Good morning, everyone, and welcome to the Citizens Financial Group third quarter 2019 earnings conference call. My name is Brad, and I'll be your operator today. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this event is being recorded. Now, I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin.
Hey, thanks so much, Brad. Happy Friday, everybody. We're really pleased to have you all join us. First off this morning, our Chairman and CEO, Bruce Van Saun, and CFO, John Woods, will provide an overview of our results and our outlook. They will reference the earnings presentation, which you can find at investor.citizensbank.com. We'll be happy to take questions. In the room with us today are Brad Conner, Head of Consumer Banking, and Don McCree, Head of Commercial Banking, and they'll be able to provide some additional color. Now for some quick housekeeping. Our comments today will include forward-looking statements, which are subject to risks and uncertainties, and you should review the factors that may cause our results to differ materially from the expectations on page two of the presentation and in our 2018 Form 10-K.
We also utilize non-GAAP financial measures, so it's important to review our GAAP results on page three of the presentation and to utilize the information about these measures and the reconciliation to GAAP in the appendix. With that, Bruce, it's all yours.
All right. Thanks, Ellen. Good morning, everyone. Thanks for joining our call today. We're pleased to announce another strong quarter. In spite of interest rate and yield curve headwinds, we grew our revenue 5% versus a year ago and 1% versus last quarter. Our earnings per share was up 5% versus a year ago and up 2% sequentially. The key to these results were strong performance in our mortgage business, continued good expense discipline, and robust capital return. We progressed well on our efforts around TOP 6 and on some of the strategic investment initiatives that we outlined last quarter. We continue to actively manage the balance sheet through our BSO program, and we've maintained a loan-to-deposit ratio of around 94%.
We managed deposit costs down aggressively in the quarter, with interest-bearing deposit costs down six basis points versus last quarter. We expect deposit betas to tick up as we see further rate cuts. Our credit metrics remain strong overall. Both consumer and commercial are in really good shape. Our view is that the economy is holding up reasonably well, though growth has slowed somewhat versus a year ago. While we don't see a recession on the horizon anytime soon, we are being duly cautious in selective areas on new loan originations. Overall, I'd say we've executed well year to date. We feel we are positioned to close out the year with a good fourth quarter. Our formula for 2020 will remain consistent.
Namely, grow our balance sheet prudently, deftly manage our NIM, continue to invest in our fee businesses and reap the returns, carefully manage the expense base by finding fresh efficiencies, and then self-funding new initiatives, stay disciplined on credit, and actively manage our capital base. We celebrated an important milestone during the quarter, the fifth anniversary of our IPO on September 24th. It's been quite a journey. We've made much progress in building a great bank, and we are now delivering better and better for customers, colleagues, communities, shareholders, and regulators. We know there is more work to do, and we are energized by the challenge. I'm confident that our track record of strong and disciplined execution will continue and will differentiate us from our peers. There's no reason the next five years can't be even better than the last five.
With that, let me stop and turn it over to our CFO, John Woods.
Great. Thanks, Bruce. Good morning, everyone. We're pleased to report a strong quarter with record fee income, good expense discipline, and continued execution against our strategic initiatives. Let me kick off by covering important highlights of our underlying results on page four. On a year-to-date basis, our EPS is up 11%, and for the quarter, we delivered EPS growth of 5% year-over-year with PPNR of 2%. This reflects relatively stable net interest income as 3% loan growth helped offset the impact of a decline in net interest margin to 3.12% given rates and the yield curve. We delivered record fee income of nearly $500 million, up 19% year-over-year, illustrating the diversity of our business model. Commercial and consumer loan growth were each up 3% year-over-year as we seek attractive areas to deploy our capital and grow our customer base.
Strong deposit growth was paced by continuing momentum in Citizens Access, which grew to $5.6 billion by quarter end. Our spot LDR was 94.5%, providing us with funding flexibility as we head into the end of the year. Given the environment, we remain highly focused on expense discipline and continue to execute extremely well on our TOP programs. We now expect to realize a pre-tax leverage benefit for our TOP 5 program in the range of $105 million-$115 million by the end of the year. This is a $10 million increase over our prior estimate. Overall credit quality remains strong with a stable non-performing loan ratio of 57 basis points and an allowance for loans ratio of 107 basis points.
On an underlying basis, the effective tax rate was 22.3% as the reported rate of 20.5% includes a $10 million tax benefit associated with an operational restructure. We delivered underlying ROAA of 12.6%, and tangible book value per share was up 14% year-over-year to $31.48. This quarter, there was some noise in several line items due to an aircraft lease restructuring in our non-core portfolio. This was triggered by a client merger and reflects our continuing efforts to accelerate the rundown of the non-core lease portfolio. This reduced PPNR by about $3 million, with an increase in expense of $10 million and a $7 million increase in fees. Charge-offs and provision were also $5 million higher due to this transaction. The important impact of this restructuring is that it is positive operating leverage of 30 basis points on a linked-quarter basis and an efficiency ratio of 57.8%.
On page six, net interest income was relatively stable year-over-year despite the impact of a challenging reoccurring environment. Loan growth of 3% helped largely offset the impact of a 10 basis point decline in net interest margin to 3.12% given the rate backdrop. Contributing to the decline in NIM was a three basis point impact year-over-year from higher premium amortization tied to significantly lower long-term rates. This is partially offset by the benefit of higher interest earning asset yields given continued mix shift towards better returning assets and modestly higher short-term rates. On a linked quarter basis, the margins decreased nine basis points, including a three basis point impact from premium amortization. On a positive note, we managed deposits well with a six basis point decrease in interest earning deposit costs.
Given the challenging rate environment, we have continued to actively manage our asset sensitivity, which came in at 2.7% to a gradual 200 basis point rising rate versus 2.9% in the prior quarter. year-over-year, our asset sensitivity has come down, which was driven by the addition of approximately $7 billion of net received fixed swaps over the past four quarters, including a net $2 billion forward starting position we added this quarter, as well as evolving expectations for balance sheet mix. In two months of effect of our hedging activities over the last year, plus our balance sheet mix changes have the effect of shifting our sensitivity to the long end of the curve, with about 20%-25% of our exposure now five to six months and shorter. Our current outlook is for an additional rate cut in October.
However, we expect to see a lower level of yield compression in the fourth quarter reflecting further declines in interest earning deposit costs while we stable premium amortization and the benefit of our hedges. These factors, along with an expected resumption of loan growth, should help support net interest income in the fourth quarter. Moving to fees on slide seven. As I mentioned, our fee-based businesses delivered record results this quarter, with fee income hitting 30% of revenue. Non-interest income was up 7% on a linked-quarter basis and up 19% year-over-year, driven by strong results in mortgage banking, card fees, and foreign exchange and integrated products. Service charges and fees were up $2 million or 2% linked-quarter, reflecting seasonality, and card fees were up 5% sequentially, driven by seasonally higher volume.
Our acquisition of Franklin is playing out as we hoped and served as a nice hedge against the backdrop of lower rates. Mortgage banking fees were up $55 million as the originations business led the way with production revenue of $31 million on higher volumes and improved deal sale margins. Overall mortgage servicing revenue increased $24 million given favorable MSR hedging results and our larger servicing portfolio. Capital markets fees came in at $39 million this quarter, which represents the lowest level since the first quarter of 2018 in the face of overall market weakness. We increased our market share and positioning. Syndication fees were down linked quarter, reflecting the impact of a significant slowing in middle market activity and seasonality, while bonds underwriting fees were higher as fixed income markets picked up later in the quarter.
We are entering the fourth quarter with a strong overall capital markets pipeline, which includes the impact of several deals that were pushed out of the third quarter to the fourth quarter. Wealth fees were 6% lower linked quarter from record second quarter levels as investment sales were impacted by volatile market conditions. In FX and integrated products, we executed exceptionally well despite challenging conditions, delivering near record level fees in line with the second quarter in what is typically a seasonally slower quarter. We are pleased with the progress we've made diversifying our fee revenue by broadening capabilities, executing well on strategic initiatives, and integrating key acquisitions to build scale in mortgage, expand our M&A business, and enhance our wealth capabilities.
As we look forward, the investments we have been making across the platform over the past five years should continue to gain traction as we seek to do more for our customers and be their trusted advisor. Turning to page eight. Underlying non-interest expense was up $10 million linked quarter, reflecting the impact of the lease transaction. Excluding this impact, expenses were flat, illustrating our strong commitment to expense discipline as we continue to deliver efficiencies from our TOP program. We continue to recycle cost savings from TOP into revenue generating opportunities. Salaries and employee benefits remain relatively stable and equipment and software expense was up 3% given our ongoing technology efforts. Compared to the prior year, underlying non-interest expense before the impact of acquisitions and the lease restructuring was up 3% as we efficiently managed our costs while investing for growth.
Let's move on to page nine and discuss the balance sheet. Average loans were relatively stable linked-quarter, largely reflecting the impact of second quarter loan sales, as well as relatively higher repayments and lower loan utilization in commercial. Year-over-year, average loans were up 3%, driven by growth in both commercial and retail, with some modest headwinds from asset dispositions. Adjusted for the impact of the loan sales in the first half, loan growth was 4% year-over-year. Commercial loans were up 4% year-over-year with strength in C&I and were down slightly linked-quarter due to relatively high repayments and the impact of lower line utilization, as well as planned reductions in commercial leases. On the retail side, loans were up 3% year-over-year and 1% linked-quarter, driven both in mortgage, education refinance, and our merchant finance partnerships.
Regarding the lease restructuring this quarter, I should mention that we have done a nice job running down the non-core leasing portfolio and the total non-core book, which are both down about 30% year-over-year, while the overall credit quality of the book continues to improve. Overall period end loans were up 1% linked quarter, providing momentum for fourth quarter loan growth. Moving to page 10, we saw nice deposit growth of 1% linked quarter and 6% year-over-year. We continue to benefit from our Citizens Access digital platform, which has contributed nicely to our funding diversification and the optimization of our deposit levels and costs. At the end of the quarter, we reached $5.6 billion in Citizens Access deposits.
Given the rate environment, we have been aggressively executing our deposit playbook to manage down our deposit costs across all channels, reducing CD rates, retail money market promo rates, and taking down the savings rate in our direct bank. We've also been reducing rates for some commercial clients where they can. As a result, our total deposit costs were well controlled, down five basis points linked quarter. A nice improvement from the three basis point increase last quarter. Interest bearing deposits were down six basis points linked quarter. Next, let's move to page 11 and cover credit, which continues to look quite good overall. This reflects an improving risk profile in retail and a relatively stable risk profile at favorable levels in commercial. Net charge-offs came in at 38 basis points in the quarter, up modestly from relatively low second quarter levels.
Net charge-offs were up $27 million year-over-year, with a $16 million increase in commercial, largely driven by a small number of uncorrelated losses as the broader portfolio risk profile remains relatively stable. Retail net charge-offs increased $8 million, reflecting excessive seasoning in our growth portfolios. Provision credit for credit losses of $101 million was up from prior quarter and prior year levels, reflecting the higher charge-offs. The non-performing loan ratio of 67 basis points was relatively stable linked quarter and improved six basis points year-over-year. Non-performing loans decreased 5% year-over-year, driven by improvements in retail. On a linked quarter basis, non-performing loans increased 3%, driven by an increase in commercial primarily tied to a small number of loans, while we saw improvements in retail driven by home equity and education. Our allowance to loans coverage ratio remained relatively stable, ending the quarter at 107 basis points.
The NPL coverage ratio was also stable linked quarter at 159 basis points. On page 12, we maintained our strong capital and liquidity position, ending the quarter with a CET1 ratio of 10.3%, which compares well with peers and gives us excellent financial flexibility. Including dividends, we returned $652 million to shareholders, up 25% year-over-year. Going forward, we continue to target a dividend payout ratio of 35%-40%. Our planned glide path to reduce our CET1 ratio remains on track. Let's move to page 13 and discuss CECL. We expect that the day one impact for CECL on a pro forma basis will be about a 30%-35% increase in the existing reserve, which was about $1.3 million at the end of the quarter.
From a capital perspective, this represents about 22-25 basis points of CET1 on a fully phased-in basis or approximately 5-6 basis points in year one. This range considers the current economic outlook and mix and credit characteristics of the portfolio. In addition, a key factor is the impact of longer duration loans such as education, home equity, auto, and residential mortgages that tend to attract a higher level of reserves. At the same time, the commercial portfolio is generally shorter duration and so is expected to require less reserves than it does today. Ultimately, the impact of the initial impact will reflect both the portfolio mix and the macroeconomic outlook when we get to the end of the year. On page 14, I want to highlight a few exciting things that are happening across our bank. First, we ranked number 4 in the 2019 J.D.
Power U.S. Home Mortgage Satisfaction Survey. Since last year, we moved up six positions in that survey, which is a real testament to the hard work our mortgage colleagues have done to integrate Franklin American while relentlessly focusing on our customers. We are also very excited to announce that we just entered into a new consumer banking partnership with an iconic technology company to be announced shortly. We will provide more details around the launch of this program, which is later this quarter, this is another great example of our commitment to innovation and strong focus on the customer experience. In commercial, we are really progressing well with the client migration to accessOPTIMA, our best-in-class cash management platform.
About half of our clients are on the platform. We expect the transition to be complete by the end of the year. In addition to TOP 5, as I mentioned earlier, substantial work is underway on our TOP 6 program, which is targeting a pre-tax runway benefit of about $300 million-$325 million by the end of 2021. Our outlook for the fourth quarter is on page 15. It reflects continued good positions for both our top and bottom-line results. Our current view is that we expect an additional rate cut in October. As a result, we expect net interest income to be relatively stable in the fourth quarter as loan growth should offset further, but less net NIM contraction due to rates. Our outlook for loan growth reflects stronger period end trends, coupled with healthy pipelines driven by our geographic, product, and client-focused expansion strategies.
Also, we expect a moderation of third quarter commercial paydown and utilization trends, as well as continued growth in mortgage, student, and other retail. We are expecting non-interest income to be down modestly from the record level last quarter. Strength in capital markets revenues should largely offset a decline from record mortgage fees. Given our continued focus on expense discipline, we expect non-interest expense to be flat to slightly down. Additionally, we expect provision expense to increase by about $10 million. Finally, we expect to end the year with a CET1 ratio of approximately 10.1%. To sum up on page 17, our results this quarter demonstrate our continuing strong performance as we execute against our strategic initiatives, grow customers and revenues, carefully manage our expense base, deploy new technologies, and improve how we run the bank. Now, let me turn it back to Bruce.
Okay. Thanks, John. Operator Brad, let's open it up for some Q&A.
Thanks. Ladies and gentlemen, if you would like to ask a question, please press star and then one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue, and you may remove yourself from the queue at any time by pressing the pound key. Again, it's star one to ask a question. We go to the line of Ken Zerbe with Morgan Stanley. Please go ahead.
Great. Thanks. First of all, great job on reducing your interest-bearing deposit costs this quarter. We've heard from other banks that deposit competition is still really aggressive. Bruce, I know you mentioned that you expect your deposit betas to increase next quarter. Does that imply that some of that deposit competition might be easing?
You want this one?
Yeah. I'll go ahead and start off there, Ken. I think it's a number of factors. When you have a rate cut like we had in September, there's just a natural operational lag, if you will. We've talked in previous calls that there's a deposit lag that maybe, call it three to six months. As we get farther away from that September cut, the impact of that cut gets pushed through operationally and you're going to see deposit betas increase from 3Q into 4Q, and therefore we expect interest-bearing deposit costs to actually decline by a larger amount than they did this quarter.
Okay. Great. Then just my second question is in terms of your energy exposure. We've had three other banks that I cover announce higher energy charge-offs this quarter. I know you guys didn't mention it at all, which is certainly a positive, but can you just address what you're seeing from a credit perspective in your energy portfolio?
Ken, I'll talk about that for a second. We've actually been working through our energy exposure for a little over a year now. Our NPLs are way down. They're down from about 25% of our total NPL to nine. We've restructured and worked through a lot of them. Our overall portfolio is down. I think one of the things that we have in our portfolio, I don't know what other banks have, is very low exposure to oilfield services, and that's where a lot of the distress looks like it's happening in the oil sector. We tend to be good RBL structures and good midstream structures. We're very comfortable. We don't see any promote distress in the portfolio or anything significant at this time.
All right. Great. Thank you.
We can move to the next question with John Pancari with Evercore. Please go ahead.
Morning.
Hi, John.
I want to see if you can give a little bit more color on the commercial credit front. I know your commercial non-performers were up 25% linked quarter. You noted in the release that it's small number of uncorrelated credits. Just want to see if you can give us a little bit more detail on the industry, on maybe the sizes and the types of loans as well. Thanks.
Want to go again, Don?
Yeah. Thanks, Van. We did have a couple charge-offs in the quarter, one in the real estate division, which is a regional mall, where we took a small charge-off to basically position ourselves to hopefully exit out of that credit with a sale or restructuring in the near future. Our Non-Performer move was really one credit, which is in the automotive linked sector, which we've been working through. It's well reserved. We don't think there's a significant charge-off there, but we took a Non-Performer or not non-performing. It's a restructuring deal that we did about a year ago. There's a significant amount of junior capital below us now. We feel okay about the credit, but we felt it was prudent to take a Non-Performer given the cash flow dynamics of the complex.
Yeah. I would add that what Don mentioned on that first credit, we're close to having that one resolved, which would allow NPAs to fall back down in Q4.
I think more generally, as I think John said, we feel good about the general trends in the portfolio. We feel like we're identifying any issues early. We're aggressively addressing them. We're trying to move them off the portfolio to the extent we think there's future risk. We're trying to move through anything in the portfolio that we think has any significant loss potential.
Yeah. Be proactive. Good model.
Okay, got it. Bruce, you indicated in your remarks that you're being prudently cautious in certain lending areas. What type of areas are they, and what are you seeing that's making you get more cautious? Thanks.
Well, I could throw that one to Don as well, I'll kick off here. I think in general, there's some very competitive conditions in certain parts of the market, particularly middle market. We have a lot of non-bank competition there, and so we're competing where we want to hold up our relationships with our customers. We're not being aggressive to try to grow the book there and take on tough spread situations or tough term situations. That's one. I think in certain areas like restaurants, we're certainly actually taking a posture towards reducing exposure, not adding exposure. I think we're also being proactive there, and we have some good momentum there. I'd just say it's around the edges of being disciplined, and then seeking out areas of growth, our specialty verticals. We get some better spreads there.
We're moving up market and competing effectively in mid-corporate. We think we'll see some growth there. I think we did indicate that we will see a return to overall loan growth in Q4, and also in commercial in Q4. Our pipelines look quite good. We have seen in Q3 elevated pay-downs, refinancings, lower line utilization. Even though we had a pretty strong quarter in terms of originations, we were fighting against that a little bit. I think in Q4, we would expect to see less of that, and we're continuing to see a nice pipeline. Don, you can add to that.
Yeah, I'd just give you a little more defense of that. Kind of a year ago, we were seeing pay-downs drive about two-thirds of our originations. They were basically one to one this quarter. We really got hurt on the new origination side from pay-downs. I think there's a combination of things going on. I think particularly in the middle market, but in general, we're seeing people deleverage in anticipation for uncertainty in the next year. They're not putting on incremental debt. There's not as many special dividend deals going on. There's not as many releasing capital or buybacks that we're seeing in the core of our portfolio. That's resulting in people just saying, "We're going to take your utilization down." We are seeing some sense of that moderating. That'll drive some of our loan growth going forward.
As Bruce mentioned, some of the challenging portfolios, our restaurant portfolio is down by about 50% of where it was at the peak. We're working that down. We're purposely working our leasing portfolio down and focusing on our core business. We've been working on multi-family real estate portfolio down. There's a lot of things that we're actually trying to address from a portfolio standpoint that is dragging the numbers on a net basis. As you heard John talk about, we are actively involved and engaged in DSO, and where we don't see adequate returns over the next two to three years on exposures we have, we'll consider moving them off the balance sheet. I think the new business feels good. The areas that we've actually grown from a regional standpoint, from an industry specialty standpoint feels good.
It's just there's a little bit of adjustment going on in terms of the overall book of business that we're trying to run. Just to echo what Bruce said, it is very competitive as people search for loan growth out there, and we want to stay disciplined on both a terms and conditions and a pricing standpoint, so that we can maintain the returns as well.
Okay, thanks. Taking my questions.
We'll go to the next question in queue. Come from Scott Siefers with Sandler O'Neill. Please go ahead.
Morning, guys. Thanks for taking the question. John, first question best for you. Hoping you can just put a little bit of a finer point on the C guides for the fourth quarter, including some of the expected drivers. You mentioned capital markets and the pipeline there. I guess I'm just curious given that you got the pretty substantial MSR benefit, so sort of right off the bat, it could be kind of a $25 million hole or up to a $25 million hole. Just curious if you can talk a little bit more detail about the puts and takes, please.
Sure. I'll start off, others can add. I think the main point here is that, as we mentioned, the capital markets pipelines look quite strong. When you look at 3Q, that was a little bit more of a down quarter at $39 million. When we see the outlook into 4Q, we had some deals push out of 3Q into 4Q. We had a very soft syndication quarter in 3Q that looks to be firming up into the fourth quarter. M&A advisory was an area that was flattish from 2Q to 3Q. We look to see that being meaningful and significantly up in the fourth quarter.
I'd say that when we tend to look at this in the early part of July, we looked at our pipelines and how that would play out in 3Q, and now we're looking at the pipelines in early October here, and it bodes well for a really nice rebound in capital markets. I should also mention that the service charges in CARD which had a nice quarter in 3Q, look to be up a bit further. Trust. I think there were some choppy market conditions that impacted trust and investment services, and I think that you'll see that our expectations are that that will improve going into the fourth quarter, too. It's a couple of different levers that will all tend to have an impact into 4Q that would largely offset, as we've said, the mortgage decline.
Okay, perfect. Thank you. A broader question just on rate sensitivity. You pulled back a little bit of the asset sensitivity this quarter as well. I'm wondering if you could just comment on whether there's sort of an end goal as to where you want the company's rate positioning to be. Obviously, it's kind of tough given all the volatility in rates, but just what the broader long-term thinking on rate sensitivity is at this point.
I think you've seen us take our asset sensitivity down over the last year. I think that we've improved on that front. As you know, a commercial bank has a natural asset sensitive profile. We use derivatives and other techniques to frankly dampen that profile. I think you would see us in a low to moderate asset sensitive position over time, maybe converging towards neutral as we get towards the end of the cut, the easing cycle, if you will. I think we're getting pretty close to a stable place. We do like and have the view that we are at historically low long-term interest rates. We've changed our sensitivity from a majority exposure to the short end of the curve over the last year to now the majority of our exposure is to the long end of the curve.
We have that view over time that long end of the curve will rise, and we've executed our hedging activities with that in mind, and with a general sense that we should take some asset sensitivity off the table. That's just on the net interest income line. As you know, mortgage provides a very nice overall revenue lift when and if rates were declined by a lot, which is what happened in the third quarter. It's not just our derivatives and not just our sensitivity on net interest income. We look at how we try to preserve revenues overall, and you saw the power of that diversification in the third quarter.
Perfect. All right. Thank you very much. I appreciate it.
Next in queue, we've got Brian Foran with Autonomous. Please go ahead.
Oh, hi. Good morning.
Go ahead.
I wonder if, just conceptually on net interest margin, once the Fed stops, I guess we'll have to decide when that is, but let's say it's mid-2020, the Fed stops easing. There's one school of thought that the banks could actually get a little bit of a bounce back in margin because of the deposit repricing lag you mentioned, and that'll catch up. There's another worry that while the assets don't all reprice immediately, and you're still going to have that kind of rollover of fixed rate assets to lower rates. As you think about it, not getting into the basis points of what the actual margin's going to be, but just conceptually, when the Fed stops, is your bias kind of a roughly stable margin or up on the deposit repricing or still some pressure on the asset yield rollover?
Yeah. I'd say a couple of things. I think you mentioned the deposit lag, and I think that provides a tailwind. Once you get 3 to 6 months out, that's helpful. I think it matters where long rates are. As I mentioned earlier, if the Fed gets to the end of its easing cycle and we end up with a positively sloped yield curve, I think you could see some positive impacts in net interest margin over the, call it 2, 3, 4, 5 quarters out into 2020. That's an important aspect. I think that front book, back book dynamic is, given the fact that we are roughly split 50/50 with a fixed loan portfolio and a floating loan portfolio. You're right that when rates fall, we get the immediate impact on the floating part of the portfolio, but the fixed part provides that buffer.
If we can see some lift on the long end, you could see stabilizing to rising NIMS after you get three to six months beyond a Fed easing cycle. Yeah, I think you see some stabilization here over the next quarter or two, and with those dynamics I mentioned, possibly even some lift when we get towards the end of 2025.
The other thing I would add also is that if we get a little more loan growth, which we expect in the fourth quarter, and to be able to sustain that in 2020, that facilitates more BSO actions in terms of kind of the loan side of the balance sheet. Hopefully that will kick in and then be accretive to our NIM as we go through 2020.
Thank you. One small one. I don't mean to jump into the weeds, but on page 20 of the supplement, I've had a few people ask about this negative $48 million in the provision for unfunded lending commitments. Can you just talk through, was that a release or was it more like a transfer because a loan drew down? What drove that negative $48 million provision for unfunded lending?
Yeah, thanks for the question and looking at our supplement. We appreciate that.
I didn't look at it. Someone else pointed it out to me.
Yeah, it is exactly as you mentioned. We had an unfunded loan where over time we built the reserves on the unfunded part of the reserve in the ACL, if you will. All of the provisioning and reserves happened while it was unfunded, and then once it was fully reserved, it funded and then got transferred and needed to get transferred over to the ALL. Overall, really the driver was a transfer of an unfunded, fully reserved loan.
It actually was a backup letter of credit.
Yeah.
It's not exactly a loan.
Fair enough.
That ultimately drew down, and we moved it over.
Yeah.
So.
I think we released some reserves because we moved it to held for sale as well.
Right.
Great. Thank you.
Okay.
We'll go to the next question in the queue. It'll come from Matthew O'Connor with Deutsche Bank. Please go ahead.
Good morning.
Hi.
Fees were obviously strong this quarter, and you gave some pretty good granularity in your thoughts on the fourth quarter. Just looking out more medium term, can you talk about the magnitude of fee growth you think you can generate and some of the drivers? Obviously, it's incrementally important from here, given the pressures on net interest income. Just try to maybe quantify the growth that you expect and again, some of the drivers. Thanks.
Well, I think, Matt, I'll start it first. John can pick up. When I think about where we've been and how we've grown through time, we've pretty much been growing commercial fees, probably high single digits, keeping pace with reasonably robust loan growth over that period. That's reflective of the investments that we've made in building out the platform, hiring some great bankers, standing up our own global markets FX and interest rate business, investments in the cash management business, acquisitions of M&A shops. I think we're really just gaining traction and reaping the benefits of those investments. I would expect to see continued good growth on the commercial side. Q3 was a little bit of an air pocket. We think Q4 is going to be a bounce back quarter. On the consumer side, we've had a harder time growing.
I think we addressed some of those issues. We've been investing organically in building out the sales force and coverage folks in wealth and in mortgage. I think the acquisitions that we've done, particularly mortgage, looks very timely in light of being able to catch the refi wave. I think there's a lot we can really do with that business. It's really scratching the surface of its potential in terms of building out more tools for the correspondent and wholesale customers that we have. I think we can grow our market share there very nicely and then get better penetration into our branch channels as we continue to add LOs. Even though we came off a high with the refi wave, I think that will continue some through Q4 and early into the first half of 2020.
There's other levers to continue to, I think, gain market share in the mortgage business. Then wealth, we've now addressed the high end of the pyramid with Clarfeld, and we're looking, frankly, to do more in terms of acquisitions to further that growth on the wealth side. If we average the commercial and then the slower growth on consumer, I think with the rearview mirror, we probably were in a mid-single digits range and certainly would think that that's a goal we could set going forward when we think out a number of years to at least be able to continue to do that.
That was helpful. Could you just elaborate on the type or maybe size of wealth deals that you'd be open to? I think you did a relatively modest one.
Yeah, I think all these deals we've described as bolt-ons. I think what we really need to make sure of is it has a good strategic fit that the company has a great culture that's going to mesh well with us, and that we can get attractive financial terms. I think if you buy smaller, you can get a little better handle on all of those things. If you buy bigger, it's a little harder to achieve those three objectives. I would think you'll still consider these deals smart but more in the bolt-on category. You probably need to do several to continue to scale up our business.
Okay. Thank you.
We can go to the next line in queue. It'll come from Saul Martinez with UBS. Please go ahead.
Hey, good morning.
Hi.
I know you've addressed this to a certain degree, and I know there's a lot of volatility and probably some seasonality in this, but can you just give a little bit more color on how we should think about what a more normalized run rate is for mortgage income, assuming the long end of the curve stays where it's at? You had, I think, $80 million of production revenue, which is very strong, the MSR valuation gain. As we think about that going forward, how should we think about sort of the moving parts there and what it could trend to, not only in the fourth quarter but just beyond that?
Yeah, thanks for the question. It's John here. I'd say you could break that down into three P&Ls, right? You talk about production and servicing and then the MSR valuation out of the economic hedge, right? When you go across each of those three going forward, I think you could see production P&L basically coming down a bit right in the fourth quarter. I would call it higher than where it was in the second quarter. We had a good quarter in the second quarter. Phenomenal quarter in the third quarter. I think maybe coming off those highs, but kind of stabilizing at higher levels than what we've seen in the past in production. We're really excited about that. Very strong production, really strong margins, which is important to how we generate those revenues and just a growing integration of the Franklin platform.
That's how I see that part of the P&L. I'd say a similar comment on the operating servicing part of the P&L, where we're retaining all the UPB that was previously being sold by this platform before we acquired it. Our servicing UPB is growing nicely, as well as the servicing fees and ancillaries that we're recognizing on that P&L. That P&L is stabilizing and rising, and we're completing the full integration and in-sourcing of the servicing platform from what Franklin was using, which was an outsource platform, to bring it in-house, which will give us more control over data and direct access to the customer. We're excited about that. The last one, of course, is the MSR valuation net of economic hedge.
During the quarter when we see large swings, this past quarter, we were positioned to benefit if mortgage spreads were to widen out. When we get to extremes, we tend to moderate positions and assume that they will revert over time, and it did. That's something that I think you could see more of in the future. That'll jump around a lot, but I think we've demonstrated a really solid job of managing what is otherwise a volatile asset for the last four quarters that we've had this platform going into the fifth. We've managed that really well with a flat to upward bias on the MSR net of economic hedge line.
Brad, you might just want to add a little bit some of the innovation and the new technologies that we're delivering in the mortgage business because I think it's quite exciting what's actually taking place.
Yeah, I was actually just going to do that. One thing I'll also chime in with John. I think you hit it spot on. One thing to keep in mind, the industry is quite full of capacity right now, and that gives us great optimism around margin maintaining for a period of time. Those signs are good from a margin perspective. To the point, Bruce, that you made, we've invested heavily in our digital capabilities in the mortgage business. We put a new digital front end onto our origination platform. This past quarter alone, we saw more than a third of our applications come through the front-end digital platform, which gives us efficiency opportunities for one, but also gives us more opportunity to build our direct-to-consumer side of the business.
We also invested in digital capabilities on the back end of the business with a digital and mobile servicing application. We're seeing a lot of our customers transition over to using that digital platform on the back end. A lot of good things happening other than just the rate environment. I think the integration, as you said, has gone extremely well, and we're starting to reap the rewards of investments that we made in the digital capabilities and the servicing capabilities.
Yeah. Great.
That's great. No, thank you. That's great color. If I could switch gears and also ask a question on reserving and on CECL specifically. The day one impact's not a big deal from a capital standpoint. How do we think, John, about the day two impact of CECL? Because a lot of your growth, if you look at the balance growth over the last year, a relatively large portion of it is coming from education. It's coming from other retail lending that tends to either have longer tenors or higher loss content than others. Obviously has a higher provisioning load as you originate those loans. How do we think about the loan loss provisioning outlook in light of that loan growth and mix shift into 2020?
Yeah. We've just kind of come out with our first real quantitative outlook for where this adopting this standard will affect us in early January. I would say a couple of things, but also caveat that we have more work to do, and we're continuing our parallel runs and completing all the validation of our models. With all of that said, I think there are two big forces that you have to think about. One is with all of those portfolios that are longer duration, we have a big back book. The dynamic that we're dealing with is the fact that we're being asked to reserve over the entire life of the entire back book for those longer duration loans in early January.
Going forward, if our models are reasonably accurate and reflect the future, which is a big question for all banks, then really the provisioning for that entire back book is really behind us and is really already up on the balance sheet.
Yep.
What you're left with is the other side of the ledger, which is the front book and the front book originations that you have to basically put through P&L all of the reserves that you're likely to run. I think for portfolio by portfolio, the gearing of ratios, if you will, of the benefit of the fact that the back book is no longer being provisioned, which would otherwise have been provisioned in the incurred loss model under the existing standards, is now going to be already handled and probably closer to zero against the magnitude of the front book. I think the answer with respect to whether that's positive, negative, or neutral varies by portfolio, and that's going to play itself out.
Yeah. What I would say just to add to that is that we're working through our kind of three-year strat plan that we finished in July to kind of overlay portfolio by portfolio what the interplay between those dynamics that John described, back book, front book, and then how does that play out from an accounting standpoint over, say, the next three years. There may be certain product twists that if we're offering a longer duration version of a loan, and it may not make as much sense. We might tweak some things.
I would say that at the end of the day, the economics are the economics, and the accounting is something we have to contend with. We'll get on top of it, and then obviously when we do our guidance in January, in the next call, we'll be able to take you through that in some more detail. We're working at it, we're analyzing it, and I think we feel broadly fine about it.
Got it. All right. That's very helpful. Thank you very much.
Yeah.
Next in queue, we'll go to the line of Gerard Cassidy with RBC. Please go ahead.
Thank you. Good morning, Bruce and John.
Hi. Good morning, Gerard.
Bruce, you touched on growing the fee revenue, and I wanted to zero in on the capital markets business, since you guys have had good success in expanding that business. I understand the second quarter, if I read the press release correctly, was a record level. Third quarter came down a bit. Two questions. One, you mentioned the pipeline is very strong going into the fourth quarter. Can you compare that pipeline to prior quarters? Is it higher or lower? Second, what will it take for you guys to bring this business up to maybe a $70 million a quarter run rate? Is it hiring more people or expanding geographies? How can you grow it to that level?
I'll let Don take that one.
I'll talk about a combination of fee lines for the commercial bank activity. You saw our FX and interest rates and commodity hedging activities for clients, and those have been running at incredibly strong levels for the last couple of quarters. There was a little volatility this quarter. It hurt us on the capital markets side. It benefited us on the interest rate and currency side, and we're seeing that continue. On the capital markets side, we generally play in the middle market and middle market leveraged finance space. What happened this quarter was that market was way down year-on-year, and effectively the market was all but closed for about six weeks in the middle of the summer as the Fed changed its interest rate posture.
We saw a great lift in September on the back of an opening up of the bond market, and so our high yield activities grew exponentially. That all being said, I think that we've got the pieces in place to allow us to take advantage of the opportunities as they present themselves. The really big growth area over the next quarter or two is going to be M&A as the acquisitions begin to kick in. We've been running it kind of between four, peak of eight back to four in terms of M&A fees. Those should go up significantly this quarter, and the pipeline looks very strong. Our strategies to get that fee line even higher are couple fold. One is in our high yield business.
We've started high yield sales and trading activity this quarter which should allow us to take larger positions in high yield underwrites and our splits on those transactions could double or triple. That'll drive the high yield side of the business. We've been building credibility in our loan syndication and leveraged financing capability over four years, and we're seeing larger transactions and even more transactions as we build comparables and a reputation for execution with our clients and with our investor base. We're seeing just general activity growing in the fourth quarter. Whether that continues in the first quarter, second quarter, third quarter is a little too early to say, but I think there's upside on all those key elements. The other thing we've been trying to do is grow our client base.
As Bruce said, at the time of the IPO, we moved into the mid-corporate and industry vertical sectors. We built very strong corporate finance industry advisory teams. The way we're engaging with our clients, I would argue maybe four or five years ago, was very much around provision of credit, and now it's about advice and basically ownership transition and complex financing. It's only been the last couple of years where we've had all those pieces in place, and they're really gelling well. I think they're gelling well as I've seen them any time in my career. We're just in a lot of very interesting conversations with our client base.
If you could, I would just add to that, Gerard. We have knocked on the door of $60 million quarter before. I hate to put my neck on the line, but I think this fourth quarter shapes up potentially to be a new record quarter for us in capital markets. We're not that far away from that $70 a quarter. I don't think we really need to hire more people or acquire another M&A boutique to get to that kind of a level. It would require, I think that the markets are healthy and open over the next year, and then some of the investments that we've made and the approach to how we cover all that would have to continue to progress and come to fruition.
There's not a lot of incremental investment that we need to make in order to continue to drive higher revenues in this business.
Further to that point, Gerard, just to the question earlier about pipelines. Our pipelines in early October are up across the board, whether you're looking at the combination of syndications and bond underwriting or FX, IRP and M&A in particular, they're all up since early July when you look in early October. Just to close that out.
Great. Thank you for the color. Bruce, since the BB&T SunTrust merger, many investors and myself all thought more deals were going to be announced. Obviously, nothing's happened. When you look at the BB&T stock, it's outperformed the general bank indexes. It looks like the market's supporting that type of transaction. Is that something Citizens could ever consider in the future?
Well, I think the stock answer to that is we're going to always consider anything that benefits our shareholders. I would say whether that deal proves to be a good one depends on the quality of the execution. I've been part of a big MOE in Bank of New York and Mellon. The spreadsheets when you announce the deals always look great, and then it comes down to do you make the right personnel decisions? Do you get the cultures to mesh? Do you fundamentally execute well? We'll see if that happens. I think for us right now, we're very focused on continuing to run the bank better, and we're in a period of very rapid change in terms of customer expectations, new technologies, and we're very focused on being on the front foot with our TOP 6 programs, some of our strategic investments.
I think we can carve a path that's very exciting and fulfilling for our stakeholders by really staying focused on our own current agenda. One of the risks of getting involved in larger transactions is it can be distracting and take your eye off the ball in a period where you really have to be all over the current agenda. Anyway, those are a few thoughts, Gerard. No, I appreciate your candor. Thank you.
Our next question in queue comes from Erika Najarian with Bank of America. Please go ahead.
Hi, good morning.
Hi.
I just had one follow-up question. It's really what sort of Brian Foran was asking earlier. As I think about what's unique to Citizens as we look out over the next few quarters, obviously you've done a lot of work in terms of driving your business momentum upward and accelerating it. Second, you do have high deposit costs. As we think about beyond the fourth quarter, right? You're still feeling good about loan growth, you're still feeling good about the economy. Based on the forward curve, should we think that the worst-case scenario for NII next year could be stable? I'm trying, Ellen.
Yeah. That's okay. Erika, it's John. I think stay tuned for January, right? We'll come out with relatively specific expectations for what 2020 will be on NII. I think you have the broad contours, the direction correct. When you think about where our loan growth has been year-over-year, we're in the neighborhood of that 4% range, which is a percentage or two above GDP. Next year, we want to aspire to continue to grow the platform at levels that are similar to that or better, and that plus all of the work that we're doing on the net interest margin side of things. We did have, as you know maybe, some betas that when we were in a tightening cycle, we had some deposit cost rises that were higher.
That's starting to retrace itself here, and you'll see our deposit betas rising in the fourth quarter and continuing to reflect the fact that we've done an amazing amount of work on our deposit betas.
Frankly, we've been outperforming now through the cut cycle.
Yeah, on the deposit side, we have. In the second quarter we did, and then we outperformed during the third quarter we did, and I think you can almost consider a trajectory there. I'm sorry, in the third quarter we did. In the fourth quarter, we're going to have a meaningful improvement in the interest-bearing deposit cost decline. We're excited about that. I think a few levers will cause that kind of stabilization that you're talking about. Stay tuned. We tend to try to hold off on that. Now we wait till January. Yeah. Good try there. Yeah.
Got John to open up a little bit. I know.
Yeah. I understand the timing is odd, but it just sounds that if you're relatively stable next quarter with pressure from October and the underlying pressure from what's happened so far so quickly with only taking your deposits cost down the way you did, it seems like stable seems like a potential. I guess I'm not asking to confirm that, but that's just how I was looking at that. I appreciate the color. That wasn't actually a question. I'm going to take myself off mute.
You were going to have another question. Do you have a question?
All right. Thanks for that.
Okay. Sure.
Next we'll go to line of Ken Usdin with Jefferies. Please go ahead.
Thanks, guys. Good morning. Hey, just a follow-up on the overall balance sheet. You guys have shown really good deposit growth in the money market accounts and then the non-interest bearing, and obviously we're starting to see the term deposits come down against that and Citizens Access kind of flattening out. Can you just talk us through just that mix and how you expect just overall balance sheet to traject from here, especially as loans look to be still growing and securities have kind of flattened out just given where that rate dynamic is. I guess just talk about the earning asset base and the mix within and how you'd expect that to go forward. Thanks, guys.
Yeah. Overall, you're seeing the fact that we continue to year-over-year, we're growing deposits at 6% and loans a bit less than that. You look at the LDR ratio around 94.5%.
In the third quarter, that's down reasonably.
Significantly.
Significantly, yeah. Down to the neighborhood of 98 or so about a year or a year and a half ago. I think the balance sheet strength is quite good. Really solid liquidity position as we head into the end of the year. Deposit growth has remained a bit greater than loan growth. That gives us optionality in terms of how we execute our playbook in terms of deposit pricing, and that's part of how we've been able to drive deposit costs down is all of the good work that we've been doing in terms of generating deposits. On the loan side, we gave you that color about the fact that year-over-year, our trends are in that 4% range or so. That's something we'll aspire to accomplish over time. Deposit costs will continue to fully fund loan growth. I think that's our main-
I think one piece of color I would add, Ken, is that we're quite pleased that we've been able to grow our demand accounts and outperform relative to peers. Brad, you might want to add some color on that, really the focus on the mass affluent customer and some of the investments we've made in customer experience and customer journey. We're gathering them, targeting them, getting them in the door using data analytics, and then they stay. Retention is up there, and that's really fueling that growth in demand accounts.
Yeah. You nailed it, Bruce. I think we've talked for quarter-on-quarter about our investment in analytics, and that has given us the ability to really target the right customers, improve the value proposition, which we've done that with a focus on the mass affluent client, which is deepening our relationship with them in that we're getting them active quicker than we were in the past, and we're improving our attrition, and our Net Promoter Scores are showing that they're much more satisfied customers. We really think that's what's fueling the growth in non-interest-bearing deposits.
Yeah.
Understood. Thanks for that. One follow-up on the securities book. The securities book, you mentioned that the premium amortization was a three basis point hit to the net interest margin. I'm just wondering at this point, where are you able to reinvest cash flows at versus the back book? If we could try to isolate for what's happening aside from the premium am. Thank you.
Yeah. I think on the front book, back book trends here, you've got reinvestments in the third quarter are around, call it 250 or thereabout. You still have a positive front book, back book in securities with write-offs in the neighborhood of 220, 223 or so. I think it's nice that against this backdrop, we've done a reasonably good job of holding our cash and investing and deploying that cash at points during the quarter where rates are a little higher.
Hit the spikes.
It's hard to do that all the time, but in the last couple of quarters, we've been holding our powder a bit until some of the big declines in rates moderate, and then we put all the cash to work. Like I said, you still got a positive, call it 25 basis points or so of front book, back book on the securities portfolio.
One quick one just on the premium am. If rates stay flat, does that three basis point headwind just go away? Meaning, does it go to zero as an increment? If you realize it on a realized basis, is there any lag to the premium am that would continue to roll forward just because of where rates have gone to? Thanks.
Yeah. I think you've hit it. There's a couple of factors. I think our outlook is that it's going to be relatively stable quarter-over-quarter, such that the drag of three basis points this quarter is because there was an increase from 2Q to 3Q. Our current outlook with outlook for rates, et cetera, is that that will be flattish from 3Q to 4Q, so therefore no longer a rise. Over time, maybe that can moderate. Again, back to 2020, we'll get back to you on that later. Yeah, it'll be flattish from 3Q to 4Q.
Understood. Thank you.
Okay.
Our next question in queue will come from line of Peter Winter with Wedbush Securities. Please go ahead.
Thanks. As you guys get ready to implement the TOP 6 initiative, are there any thoughts maybe that you'd be willing to delay investments or maybe accelerate some of the planned cost saves just to ensure you generate positive operating leverage going forward?
Well, first off, we're trying to get this thing off the ground. We have a number of work streams. Basically 7 or 8 work streams with individual leaders. As soon as they're good to go and launch, we're already moving ahead. We've given the green light on 2 of those work streams already, and we'll have more that launch in the fourth quarter. The bulk of the TOP program is accretive right away. We want to get those things going quickly. The places where we would be in turn reinvesting, the next gen tech is 1 of the big work streams. That has probably the most value of any work stream to the bank in terms of how we're running the bank and how we can deliver for customers. It is somewhat reliant. It doesn't generate immediate savings.
It requires some investment and then the savings come later. As long as the rest of the streams are moving ahead, then our disposition is we got to move on that. It is really critical. When we announced the TOP 6 program, we also talked about some strategic investments that we were assessing and prepared to make. Those include further expansion of Citizens Access, our digital bank, or of our point-of-sale merchant finance platform, or new ways to cover small business customers and low and middle-market customers with more digital and data applied. We're working through those. I think we have an ability to gate those based on how fast the savings come through on the other streams, and then also the overall macro environment next year.
We do have this commitment that we've held fast to since the IPO of trying to deliver positive operating leverage, and that's probably the lever that we have, would be to gate some of those investments. Our objective, our hope is that we can move on those because I think they're really exciting and I think they really will drive medium-term revenue growth for us.
Great. That's really helpful because I guess when I look at the medium-term profitability targets that you laid out, obviously the rate environment is much different than when you originally gave that.
Yes.
I'm assuming you're still expecting to see then continued improvement in the profitability in terms of the efficiency.
Yes
and ROTCE.
Yes. That's the only way to really get it, is you're going to have to drive the operating leverage. One of the things to keep your eye on is if some of these trade tensions and concerns that are holding back the economy a little bit abate, that obviously is going to be a tailwind into next year, and that could also result in the long end of the curve moving back higher. That's actually been a bit of a crusher when you look at ROTCE, because year-on-year growth in OCI related to the growth in the value of the securities portfolio actually has clipped 75 basis points of ROTCE. If you had the long end move back, you could actually throw that right back onto the equation. There's a number of factors there.
Yes, commitment to operating leverage, key in terms of continuing to drive forward and reach those ROTCE goals.
That's great. Thanks, Bruce.
Yes.
We'll go to our next question queue. It'll come from Marty Mosby with Vining Sparks. Please go ahead.
Thanks. This is a good question to follow that last question. When you look at banks, there's so many intricate details that we've spent all this time talking about, but really investing in it comes down to three different metrics. One is return on tangible common equity. The other is dividend yield, and third is basically how fast can you grow tangible book value. While your ROTCE has been under pressure, one statistic that hadn't really been talked about was your growth in tangible book value was 14% over the last year.
Yes
which is the counter of that. When you look at those three metrics, let's say, assuming we don't have a credit event or a credit downturn, how do you see those three metrics moving forward over the next, let's call it 12-24 months, given the environment that we have? Do you see progress in those metrics? Where we're at right now is very positive. I think the valuation reflects some deterioration in those metrics. Just wanted to get your take on that.
Obviously, the objective is to be driving the ROTCE and driving the tangible book value per share higher. If we execute well and the environment stays okay or improves, I think we'll certainly be able to do that. If we do that, the stock should reflect positively, so our dividend yield would go down, which wouldn't be a bad thing, ultimately. We're still committed to raising our payout ratio and getting to a 35%-40% dividend payout ratio. The yield obviously is a function of the stock price.
John, I want to dive into a very, so from a big picture to a very minutia type of question. Given that what we're seeing is consumer allowances are going up precipitously on the CECL and commercials are going down. While that day 1 impact is negative for those that have more consumer, what I'm trying to get at is, as we go into day 2 through 200, is the consumer because it's less lumpy and the commercial is getting impacted because of how low we are in the cycle right now, and their losses tend to come in in big pieces. Is the consumer possibly going to be less volatile over a cycle versus commercial when you have big pieces coming in and out and having to adjust those factors when you go through those economic cycles?
Yeah. We're still, I would say, developing our intuition about this new standard and how the models will work. I think there are a series of factors that impact both sides. I think just the prevailing market conditions and expectations of how your reasonable and supportable projections will revert over time. I think it has meaningful impact on both portfolios, to tell you the truth. It's one of the reasons why we've all been scratching our heads about why this standard was necessary. It's going to be very difficult to compare across institutions for a period of time. It's going to be a lot more difficult to frankly anticipate where P&L impact will go over time. All of that said, as you heard earlier from Bruce, economics are still something that we have to keep our eye on that ball and we'll deal with the capital impacts as necessary.
I don't know that I'm ready to say that one of the two portfolios is going to be less volatile. I think it's possible that either portfolio could contribute to significant volatility in any given period. Stay tuned for the continuing disclosures that we'll do on this in January as we finish our, frankly, our parallel run and our model validations, which are happening here as we speak in the fourth quarter.
Thanks.
Sure. All right. Ellen?
Yeah, I think no further.
Yep. No further questions at this time.
All right. Very good. Thanks everyone for dialing in today. We always appreciate your interest and support. Have a great day.
Thank you. That does conclude the call for today. Thanks for your participation. You may now disconnect.