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

Great. Good morning, everyone. My name is Ken Usdin. I'm the large-cap bank analyst here at Autonomous. Happy to move us through the last day of the Strategic Decisions Conference and really happy to have with us Bruce Van Saun, who's the Chairman and CEO of Citizens Financial Group. Bruce has been the CEO since 2013. He's led the bank through its IPO in 2014 and has also helped produce steady progress in financial performance for the last decade-plus now. And as we'll talk about, this includes improving the return on common equity -- tangible common equity profile from sub-5% to over 10% today, with a path to mid- to upper teens over time. So with that, Bruce, thanks so much for joining us.

Ken, my pleasure.

Excellent. So Bruce, look, it's hard to not start just with the big picture with all the moving parts that we're seeing and feeling every day. Maybe you can start us off with just your perspective of the economy, both from the perspective of having a regional footprint, but also being in several national businesses.

Yes. So I'd say the interesting aspect is coming into the year. I think there was a great deal of optimism that we had a pro-business administration. We're going to see lower taxes, less regulation, pro-energy. It all set up well, but the wildcard was going to be the tariff thing. And then I'd say, the month of April with Liberation Day, certainly, I think, created a huge amount of uncertainty as to how that was going to play out. And then there's been kind of some adjustments, some off-ramps. Now there's potential legal rulings that, it's still unclear exactly how this ends. But it's kind of the new normal that people expect that they're trying to cut some better trade deals. It's not going to be the worst-case outcome. We'll probably end up with some permanent tariffs that are kind of higher levels than we've seen historically, but not the worst-case. And so I think people are now starting to gain more comfort that the economy is going to solidify. The things that are coming that are more back-loaded to the year, such as the tax legislation, the impact of regulatory appointees being confirmed, the energy policies, those things. We always thought the second half of the year would be relatively stronger than the first. And the first would be choppy because of rollout of some policy implementation from Trump Administration. So it's kind of playing out in a reasonable fashion to how we plan the year with, I'd say, the month of April being a bit of a divot as people recalibrated and step back to kind of think about what does this mean and then what contingency plans do I have to put in place in case things go left or things go right.

Yes. And when you think about tariffs specifically and how Citizens is looking across the portfolio and trying to assess impacts. What are you seeing and how are you assessing like where there could be potential things to worry about?

Yes. I mean, you kind of look at where are there direct impacts on companies and then -- or industries and then where are there potentially indirect impacts, and the good news from our standpoint is, we don't think we have huge exposure to direct impacts. And so when we look at the lending portfolio, it kind of -- we think stacks relatively well to peers in terms of having exposure to the most exposed industries. And I'd say the portfolio that we're monitoring the most, the office portfolio, I'm not sure there's going to be big impacts there. There's a bunch of cross currents going on, but it's kind of playing out as we thought. And I would say the rest of our credit outlook is quite positive. So we don't see any adverse migration occurring in Consumer and most of the core companies are having good years and we don't see a big increase in NPAs or any real stress building.

So when you think about the factors that you mentioned about changes coming into place, heads being appointed. What are the couple of things we look out 6 to 12 months that you're most focused on in terms of how they can impact Citizens and Citizens' performance?

Yes. I would just say the pro-growth agenda, banks trade based on how the economy is doing. So if we can eliminate some of the noise and uncertainty and then the broader program kicks in place, than that's going to be good for the whole industry, and it's going to be good for us, too. So to me, that's the biggest thing. I wouldn't point to one specific thing. It's just like let's get on with it. Let's kind of put the tariff thing in a box and then the rest of the agenda should provide a boost to the broader economy.

Yes. So where to think about Citizens. As I mentioned, Citizens has gone through a decade plus of meaningful corporate transformation, shedding some legacy business, building a lot of new ones. What do you see as the most -- the biggest differences about Citizens today versus 5 and 10 years and even back to when you started at the company? And how is that now positioning the firm for better growth and the improving [ revenue ] profile?

So it's really been a quite remarkable transformation. I think there's really no historical precedent for a foreign-owned bank in the U.S. to kind of spin-out from its parent and then make a [ go ] of it and then have a fair amount of success in becoming a respected super regional bank. But it took a lot of work initially on the foundation block like getting a Board in place that was strong, getting a leadership team placed that was strong, investing in areas where we had big deficits like technology, like risk management, like our people program, the business model. So kind of A to Z, it needed a huge amount of work and effort. But I think we put that foundation in place and then we started to play more offense and had this vision of what we wanted to do with the Consumer Bank and the Commercial Bank. And then we had an aspiration to actually scale up a Wealth business and it's a little unclear how to execute on that, given where bank multiples are and where if you wanted to acquire something in the wealth space, it was kind of virtually impossible to make the math work. So if I fast forward to today, I really like our positioning. I really like our strategy because we like to talk about it kind of tripod or triangle of those three activities, where the Consumer business has been completely transformed. So what was there when I got there was, kind of an amalgamation of franchises that were acquired by RBS. Many of them were savings banks or thrifts. So they had kind of a rate-led value proposition, and that had to be transformed. So we had to segment the market. We wanted to move upmarket, go after mass affluent and affluent customers and be more than just a bank that provided good interest rates on deposits. And so we had to move to an advice-based model, up-skill the people in the branches. Come up with some innovative lending products and then start to build out the Wealth side, so we could offer wealth advice. In the process of doing that, we completely transformed the deposit base, so that back in the olden days, we had the worst betas. And in this most recent cycle, we were probably, I think, #4 of 10 in the super regional space and acquitted ourselves quite well in terms of how we're managing the kind of volume and interest costs during these rate move periods. So I feel really good about kind of where we're positioned. We've grown households faster. We've entered the New York market, principally a consumer play, but also has a commercial element to it. But it's our fastest-growing region. Last year, we grew households mid-single digits. We grew deposits high single digits. So had enough confidence in kind of where we are that we can compete against the big boys and big cities like Philly and Boston, but we could actually come right into the belly of the beast and compete effectively here in New York, and we're doing it. So Consumer Bank, transform Consumer Bank, then we talk about best positioned Commercial Banks. So over time, we had to build up both the coverage bankers because we were principally kind of a northeastern focused regional bank that had a limited product capability to what banks sell mostly to Treasurers and CFOs. So over time, we now have, we've moved up market, hire bankers who had bigger company coverage rosters. So we went up to mid-corporate, which is typically companies with $500 million of revenues up to $3 billion. We grew that. We invested in industry expertise. So we have industry verticals, which as you cover bigger companies, you need to have more industry expertise, they expect it and demand it. We made a big investment in sponsored coverage because we knew the trend was that PE firms were going to own increasingly more and more of middle-market America. So we had to get on that. And then at the same time, we had to build out the product capability. So we did a number of acquisitions to bring in some M&A boutiques so that we could have an M&A capability. We recruited teams to start Debt Capital Markets and high-yield business, et cetera. We bought JMP that brought us equity capabilities, research and equity capital markets that focuses on interesting sectors like tech, health tech, fintech. So really kind of bootstrapping both sides at the same time, building out coverage while we're building out product. And it's a little tricky because coverage bankers wouldn't come if they didn't think you had the full product set and the product, people wouldn't come if they didn't think you had a growing customer base. So if you look at the results of that now, we've had kind of in the middle market for sponsored leveraged loans. We've been #1 or #2 in the league table now for every quarter for the last 2 years. We're going out against JPMorgan, BofA, all the big players. And when we stick to that sweet spot, we can be very competitive based on the quality of our people and that focus. So we haven't really seen the full benefit of what we've assembled because we've been in a lull in activity levels, on the capital markets side for the better part of 3 years. So hopefully, we thought this was the year. We came into the year with record yield backlog, huge pipelines. We've had -- all things considered, I think we had a pretty good first quarter, but some of the deals pushed out a little bit, and we'll see. Still none of the deals have dropped. And so how quickly they're actually closing is still up for grabs. But I think once we start to see that flywheel spinning and activity picks back up, then I think you'll really see the differentiation between what we have and what we've built and how we play the game versus the other super regionals. And then the third leg of the stool has just been that aspiration to get bigger in wealth. And so part of that resided in the branches, we have a broker-dealer that we trained up and brought more sophisticated financial advisers and have a better product set, and we're making traction there. We probably have the lowest penetration from a cross-sell standpoint of our branch-based customer. And that's starting to really rise. And so there's a huge opportunity just there. But then really where all the assets are to manage is kind of upper end of the income spectrum or wealth spectrum. So that's the high end of the pyramid, ultra-high net worth, high net worth investors, is something that we started on when we bought Clarfeld, 5 years ago and had the opportunity to bid on First Republic, JPMorgan won. A lot of the talent didn't want to go to JPMorgan. So we had kind of an opportunity to bring all the A players that actually put First Republic on a map and bring a team in from Boston, New York, Florida, and three teams from Northern California. All their very best players because you win with talent at the end of the day. And it wasn't for the faint hearted to take that step. As you recall, we were back in '23, and there was a concern about what was happening to regional banks and their balance sheets, and their income trajectory. But we said, look, we've got to step up to the plate. This is a once-in-a-lifetime opportunity to actually occupy that space, that First Republic came to dominate. So we brought over 150 people day 1, we have that up to about 300 people. We've started to do a bunch of wealth lift-outs and pairing up the wealth teams with the banking teams, and we're making great progress. We had $8.7 billion of deposits, the sixth quarter after we really opened the doors and AUM is over $5 billion. So things are going very well. So anyway, we're aspiring to basically have the premier bank-owned Private Wealth and Private Bank. And I think we're on the road to achieving that.

So a ton of change in the last decade, given all you just walked through. What's still missing? Where do you still want to deepen? Where is there either a product or geography or density where you still say, okay, we've got a lot of pieces here and they're all in that gestation period? What else does the company need if anything?

Well, I think we have to just keep maturing some of the investments that we've made. So the good news is I think there's still a lot of running room to drive improved profitability and boost returns from the things we put in place. I look at retail, for example, and we're starting to look at the branch configuration in interesting ways, kind of new and fresh ways because a lot of times, banks tried to figure out how to take out costs and reposition the networks and hold on to the deposits. But you could end up in a position where you're not fully optimized. And so we're kind of looking at each geo location and saying, for going after mass affluent and affluent customers, we have the right number of de novo branches are they in the right locations? Do we still have some supermarket branches that aren't helping the effort? So the goal is you'd like to have below, on a regression line, you'd like to have below the number of branches to serve the region but above, kind of the regression line deposits. And so I think there's, billions of dollars in deposit opportunity that, this isn't an overnight flip a switch thing. But as we keep repositioning some of that branch footprint, I think we can unlock a lot of deposits and customer growth. So that's one thing. I think that's high on the list. I don't -- in the Commercial Bank, I think we have everything that we need. So I think that's just -- we're waiting for the cycle to benefit us on that. And in the Private Bank, we're spending a huge amount of time there to make sure that we seize the moment. And what First Republic sold was kind of white glove service and taking the pain out of the banking experience. And while I think our level of service for core Citizens is always good. It's another step function to get it where First Republic had it. And so we've made some big investments on things like Single Sign-on and ease of navigation for people who have complex lives, and they have a lot of accounts business and personal banking and wealth. And so delivering that kind of high-touch, ease of navigation, ease of use kind of capability has been a big goal for us. And so that's something that I think we're well on the road. We're certainly well into the middle innings of that and moving towards the later innings. But I think there's a big unlock there too, when we finally conclude that. And then the one other thing I would say is that we're embracing something called One Citizens, where we go into markets like California and Florida, where we have private banking teams. We've been adding in commercial banking teams for the middle market to really goes to serve the customers in those regions and kind of come in over the top in those markets where our folks on the ground know all the successful businesses and people that really drive those economies. And working together, we can, I think, offer more convenient banking, more comprehensive solutions than anybody else who's in the market. So trying to make sure that the whole bank knows the rest of the bank and understands the connections and plays collaboratively as a team and having the right culture and incentives around that. We've been very focused on that because I think that could really distinguish us in the marketplace.

We're going to talk more about the path of the ROTCE improvement. But if we take out the kind of rates and maturity part of that, which we'll talk about when we discuss NII. When you think about these three buckets, does one of them stand out as like, oh, that's the fast-growth ROE incremental generator? Or is it kind of -- they'll all lift in?

They'll all lift. But the thing that mathematically should make the biggest impact is the Private Bank because it started -- it was a start-up inside almost 200-year-old bank that just decided to start a big new business and incur an $0.11 EPS hit in the middle of all this turmoil. And we said the lines would cross on that in the second half of 2024, so in the first year, and we get profitable. In the first quarter, we now made $0.04 of EPS. We're on our way to be more than 5% accretive to the bottom line. So if you just kind of do the math on that, and the other thing is this is already a 20% work business for the year. It's not -- First Republic never got above an 11% ROE, and we put the guardrails on this business to run it for returns, profitability and growth and try to balance that. And so if you get to 5% or 6% this year and then you kind of run it out and then we start adding more people and more locations. This thing could really lift and really positively impact our profitability over the medium term.

Yes, absolutely. So let's talk about some things that are relevant to Citizens' financial performance. So we talked about the potential impact of tariffs. The interest rate environment is all over the place on a day-to-day basis. And when we think about kind of the evolution of those items in the backdrop for net interest income, you guys talked about 3% to 5% growth this year. What informs kind of the different ends of that range in terms of what we're hoping for? What are we dealing with? And how do you think across the balance sheet and rates?

So I think most banks have naturally asset-sensitive balance sheets. So they kind of benefit as rates are higher or move up, but you have to protect against rates actually going down because the economy is cyclical and the Fed comes to the rescue and they lower rates. So when we just look at that band that we put out there, 3.25% to 3.50% NIM if rates tend to be on the higher side, if the Fed cuts slower, that will push us to the higher end or above. And if the Fed cuts abruptly, we've hedged a lot of that downside. But if they go down to 2% or something, it's harder to hold kind of the bottom of that range. We think we're pretty well covered through, all the way down to about 2.75% at this point on the Fed funds rate. So I think the likelihood of high probability that we're going to be in that cone, but there's the external, which is what happens to where the Fed has rates at a given point in time or the steepness of the yield curve as the secondary factor to that. And then there's our own performance, our deposit performance. So can we continue to grow deposits in the right mix, where low cost is growing at or above the rate of overall deposits. And so embedded in the forecast for the NII going forward to kind of hit some of that 16% to 18% is that we're going to continue to do a good job in managing the balance sheet, both deposits as well as loans.

And on the loan side, we talked about the potential hesitancy out there. What are you hearing when you think about both the Commercial, Consumer and Private Banking side in terms of just loan demand, utilization, investments, et cetera?

Yes. Well, one thing I'd point out is like we have idiosyncratic driver of loan growth, which is the Private Bank. And so as they bring customers into the bank. We try to get their operating accounts first, but then they're going to want to borrow money from us. And so that, we anticipate will create some nice growth, almost $1 billion a quarter, in terms of size. And I think that looks pretty solid, almost regardless, as long as we stay in a reasonable environment, that should come through. We're not looking for huge growth on the Consumer side. So I would say relatively modest growth focused around real estate-backed lending. So HELOC being our kind of lead most important product, but also mortgages is another area. We're launching kind of a new card complex. We'd like to reinvigorate our card growth a little bit. Again, that will be modest. It will be kind of maybe high growth off a relatively small base. So that's kind of the main things on the Consumer side. And then I would say over time, I think there's a big opportunity for C&I loan growth to pick up and line utilization is below where it has been historically. That's starting to tick up a little bit, which is promising. I think these expansion markets, we actually consider New York and expansion market too, because investors really wasn't playing the game the way we play it. So we've upgraded some of the corporate bankers in the region. And so we've got a lot of new companies coming to us in the region. We're doing that in Florida. We're doing that in California. So we're holding our market share in our mature markets and using these expansion markets to grow. So I think the C&I should actually grow at a decent clip. So again, some of that is dependent on the macro, but some of it is when you bring in seasoned bankers, they bring their relationships in. And we've used that playbook before to kind of really start to put loans on the books in Corporate. And then we have a counter dynamic to that on the Corporate side. So we've been doing what we call BSO balance sheet optimization. So if we are locked into some relationships with companies, and we anticipated getting more cross-sell. We're not getting to cross-sell. The relationship returns aren't where they need to be. We're kind of running some of that off. We've been doing that for a while, and I think we're probably in the late innings of that. We've cleaned up a lot of that. But anyway, that should also less of drag from that going forward could also help to bolster the natural loan growth rate. And then we have CRE, which we ended up for years, we were underweight CRE when I got here, and we wanted to go back to equal weight, which we did, kind of the 5 years after the IPO, 7 years. Then we bought Investors Bank, and it came with a lot of CRE. So then we became kind of overweight. The good news was that most of that was relatively safe multifamily in the New York Tri-state region, which is kind of a lot of mom-and-pop operators, very granular portfolio. Credit history fantastic, because these are like the sole assets of a family, so they protect them and run them really, really well. But the spreads on them are very tight, and it's not a great use of capital. So that's one of the things that we're starting to run down to make room for some of this other growth in the Private Bank or in the C&I lending.

Yes. And you mentioned spreads, anything that you're seeing in terms of competition? And obviously, all the talk in the world about the private credit environment out there. You guys are working alongside them in addition to them being direct lenders. How do you see that...

Yes, I'd say banks are hungry to put loan assets to get loan growth. There's a lot of competition on spreads. You try to compete on being a relationship bank. And all the thought leadership we provide in delivery for the customer and a lot of times, that will carry the day. But there's also, price is a factor. So I'd say there's a fair amount of competition going on right now. The private credit sector is here to stay, but it's also going to be cyclical in terms of it's ability to compete against banks and partly where their cost of funds goes will impact how aggressively they can play or not. So I think our view has been that we should view the -- a lot of the private equity firms, we had great relationships with, have morphed into private capital firms that have a private credit arm. And so, since we're a great partner to that firm on the PE side, we should be a good partner on the private capital -- private credit side as well, so we can help source paper for them. We can help provide leverage and other services to those complexes and decided not really to align with the partner of vehicles. So we're not in the water competing against the other boats, but we can kind of syndicate and use players based on kind of the opportunities that we see. So in the Institutional business, we can use other people's balance sheets to do kind of more sizable transactions is one way to think about that.

Yes, absolutely. And in terms of transaction activity, you mentioned April, a little quiet. Really good pipelines on the Investment Banking side, some deals being delayed. You guys had a pretty good aspiration to grow fees 8% to 10%. Again, what needs to happen? And you mentioned also that you originally expected the second half to be stronger than the first half. What are you anticipating in terms of that pipeline being able to pull through? And what are the offsets if, in fact, it becomes a little bit more delayed than hopefully?

Yes. Look, we haven't come off the 8% to 10%. So when we gave our earnings call back in April, we said it's too early to tell. There's uncertainty in the marketplace. And so the way I like to think about it is if you kind of lost a month where people were stepping back in April trying to figure out what the hell is going on. There were fewer conversations to start up new stuff during a month. What is 1 month out of 12. It's 8%. So if you had a little lull in pipeline build of 8%, is that a number you can make up over the remaining 7 months of the year? You should be able to. And so anyway, I think the conversations have resumed again. People want to do things. There's a little more certainty, not full certainty, but it feels like it's moving in the right direction. So that would be my take on it. And in any given quarter, you can have like some of these M&A fees now that we're doing could be pretty big. They could fall on one side of the quarter or the next. We're not too worried about that as long as we're getting hired and we're relevant, we're focused on the opportunities. The line is going to go upwards to the right as we get back into a healthy environment.

Understood. And one of the things that Citizens has also been able to deliver is operating leverage and the annual TOP program creating $100-plus million of efficiencies on an annual basis. So as you have improved the efficiency while investing here we are, we're sitting with a still mid- to upper 60s efficiency ratio, but you've got a long-term goal to get it down to the mid-50s. Can you talk about how you align that expected line that you just painted, up into the right in terms of the top line with efficiency, control and improvement to get that ratio down and also hope...

Well, I'd say that ratio right now is kind of like efficiency ratio is higher than it would be, if you gave us the pro forma credit for the times benefit. So as the legacy swaps burn-off and core burns off. If you just wave the magic wand on that today, you've knocked a few hundred basis points off of that number. So there's a built-in 65% getting closer to 60% just from that. And then I think the key is as we have the other kind of revenue lift coming on top of that, that we stay disciplined in terms of our investment appetite. And so this year, we said we'd run about 150 basis points positive operating leverage. And some of that is a balancing act, we're going to plan to grow expenses at 4%. The investments we're making in the Private Bank build-out add about 1.5% to that growth rate. So the rest of the bank growing at 2.5%, some of that benefited from the TOP program. Last year in '24 was still a very suppressed year from expenses. And so there's a little bit of catch up. But that's a good number. And you have to be disciplined and thoughtful and really prioritize your areas, where you have a right to win because when your wish list comes in for the next year, it's a long list of hopes and dreams that people would like to invest in. I think we've been saying like, we can't do everything. We have to stay focused on areas that we have competitive advantage and keep investing there. And so we have our list that we have things we want to do in Commercial, things we want to do in Consumer and the Private Bank has been an area that we're feeding. But we're feeding it with discipline. I mean I don't want to say to investors, just trust me, let us keep building and grab all the people, the great people we can. And then this business will be 2x the size sooner than if we put it on a more gradual pace. I think there was some -- I wouldn't say skepticism, but people like the idea, but they said, show us that you can run this business in a profitable way, which is what we're doing. We ran ahead of our profitability last year to the point where we could go bring in a team to cover Southern California, which was hard to cover with three teams in Northern California. You can't really cover that market with a suite case. And so we brought those people in. When you bring in a banking team, there's a J curve on all of that. The expenses come first and then your customers and your revenues come second. So you kind of pace yourself on how much of that you do. So I think we got that balance correct. But I think that with the tailwinds from the time-based benefits and these initiatives lifting off that operating leverage can explode -- kind of really, really substantial, like mid-single digits type of operating leverage when you look out to '26 and '27.

Yes. And while you doing that balancing act of investing...

And efficiency ratio comes down, by the way, just to close the thought on that.

As you put money into the business like you just explained and TOP as a funding mechanism for some of that. There's the constant burden of risk, regulation, technology, now AI on top of all of that. How do you get the sense that you're doing the right balance across the different parts of the organization in terms of what needs to go into the company?

Yes. I feel good. We don't short the pot on any of the things. We've kept out position solid with the regulators, witnesses being invited in to bid on First Republic. So I think we're making all those investments. We're investing in cyber and fraud tools and we're starting to figure out how to leverage AI. What I am challenging my team, Ken, is to -- that I think we're at the cusp of some major transformation opportunities, not kind of more top-like tactical things that we do every year that come up with $100 million to $125 million of benefits, not 1% of your expense growth rate. But maybe I don't know Kristin, when the TOP program 5 years ago or 4 years ago, we did a 2-year one. We use some bigger projects with more technology investment. I think we're on the cusp of trying to build that out and say, reimagine the future. Banks are going to be run very differently in 3 years' time, 5 years' time based on some of the new technologies that are available like the Gen AI. So let's not limit ourselves to -- we have to start work now to get another $125 million, like what functions in the bank could be done dramatically differently if you have 800 people in our contact centers, can you end up with 100 and having agenetic AI do a lot of that lifting and deliver better outcomes for customers. So it's things like that, that you have to start thinking about. So I'm excited about that. I think there's a real opportunity that's in front of us. And we certainly, I think, have demonstrated an aptitude for this, that we have a mindset of continuous improvement, and we want to self-fund the things we're investing in. So I certainly don't want to be a laggard in that big transformation that's coming. We've got to get on it right now and not fall behind.

Yes, absolutely. So another thing that's changed over the course of the last decade has been the credit risk profile of the company, which you alluded to earlier. You have a goal to get the charge-off ratio through the cycle down to the 30s or so. It's around 50 basis points today. So talk about that mix shift that's happened? You talked about the growth a little bit earlier. But talk about the mix shift from a risk perspective and your confident that we're going to see a different looking loss outlook from Citizens as we go forward.

Sure. And the reason that we're up around 50 is one segment. We got $2.9 billion of exposure left in CRE office. And the good news on that is we ring-fenced it early. We have workout people on the credits. There's no new stuff coming into the workout group. We're just kind of working these things through. So we're kind of taking the pain on that. If you remove that pain. We've had very good performance in Consumer and in C&I and in the rest of CRE, by the way, outside of Office. And so I see a glide path as I'd like to say the pig goes through the python. The CRE office charge-offs will come down, and that will bring us back down into the 30s. I think we can sustainably be in the low to mid-30s for a couple of reasons. We'll have rightsized CRE, so we're bringing that down. The C&I that we're doing is, I think, superior credit-wise from kind of maybe where we've been historically. I think over time, as we move to more mid-corporate names and more sponsored lines and things, the credit profiles on those is very solid. And then in Consumer, we're really just focused on super prime and high prime customers, and we don't do a lot of lending to mass customers. And we're exiting businesses like Auto, which were relatively higher charge-off portfolios in the mix. So the mix in Consumer is cleaning up and it's focused on pristine customers. C&I, again, we're kind of rotating into kind of the areas that I think are going to be better long-term credit risk. And then CRE, we're bringing down, and we're going to get the pig through the python on Office. And so I think we can get that down. I think there's a big prize for that to -- for people to say, these guys have weathered the storms. They've kind of gone through some rough patches and credit has performed relatively in line with peers.

Yes. And you still have a 12% reserve on that legacy office portfolio. So hopefully, that will be enough or more than enough to kind of get that pig through the pipeline.

Right.

And in terms of reserving companies right in the middle of the zone 1.6% or so of ACL. There's been a lot of talk lately about what's going into that reserve? Can you talk a little bit about how you build the economic outlook into the reserving process?

Yes. So we try to be relatively conservative on our macroeconomic assumptions. So I think our broad assumptions for unemployment, GDP contraction, et cetera, are on the conservative realm, when you stack them up versus what other banks put out there. And then on the commercial real estate, we put our thumb on the scale, we make a very draconian assumption. And so I feel very comfortable that we have sufficient reserves. And I think that should come down over time, particularly as those mix shifts take place and as CRE kind of runs that office portfolio, works itself out.

Yes. Great. Let's talk about the regulatory regime capital outlook. So Citizens now $220 billion of assets, heading towards the current tailoring zone, where the next bucket at $250 billion is not that far away at this point. What do you need to do, if anything, to get ready for the eventual Category 3 cross. And what should we be thinking about how you just have to prepare for it? And regardless of what the actual outcome is, if there's any changes going forward...

I don't really -- it's not top of mind at all, the $250 billion barrier. Because a lot of the things that you would have to do, like daily liquidity reporting and things. We already do that. So I think we've made the right investments so that if we magic wand, we're now $260 billion. Would it incur a lot of more costs and would it change how we're operating the bank? No, the answer is no. So we're in a good position for that.

Right. And so on the topic of just broader regulation, obviously, with new incoming Head of Bank Supervision, Treasury Secretary Bessent has put forth a lot of commentary about reforming. What do you see kind of cascading over time in terms of what the tone of regulation is and in terms of the direction of travel about rules and regulations?

Yes. I think we're -- I like the picks. I like the regulatory nominees and I think Miki Bowman really has put out a lot of great thought pieces while she's been on the Fed and is a good choice there. So I'd say some of the overreaction that came in proposals during the Biden Administration to what happened with the Silicon Valley Bank and First Republic failures. That's already been effectively forwarded. And so if there's an effort to finish Basel III or put some liquidity rules in place or issue long-term debt, I think it won't make that much difference for the banks. It never really did for banks in our weight class. The Basel III was more of a big hit to the big banks. And so in any case, I think there's low risk of anything, any bad outcomes happening now, compared to how we're operating. So that's positive on the prudential side. I think on the consumer protection side. I think that also became highly politicized in the last 2 years of the Biden Administration and this whole rubric of junk fees and starting to cap fees that banks can charge and et cetera, I think was misguided. And that's now also being rescinded and reworked. And so I think the risk to the fees you make on the consumer business also is lessening, which is important for the banks and particularly banks like us that have big relatively large consumer franchises. So anyway, I feel all of that is good, and we can just focus on running a good, safe and sound institution, taking good care of our customers, and we're not going to have kind of adverse regulation come and kind of upset the business model. The other benefit that I see is that at any point in time, we have 40 to 45 supervisors in our shop like full time. And they're turning over lots of rocks. And at times, you can get kind of too in the weeds and miss some of the bigger-picture things. And so the supervisors are saying the right things about we're going to a more risk-based approach and maybe thin-out some of those teams and kind of more focused and targeted reviews as opposed to being everywhere all the time. I think that's also a benefit to the banks. And so we spend less time like in a cyber audit. You have two back-to-backs instead of having one, and then you're spending time educating the exam teams and my team is spending 70% on working with supervisors and 30% on their day job. If we can flip that, now I'm spending 70% on my day job, it makes the bank more effective and safer and running better. So I think that's also a benefit that's coming down the pike.

Yes. One of the questions that arises around this is just what do we see as the future for industry consolidation, which is 4 decades in the making and likely to continue going forward. What's your perspective on that? And in which way do you anticipate that Citizens might again become engaged to the points you made earlier about the previous integrations that have gone quite well?

Well, I think that the last 4 years, there was a lot of sand thrown into gears around the deal approval process, and as the approval process becomes murky and it extends, it's a real dampening effect on wanting to do any deals because you're on risk for something that you're not running, for an extended period of time. So that's an untenable situation. So I think the new regime coming in says, we're going to have hard rules. We're going to have shorter review thumbs up, thumbs down, decision-making. That opens the possibilities up again. And there's pent-up demand because particularly on the smaller end of the bank size-spectrum. I think there's deals that people would like to do. Now some of that was environmental and where rates weren't, and so the math didn't work on deals, but I think the math aspect is coming back into alignment that you can get more deals done and then having more certainty on the regulatory side, certainly, is going to facilitate more consolidation. So I do think seeing consolidation start to pick up, particularly on the smaller end and community banks and smaller regionals. Scale is important when you're facing the need to invest in digital business models and infrastructure to the cloud and cyber defense and all the things that you have to invest in, plus absorbing regulation. It's just, I think, the drum beat continues for more consolidation. I think when you get up into the kind of bigger sized banks, I'll refer to Bill Demchak at PNC says like "everybody seems to be a buyer again, and there's no seller". So if there's desire to get scale, it takes two to tango. So I'm not sure this will be a very active year kind of based on that dynamic. But anyway, I think inexorable kind of pressure will continue that even banks that think they're fine will have to consider. Am I really fine? Or do I need to partner with another bank? So from our standpoint, we're kind of content to just kind of wait and watch and see what's happening and focus on driving our internal organic growth agenda, which is, I think, outsized relative to our peer group. And so we have that luxury. And that should also allow the stock to re-rate a little bit, which also is important if you're going to actually do an acquisition. So, I don't really see anything imminent and I'll focus on the organic side of growth. But if the day ever comes, when there's something that do, I have confidence that the organization is mature enough now and the technology complex we're running is really, really good. When we did that two-handed deal with first HSBC's East Coast branches and then investors and pulling that together as one, that was fairly complicated. We did a fantastic job on that. We actually got a letter of commendation from our regulators, one of our regulators saying how pleased they were about how we execute all that, which doesn't happen every day, honestly. In fact, it's never happened in my career. I had to ask to see the letter, so I can believe it. But in any case, yes, so we're focused on organic growth, but if the opportunity ever came up, I have confidence we'd be able to execute well.

Two more questions to get through. First of all, just on those uses of capital. The balance sheet growth will take up some. You're in a really strong position, 10.6% CET1, 9.1%, including AOCI. The stress test process has been a little bit frustrating, right, keeping your regulatory minimum higher than, I think, a bank of your risk profile would take. But you still have plenty of room to still grow and buyback stock. What is your cascade when you think through organic growth, dividends, buybacks and as you look ahead?

Well, I think banks have to have a good yield. So the dividend is kind of top of the list to make sure as earnings grow, that the dividend goes up. I'd say the next thing is using your capital for organic growth, if you can invest in growing your loan portfolio in smart ways to bring new clients to the bank and gain that kind of growth dynamic on the balance sheet to power NII and create more fee opportunities. That's critically important. And then I think the buyback is the kind of last thing, it's the residual that you use to buyback your stock. And M&A is potentially a substitute for some of that buyback if you find deals and you compare the returns and the earn-back periods on an M&A and the strategic benefits versus the sure thing of buying back your stock. So that's how we've thought about it. I'd say we feel good that we've been in a strong capital position all along, so we could play on First Republic. So we can go into market, buyback our stock. Bank stocks are cyclical. So most banks in the good times, they enact big buyback programs and they're buying back stock at high prices. We were buying back -- we were kind of the only bank, I think, for most of 2023 and '24 that was buying back a meaningful amount of stock. And part of that was also just fueled by the non-core rundown and freeing up capital there.

So last thing, with all that we talked about, this company has changed a lot over the course of the last 10 years. Recently promoted Brendan Coughlin, to President. But at the same point, John Wood left to move on, talk to [ state free ]. Can you talk a little bit about just the management team depth, and just leave us on a note about like what we need to understand about those recent changes in terms of how it leads Citizens forward?

Yes. Well, I think I'm of course, biased, but I think we've got an exceptionally strong team across the Board. And so our people will be attractive to other companies. And so that really explains, John is kind of got an opportunity to work for a significantly higher pay package and kind of do something in a different segment than regional banking. So sorry to see him go, but I think we'll -- I've had success in my career, I was a CFO, and I know what to look for in a CFO. And we have a lot of interest in the position. So I think that will be not that difficult to get a good person into that role. I think Brendan, over time just continues to really demonstrate his growth as a leader and his impact on the company. So that transformation I mentioned around consumer, the initiative to really go all-in on this Private Bank and Private Wealth and scale it up and make it work. That was his initiative, really his drive, supported by the rest of us, but he was on point for it. So I think the President title is just a recognition that this guy is really a superior leader. And we'd like to see him continue on his growth trajectory, and he could one day be the CEO of the company. So anyway, but as far as I'm concerned, I'm here and engaged and full of energy and I want to make sure that we kind of get more to the promised land than we are today.

Great summary. Thanks for joining us, Bruce. Thanks very much everybody, for attending.

Okay. Thanks, Ken.