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

All right. As everyone takes your seat, if we could put up the first ARS question like we've been doing for everyone else. But next up, very pleased to have Citizens Financial with us this morning from the company of John Woods, Chief Financial Officer; Brendan Coughlin, who runs Consumer Banking. There is a kind of a short slide deck on their website, which -- they're both going to take us through this morning, and we'll kick it off with John.

Okay. Great. Thanks, and good morning. A pleasure to be here, Jason. Let me first just say that on the anniversary of 9/11, we had Citizens offer our condolences to the families who lost loved ones, and we celebrate the bravery of our first responders on that day. Okay. So moving on to what is on the agenda for our presentation today. I'll start off with a few comments about the state of our franchise. Then I'll cover how the balance sheet is positioned in light of recent proposed regulations, and I'll emphasize our balance sheet optimization efforts as part of that. And then I'll turn it over to Brendan, who will deliver an update on the launch of our Citizens Private Bank. So if we get to the first slide here, I'll start off with some overarching comments. We're navigating extremely well against all of the headwinds and uncertainties in the macro and regulatory backdrop. We have a track record of strong execution and excellent capabilities built since the IPO. And therefore, we're poised to deliver strong returns through a challenging environment. This will rely on a strong defensive foundation. Key components of this include one of the highest CET1 ratios in the peer group, liquidity levels well above requirements and growing. And this is all based on a quality deposit franchise. Consumer deposits are 67% of total deposits, and 70% of our deposits are either insured or secured. This positions us quite well for the proposed changes coming down from the regulators. And I should note that a strong defense gives us the flexibility to stay on offense even during uncertain times. We've launched a series of unique initiatives that we expect will contribute to outperformance over the medium term, including, again, the recent launch of the Citizens Private Bank, also our recent entry into New York Metro, where we all are today, hopefully, you saw some Citizens screen on the way to the hotel today and a number of others, such as Citizens Access, Citizens Pay, and Private Capital Investments we're making in our commercial segment. On the left side of the next slide, it's exciting to see the growth and expansion of our franchise beyond our historically strong regional branch network to now include the Light Branch Network in D.C. Metro and Florida. And we're also including the national customer and client coverage through Citizens Access and the commercial banking regional presence coast to coast. And it's always rewarding to see customer satisfaction results and industry accolades presented on the right side of the slide as well. On this slide, I'll pivot to the balance sheet foundation. And you can see our exceptional capital strength, which grew to 10.3% at the end of the second quarter. We also had very strong deposit growth, which drove a decline in the loan-to-deposit ratio in the second quarter to 85%. And I already mentioned our high percentage of insured and secured deposits in the lower right. This next slide illustrates our retail-oriented deposit base where it's just diversified across channel, which you can see on the pie chart on the left and is diversified across product on the right side of the page. On the next slide, this illustrates our capital position versus peers, which is maintained even after estimating the impact of deducting AOCI. And driving a little further on capital, you can see on this slide, the impact of AOCI is approximately 180 basis points for us, where this impact is well above 200 basis points for the vast majority of peers. On the right side [Technical Difficulty] impact of the [Technical Difficulty] to be approximately 4% for us. Taken together, we are well positioned to broadly meet minimum regulatory capital requirements, even on a fully phased-in basis around the end of the year. And we expect to return to our recent CET1 operating range of approximately 9.5% to 10%, even before the likely beginning of the phase-in period, which includes fully phased-in impacts and excludes the impact of share repurchases. On Slide 9, as previously mentioned, we have been building liquidity with a plan to increase cash and securities from about 22% of interest-earning assets at the end of the second quarter, up to about 25% of interest-earning assets by the end of the year. We're also planning to reduce reliance on Federal Home Loan Bank borrowings by issuing term ABS funding from our auto book and continued runoff of the non-core portfolio in general. In the end, while waiting for clarity on proposed revisions to LCR requirements, we are increasing our pro forma LCR levels, which already exceeded existing Category 3 requirements at June 30, and they were close to meeting Category 1 requirements, which we plan to also exceed by the end of this year. On Slide 10, continuing on the theme of proposed regulations, some key points to offer about the long-term debt requirements. We estimate the need to grow our holding company long-term debt by approximately $4.3 billion to comply with these rules. We expect to accomplish this programmatically over the phase-in period and will be opportunistic along the way. The impact appears to be manageable, equating to approximately 1% to 2% of EPS, assuming a reduction in other high-cost funding. Turning to key strategic initiatives. We will focus on the top 2, balance sheet optimization and Citizens Private Bank for our discussion today, although we have provided commentary on the others in the appendix for your convenience. Regarding balance sheet optimization, this slide illustrates the relatively rapid rundown of the $13.7 billion book by about $9.2 billion by the end of 2025. And on Page 13, we indicate where we plan to redeploy this $9.2 billion, about half of this will go to building cash and securities with the remainder used to reduce funding and support organic loan growth. In summary, this strategy strengthens liquidity and has already been a source of $3 billion of term funding ABS issuance year-to-date. It builds capital by reducing RWAs and it's accretive to NIM, EPS and ROTCE. With that, let me turn it over to Brendan.

Thanks, John. Good morning, everybody. We're really excited about this initiative to build out the private bank for Citizens. We've made no secret about our desire to continue to grow our wealth management franchise over the last few years and have had some really strong results in that regard. And while the failures of SCB and FRB were challenging for industry, it did present an incredible opportunity for talent that was disrupted and in motion. And so, we elected to play a little offense here to balance off a lot of the focus that we're putting on managing the balance sheet really well and non-core strategy that John hit on and hired what we believe to be 150 of our industry's best bankers in 4 key markets for Citizens in Boston, New York, Florida and planted a bigger flag on the West Coast and the Bay Area. These bankers -- while 150 doesn't sound like the biggest number, these are super bankers. These bankers are the very, very best in our industry. They have very, very large books of business, and they were the cream of the crop predominantly at First Republic. So we're very, very excited for that. I would also say, as we think about positioning Citizens for the future, 1 thing that differentiates the really large banks with the midsized community banks is often the presence of a well-run private bank to serve high net worth customers. So we believe this move is very strategic for us in a lot of different ways, including making sure we've got the right diversified offering to play with the big boys over time. How are we thinking about the packaging and the brand and the market. So what I would say is that we believe that the success here for our private bank will be grounded in offering a world extraordinary customer experience to play and win in the high net worth space, that's table stakes. It's 1 thing with many flaws and some of the failed banks. The 1 thing they did incredibly well was to have a world-renowned service offering. And all of our strategy starts and stops there. We often aim to bring together the breadth of the bank, from commercial banking, consumer banking, mortgages, wealth management, capital markets to the client in a single integrated client experience. That's very differentiated, in particular with some of the big banks that are a little bit too large to bring it together in that seamless way. And as you all know, a lot of high-growth individuals often have diversified needs, which includes businesses, whether it's multifamily, private equity so on and so forth. So we've got the model coming together with correct end-to-end ecosystem of banking for this client segment. And again, really grounded with world-class service. And our belief is when we can deliver that world-class service, the ability to earn trust, be their primary financial adviser through life's journey and dislodge the wealth relationship is right there for the taking for us. And we're already off to a very strong start. While we're leaning in heavy to private banking, we do want to make sure that it's well understood some of the business guardrails as we stand this operation up. While the 90% of the private banking activity that we brought in was really world-class. Obviously, there are some business model corrections we're looking at that now with the benefit of hindsight, some of the banks that are no longer around, had a few missteps. So first and foremost, this entire business model will be grounded in primary banking relationship business. We will not be offering out capital and loans for those that don't fully intend to bank with us and to end the relationship business period hard stop. We do intend to have a pristine credit risk appetite aligned with Citizens and in some cases, even better than the average of what Citizens has on balance sheet today. The credit quality here is traditionally very, very high, and we don't intend to take a step away from our strong credit appetite. We do -- we will grow this business with a strong self-funded deposit book, including operating deposits. So our pace of growth here will be guided by our ability to do that and drive a strong deposit profile, both the quantity and the quality of the deposit book that we can build. We'll offer relationship pricing, but it's going to come with some guardrails. We will absolutely ensure that the end-to-end relationship is ROE accretive for this firm, and we'll not be meeting with underwater lending rates that aren't justified with the end-to-end relationship that we're bringing forward. We'll be very disciplined about that. And we'll have this grow at the pace that we can drive accretive profitability for the firm. And so we're going to be very, very disciplined on how we think about standing this up and the offering that we bring to market. And of course, strong risk management front to back. The client segments that we're looking at here, we've sort of bucketed them on 2 sides. One is the businesses that we're targeting and 2 is the ultimate individuals. The businesses that we're going after are those verticals that tend to have a connected ecosystem of high net worth individuals. So there's connectivity here across these 2 segments that is very real. So on the business community side, private equity venture and multifamily are 3 of the target opportunities that we're going after, obviously, with SCB and FRB, not participating in the market anymore. There's a large void in private equity and venture banking. And we've hired some of the world's very best private equity and venture banking individuals to join Citizens to help stand up in operation. Obviously, we also participate in that space in our commercial bank. This offering will be grounded in day-to-day operating cash management relationships with these firms, ultimately then connecting into banking the LPs and the GPs from a personal banking perspective and wealth management standpoint. On the personal banking side, we're targeting individuals with $5 million or more in liquid assets, $10 million in net worth, and HENRY clients to plant some seeds to build the bank of the future. And you can see the product offerings that are going to be traditional for us to bring to market for these segments, whether it's capital call lines, certainly operating relationships, partner loan program, cash management, and on the personal side, mortgage, home equity, in some cases, student loans, credit cards and certainly, wealth management is a prize for us at the end of this build. We've done a lot of work so far. The team is off to the races out bringing in clients already here at Citizens, but there's a lot left to do as we position this segment for success long term. We sort of called the summer a bit of a beta. And now as we enter the fall and close out the year, we're intending to move from beta to sort of full market launch across the U.S. So we do intend to launch a packaged brand in Q4. We're actively in the market hiring and scaling our wealth management team, so they can participate and partner with these world-class bankers we brought on board to monetize the wealth opportunity in front of us. We are in talks in multiple locations around opening private banking offices for these new clients to come in that will augment our retail branch network, and we're making operating model changes across the bank to ensure that world-class service offering can come to life the way we desire it to be. Of course, on the financial side, a couple of points, we've shared this in our earnings, but I'll reiterate it again. We do expect 2023 to be a year of investment. So we think it's going to be $0.08 to $0.10 dilutive to our EPS this year. We think it's a very, very smart and appropriate risk return investment for us. If you translate that into basis points of capital, it's a very modest investment for potentially a really large return. And when you look at the multiple wealth firms that are trading at right now, the impact to capital is de minimis, and the upside is just so much more significant long term than if we had to go out and pay 20x EBITDA for an [indiscernible]. So we're really pleased with the risk return dynamics and the investment we're making. We do believe that in 2024, this investment will be accretive. The revenue will start to build and will be modestly accretive to the firm from an EPS standpoint and over time, 5% EPS inflation as we think about stepping off 2025. What you see in the bottom right is some of the key business metrics that we intend to target in the year 2025. Ironically, the size of the loan and deposit buildup is fairly similar to the size of the rundown of our non-core segment. So if you think about strategically what we're doing, we're running down less important, lower profitability, less relationship-oriented businesses with indirect auto, some of the loan purchases that we have done over the years as we go through the IPO phase, and we're replacing it with highly strategic, highly return-accretive customers and relationships with targeting $11 billion in deposits, $9 billion in loans and $10 billion in AUM by the end of 2024. So there's a lot to do. We're off to a very strong start and we're very confident about the progress we've made and the market opportunity that's in front of us. With that, I'm going to turn it back to John to close this out before Q&A.

Great. Thanks Brendan. I'll just make some final concluding comments. I mean, really, what we're trying to leave you with here is that Citizens has a strong and growing capital and liquidity foundation. This allows us to stay on offense even during challenging times. We believe our portfolio of strategic initiatives are unique and will contribute to outperformance over time. So these factors, along with our historical track record of execution since the IPO and excellence and capabilities, this will drive strong returns through a challenging environment. Thank you, and now we'll transition to Q&A.

Great. John, Brendan, good overview. Maybe I thought we'd kick off Q&A with a broader question about the environment. Just kind of what are you hearing from your clients. Do you think we're headed for soft, Brendan, maybe specifically just for you, how different we're doing. I would kind of think the CFG footprint is kind of higher income, higher wealth spectrum in terms of any changes in the behavior or where kind of deposit levels today versus kind of pre-pandemic? And just maybe more color there?

Yes. Maybe I'll just get started, and we'll turn it to Brendan. I mean, I think overall, the U.S. has been strong, right? I mean we've seen resilience with some -- with the data coming in from ISM or from the job front has all been quite strong. And as a result, we've seen the rate environment kind of react to that. I think we are cognizant of some of the downsides, though. I mean it's just 1 of the questions that we have is that it appears that recession odds are following. It appears that soft landing is much higher likelihood than it's been in a number of quarters. However, how long can the U.S. sit on an island when you have the rest of the world dealing with some softness and in particular, China and Europe. So that's something that we're cognizant of and that we keep an eye on. The second item I'll throw out there is with respect to the Fed. I mean I think the Fed has kind of transitioned out of catch-up mode. I think we're now in calibration mode, right? They're taking a look at the data as it comes in finally. And maybe we are actually in a pause, maybe we'll get a pause next week, maybe a coin flip for a hike later in the year. So I think it's not so much about how high will it go? It will be how long will it remain high. And I think that's where we spend a lot of time thinking about and have had a view that it would be higher for longer for a period of time. And we remain asset sensitive as a result of that. And then maybe I'll just touch on the commercial clients well and then turn it over to Brendan. I mean I think what we're hearing from our commercial clients is some caution, right? I mean they're combating input costs, rates are higher, operating costs are higher, and maybe a little hesitance to leverage too aggressively at this point in the cycle that's playing out in our utilization rates. When you look at the commercial side, our utilization for our corporate banking customers is around 31% or so, pretty stable quarter-over-quarter. But historically, that would be more mid- to high 30s. So there's a little caution out there that we're hearing, but that said, in the capital market space, we're starting to see some pickup here after the typical summer wells. So from that standpoint, we're seeing a lot of momentum. And maybe with that, I'll turn it over to Brendan.

Yes. Thanks, John. The health of the consumer is still very resilient and very strong. And if you -- and to your point, our footprint skews a little bit wealthier and then our business strategy and tied to Citizens SKUs a little bit higher end in terms of massive flow and influent customers. If you were to decile the U.S., the bottom 2 deciles or so, are back to paycheck and it fully burn through their stimulus. Our customer -- while we have some of those customers relative to other peer banks we have less of them than others. So our portfolio has probably been even a little bit more resilient than others, which we're seeing, and we see that in some of the benchmarking data around deposit performance in the consumer segment. I'll give you a couple of stats. So prior to COVID, our average customer had about 17,000 in deposits. At the peak of COVID that scaled up to about 24,000 and now it's sort of reduced down to about 20,000. So the consumer is in generally a state of normalization, I would call it. But I'm not seeing any signs that would suggest there's anything other than a normalization happening. Deposit levels are kind of spending down slowly. It's starting to moderate a little bit as consumer confidence kind of bounces all over the place. And the credit side is the same. I'd say delinquencies. We were at 55 points of charge-offs pre-COVID, we were a little bit below 30 at the peak of COVID and now sort of normalizing into the 40s. So we're starting to see that normalized delinquency is ticking up a little bit, but nothing more than normalization. I'd say this, but a lot of talk about Citizens over the years and some of the growth portfolios that we've had, in particular with Student and Citizens Pay. Those are well under control and not normalizing any faster than any of the other portfolios. So there's nothing that I see in front of us in the near to medium term that is suggestive of any undue stress on the consumer.

I guess, John, you answered a lot of my questions on RWA impact, long-term debt impact, you even touched on liquidity. So we appreciate that. But when you think about those like in tandem, can you maybe just talk how those changes impact the way you run the bank? And now that we've seen the account proposal, maybe just -- does that change your thoughts on share buyback?

Yes. I mean I think it doesn't have a huge impact. I mean, we've come in to this cycle. We've run the bank at a higher level of capital than many of much of our peers. And I think that we are well positioned for the regulatory sort of proposals that are out there. On the capital side, that's pretty well down the middle of the fairway in terms of the way we've been operating. We've been monitoring external developments. Looking at where we could deploy capital, I mean, top of our list is, of course, allocating to our dividends and supporting organic loan growth and RWA deployment where we see deep relationships that we can deploy and commit to. I mean as it relates to buybacks, we've been able to be supportive of modest buybacks, and we see that continuing -- will be measured. We're going to continue to interpret and analyze the regulations as they come through. But I still think that we can achieve capital objectives as we [indiscernible] getting back to our normal operating ranges by the sort of [indiscernible] compliant on a phase-in basis as you get towards the end of the [indiscernible] -- that's a pretty good outcome that we're trying to [indiscernible]. So we're not really running the bank terribly differently. We began -- on the liquidity side, we began this sort of balance sheet optimization and sort of intensifying on that front even before the March disruptions. So we elevated that a little bit. But in general, mostly business as usual while acknowledging that the macro and the regulatory environment has changed a bit.

I guess maybe bigger picture for a second. At the beginning of the year, you kind of raised the medium-term ROTCE target about 200 basis points, 16% to 18%, to 55% efficiency ratio, but that was with the 9.5% to 10% CET1 -- in your remarks, you kind of talked about in mid-teens ROTCE for '23, although capital above that 10%. I guess how quickly do you think you could return to that 16% to 18% ROTCE. What does that mean for a normalized interest rate and credit backdrop? And is that 16% to 18% still the right number in the new capital resume?

Yes. I mean I think the banks adapt, right? So the world changes. The last time we gave a medium-term outlook, it was January of 2020. And ironically, 60 to 90 days later, we had the pandemic. And early in that period, there was -- if we were looking around and saying, okay, we're going to still hit this, right? And we did, right? And we did deliver our 14% to 16% range, approximately 3-ish years later. I think that at this point in the cycle, we remain committed to that 16% to 18%. We believe that the conditions that will be conducive and supportive of that outlook will be a more constructive rate environment, right? I mean I think the rate environment is inverted. That's not exactly the best environment for a bank that operates as a maturity transformation agent from short to long. I think an upward stoping yield curve is likely to be in our futures again a couple of years out. I think we'll have some normalizing of credit. We have lots of opportunity on the expense side. So Top 9 is going to be a big driver of what we do in '24. And we've done 9, you can bet that there'll be a Top 10 potentially on the horizon. But we see a lot on the expense side. The investments that we're making from a strategic perspective, we think are large contributors to the outperformance over time. And so I think we're sticking to that medium-term outlook, which has some flexibility to it. But we [Technical Difficulty] in the environment will be conducive to that kind of objective.

I guess, Brendan, you gave us a pretty view of the private bank. But just kind of an area we hear a lot of things, regional banks talking about. So it's clearly competitive on both of the regional banks, big banks, not traditional players. Just -- what do you see as your competitive strengths in private banking? And then I know you put up some goals which you kind of talked about in the earnings call, but just -- I know it's early innings, but kind of how are you tracking versus those metrics you laid out?

Yes. Well, I think the competitive advantage really is going to come down to sort of -- most banks have the product offerings that I listed up there. And 1 of the uniqueness to the model that we're building is the integration of commercial and consumer banking. And if we can deliver the service standard that we believe we can, we believe actually the market is very ripe for us to go in and fill, boy. While private banking, in general, is competitive. The ability to actually de-silo the bank and bring it together in that world-class connected offer is actually pretty uncommon. It's an objective that banks have, but particularly the bigger banks have hard time really uniting all their various different business lines under 1 umbrella. And that's exactly what we're aiming to do. And so we're in a bit of a sweet spot where we're big enough to have the sophisticated capabilities, but small enough that Don McCree, who is my counterpart on in the commercial bank is half a phone call away and connecting the 2 parts of the origination in a distinct new segment with empowerment with some rules that we set to unleash them into the market in a very different way. So what we hear from clients is that's really what they want. And 1 of the reasons they were at these regional banks, private banks is because it wasn't a money center bank because the service that they could bring together for them was very unique and distinctive. And so, we believe that we can create that, that on its own will be very, very distinctive. So it's early innings, and we're not sort of disclosing kind of mid-quarter stats on performance. But I would say the customer inbound interest has been very strong. And so this is not an effort that we will, of course, be out in the market proactively driving customer growth. But it's not an effort that necessarily is fully dependent on that alone. The brand of these bankers that we hired is so strong with their clients, they banked at whatever organization they were at because of them, not the brand. And so we're taking an incredible amount of inbound calls right now. So we feel really good. It's early innings, but we feel really good that the numbers we put out there are very, very much achievable for us.

Yes. And then, John, Brendan talked about kind of consumer deposits, but maybe you can talk just bigger picture, really deposit levels stabilized last quarter, but interest-bearing went up a lot of and noninterest gain went down a lot. Just maybe talk to how trends are shaping up for the second -- for the third quarter, rather. And just when do you expect to see a stabilization in that mix?

Yes, that's a good question. I mean I think we -- I think the main story here is stabilization. I mean we're seeing stable deposit levels and increasing stability in decelerating, I would call it, migration. So when we do think that our outlook for the second half of the year, we do expect to end the year right around where we were at the end of the second quarter in terms of noninterest-bearing versus interest bearing. There are also migration within that low to high. But that number for us around 22% or 23% is about where we are on a mix-adjusted basis prior to the pandemic. So we see ourselves -- we ended in that spot around the second quarter, and we see that kind of stabilizing over the second half. And that's critical. And the levels of deposits have been quite stable over the last several months. So we're feeling good about that.

I should have asked that last we spoke, we talked about 49%, 50% terminal beta. Any updated thoughts?

Yes. No, that's where we think we're going to end up. I mean our terminal beta being around 49% to 50% as you get around the end of the year. We were at 42% cumulatively through the second quarter. And I think the big message there is that in prior cycles, we had higher betas, kind of lower quartile in terms of performance. Right now, we think we're in the pack, and that was the objective. Better part of a decade of investments in our capabilities in consumer and commercial. And that's playing itself out. We think we're in the pack, if you will, with respect to cumulative betas and we're feeling pretty good about that.

I'll add 1 quick point to that, 70% of our deposits are on the consumer side. For years now, sharing with all of you my confidence in the transformation of the deposit business at Citizens in John's point, we were pretty near worse than class in the last rate cycle, and the way to transform our consumer business on deposits is the ground game of highly engaged primary banking customers, direct deposits, so on and so forth, and we've done that. And when we look at benchmarking, it shows that we are actually beating peer average on the consumer segment, both in net relative growth and on cost -- and decent margin. And so while we might be in the seventh or eighth inning, it's certainly the story is not done. I think what we've been sharing over the last number of years is actually playing out in practice that the health of the franchises very much recovered at minimum, it's peer like. And that was maybe a reason to have a discount on the stock a couple of years ago. I think we're performing incredibly well on the deposit book so far. When you overlay Citizens access to it, obviously, that puts some more interest expense in the mix. But if you did a regression line on what you'd otherwise pay for that through the rest of the bank, actually, it's quite a good trade, and we're both fenced-off and not have kind of interest-bearing contagion flow into the rest of the bank with that strategy.

Yes. You, I guess, on the July earnings call, talked about the establishment of this non-core portfolio to help you reposition the balance sheet. There seems to be a bit in the market to kind of sell some of these loan portfolios. Just any thoughts on desire to maybe accelerate that prospect? And just how that book behaving from your perspective?

Yes. I mean, I'll take the last point first. Credit perspective, there's no concerns with credit. It's performing exactly as expected, and new credit is actually performing pretty well. When it comes to the capital and liquidity side of it, I mean, this was sort of a shock absorber portfolio for us with the excess deposits that flowed in. We didn't get quite as much as most, but we did get a lot of search deposits during the pandemic and someone in securities, but a lot went into auto. And so that's the majority of this non-core book, in part because of -- we were clear about how the credit would perform and because we were high prime and super prime lender in that space and also has a short duration. So it's kind of run off reasonably quickly. So that, plus the fact that we have quite a strong capital position to begin with, there's no need to actually rush out and have a fire sale in this rate environment for auto in order to achieve some capital objective. We're right along our glide path in terms of what we want to achieve on capital. When it comes to liquidity, there's actually ways to accelerate the liquidity without crystallizing losses, and we've been doing that. We've issued over -- actually, we've issued $3 billion of asset executions against that book, year-to-date with excellent execution on the last deal that we did, second till we did in just last week where credit spreads came in, the spreads that we were able to enjoy on that trade were quite tightened from the first transaction, so much more narrow. So we're feeling really confident that there's no need to rush out and accelerate something and crystallize some losses in the non-core book.

I guess just given the impact of the balance sheet for optimization, do you expect to see loan growth in 2024? And are you seeing differences in demand between consumer and commercial?

Yes. I mean I think that when you pull in the fact that we do expect some normalization on the -- in the commercial book, as I talked earlier, utilization is at historic lows. We expect economic activity to pick up more in '24. So we're going to see some loan growth out of C&I. In the consumer space, we have core relationship lending that we'll continue to do in mortgage space and in student and in card and in home equity, right? So all of those. And then you add on top of that the private bank initiative, we do expect that we'll be able to drive some loan growth in '24.

Got it. And then we're at the 5-minute mark I have not asked about the third quarter yet.

You can keep going with other questions, Jason. You're prerogative.

We'll get it. I mean you hint -- you kind of foreshadowed capital markets picking up. I know on the earnings call, you talked about NIM flattening holding in the 3% area to the end of the year, just few weeks up to go in the quarter, just any things in your outlook? What do you expect to?

Yes. I think so really, generally, as expected, right, across all of the key components. When you talk about a net interest income, net interest margin, skipping over fees for a second, I'll come back to that expenses and credit all coming in as expected and the balance sheet. So that's really great to see. So a lot of stability there. When it comes to fees, that's -- as I mentioned, the capital markets is a very big driver of our fee performance, and that has really come out of the shoot quite nicely post Labor Day. That said, it's always sort of seems to be a race to the finish in capital markets. And so we're feeling pretty good about it, but it will be- we'll see what happens -- what crosses the finish line on this side of 3Q or what gets pushed to 4Q. But I'll mention that the momentum coming out of Labor Day going into [indiscernible] capital markets quarter, which we tend to perform quite well and looks very good. And a lot of the reasons for that are in the M&A space. I mean M&A is a big driver of cap markets and buyers and sellers are starting to find ways to interact, whereas before, sellers were holding out or lower rates to get better prices and buyers were somewhat unwilling to put in equity to make -- get financings done. We're seeing more capitulation on both sides and starting to see deals get done on the M&A space. And frankly, jumping over to equity. We're starting to see equity deals get done as well, IPOs and ATM transactions. So a lot of good things to see there as you go into the fourth quarter for capital markets.

And then you touched on Top 9, but you've done 1 through 8 or kind of working on an upsized 8. I mean how much more incremental efficiency would be achieved to?

Yes. I'll hit Top 9 real quickly, and I'll come back because I forgot to cover your other part of your question, which was on NIM. But the Top 9, I mean, this has been -- we ask ourselves that a Top 5, right? And we found 4 more programs and transformational programs since then. When we look at Top 9, we're excited about Top 9. We've got all of the traditional components, which include organizational simplification, third-party spend, those kinds of things that we tend to do quite well. But there's a lot of new opportunities on the horizon, different ways to use automation to migrate from manual processes to automated processes. And then, of course, the big category of gen AI. We've got a number of interesting use cases that we are exploring and maybe a lot of thing to get into next year. So stay tuned on Top 9, and we're feeling good about that. I mean going back to net interest margin, you asked about the 3%. I was feeling good about the 3% as you get into the end of the year. I think the -- we're going to build liquidity and so that will have a net interest margin headwind, but not so much on NII. It's pretty flattish on NII. But the offsetting aspects of that would include the fact that our non-core portfolio actually contributes to the net interest margin when you get into the end of the year. So you'll see some in the third quarter, maybe a similar decline in 3Q that we saw in 2Q, but then seeing that flatten out as you get into the end of the year. And as we're updating here in September, we still see around that 3-ish percent NIM being a good number as you exit '23 -- and also I might add that jumping out into '24 as we look out and we see some offsetting forces in '24 as well because we still think that, as we mentioned on our July call, that exiting '24, 3% is something that we see also.

Got a minute left. So I'll use it for Office CRE. You did give us more details on the July deck. So we appreciate that. But maybe just talk to in terms of anything you're seeing from the [indiscernible] rate sales, transactions obviously built -- you have a reserve. Just is that the right reserve and just to kind of view on how things play out?

Yes, the reserve looks good. The reserve around 8%. We're likely to be around there, possibly even a touch higher, but right around there as you get to the end of the third quarter, plus or minus. And that's after recording charge-offs in the second quarter, putting that behind us, charge-offs in the third quarter and we'll put that behind us. And nevertheless, we're still have a similar ACO level against general office. So you're really kind of leaning in here when you do it in that manner. That 8% environment assumes approximately 70% decline in valuation, which would translate to a 50% loss rate on the book translating to about 16% kind of default. Those are pretty stressful environments and we're going to have that sort of protection at the end of the third quarter, even after cleaning up some of the book, and with a strong capital base to actually be there for any unexpected needs beyond that. So we're feeling pretty good about it. It's the early innings. It's going to be a multiyear process for Office CRE as we know. But we're working our way through it and feel -- I feel like we've got it handled from a financial standpoint.

Great. With that, please join me in thanking John and Brendan for their time today.