to you. And so I just think our ability there to be someone's trusted adviser on their life journey is, we're all in on that in terms of delivering value, having trained people who can give advice. And yes, maybe the criticism a little bit. A lot of these banks do the same things, but who executes it the best and who delivers the best experience we've seen our J.D. Power scores kind of skyrocket since we've really focused on this approach and investing in underlying technology and trying to create digital end-to-end experiences. So we feel really good about where the consumer bank sits and the size and scope of it. And then on commercial, I mentioned earlier, I think what we've built is kind of as good as anybody. Certainly, I think we're top of the peer group and we can go toe to toe with the big banks. So feel really good about that. So I think that's differentiating in and of itself.

Less the stock at tangible book is so bad. The -- I joke lately top 3 questions I get from investors is deposits, deposits, deposits. It's deposit volumes, it's deposit betas and it's noninterest-bearing mix. Can you give us your thoughts on where you think Citizens is on each? What inning of the cycle do you think we're in?

Well, some of this will depend on how the Fed moves from here? Do they have a skip? Do they have a pause? Do they go up another 1 or 2? And so I'd say the good news is that a lot of it's repriced that's in the commercial or in the wealth side. And so anyway, we're kind of maybe in the late stages of a little catch up on our betas. And then if the Fed is done, then things will level out there. But I would say we still have potential to keep improving our deposit franchise, which I'm very optimistic and positive. So back to the time of the IPO, we really, we're punching under our weight both in consumer and commercial in terms of the quality of the customer and the value propositions and share of wallet that we had. And I think we've addressed a significant amount of that. We kind of invented Citizens Access digital play. And we've used that, I think, very wisely in terms of attracting in specific types of deposits come with what we have in the core consumer space. But we're still, I think, using data analytics and other investments to continue to grow deposit share in the consumer space. And the same thing in commercial. We didn't have many capabilities. Our cash management system needed to be replatform and improve, so we can compete more with bigger companies for deposits. We didn't have full escrow and bankruptcy capabilities, rich deposit pools that are sticky and lower cost. We've made those investments. But I'd say we're still kind of in the fifth, sixth inning of kind of some of those plans. So I do think there are pressures. You're watching H8, you're watching the Fed with QT and people are starting to raise the flag and say we think deposits will -- we will be happy if we're trending down with the H8 to continue to see these 2% to 3% declines in the past this year and next year, I would expect to do better than that. I think we can do better than that.

And you mentioned earlier, you're still up on deposits. That's a 2Q to date -- that comment?

Correct.

So maybe turning to the lending side, you came into this year already somewhat cautious. You mentioned some of the BSO, the balance sheet optimization activities you had, I think you were looking for about flattish for the year. When you think about the shock to the system from SVB from First Republic, how does it affect your lending standards and your appetite to grow from here? Is it a hunker down moment and really tightened lending standards significantly? Is it more tightening around the margin? Just give us a flavor of how your appetite to take on new loans and new relationships may change?

Credit is important to our customers. And so we certainly want to be there for our valued customer where we have deep relationships. And I think we have certainly the capacity to do that. We're creating new capacity as I said, by running down some of these other portfolios, which are less strategic to give us the kind of firepower to keep playing where we have valued relationships or interesting opportunities. Having said that, I think you're still at the margin if you're kind of on the cusp of potentially a recession, you want to be careful. So I'd say we've tightened at the margin like everybody else, but we are there for important relationships.

And then commensurate with that, has there been any notable improvement in spreads and pricing?

Yes, certainly, I'd say it's shifting a little bit more to be a lender's market at this point. And so you are seeing I'd say, good performance on loan spreads.

Maybe broadening that out then to the margin a couple of quarters ago, it looked like NIM might be as high as 3.5%. And now we're probably more like 3.1% in 2Q on your guide. How do you think about the margin progression from here if there are any near-term updates or forecast, happy to take them, but maybe like a through-the-cycle margin range or average, what's your updated thinking there?

Again, I'd say a lot depends on kind of where the Fed goes. I would think our house view is that maybe there's one more '25 and then they probably hold that through early into '24. And so I think that's a reasonably good scenario for banks. We've tried to manage our asset sensitivity. We were one of the more asset-sensitive banks, and we've kind of become more neutral. So we're still only asset sensitive, but on a very modest basis and what we've really focused on is layering in protection for the inevitable Fed coming back to a more natural rate over time. So if rates are 5, they go to 5.25%, they're likely to come back over a period of time back to 3% or some natural rate. And so we've layered swap protection in on '24 or '25 even into first half '26. And so I think that's important, Brian. We all benefited in our NIMs when rates got off the ZIRP and that positively impacted our NII and our ROTCE. And so you want to try to protect that. And that's really where our focus has been. I would say in the short run, it's still competitive. It's still quite competitive in terms of deposit pricing, and we are paying what we need to pay to protect deposit relationships. And the net result of that is, we're focused on volume and making sure the funding base is solid. And if you have to pay a little more in the short run, so be it.

And maybe a last one on deposits. I mean they felt like an existential issue a month ago, maybe now it feels still very important, but a little less existential. But in terms of like structural industry changes, whether it's deposit insurance levels, whether it's transaction account guarantees, whether it's the Fed's RRP facility, anything like that, that you think is still important and still needs to change.

Well, I'd say the most important point on an individual bank basis is to demonstrate that you have a good diversified business model, diversified customer base, strong relationships. You have a strong liquidity and funding and capital position. And that should, in and of itself differentiate you from some of these banks that failed and other banks who don't have that. And so I think being out there, having the facts and then communicating the story that we're strong and we're solid and telling that to all your stakeholders is important. So that's probably the #1 thing from a macro standpoint, what would we like to see. And I think the industry like to see. I do think the Fed overnight repo facility was never designed to be this big to be $2.5 trillion and kind of competing with aggressive rates and sucking deposits out of the banking system. And so you can rest assured we've made that point on our trips to Washington, the banks that there needs to be a plan and ultimately to kind of bring that down. That should not meant to be structurally something that's permanent. So anyway, we'll see how fast that happens. But certainly, points have been made on that. I would say on other aspects, the deposit insurance report that came out from the FDIC was quite interesting. They're not in favor of raising basically the 250,000 kind of coverage level even though if you -- that was 15 years ago when that was set and if you index that for inflation or money supply growth, it would be well over 500,000, but they're saying that would potentially create moral hazard. But if you kind of -- they did leave the door open to say that what they'd like to see is something like the old TAG system where corporate operating accounts do get covered. And the reason there's a little moral hazard with that is that companies are just looking for services from the banks. They're not shopping for the highest interest rate because these are in noninterest-bearing accounts. And so I think there's an openness to consider that, although there's a lot of politics involved in whether that would have to get congressional approval. Maybe there's a sign of hope now that they did something positive on the ceiling, maybe they'd come back and look at that. But I think partly the fact that things have calmed down, there's less inclination really to have to make a change. So people are saying, structurally, things seem okay. And I don't -- I think it probably gets pushed to the back burner for a while. So maybe that's something that comes back if things flare up again. But I think for now, I wouldn't hold out hope that will make it through the political process.

Barely made it through the debt ceiling, and it's tough to get anything else done. I should say we do have investor Q&A. The system is not working. But if you e-mail me, [email protected], I've got my little thing here, and we'll track them and ask them. So on expenses, you mentioned some of the areas that are key to invest. You've also got the TOP 8 program, which is focused on efficiencies, really revenue and expense efficiencies. But often, people focus on it as an expense program. if the environment gets more difficult, are there things that can be done? Or would it be more of a '24, '25 do more planning for that period?

So we've already leaned in a little bit on TOP 8 and have added some new initiatives. And as a result, when we gave our updated guidance for 2023, we kind of brought the expense growth rate down by a couple of percentage points. And so clearly, if your NIM is impacted by higher funding costs. And so you're going to have lower revenues for the year. We had that in the outlook, but then you would expect to see well-run banks trying to figure out how to chisel a little more out of expenses while protecting the things that are important. So we've done that. I think we're already start to think about TOP 9. And I never thought when I started with TOP 1 that I would be still going into the high single digits. But I think it's reflective of this mindset of continuous improvement that we have that if we want to invest in new things, we have to be ruthless in looking at the existing expense base and try to extract efficiencies and not easy things, but the fruit in the low part of the tree has been picked. And so some of the things that excite us about the future are things like Generative AI and how can you transform certain functions and things that banks do. And could that be a kind of step function in some of your cost bases around the company. And so we got people focused on that. Stay tuned. We'll probably have something to report on it later in the year, but we're already thinking ahead.

I know you said stay tuned, but for those of us less familiar with AI, what would be a use case within a bank?

Well there's many, many functions that involves research and repetitive work for example.

Research cannot be outsourced...

Sorry. But I didn't mean to hit a hotpot, but in any case, like AML and KYC and things like that or customer inquiries that you have to go search a bunch of systems for the history, you could make people a lot more productive and have fewer people if you can harness the power of that kind of technology.

[ KYC ] Research is okay. Thanks. Credit, it's obviously all CRE all the time lately. I think you've mentioned you've got off the CRE reserves all the way up at 7%. I think when you kind of even narrow further into multi-tenant, it might be higher than that. But I guess the flip side of that is the rest of CRE the reserves left on that or 1%, 1.25% to find level, but implies less stress. What gives you confidence that this is kind of a concentrated office CRE issue and the rest of the CRE book, which I should mention is actually underweight overall for Citizens relative to the industry. But what gives you confidence this won't spread and become a CRE issue?

Yes. I'd say a big chunk of this is multifamily away from office and a chunk of that came from the investors acquisition. And if you look at how that has performed historically, it's actually had very good credit quality. And so if you're in the right geographies with the right locations and the right buildings and owner structure and the demand for space, I'd say people are still opting to rent at this point. It's hard to buy houses and supply is a bit constrained, I'd say the kind of macro backdrop for multifamily where we're playing is still quite good, even if rates are going higher, I think there's still demand contrast that with the office. They have to contend with the higher rates, but then they're also suffering from reduced demand given the slower return to office trends. So I'd say that would be the main differential there. And then if you're in other things like the warehouse and distribution space. I think that's safe and any retail that was we kind of washed out in the pandemic. And so really, to me, it comes back to the CRE general office.

And do you think that CRE general office, given where the reserve is, I mean, is it put to bed at this point? Or what would it take in terms of price declines versus trends at this point to drive additional reserve?

I think we've run some pretty aggressive stress scenarios to arrive at the reserves. And so we feel that it's covered. I think we'll see a lot of this play out. We're probably a little more front-loaded in terms of our maturity profile than some of our peers, which is fine, but we have those conversations going, and we've got teams lined up to have the conversations with the borrower. And the vast majority of the book is performing and our NPAs are very low, but the moment of truth on somebody hasn't arrived until you get to that maturity and the decision has to be made by the borrower and by the lender. So -- but again, I take some comfort in the fact that we've looked very carefully at kind of where we are, what the quality A, B and C is, who the sponsors are at better. And so real estate -- commercial real estate, these office buildings are unique in and of themselves, the idiosyncratic nature of each building and each relationship will make a difference in the outcomes. And so we feel, certainly, this is manageable. And the other thing I would point out is, if it is a bit higher, we have plenty of capital, Brian. So I mean we're running capital. I think M&T has a top ratio adjusted for securities losses, and we're right behind them in second place. So if we had to build the reserve a little bit, we have plenty of capital to do that.

So right on schedule, I got one that kind of dovetails with that. So I realize you kind of half answered this question already, but I'll just read the whole thing. Can you explain in layman's term, why you're not overly concerned on CFG office exposure? And then in particular, some of the things you give in terms of statistics. Can you just explain why you think helps, for instance, any percent suburban on this? Why is that better in your view?

Yes. So I think I did answer the first part. But in some of those statistics, what we see is that suburban locations have been less impacted by slow return to office than central business district. And so that -- when we put out those statistics, we've actually gone and look at what the occupancy levels are and some of those cations where those regions, geographic regions where we have those buildings. And generally, I think those will be easier kind of negotiations when you come to maturity than some of the central business district at this point.

And maybe stepping back on credit. I've observed, I'm sure you've observed ever since the IPO, there's been this persistent perception that Citizens is riskier than the average bank. Some of that's based on history, which arguably you were a very different bank. Some of that's based on growth, which you've made the point, you started out underlevered on your balance sheet. So you're kind of growing into your natural size. But even today, it still does hang around in investor discussions. So when you get that same question that's seeing pushback from investors, hey, I just think Citizens is going to do worse in the next downturn. What are the 3 key points or whatever number they are, but what are the key points you would use to refute that?

Well, I think just from a credit standpoint, we're in a proving ground at this point. And so we got a modest test in the pandemic, and I think we did just fine. But now depending on what the slowdown is, there'll be another test for us. When you look at the CCAR exams for the last 10 years, we've generally been right around the median. I think they put their thumb on the scale on CRA in the last one. And so we drifted up slightly. But still, the way we've played on consumer has been super prime and high prime, and are -- even though we've grown, Brian, we've grown faster in the kind of higher credit quality spectrum so that overall credit scores of the consumer book have gone up similarly in commercial, we've migrated to grow faster with bigger companies and mid-corporate companies with $500 million in revenues to $3 billion. And so those tend to be more diversified companies and better credits generally. So the credit risk profile of our corporate book has also improved since the time of the IPO. So I don't think we did anything in a breakneck pace, certainly not the idiosyncratic banks who failed, they went -- they quadrupled in size in 3 or 4 years. we've been just growing at a controlled steady pace with a veteran leadership team and not getting over our skis on credit. So I'd say that would be one thing I would say. The second thing, I think we're an improving ground on deposits as well. So the Citizens pre-IPO was an amalgamation of kind of many savings institutions or thrift-like institutions who competed on rate and didn't have a fully built-out value proposition for customers. And we've done that. We've fixed that. And we've grown the size relationships in our noninterest-bearing and the quality of the interest accounts that we have been significantly improved, and we're seeing that. I have high confidence that deposit betas that we post through this period will be in line with our peers, whereas the last time we went through a rate hike cycle. We were quite a bit out of the pack still. So in the last 3, 4 years, we've made significant progress on the deposit franchise. And so -- and then really, since the IPO, we've had a pretty darn good track record of hitting our numbers and running positive operating, running the place with financial and operating discipline and continuing to drive up the ROE of the business, we started it under 5 and last year, we were at 16. We were at 16 or 16.4, the year before we were at 16. I still think we're going to be delivering kind of a mid-teens ROTCE for this year even with kind of the higher funding costs and all the noise, higher credit costs that went into everybody's forecast. We're still, I think, posting a good level of return. So we've built out a strong franchise. It's diversified. It's well managed. I've got a great team. And I think that will become evident over time that investors will see that this is a quality franchise. It's not riskier and it's undervalued. It's rare that you could buy a quality franchise for just blow your tangible book. Anybody historically who steps into that makes a lot of money over time.

You mentioned the -- I will say, Bruce and I were joking before this, that the best questions are short and open-ended, analysts always write over complicated number of questions with too many numbers. So I'm going to my capital question. It's 9 lines long. I quote 7 different numbers, and I talk about the changes coming under Basel III. So I just want to know I studied your capital quite closely, but I'm going to ask a very simple question. You're in a good spot on capital. Is now the time to be defensive and hold that advantage or a time to be a little bit more opportunistic and maybe do things like pursue buybacks below tangible book?

Yes. I would say yes and yes. So in any case, we feel really good that we have a strong capital position. we're still generating good level of returns. And then the use of capital to support loan growth were actually slightly shrinking loans with the auto rundown that's generating more capital, and we're not looking at doing much in the way of acquisitions even bolt-on. So the capital generation is high. So this quarter, we gave guide that we're already at 10%, which is our range was 9.5% to 10%. We can build to 10.25% and still buyback stock given kind of the strength of our capital generation. And in a little ways, we can have our cake and eat it too. We can keep building capital to precautionary even safer levels, while we're in the market and repurchasing shares, and those are immediately accretive to existing shareholders if we can be doing that.

And is that somewhat governed by the upcoming stress test? Or is that something even before the stress test you can do?

I think you can do it before. I mean we have even our -- if you take off the AOCI filter and look at where our capital ratio is, we're like 8.7%, so we start at 10%, or at 8.7%, and our SCB is at [ 7.9%. ] We have quite a big cushion there.

Got it. Acquisitions. You mentioned you're not looking to do a lot. There was a lot of press that maybe we're looking at the Boston Private piece of SVB maybe submitted some kind of bid for a piece of First Republic. Any thoughts on the thinking there and looking forward, whether it's FDIC loan sale from Signature, whether if there are any additional failed banks, are there other distressed opportunistic things you would consider?

Yes. Well, just going to the past first. I think the fact that we were involved in certain specific opportunities, to me is a testament to how far we've come as a company and our overall good standing. So I think the fact that we have a strong management team, we have a strong capital position. We've integrated investors in HSBC flawlessly. I think the regulators have high confidence that we can play, and we can take advantage of opportunities as they come along, specifically the Boston Private SVB Wealth and First Republic to us, that was wealth play. We've been trying to scale up our wealth and get that to the appropriate size. It's been difficult to do that and to buy RIAs and other type firms, given our price discipline, but these were potentially unique ways to get kind of a capital boost plus you get the boost that you've been spring to augment here at Citizens. I don't see -- I hope there's no more failures. So I hope we don't have to use these muscles that we've developed. But in any case, we do have the capacity to operate and kind of play when these situations arise. And I think you've seen historically over time that the stronger banks to take advantage of market conditions, and they turn that to advantage to take strategic strides forward, and that's what will be alert to.

I want to ask about reregulation before I do. There's a few follow-up questions on your deposit commentary. One, you mentioned betas -- mentioned something about betas. You think the beta is in the late stages. Can you give any thoughts on the cost of deposits to grow in 2Q? Is it getting more expensive to grow deposits? What are the price deposits are coming in at this stage?

Yes. So I mean, we -- I think most banks, when you look at kind of their Q1 sequential betas and what they paid and their kind of average deposit costs they were impacted by the kind of real crisis hit in the month of March. And so you didn't get a full impact on the quarter. And so when you look at the guidance for the second quarter, they were down a lot more sharply because then you're going to get the kind of full impact of the actions that you took to stabilize when the market was very turbulent in the last 3 weeks of March. I'd say it continues to be very competitive. And so it's not surprising to me that you're seeing some of the peers who've been here at your conference, Brian, talk about they're taking up their terminal betas just a little bit. I think our -- we're still -- we're probably in the mid-40s in terms of where we would expect the betas to be. And that assumes that the Fed is kind of done or largely done. And so my earlier commentary, that can kind of move around a little bit if they have to go to 6% or above 6%, that could change, but kind of where we see now. And I think the basis that everybody else is forecasting on, you're hearing a lot of kind of mid-40s type talk. And I think, as I said, I want to be in the pack on that.

And in terms of the source of deposits, are you relying at all on broker deposits for growth? How do you think about that as a channel?

I would -- we're kind of within our risk appetite for brokered deposits. So we're not -- it's not like plugging holes and that's where you're getting your deposit growth from. So I'd say the growth has been -- so far, quarter-to-date has been in the consumer space and in the commercial. So we're kind of managing that kind of across both major segments where we take deposits.

And then I guess the last one, some banks have talked about at the edge, very competitive even irrational pricing for deposits, things like Fed funds plus pricing for certain large corporate blocks of money. Is that something you're seeing in? How are you managing that within your book?

Yes. I think everybody has gone through a rethink of kind of what was my deposit growth strategy. And in light of the kind of concern about uninsured and hot money, if you had any of that, the good news is a bunch of it has kind of already diversified out. And you kind of got some other monies coming back in. We actually -- what I liked about the first quarter, the period after SVB was, we had some bigger accounts diversified out. They didn't close their accounts, but they diversified. But -- at the same time, we opened 350 commercial accounts that were deposit-only accounts, and we brought in 5,000 small business accounts above our trend line. And so we were generally flat at the back end of March, but the profile of the granularity of the deposit base improved. And so I think as we formulate our deposit strategies going forward, we're going to be kind of more disciplined in kind of the bigger relationships and taking in that money. And really just what's interesting is, all of the commercial peers, including M&A bankers understand it's deposits, deposits, deposits. To your earlier point, that if we're lending you money, we need the deposits back here. And if you put them in money funds, the money funds aren't going to make you a loan when you need a loan. And so just even educating sophisticated depositors that it's important that, that money kind of comes back into the bank and that we have strong deposit patient. So we can do what we -- so we can kind of provide that intermediation. And so it's kind of all hands on deck. And we have a number of programs like that. But I think you'll see banks for the next several quarters really working on that profile and continue to try to improve that deposit profile.

Reregulation, there's a lot on the agenda kind of an alpha bit suit. What are the biggest things you're watching for Citizens.

I would say, again, since we have such a strong capital position that it doesn't create any need to really stay on the sidelines and focus on like 8 quarters of capital build if the AOCI filter goes away like some banks that we compete against. So we're kind of -- there probably direction of travel will be a bit higher capital, whether Basel III end game puts in something for op risk, we'll see how that plays out. But I'm not as concerned about capital since we've always managed the capital base conservatively. I would say, on the LCR, we're already compliant with a Category 3 LCR standard. So I think we're in good shape there. But having said that, I'd say it's important that we continue to strengthen that liquidity and funding profile even if the LCR, if it gets -- if it doesn't get pushed down to category 4, I still want my LDR to be lower. I still want to hold more cash and securities and just kind of have a perception that -- and a reality that the organization is even safer. And I think we can do that in a way that doesn't alter the fundamentals of the return profile that we're seeking.

TLAC. That's something that you've historically not had to deal with. How would you layer that into the commentary?

I don't really see the need for it in particularly category 4 where we have very simple business models. But if it comes, I don't think it's a game changer because you'll have a long period of time to ultimately comply. And I think there'll likely be an ability to issue at the holding company or the bank level. if you're issuing at the holding company, it's 25 basis points more expensive than at the bank level. But I'd say, direction of travel, we will probably be, as part of this balance sheet optimization adding some of that more senior debt capacity, et cetera, into the mix. So I don't think it has a dramatic impact on our funding structure, the cost of our funding structure.

Back to the story. Again, can you just give us a sense of -- this is kind of asking the same question again, the layman's term of why this isn't a bigger deal than a 7% cum loss implied by your reserving. Was there a price level that it would have to break or maybe put it in terms of I guess what you're probably starting at like a 55% LTV and prices would have to probably be down 25% to put that in a loss.

I don't know if going through the mental math is -- will be illuminating. I'd simply say that we've done meaningful stress testing across on almost a borrower-by-borrower basis, looking at the different kind of portfolio, sub-portfolios that we have. And we feel that where we originated the loans where we think the current LTVs are that, that will be sufficient. And again, if it's -- and if we're wrong, we have plenty of capital. I think it won't be wrong by a lot. And if it's strong by a little, we will absorb it, and we'll have plenty of capital to absorb it.

I guess my last question here was on rate cuts, you did reference it might be a little further out in your view, but you are layering into swaps to protect against it. I guess the question I would have is a little bit more investors, the market seem to be rooting for rate cuts for banks to take the boot off the throat of deposits. But historically, the rate cuts can be difficult because the deposit lag works against you, assets reprice. How do you think that will play out this time around? Do you think banks will be able to lower deposit rates quicker as rate cuts come in because they're all looking to do it in mass? Do you think the deposit lag will be a problem? Just if you were to go through the industry view of 2024 rate cuts for the banks, what are the things you'd be looking for?

Well, one of the things will be how sophisticated and correct where people's asset liability management costs, like have you layered in the swap protection that can kind of ease that glide path and provide some support for the NIM. And there, I think we feel good about that. I would say that there will be desire for the industry to start moving down and whether that is a little more aggressive and faster than what we've seen historically remains to be seen. So partly, that will depend on kind of what's happening in the economy, what's happening in the bank landscape and the kind of calmness or anxiety over whether there's more failures. And so it's kind of hard to make that call. But I do think the banks that have been smart and adept at how they've kind of hedged the forward rate possibilities of those cuts stand a chance to outperform.

That's great. Well, thank you for taking the time today. Thank you, everyone, for being here, and we appreciate your insights.

Thanks.