Welcome to the Citizens Financial Group first quarter 2019 earnings conference call. My name is Brad, and I'll be your operator on the call 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 conference is being recorded. Now, I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin.
Thanks so much, Brad. Hello, everyone. We really appreciate you finding time to join us this morning. We're going to kick things off with our Chairman and CEO, Bruce Van Saun, and CFO, John Woods, reviewing our results. Then we'll open the call up for questions. We're really happy to have Brad Conner, Head of Consumer Banking, and Don McCree, Head of Commercial Banking, with us. Of course, I need to remind everyone that in addition to today's press release, we've also provided a presentation and financial supplement, and you can find these materials at investor.citizensbank.com. Our comments today will include forward-looking statements, which are subject to risks and uncertainties. We provide information about the factors that may cause our results to differ from expectations in our SEC filings, including our 8-K that we filed today.
We utilize non-GAAP financial measures, and we provide you information and a reconciliation of those measures to GAAP in our SEC filings and earnings materials. With that, I'm handing it to Bruce.
Thanks, Ellen. Good morning, everyone, and thanks for joining our call. We're pleased to announce strong quarterly results today. It's always great to get off to a good start to the year. Importantly, beyond the short-term results, I feel we're really doing a good job of staying focused on evolving our long-term strategy given the rapid changes in technology, customer expectations, and the competitive dynamics that we face. With change comes opportunity and risks, and we seek to exploit opportunities that will strengthen our franchise while minimizing potential risks. We have a significant cross-section of our leadership team engaged in these efforts, and the key will be to make good decisions, to prioritize well, and then go out and execute. Balancing the long and short term requires skill, and I believe we're doing a good job overall on this.
Let me give you a few high-level takes on the quarter before John gives you the full details. The quarter had some seasonal impacts, so the year-over-year comparisons are the most meaningful. Our underlying earnings per share was up 19% year-over-year, paced by strong operating leverage, which was 3.2%, and even more impressively, was 5% excluding acquisitions. What really stood out for me was strong fee income growth of x percent, ex the acquisitions, compared with only 2% expense growth, ex acquisitions. We've consistently invested in our commercial fee businesses, and we're gaining real traction in deepening relationships. Our capital markets revenue hit a record in the quarter, up 38%, as did our global markets business, which is foreign exchange and interest rate products, where revenues were up 33%. We've assembled some great talent, and we're able to compete highly effectively against the biggest banks and our peers.
Our top programs really are differentiating, allowing us to become more efficient while serving customers more effectively. We bumped up our top five estimated impact to $95 million-$105 million, which is up $5 million, and we're hard at work on top six, which is expected to be bigger and potentially more transformational. Another highlight for the quarter was our strong year-over-year average loan growth of 6%, along with sequential loan growth of 1.5%. We continue to focus on attractive areas to deploy capital and improve our risk-adjusted returns. On the deposit side, we grew average deposits 6% year-on-year and 2% sequential quarter. We brought the spot quarter-end loan-to-deposit ratio down below 95%, with some nice performance from Citizens Access, which had $4.6 billion in deposits as of quarter end. Even with the strong deposit growth, our deposit costs were manageable, and our NIM held steady.
We now have some additional balance sheet flexibility as we look ahead. On balance sheet management overall, I'm pleased with our BSO efforts, which provide us a razor-sharp focus on enhancing our growth, our NIM, and our return on capital. We continue to deploy some great new technology to better serve customers and to run the bank better. Slide 14 of our presentation provides you with some of the color, including four new fintech partnerships in the quarter. Suffice it to say, we expect a big leap forward in our technology capability and delivery in 2019. To me, it is one of the keys to our year. Overall, we maintain a positive outlook for the balance of 2019 as we expect another year of good execution and further progress across the board. Let me stop there and turn it over to our CFO, John Woods.
Thanks, Bruce, and good morning, everyone. We are pleased with solid first quarter results that highlight steady execution against our enterprise level initiatives, with particular focus on robust positive operating leverage. We continued our momentum in delivering cost efficiencies while making the long-term investments required for sustainable success. Let me kick off by covering several important highlights of the quarter. On page four, we delivered EPS growth of 19% year-on-year, with PPNR up 13%. Our strong focus on growing the top line while being disciplined on expenses drove positive operating leverage of 5% before the impact of our recent acquisitions.
Overall, credit quality remains very good, with a relatively stable net charge-off ratio of 31 basis points and a decrease in the non-performing loans ratio. Our consumer and commercial banking segments are delivering strong and prudent loan growth, 1.5% linked quarter and 6% year-over-year. We continue to gain traction in fee income, with this quarter's results highlighted by record capital markets and FX and interest rate product fees. Deposit growth outpaced loan growth during the quarter, in part due to ongoing momentum in Citizens Access. As a result, we drove a nice improvement in our spot LDR to 94.9%. This puts us in a strong liquidity position as we head into the second quarter. In addition, DDA was stable year-over-year as we continue to do a nice job of executing on our initiatives to gather low-cost deposits more efficiently and effectively.
We also continue to actively manage our capital base, returning $349 million of capital to common shareholders through higher dividends and share repurchases. We delivered underlying ROTCE of 13.1%, which is up 141 basis points year-over-year. Our tangible book value per share was up 9% year-over-year and 3% sequential quarter. We finished the quarter with a strong 10.5% CET1 ratio. Across both business segments, we continue to make significant investments in broadening our capabilities and strengthening the franchise as we balance delivering on our near-term objectives and executing against our long-term strategy. We have some exciting things to talk about this quarter, and I'll expand on our strategic initiatives in a few minutes. On page six, our net interest margin came in broadly stable for the quarter. Even though average LIBOR was less than the prior quarter and the long end of the curve was lower than anticipated.
The December short-term rate rise drove higher loan yields, this was tempered a bit by robust growth and shift mix in deposits, which put some upward pressure on deposit costs, as well as by an increase in securities premium amortization due to the drop in long rates. Turning to fees on page seven. We delivered very solid results despite some seasonal headwinds. As I mentioned earlier, we saw record results in both capital markets and in foreign exchange and interest rate products, reflecting continued benefits from investments in broadening and enhancing our capabilities as we are increasingly able to win lead left mandates against the larger national players. This helped overcome expected seasonal headwinds in mortgage, service charges, and card fees.
Capital markets delivered a 38% increase in fees year-over-year, with strength in loan syndications, M&A and advisory fees, and bond underwriting fees, overcoming lower market volumes in loan syndications, which were down significantly. Results were up 20% linked quarter, largely tied to an increase in M&A and bond underwriting activity as market conditions improved from the fourth quarter, which helped offset the impact of the typical seasonal decline in loan syndications. In global markets, FX and interest rate products were up 33% year-over-year, led by the IRP team, which was able to win some nice lead transactions and take advantage of the flat yield curve by restructuring existing client hedges. In FX, higher dollar volatility created the opportunity for favorable hedging across a number of currencies.
Because of what we saw happening with the long end of the curve, we took the opportunity to lock in some securities gains and executed on targeted asset dispositions, which increased other income in the first quarter. This helped offset headwinds in mortgage, where Franklin's fees were down $14 million linked quarter, largely as lower rates and an $11 million of MSR losses and wholesale origination levels dropped, reflecting tough market conditions. The integration of Franklin is on track, and while the first quarter was challenging, we see an improving environment in 2Q and continue to believe this is an attractive and important customer business for us to be in over the long term. Turning to page eight, expenses were up 3% linked quarter, reflecting seasonally higher salaries and employee benefits, partially offset by seasonally lower outside services costs.
Year-over-year, before the impact of acquisitions, non-interest expense was very well controlled, up 2%, reflecting strong expense management and benefits from our top program. We are identifying further opportunities to streamline our operations and activities across the organization to capitalize on the next level of efficiencies, which include a strong focus on end-to-end automation across the front and back office. These activities will be critical to maintain our operating objectives over time. We remain committed to self-fund our growth initiatives and deliver compelling products and services to an increasingly digitally oriented customer base. Let's move on and discuss the balance sheet. On page nine, you can see we continue to grow our balance sheet and generate nice returns from the investments we've made in our geographic and industry verticals expansion strategies with strong progress in higher growth geographies like the Southeast and Texas.
We are also seeing attractive risk-adjusted return opportunities in commercial real estate with growth tied to high-quality projects, largely in office and multifamily. We remain disciplined around client selection, where we are focused on larger NSAs. On the retail side, we also continue to drive growth in innovative and attractive risk-adjusted return categories like education refinance and unsecured, including our merchant partnerships. Overall, we grew loans by 1.5% linked quarter and 6% year-over-year. Despite the impact from the planned runoff in auto, non-core, and leasing, as well as some modest impacts from asset dispositions tied to balance sheet optimization. Loan yields improved by 13 basis points in the first quarter, reflecting continued mix shift towards higher returning categories and a backdrop of higher short-term rates driven by the December rate increase.
As you can see on page 10, we are doing a nice job of growing deposits, which were up 2% linked quarter and 6% year-over-year, with stable results in DDA as we continue to do a nice job of executing on our initiatives to gather low-cost deposits and capitalize on the inherent value of our franchise. Our total deposit costs were relatively well controlled given strong growth, up 15 basis points linked quarter, reflecting the impact of higher rates and a shift in deposit mix as we drove new customer acquisition and managed down the LDR from 97.6% to 94.9% at the end of the quarter. Note that interest-bearing deposit costs grew 16 basis points sequential quarter. We continue to make investments across Citizens Access digital platform, where we are gaining share nationally in the mass affluent and affluent segments.
This platform has contributed nicely to our funding diversification and optimization of deposit levels and costs. At the end of the first quarter, we reached $4.6 billion in Citizens Access deposits. Year-over-year, our asset yields expanded 49 basis points, reflecting the benefit of higher rates and the impact of our BSO initiatives. Our total cost of funds was up 48 basis points, reflecting a shift towards a more balanced mix of long-term and short-term funding and higher rates. Next, let's move to page 11 and cover credit, which continues to look quite good with the continued mix shift towards higher quality, lower risk retail loans and a relatively stable risk profile in our commercial book. The non-performing loan ratio improved to 66 basis points of loans this quarter, down from 78 basis points a year ago.
The net charge-off rate of 31 basis points for the first quarter was relatively stable linked quarter and up modestly year-over-year from relatively low levels. Overall, we feel good about the credit metrics and trends in the book, including a downward shift in criticized asset levels. Provision for credit losses of $85 million was relatively stable with prior quarter and prior year levels. Our allowance to loans coverage ratio remains relatively stable, ending the quarter at 1.06%. As we increase the mix of higher quality retail portfolios in our overall loan book. The NPL coverage ratio improved to 160% as we saw improvement in NPLs and runoff in the non-core portfolio. On page 12, we maintained our strong capital and liquidity positions, ending the quarter with a CET1 ratio of 10.5%, which came down from 10.6% in the fourth quarter.
Also this quarter, we repurchased $200 million of common stock and returned a total of $349 million to common shareholders, including dividends. Our planned glide path to reduce our CET1 ratio remains on track, and we remain confident in our ability to drive improving financial performance and attractive returns to shareholders. Our current plan is to announce our buyback plans later in the second quarter. As a broad comment, we expect to meet expectations. On page 13, I want to highlight a few exciting things that are happening with our enterprise-wide initiatives. As we work on running the bank better and improving our customer experience, we've launched a new digital mortgage application and home buying platforms that we are very excited about as it will drive cost efficiencies and an improved customer experience.
Given our strong focus on strengthening our advice-based model in consumer, we recently opened a new banking and wealth center in downtown Boston. This approach allows us to deliver tailored advice, ideas, and solutions to help our clients with all of their banking and investment needs. We are full steam ahead on the integration of Clarfeld, which is progressing ahead of schedule. We continue to gain traction on our merchant partnership platform, where we recently signed agreements with several new partners, including ADT, which should be announced later in Q2. In commercial, we continue with the build-out of our treasury solutions business as we began piloting accessOptima, our new cash management platform, which offers clients a comprehensive suite of online cash management resources and real-time mobile capabilities.
We also launched real-time payments to make customer payments more efficient. We have partnered with Worldpay to expand our international payment capabilities. These are just the latest examples of the significant investments Citizens is making in the commercial banking technology and solutions in order to meet and exceed the ever-changing financial management needs of our clients. Finally, we continue to exceed expectations in our top programs, where we have now increased the expected benefit from our top five program by about $5 million with an estimated benefit in the range of $95 million-$105 million. Our outlook for the second quarter is on page 14. It reflects continued momentum in both our top and bottom line results.
We expect our linked quarter average loans to be up approximately 50 basis points. We are considering selling some loans in the quarter as we seek to redeploy capital under our BSO initiative. We also expect net interest margin to be stable to down slightly due to continued but decelerating deposit repricing that will abate over the back half of the year. The NIM should bottom out in the second quarter and gradually rise in the second half of the year, given less deposit pressure and the benefit of fixed loan and securities repricing at higher rates, along with further balance sheet optimization impacts. In non-interest income, we are expecting to see growth in the mid-single-digits range, given continuing strength in commercial and a seasonal uptick in consumer. We expect non-interest expense to be flat to up 1% as seasonal decreases are offset by higher revenue-related expenses.
We also continue to expect to deliver positive operating leverage and further efficiency ratio improvement. Additionally, we expect provision expense to be in the range of $95 million-$105 million. Finally, we expect our CET1 ratio to be broadly stable. Overall, we expect our full-year results to be broadly in line with our overall guidance. There will be puts and takes with modestly lower net interest income offset by better fee income and expense performance. In response to the rapidly changing environment and a little less tailwind from rising rates, we have been doing some early work on a transformational expense program designed to boost efficiency and effectiveness. This will provide additional capacity to invest more heavily in revenue-producing capabilities while ensuring that we maintain strong financial performance into the future. Stay tuned for more details on our second quarter call.
To sum up, on page 15, our results this quarter demonstrate our continuing strong performance as we execute against our strategic initiatives, carefully manage our expense base and improve how we run the bank to drive underlying revenue growth. Let me turn it back to Bruce.
Okay. Thanks very much, John. Brad, I think it's time to open it up for some questions.
Thank you, Mr. Van Saun. We're now ready for the Q&A portion of the call. If you'd like to ask a question, please press star and then one on your touch-tone phone. The first question in the queue will come from the line of John Pancari with Evercore. Please go ahead.
Morning.
Hi. Morning.
Just looking to get a little bit more color on the deposit efforts this quarter. In what areas, what types of deposits were you pushing? Was there any broad-based increase in stated rates? What's your outlook there? Is there a continued push beyond your existing national platform that you're going to continue to push the product and therefore deposit rates higher? Thanks.
Yeah. John, how you doing? It's John here. I'll go ahead and comment on that. Average total deposits were up very strongly this quarter. We were very pleased to see the take-up. It was driven primarily by term and savings. Those were the two drivers. I think we saw some good performance in the DDA area as well. We've been making lots of investments in that space. Year-over-year, DDA was relatively flat. We're very pleased with that. We had a strong 2018, and we look to continue that momentum going forward. Citizens Access had an excellent quarter. That'll continue into the future. I'd say that strong deposit growth really drove the LDR down to around the 95% level, as you heard earlier.
I think looking forward, I think you could see that LDR level staying relatively stable into the second quarter and continuing to see growth looking forward in the term and savings space. I think big picture, a big deceleration, I would say, in interest-bearing deposit costs, the further away you get from the Fed rise in December is going to see that deceleration in the second quarter to where that solidifies in H2 which connects back to our NIM guide which we'll look to increase in the later part of the year.
I would just add a little color there is that there's broader efforts than just Citizens Access. Citizens Access in and of itself is a huge success story. On commercial, we've been investing in certain areas where we think we can gain some real traction in picking up a natural share of deposits with our preexisting customers where we maybe didn't have the capabilities. We've talked about escrow, we've talked about bankruptcy. We're building those out. Those don't turn on a dime. They build gradually with time, we're pleased with how that's developing. On the core consumer side, continuing to invest in data and analytics and being a little sharper in our offerings and targeting them to different segments of the market, particularly mass affluent and affluents.
Yep.
We're seeing traction there. Pretty good performance across the board and very pleased the LDR is at a lower level now, which gives us a lot of flexibility going forward.
Got it. Thanks, Bruce. Separately, just on what you just mentioned in the end of your prepared remarks, transformational expense program that you're looking at. I know you said you'd be prepared to give us details on the second quarter call, but just in general, how do you view it being transformational and using that phrase? Is it more about how you're looking at your branches, or is it a longer-term profitability change in terms of where you're operating on an efficiency ratio basis? Just a little bit more color there on how you view it as transformational. Thanks.
Sure. I think what we've done for the five years prior has been really just work on ideas and coming up with deployment of different strategies around organizational design, spans and layers, automating, starting to look at process automation and robotics. Also some branch thinning and the like. I think what we're after in this go around is something that's a little broader in scope. Really deploying new technologies, artificial intelligence, and the like, new strategies for technology development. There's a lot around technology and operations and the guts of how we're running things. There's a lot in looking at processes end to end in terms of the transactions that we have, customer-facing transactions, and how can we improve those both in terms of their cost efficiency and their effectiveness and customer experience. We have a fair amount there. It's a broader look.
Typically in the top programs up to now, we've looked for very quick payback. We didn't look at having significant technology investments, and we wanted things that would pay back within 18 months. In this version, we'll look at things a little more broader that might require some technology. It might pay back over two or three years, but I do think we'll be able to move the needle on the efficiency ratio with the payback from these efforts. We're quite excited. It's early days. We're working through some ideas. The thing I would also emphasize here, John, is that we want to pair that with efforts that are going on for finding new revenue growth and finding different trusted ways to serve customers or create new products and services, potentially a bit disruptive.
There's a huge effort that we're undertaking now to really focus on how can we differentiate ourselves. Similar to how we grew the education refinance business, or we grew the Apple relationship into having a very strong point of sale financing offering. We want to drive forward so we can have more revenue growth than our peer set and actually keep the top line going and then create a virtuous circle where we got a good top line, we can afford the investment, et cetera. It's really a one-two punch. Part of it is let's really go after the cost base and transformational, and some of that will drop to the bottom line, but some of that will help fund these investments to really drive future revenue growth.
Got it. Okay. Thank you.
Yeah.
Our next question will come from Saul Martinez with UBS. Please go ahead.
Hey, guys. Good morning. Couple questions. First, can you give a little surprise with the outlook that you actually see NIMs ratcheting up a bit in the second half, and you gave some broad strokes as to why, but if you could, John, give us a little bit more detail on what kind of assumptions are underlying that outlook. I assume you still expect some deposit cost creep, but how much of it's being driven by balance sheet optimization? What kind of balance sheet optimization, and also, are you expecting securities yields to gravitate up as well in that assumption?
Yeah. I'll jump in on that. I think if I take it in two pieces, I think if you look at what we expect in 2Q and then how those forces expect to unfold over the second half of the year. I think we're, as we mentioned, stabled it down slightly in 2Q. The real driver there is rates. I think when you look at where LIBOR is expected to be in 2Q, all the other drivers, which I'll cover in a second, basically offset, and you're left with short-term rates being potentially down a couple of basis points, which has an impact on our floating loan portfolio. The other drivers that all seem to offset or expected to offset in the second quarter is all of those front book/back book dynamics.
You've got loan and securities front book/back book, which is positive in the first quarter, it's positive in the second quarter, and will be positive for the rest of the year, although possibly diminishing a bit if long rates stay where they are. That's been offsetting the front book/back book dynamic on the deposit side. I think you'll see, as I mentioned in my remarks, a significant abatement of deposit cost increases the farther away you get from the Fed rate rise in December. A combination of that front book/back book plus our balance sheet optimization initiatives is offsetting those other forces on the deposit side in 2Q, and all you're left with is rates.
When you get out of the second quarter, as rates stabilize both on the short and the long end, you see deposit costs stabilizing and therefore you're left with front book/back book on our fixed portfolio driving some uplift. I think those are the dynamics that we see at the moment in terms of the back half of 2019.
Okay. Even if rates remain where they're at the long end and rates remain where they're at, the Fed funds remain where it's at, you still have positive new money yields over portfolio yields on your loan and your securities books right now?
We do.
Okay.
In the first quarter, that was 80 basis points or so in terms of that net difference in the first quarter for investments, as an example. A variety of our loan books are, you could call it, ranging from 25 basis points all the way up to 150 basis points. Basically, almost every category has a positive front book/back book across all of our earning assets. If rates stay where they are, it's possible that will shrink a bit over time, and maybe a portfolio too will eventually convert to something more neutral as you get later in the year. All in, our overall portfolio has a positive front book by dynamic. 50% of our loans are fixed, and so that momentum continues through the rest of the year as a positive dynamic.
Got it. No, that's helpful. If I could change gears on credit. I think John, in various forums recently and in the past, you've talked about the challenging environment in the casual dining space. Can you just comment a little bit about what you're seeing there? Is that a concern and what the size of the book is? Then just more broadly, what you're seeing in terms of credit and what drove the uptick in your loan loss provisioning guidance for 2Q. Is that just normal, the fact that it is so low and you're seeing some normal seasoning on the book?
It's done. I'll mention casual dining. It's a relatively small portion of the book, and it's actually coming down a little bit. We're working through that, which we flagged a couple of quarters ago. We've really slowed down, if not ceased certain segments of our franchisee and restaurant origination. We don't see large loss content that's not reflected in provisions already. We feel like we've got our hands around that book. I'll just mention, we had a charge-off this quarter, which was in our real estate book, which was reasonably significant. It's a kind of 2013 vintage origination, so it's quite old, and we've been working it through our workout groups for about four or five years now. It kind of went a little sideways, so we charged it off this quarter.
It's fairly idiosyncratic.
Yeah
too, Don, I would add as Bruce said. I think that was one that was in unique bubble wrap, and it.
Yeah
pottered over. We don't see any read across to anything else in commercial real estate.
I agree. That's true of the overall book. What we've seen as problems over the last five or six quarters have been very idiosyncratic, and we feel very good about the overall book and the condition of the economy and what we're seeing in terms of performance by our underlying credits.
Also as the credit class came down.
Yeah
again.
All the credit ratios are very historically low, and we don't see those changing.
Yeah.
I'd say that just the outlook for 2Q being up a bit. I think we've historically had a significant amount of recoveries that come through the book, and credit has been excellent. The outlook there remains so. Possibly recoveries moderating a bit.
On the loan book you have to apply for.
Yeah, exactly. That's really the reason for that.
Do you disclose the size of the casual dining book?
No.
No, I don't think we do.
Okay. All right. Fair enough. Thanks a lot.
Yeah.
Question will come from Ken Zerbe with Morgan Stanley. Please go ahead.
Great. Thanks. Good morning. I was actually wondering, can you guys talk just a little bit on how your plans around your balance sheet optimization are changing now that the Fed may be done raising rates this year?
Yeah. I'll go ahead and start on that. I'd say I'm not sure they changed very much. We've been talking about the broad strokes of that program, primarily, on the deposit side, where you would focus on all of the things you heard from Bruce earlier, in commercial, new interesting ways to fund our loan growth in the escrow space. In consumer, a lot of the data analytics and efforts around customer experience that are driving DDA take up. I think all of that remains just as important in a world where the Fed's not raising rates as it is in a world where they are. That continues in that direction. On the asset side, similar.
When you look at our rotation into, we call it the asset categories that have really solid risk-return profiles for us, such as student or unsecured, or investments we want to make in our commercial business to get more swings at the bat with respect to our customers. All of that is not meaningfully impacted by the Fed going on hold. I think that continues, and it's really something you would do with or without the Fed.
I'd say that the one thing there where we might be pivoting a little bit is the mortgage growth that we've had. We'd like to taper that off a little bit, and potentially we could consider some sales of mortgages that we have on the balance sheet. Back in a low rate environment and putting 30-year fixed on your books isn't
Right
a great trade. We think we can offset that. We've been talking for a while about how we're going to leverage our point of sale offering to some new partners.
Right.
One of the things we're quite pleased about is that we've now signed several important new partners, including one which we can mention today, which is ADT. The press release will be out shortly on that. There's several other significant ones that'll come out over the next several weeks.
Right.
Brad, you want to comment on that?
Just to say we've got a very good pipeline. We felt like we built a very unique value proposition with the Apple program. There's tremendous interest in the marketplace. We've got a really strong pipeline and think there'll be more news after ADT. Really excited about ADT.
Yeah.
Got you. Okay, perfect. Your capital markets business held up really well this quarter, especially relative to peers. It looks like some of that was due to bond underwriting. Can you just remind us how your capital markets business or the business mix may differ from some of your peers?
Why don't I take that? First of all, we really have a very small equity business. If you broadly talk about capital markets, it's equity. We do a little bit of equity in the REIT space with a partner who does the equity underwriting. Our business is really threefold. It's bond underwriting with both high yield and investment grade. It's syndicated financing, which is largely leveraged syndicated financing aimed at the mid-market sponsor community. Thirdly, it's M&A. This quarter, we benefited from bond underwriting, particularly high yield bond underwriting, as things recovered from the weak market last year. There was some pent-up demand, so a lot of our clients issued in the high yield market.
We saw Western Reserve in particular kick in. We had quite a strong M&A quarter, and that we expect to continue through the end of the year, both with Western Reserve and with Bowstring, which was our latest acquisition. The way I think about M&A is it took two or three quarters to have the capabilities on our platform to begin to see deal origination. Our win rates are very high on the M&A side. Our client base is very active. We did have quite a weak quarter in our syndicated financing business, and that should be bouncing back as we go through the balance of the year. What I like about the mix of our capital markets business is it's far more diversified than it was in terms of different fee streams a couple of quarters or a couple of years ago.
We're getting nice degrees of offset based on different markets being active.
Yeah. What I would also add if Bruce can't is I think that what Don and his team have been able to do very effectively is marry the solution set by having our coverage officers work very closely with these enhanced product capabilities. When we go out and call on clients, we show up with value-added ideas and we're able to win the jump balls against very significant competition out there. We do a really good job of that. You can start to see the traction. We hit record capital markets fees. We hit record FX and interest rates. Coming up with good ideas on how to hedge risks is also something that I think we've got huge traction in. Very pleased to see the maturation of the model and the very strong team approach in terms of how we're covering clients.
I'll just add to that, Ken. We're very disciplined as we add new clients around capital deployment against opportunities where we do think there'll be good cross sells. I think our new business process of several years now is beginning to yield flow based on where we've deployed capital and added clients on a net basis.
Yep.
All right. Perfect. Thank you very much.
Our next question will come from Erika Najarian from Bank of America.
Hi, good morning.
Right.
Just had a follow-up question on the comments in capital return. I think there was some confusion on how to treat your preferreds when investors were putting in your financials in the Fed template. John, just wanted to clarify, you said that capital return would likely meet expectations. I have a consensus of about $2.15 billion right now for capital return. Is that the bar that you're looking to potentially meet?
Yeah. Without necessarily commenting on a particular number, we've seen a range of estimates externally. I think we're broadly in line with where the market expects our buyback capacity to be. We have that flexibility. The Fed template, as you know, we're a Category IV firm. We're subject to the Fed template this year. We overall have a glide path that that Fed template allows us to continue to execute against. We have a dividend return expectation over time of 35%-40%. We've talked about our expectation of getting the CET1 ratio down to about 10.2% by the end of the year. I think the main message is, number one, the Fed template allows us the flexibility to execute against what we want to do. We think that we'll deliver broadly against what the market expects for buybacks in the window.
The 10.2 projection for the CET1 at year-end is still the projection.
Got it. Just to follow up, Bruce, in terms of the Top Six Program that you're looking to announce, as we think about the potential impact right now with the consensus is expecting something like a 57% efficiency ratio for your company this year. That's about in line with peers. Should we expect that Top Six could bring you to a position that's better than peers, let's say in the mid 50s from a natural efficiency standpoint?
Yeah. We have a stated medium-term objective to bring that down to 54. I think a Top Six like program is going to be required to accomplish that. I do think it's important, particularly if the Fed is done raising rates and may be on hold for a while here, you'll get less NIM tailwind than we've had previously. I think you have to go back and look at what are some of the offsets that you can deliver. Certainly control of your expense base is one. Doing it smartly, doing it in ways that actually provide the funding capacity to still play offense. That's what we're all about. Thanks.
Operator, can you mute that please?
Sure.
Okay, please go ahead.
Yeah. Another area that we're really focused on is the growth in the fee-based businesses, where I think we have gotten off to a great start on the commercial side in Q1, and the outlook remains strong for the year. We got off to a little bit of a rough start on the consumer side, but the outlook for Q2 is quite good on the consumer side. I expect to see some bounce back in mortgage and then also bounce back in wealth. Things move around. There's puts and takes. I think the expense base is going to be important and then also driving that fee growth.
Our next question in the queue will come from Ken Usdin with Jefferies. Please go ahead.
Hi, good morning, guys. A follow-up on the capital structure question. It's nice to hear that that glide path to 10.2 is intact. Your long-term target you talked about in January to get to 10 CET1. Some peers are distinctly talking about much lower than that at this point. Given the tailoring and the Category IV that you just talked about, how do you evaluate at what point you might be able to run the company even lower than 10? And then how do you also evaluate the choice of how you choose to get there? Was it just the buyback or just leaving room for balance sheet growth? Thanks, guys.
Sure. I'll go first, John, you can chime in. I think we're gradually bringing it down to 10, and we don't really face a decision node until we get there. I think we need to look at a number of considerations, including where are our peers and what's the regulatory and rating agency comfort with operating at a lower number including our own, importantly, comfort with being there. I think there's no reason structurally or from a business standpoint that we should maintain a ratio that's above peers. Our kind of business risk profile certainly is in line with peers. In fact, I think we're slightly on the prudent side. If you look at how we model the stress scenarios, we come out quite robust. Even in the Fed modeling, certainly on credit losses, we're at the median or slightly better than the median.
I think we'll have that flexibility. When we think about how we deploy our capital, obviously, if we can deploy it smartly to further organic growth, that's kind of mission one. If we can get loan growth, if we can do some of these accretive small acquisitions that broaden our capabilities so we can get more from our relationships on the commercial side and the consumer side, those are things that we're continuing to put on the list ahead of buybacks, I think, frankly. Again, we certainly don't want to have capital lying around. We'll try to keep that ratio sharp and relatively in line with peers. John?
I would just say, just to emphasize that last point, I think given where we are in our life cycle, I think that the opportunities to deploy capital organically and in strategic initiatives, including fee-based bolt-ons that we've been doing, remain into the future. That's job one, is to put that capital to work on behalf of our shareholders in an accretive way. We monitor all the other sources and uses, the outlook for earnings, et cetera, organic loan growth, and then we take it from there. I think we also have another lever, which is our capital stack is a little bit more oriented towards that one than some others, and most peers have more preferreds outstanding than we do. That's another lever we can look at over time that provides benefits as well.
Just some really solid strength in the capital positioning platform.
Give us a lot of flexibility.
Yeah.
Yeah.
Yeah, thanks. My follow-up on that, John, you just hit on it was going to be just, you did have done a couple of those preferreds to start to move the capital stack towards that more efficient place. You're only about halfway there. Is that something we should expect over time as you continue to bring CET1 down, we logically see that preferred stack fill in underneath it?
Yeah, I think that's logical over time. We're not going to commit to an exact execution date on that. I think that we've done this in the right way. As our ROTCE has improved over the years, it becomes much more appropriate to consider the repositioning of the capital stack such that if the costs of preferreds are attractive, and they are versus ROTCE, and we find a good execution point, we'll consider that. That's a nice bit of flexibility, as you heard earlier in terms of our ability to reallocate and remix our capital profile.
Okay. Got it. Thanks, guys. Appreciate it.
Our next question will come from Peter Winter with Wedbush Securities. Please go ahead.
Morning. In the prepared remarks, you mentioned that net interest income was coming in a little bit lower for the full year. Is that mostly driven by less margin expansion than you originally thought?
Yeah. We broadly reaffirmed the full-year outlook. I think whenever you start moving through the year, there's going to be some modest gives and takes. I think when you look at NII, the volume side of that equation is solid. I think we're still looking to be solidly in the loan growth range that we set out to achieve. I think the NIM, given the flatness of the curve and some of what we've experienced here early on in the year will be maybe a couple basis points lower than what we anticipated. Still positive in terms of NIM for the year-on-year but maybe there's a little leakage there. I'd say where we'll make that up is, I think, a more robust view on fees and a better performance on expenses. Our ability here to protect PPNR, I think, is pretty solid.
We've had beats in the past couple of years on credit. We'll see how that plays out. I feel pretty good right now where we sit in terms of the credit outlook. That gives us the confidence to broadly reaffirm the outlook, Peter.
Thanks, Bruce. Just on credit, I'm wondering, can you make any comments on how you're thinking about CECL?
Yeah. I'll go ahead and cover that. As you saw, Regional Bank had some commentary that we were engaging with regulators and the FASB on. Just more recently that has been adjudicated to result in moving forward full steam ahead with executing on CECL. We never really stopped our programs. We are launching data-related pilots for the pipes and plumbing in the first quarter here and
Full dress rehearsals as you get into the second and third quarter on CECL, just from a process standpoint. Later in the year, we'll have some more views about what that'll do and how that might impact the day one capital impact of adopting CECL. In general, as you know, longer dated loans will have a bigger impact than some other categories. We do think that CECL is procyclical, which is not exactly what we think is the right way to portray exposures going into downturns. It's very sensitive to your outlook of the economy going forward. We're on track for our internal program. We'll talk to you some more about this later in the year in terms of the impacts. We do think that our capital glide path and our ability to execute against that is not at risk as a result of CECL.
Thanks very much.
Our next question in queue comes from the line of Gerard Cassidy with RBC. Please go ahead.
Thank you. Good morning, Bruce and John.
Hey.
Morning.
Can you guys share with us, clearly the digital deposit program has gathered a good amount of deposits. Can you share with us, are you hoping to develop deeper relationships with those customers, aside from just the savings product that they're using right now? If so, are there going to be some metrics that we can look at as outsiders to see the success of deepening those relationships?
Yeah. Let me start, Bruce, and I'll flip it over to Brad for more color. I would have to say that this has been a tremendous success, this development of Citizens Access and launch. I describe it almost as gold. What's gold today is gathering deposits in this environment, gathering new customers. We have $4.6 billion of deposits. We have over 60,000 new households that are customers of Citizens Bank. We have developed digital capabilities and the ability to use data that I think puts us at the vanguard of our peer group, and that's gold as well.
Right
A lot of real positives coming out of this. I think that the next phase, now that this is up and running, we certainly want to fine-tune the offerings to make sure we're gathering those deposits cost-effectively while meeting customer expectations. If you have 60,000 customers, what else can you do with them? That's really a phase 2 project that we've kicked off. If you think about it, Gerard, we have roughly 60% of our consumer loan products today are digitally originated. There's a possibility. There's a potential. We have a digital robo advisory service that we can also marry with ability to Skype a person with a little gray hair. There's a pure digital, and then there's a hybrid person/digital offering that also could work through that channel.
There's some really interesting things to think about, but I think it's going to take us a while to actually bring that to market. With that, I'll flip it over to Brad.
Bruce, I think you covered it really well. There are some immediate things we're doing to enhance the platform, including the fact that we're adding trust accounts, which we launched without trust accounts. We see tremendous opportunity. It's a perfect client base for us. It hits right in our target customer segment of mass affluent and affluent customers, digitally savvy. As you mentioned, we built SpeciFi, which is one of the first digital advisory capabilities in the market. We think that's a perfect complement to this customer base. Several lending opportunities and lending products. We're working on all of those and what are the next steps for continuing to enhance the relationships.
Very good. Pivoting to the loan growth, which again was strong for the quarter as you guys pointed out. I think you guys highlighted that in the commercial real estate area, you saw some growth in the office and multifamily. Can you give us some color on the geography? Where are you guys seeing the best growth geographically in your footprint and outside the footprint?
Our real estate business is national, and I would say it moves quarter-to-quarter. I'll give you two examples of expansion. We've actually moved people into Texas and people into Los Angeles, where we have seen growth over the past few quarters. That's both to be active on the existing book of business, but also do some origination. It's really across the southeast and growth areas of the country where we're seeing the highest levels of growth. I'd say our real estate business in general, the growth will slow down over the balance of the year, and that's strategic because we're focusing on the better end of the opportunity set that we see. We have to originate a fair amount just to replace what's on our books already.
I think you should expect to see our real estate growth on a growth basis be a little slower than it's been in the past from a strategic standpoint.
I would also say there's still attractive opportunities in the footprint in Boston and the Seaport District, for example. It's a combination of things that are in the traditional footprint in some of these growth markets as Don mentioned. When it comes to office, we typically focus on owner-occupied. There's low risk with the type of projects that we're financing.
What's flatlining is really multifamily and anything retail. We're really not growing those with any kind of significance.
Thank you.
Our next question here will come from Marty Mosby with Vining Sparks. Please go ahead.
Thanks for taking the questions. Got kind of a rapid fire here of about three or four questions. Your mortgage hedging this quarter was a negative. Was that just unusual, some basis risk in there, or were you just not as hedged or as a percent of the portfolio? Are you making any adjustments? Is this going to be unusual, or should this be something we expect as rates go up and down, have positive negatives?
Yeah, Marty, I'll take that. This is John. I think that you're going to have, when you have an asset of this size that is $600 million, $700 million. We have a split between fair value and LOCOM, but it's a large asset. It's a complex asset to hedge, and you're going to have some variability from quarter to quarter. Last quarter, we had a $2 million net positive MSR valuation net of hedge. This quarter, we had $2 million negative MSR valuation net of hedge, so quarter over quarter, that's $4 million. There were other rate impacts as well. When you look at outside of just the straight hedging piece, you also have to estimate what your amortization is just in the main servicing P&L.
We had an increase of $7 million from $25 million to $32 million in amortization that was largely rate related as well. All in, quarter-over-quarter, you had $11 million of largely rate-driven, MSR-related valuation and impacts. Hopefully that gives you some context.
No, it helps. I really appreciate y'all's guidance. This is kind of a statement as well as a question. When you talked about the front book versus the back book, that's really what we've been trying to outline for investors is the fact that you have this historical spread between what's still in the market, even though rates have come down, versus what's on the books just because rates were so low for so long. That over time, that's kind of a grind up as you kind of just see that coming through. In relation to that, you mentioned some balance sheet flexibility. I just didn't know if that was liquidity-wise because your loan-to-deposit ratio had come down or there was some other flexibility that you were talking about there.
Oh, yeah. I think that we have some flexibility primarily due to the fact that we had a really strong deposit quarter after several prior quarters that were strong. First quarter was particularly strong, and the LDR has come down to around 95%. That provides some flexibility. We've demonstrated the ability to grow deposits at least as quickly as we grow loans. As a good example, when you think about the big impact that growth has on the increase in interest-bearing deposit costs, ours was 16 basis points in the quarter. Approximately half of that was driven by just deposit growth. If you get ahead of things a little bit and you can fund your growth without necessarily having to grow a lot in future quarters, that has a beneficial impact and underpinning of net interest margin going forward.
The other thing, John's describing the flexibility on the deposit side that we have. I think we have some nice flexibility on the asset side as well. We've been well-positioned to have an origination engine both on the commercial side and the consumer side that is pretty robust. That gives us the wherewithal to then look into the back book and make asset sales, and we made approximately $300 million of sales in the first quarter. We can look to do that as we go through the year and still report net loan growth. That's all part of BSO. It's working for us on the deposit side, but it's also working for us on the asset side.
Just two bigger picture questions. You've been the easiest bank to kind of estimate was going to beat market consensus every quarter. Just wanted to get you to kind of think about why, and just maybe highlight for us, because you all do ask for our models every quarter, so I know you're tracking what everybody's putting out there. What are the earning surprises that people just aren't catching up to? Bruce, I just wanted you to give us a little bit of a thought, given some of the other transformational, let's call them mergers or placements of banks in the country. How does Citizens fit into this competitive landscape? How do you see the bank being able to evolve over the last five years?
You're really talking about how you're competing a lot with everybody around you, but just wanted to kind of get your thought on how you fit in there.
Yeah, sure. With respect to the consistent track record of being able to beat pretty much every quarter that we've been a public company, I just think it's a reflection of our very strong focus on execution. We're all, I think, very aligned on where we're trying to take the bank and what the key drivers of a successful turnaround were and what the next phase is going to require to become a top-performing bank. I think we've got great people, great leadership team, and we have good alignment through the organization that people know what's expected of them. They're empowered, and then we hold them accountable, and they've been doing a great job. Hats off to our colleagues here at Citizens. With respect to where we fit into the landscape, I do think we have really come a long way from where we started.
Foreign ownership, foreign parent had a bunch of difficulties. Left us with a strong potential franchise, but had accumulated some baggage, some lack of investment in key areas like technology and our people program and our risk capabilities. Bill's business model wasn't fully built out to really serve customers on an integrated way, both on the commercial side and the consumer side. Balance sheet had shrunk to a position where our profitability was really emasculated. We had a lot of work to do, and I think we've now certainly made our way back into the pack. In many cases, I feel that we're doing better than our results indicate and certainly better than our stock price would indicate. I'll leave that for another day.
Certainly, on the commercial side, I'm so pleased that what Don and his folks have put together, the level of talent that we have, people who worked in big banks who are covering the middle market and the mid-corporate clients so well. We can go out and we can lead deals. We can have a money center bank on the right of us. We can go out and compete for an interest rate hedge and win it against money center banks, which we did several times in the first quarter. We've got really, really good talent, and we're well positioned. Then on the consumer side, some of the things that Brad talked about with Citizens Access and our fintech partnerships and thinking about end-to-end customer experiences. The customer satisfaction's moving up nicely. I think we're doing a really good job there, too.
I think we have a strategy and a capability to continue to drive this company forward and become a great bank. I certainly would have to say, as you look around the landscape and people are making scale arguments, you always keep an open mind about those things. If there's opportunities to benefit our shareholders, we have an open mind towards that. I think the more important news is that we're well positioned to continue on the path that we're on today.
Thanks.
Okay.
That does conclude the questions for today.
Okay. Well, great. I know it's a busy morning for you all. You probably have to hop to the next call, certainly appreciate that you dialed in today. We appreciate your interest and support. Have a great day.
Thank you. That does conclude today's conference call. Thanks for participation. You may now disconnect.