All right, I think we are ready to get started. Up next, up next, we're delighted to have the CEO of Citizens. This is Bruce's fifth year doing our strategic decision conference, and we always appreciate him taking the time. He's actually been in the CEO role now for a decade, a little over, going out to the original spin out and IPO, and over that time, both assets and returns for the bank have roughly doubled. That said, I know he's not one to rest, and there's more work to do.
I don't wanna front run the conversation, but there's some big investments going on in the private bank build-out in consumer with the New York Metro market and in commercial, in areas like private capital, and more broadly, some tailwinds we'll get to from balance sheet positioning in 2025 and beyond. So first, thank you for taking the time today. We always enjoy having you. And, you know, maybe we could start with that kind of ten-year journey. When you think back to Citizens in 2014, when you spun out to Citizens today in 2024, what's been the biggest change in the organization?
Well, it's hard to just point to one thing, Brian, 'cause I think we've really transformed the company kind of from the foundation up. But, I think what we focused on initially was getting a great board and leadership team in place, making sure we had the right culture, and then addressing some of the areas of underinvestment, like the technology, the risk management, the people program. And so once that was in place, then we started focusing on the business side and making sure we had kind of the right approach to the consumer business and prioritize the right investments. Same thing in commercial, and most recently now with this private bank and wealth big investment that we're taking. But, I really feel that we've come a long way.
As you say, there's more things to do, but our strategy, I think, is sound. We like to think of a three-legged stool, where we have a consumer bank that's been completely transformed, much more digital, much more advice-based, a good source of low cost deposits, and an opportunity to really deepen with the customers and offer wealth. So, really strong positioning for the consumer bank. I think the commercial bank is, in my mind, and of course, I'm biased, the kind of best positioned super regional, just in terms of the industry focus we have, the focus on serving private equity, and all the capabilities that we've built out that we can go toe-to-toe with the mega banks and win business consistently. And then this private bank and wealth opportunity, we've been investing for a long time.
It was hard to figure out how to really scale that mountain quickly, but the opportunity when First Republic, you know, basically, was liquidated and some of the folks, the real talent that had made them their mark in private banking and wealth, didn't wanna go to JPM and were looking for a new home. So we signed up for that, and I think that's off to a great start. So those three things, I think we're really focused now on taking really leveraging what we've built, and we're starting to see the results of that.
You know, I was gonna ask this as a wrap-up question, but since we're on what makes Citizens unique, you know, it is a generalist-focused conference. A common complaint I hear from generalists is regional banks are the same. They're kind of a macro call. How do I really differentiate? I know you're passionate about the bank. I know you're a fairly sizable shareholder yourself. You know, what is your answer to that? What sets Citizens apart, both as a bank and a stock going forward?
Yeah. So, it partly, I gave part of that answer initially, but I think we have a very unique strategy with this kinda three-pronged approach to the different businesses. And then embedded in those businesses, for example, in the consumer bank, we two years ago made a push into the New York Metro region by buying HSBC's East Coast branches and Investors Bank, which was headquartered in New Jersey. That gave us 200 branches in the greater metro area, almost 1 million new customers, and a real opportunity to kind of fill in our footprint and then drive growth.
There's both of those franchises needed work and were underserved, and we can bring our approach to banking and segmenting the market and offering good value propositions into the market and get a lot of growth there. So we have growth drivers embedded in consumer. We have in commercial. I think we've been operating in a high rate, kind of tepid sponsor investment environment for the last eight or nine quarters, which we're seeing starting to turn. So I think what we've built, we're gonna really see now take off. And we saw that in the first quarter. Our cap markets fees were up 35%.
And then, you know, on the private bank, we took a bold step and a tough year, willing to go -$0.11 on our EPS because the people cost was gonna come in before the customers and the revenues. And we said in the second half of this year, that bet will break even, and then next year it'll be kind of 5% accretive to the bottom line, based on our projections, and it'll go up, significantly from there in future years. So those are things that, I think are pretty unique to have, growth drivers embedded in each of our business segments.
And then we also have some things on our balance sheet that are kind of built in, in terms of, you know, everybody had to hedge their rate position during the kinda last two or three years, and it's hard to get it right. Nobody has a crystal ball, but we have some swaps that are at lower yields and are going to run off, and then we have other swaps that are costing us money at lower yields. And if we put them on today, eventually those things run off as well. So we can already see a big lift coming over kind of 2025, 2026, and 2027, which will kind of really bolster the NIM and help our EPS growth and help our return on equity.
Well, well, maybe piggybacking on that, I think the core ROTC was 11% in the first quarter. You've got the medium-term target of 16%-18%. So when you kind of think about those items, you know, what is the confidence and timeframe in your mind to get there?
Yeah, I'm very confident. So, I think we, we try to disaggregate the results a little to make it easier for investors to, to understand. But the kind of what- let's call it, legacy Citizens, you know, is about at a 13% or 14% ROTC. And then we have the private bank, which is at a loss, and then we have non-core, which is at a much more significant loss. You know, if you just take each one, the kind of legacy business, will benefit from those growth initiatives and from those tailwinds on the balance sheet. So, you put that together with, you know, credit provision normalizing somewhat, and share repurchase, and, we can propel that, higher to the 16%-18% medium-term target.
You get a further boost from private bank, flipping from negative to positive, and then non-core, started at $14 billion in the middle of last year. It'll be down to $5 billion by the end of next year, which also, if you put the high-cost funding against, a weak, mostly consumer portfolio and run that off, that's also very accretive, to returns. So we've got, we've got those things all working for us, and we're just focused now on driving execution on the growth initiatives.
And the private bank clearly is a big part of the story right now. Maybe you can give us an update as you think about the journey so far and the next year. What's gone better than expected in your mind? Anything that's been a challenge and required any course correction?
Yeah, I'd say on the private bank, you know, you do your best effort with a new group to try to come up with a financial forecast that you have confidence in. So we kind of listened to what the team leaders thought they could do. We had a team in Boston, a team in New York, a team in Florida, and then three teams in the Bay Area in San Francisco and Silicon Valley. And we looked at those, and we said, "Okay, here's the trajectory we think is realistic," and we're clocking right to where we thought we would be. So I think those numbers, achieving those numbers by the end of 2025, I feel confident that we can do that.
Some surprises that we've actually focused on bringing over relationships and opening operating accounts. So we have deposits at $2.5 billion, and the loans are only $1.1 billion at the end of the first quarter. So I think people thought of First Republic as they give away cheap credit, and then they ask folks to deposit some of the money back at the bank. It's actually the flip of that. We've actually been focused on bringing in the deposits, and then we'll make our balance sheet available for your credit needs, but we need to have a total relationship. So I think that's really great. Another positive surprise is just the meshing of the cultures, that these folks really care about their customers and delivering great service and taking the pain out of banking.
We've been on that journey ourselves to continue to improve our net promoter scores. And I think some of the investments that we're making for the private banks, like, many of these folks have complex needs, and they have multiple accounts across personal, across business, across wealth, that they like to be able to easily access through a single sign-on and ease of navigation. So we're building that out at the private bank, and once we have that, that's replicable to our other segments, to consumer and to commercial. So I think there'll be some trickle down, if you want to call it that, benefits to the rest of the bank from keeping this bar higher in terms of delivering a great quality banking experience.
Because remember, First Republic did an Investor Day, where they highlighted a tech build-out that allowed you to make a spontaneous purchase of a car with your debit card on a Saturday. And I always aspire. I wanna do that. I buy a Snickers bar at the checkout line spontaneously, but not a car yet. In terms of areas you're investing, I mean, clearly there's several. You've highlighted a few so far. What are you most excited about right now beyond the private bank?
Yeah, I'd say New York Metro. You know, you're here in the region. You can see our, you know, green signs around, and you see our, our colleague base, the green ambassadors out at community events, improving our, our brand recognition in this region. But we've had tremendous growth. We've had, like, the HSBC branches had about half the density of households per branch of our legacy Citizens in our big markets like Boston and Philadelphia, and kind of a little over two years later, they've grown so fast that they've reached parity.
So, we're opening a lot of accounts, attracting a lot of new customers, but we're still, you know, not—there's still plenty of potential there to do more, in terms of deepening, doing more cross-sell to get the wealth side of it. And then, I think in business banking too, we're scratching the surface of, we have some great new tools coming out, some cashflow forecasting models and things for small business to use to be kind of more effective in how they run their business. And we're basically starting to really grow there as well. So, still see lots of opportunity there. I think another area that we're very focused on is payments. You know, payments has been disrupted by, lots of, outside players, fintechs and others.
And I think banks were probably a little slow on the uptake there, and let some market share seep out of the banks industry. But you know, I'd say over the last you know, two, three years, banks are now kind of making the investments to do more for the customer base, provide more services, offer kind of much more omni-channel capabilities that people can affect their payments through different means. And so, and focusing on the industry verticals where you can develop specifically tailored solutions. So we're starting to really ramp up the growth rate there in payments.
So what was probably something you thought about in a defensive mindset three years ago, now we've put the right investments and the right people in place, that we're shifting to think about this as offense, as a place where we can gain market share, and we can actually grow revenues.
Maybe I can follow up there, because I do find payments and the B2B opportunity, probably the biggest disconnect between you and your peers, and investors I speak to, i.e., it's very high on your priority list. You know, it doesn't really come up in investor discussions, probably because there's no, like, line item on the P&L.
Yeah. That's right.
Maybe talk about what the outcomes and what does that get you? Is it, is it protecting the client relationship? Is it the DDA opportunity? Like, what is the outcome of,
Yeah
... getting better at it?
I'd say, it's that for sure. So, it's cementing that relationship and continuing to provide a critical service to your customers, and handling their cash, and we need good, solid funding base to be, effective as a foundation block as a bank. But, also, it's a fee-based opportunity as well. And so, I think that our peer group, I would say, grew broadly at mid-single digits in payments fees last year, if you can kind of pull it out and use different industry assessments, consultant assessments. And we were kind of a fair amount higher than that. We were probably, 8% or 9%.
And so, if you can get, you know, your fee base with high-quality, sticky fees growing at that pace, at kind of high single digits, that really kind of helps the business model and helps your operating leverage dynamics.
So, maybe moving on to net interest margin. You've talked about a medium-term target, I believe, of 3.25%-3.4%, and that being a key driver of that 16%-18%. I think the footing is 2.9% right now, just for a sense of magnitude for people. You know, talk to us about the confidence in getting there. Maybe you can take it in two pieces. Remind us of the mechanical balance sheet movements that you referenced, and then what else needs to happen beyond that kind of mechanical 25-27 benefit?
Yeah. So, I'd say there's a huge lift that we kind of lay out in our earnings presentation, by year, and we break it out by how much of that is terminated swaps, that is just pure passage of time and accounting, and then how much of that is open swaps that you have to make a judgment as to, you know, what the cost or benefit of that is gonna be based on a forward interest rate scenario. And we kind of have... We always use the forward curve, when we look at that. But, on that basis, we have, you know, $900 million, like, massive, number of benefit, which translates to, I think, 55 or 60 basis points of uplift to the NIM.
However, you know, the balance sheet, absent those swaps, is asset sensitive. So if you follow the forward curve and rates go down, that's gonna compress your net interest income, all things equal. So we kind of net those things- those two things off. So you could see the NIM would go from 2.90 to 3.50, kind of absent, you know, rates moving down and your, your underlying position is asset sensitive. When you factor that in, then we get back to that kind of 3.25-3.40, 3.30-3.40 type area. So, you know, we don't need a lot really from rates. I mean, our, our hope is that we've seen peak rates and that rates actually do come down.
I think that's good broadly for credit, it's good for capital markets fees, it's good for a lot of things on the P&L. And, I think, you know, we'll see opportunities here. We've been layering in new swaps to extend the protection out further, and we can be opportunistic on that and wait for kind of target ranges that we see to do that.
Just to be clear, with higher for longer now in vogue, hearing you on the rates coming down, be good for other stuff, but does it change much on the NIM calculation?
You know, it doesn't really, because our underlying position is slightly asset sensitive, so there's other drivers. If rates stay here, then you're front book, back book dynamic on the securities that are rolling off, and then you get the cash flow, and you get to invest it at higher rates in the securities. That happens for that, it happens for fixed-rate loans. So there's dynamics that are kind of if you've managed your positioning well and we're slightly asset sensitive, it doesn't really hurt you on the NII line.
Maybe let's talk about loan growth a little bit. You know, you were very clear, the first half would be a little slower, more optimism on a back-half bounce, so to speak. You know, how's that progressing? Are you seeing the customer optimism, the pipelines build anywhere where things are maybe a little slower to materialize?
I think we're sticking with our call for the year. So, you know, we didn't think the first half of the year would have a kind of robust dynamic around any of our main loan categories. And, we're also focused on running down non-core. So net-net, we're seeing some shrinkage, which is kind of according to plan. But, in the second half, we thought, clearly, the private bank is growing, so that's an idiosyncratic growth source for us. And, you know, we're bringing in the deposits, but we're also gonna be starting to lend more money, so that'll pick up. And then the same thing in commercial.
I do think that, you know, our corporate customers have weathered the storms of the pandemic and the Fed raising rates very aggressively and concern over recession. They've hung in there pretty well, but they haven't really flipped the mindset of being ready to go full on offense. But I think, you know, the longer we go without a recession and, the economic forecasts are starting to say we probably won't have a recession, we're just starting to see incremental, kind of positive, sentiment and, line utilization. I mentioned, earlier this month was up a little bit in April. So I think it's not gonna be gangbusters, but I think that's gonna pick up and keep building.
And then the wildcard is: Do you start to see private equity sponsors doing more deals and putting more money to work? And then that creates kind of new money capital markets opportunities and, and lending opportunities, which would be really great. So I think the pressure's building a little bit on the sponsors to kind of return capital and then put capital to work. They've been kind of sitting on their hands here for quite some time, so we're starting to see some signs of that.
Maybe, you know, that middle market, private equity and sponsor community is a little bigger for you than I always appreciate. You know, maybe you could just dig that out a little bit. Is it green shoots you're seeing? Is it actual movement you're seeing? And how's that translating also into the fee-based opportunities for you right now?
Yeah, I'd say, again, our first quarter, capital markets fees were up, 35% over fourth quarter. Some of that was just in the, in the bond and the syndicated loan market. There was refinancing to take advantage of tighter spreads and kind of opportunity to, to lower, finance carry costs. But, we're also seeing healthy M&A pipelines in the middle market. So the size of deals we do, that's been picking up some. So, anyway, I think we're feeling pretty busy. We're feeling like we have pretty good pipelines. I think there's a lot more lift that's possible, but it already feels better, for sure this year than it, than it did last year.
Beyond the ebbs and flows of deal activity in any given quarter, maybe help us understand, you know, the business you've built in capital markets, how it's different, what are the competitive advantages you see for Citizens to be in that space?
Yeah. Well, it starts with, you know, having really good coverage bankers and having them focused on the right spaces. So we're focused on middle market, we're focused on select industry verticals, and we're focused on sponsor coverage. And so you start with that, and then you have to have all the product capabilities. You can't have product gaps. And so over time, we've either kind of built out through hiring or team hiring. We did a bunch of acquisition around M&A boutiques, so we could have a good M&A capability. We bought JMP to give us equities capability and converts capabilities. So we're very relevant for any need. We can cover any need for the coverage groups and focus areas that we have. And we work together collaboratively as a team.
We have a great kind of culture around thought leadership. At every touch point, we show up with ideas about how to make the customer more successful, which plays really well. And, you know, I'd, I'd like to tout this, I don't know how much longer I'll be able to say it, because we'll have another quarter close shortly. But in the first quarter, in kind of leveraged loans in the middle market, Citizens was number one, JP was two, and BofA was three. So, you kind of say, "What's unique about us?" We've got really great talent, and we focus in the right kind of swim lanes, and, we can go toe-to-toe with the mega banks, and win business. So, I'd say that's, that's pretty special. That feels, feels pretty good.
Some tough competition, so not bad. Maybe we can flip to deposits. Hopefully, none of us have to relive 2023 anytime soon. But when you look at the kind of residual pressure that's out there, the debate around deposit volumes, deposit mix, deposit beta-... So maybe just give us both your latest thoughts and any change or, things you're watching again with this higher for longer, potential that's out there.
Yeah, I'd say, Brian, we're extremely pleased with our performance through this rate hike cycle, relative to anything you saw historically at Citizens. So, the last time rates went up, a few years back, we were like 10 of 10 in our 10 super regional peer group in terms of our deposit betas. I think right now we're probably 4 or 5 of 10, so we're kind of much more back in the pack. And if you look at it even more recently, we're kind of near the top. Like, our NIM was flat in Q1 versus Q4. And a lot of that is that we're very focused on kind of the quality of the deposit base, running off higher cost deposits, making sure we're focused on growing low-cost deposits.
We have a tailwind from the private bank. Of the $2.5 billion, about a third of those are DDA today, which is accretive to the DDA mix. So, we actually, I would say, feel pretty good about the outlook. And, you know, even if loan growth comes in a little light, if the, you know, animal spirits don't kick in, I think we can make some of that back, probably by doing a bit better on NIM, largely because, we're doing a good job managing deposit costs.
Maybe on that front, I've managed to create a split screen of questions. So, one is, how flexible is your supply of Snapdragon Elite? I think that's the wrong company. But two, which is more relevant, online deposits, you know, that is a nice pressure relief valve for you. It's an area where you've done very well. You know, we're starting to see some signs of rates ticking down.
Yeah.
Is that a place where you could actually start lowering deposit costs?
Yeah, I think banks are selectively testing that, and because there's an anticipation that rates are gonna come down. And, you know, I'd say one of the things we did a test on in the first quarter was, we had, I forget the number, $1 billion or something, CDs that were maturing, and the rate on that was a five handle, 5% or a little over 5%. And we tried to steer some of that money, like 2/3 of that money, into money market offering, as opposed to rolling it into CDs, and that was at a 3.5% or 4% rate. And, we retained about 75% or 80% of that money.
So that, that's kind of an early sign that, I think you maybe don't have to continue to pay up. The other dynamic we have, though, is in the first half, as we're running off non-core, we don't have to fight for deposit growth, so we don't have to pay up as much. And so again, trying to calibrate what are the needs on the funding side that match the needs on the asset growth side. And at some point, that'll pivot, but, again, with the private bank growing the way it is, we have, I think, a good sight line into being able to continue to grow the deposits at reasonable price to fund the loan growth as it kicks back in in the second half.
And then maybe kind of thinking about the toggles, if loan growth does and does not emerge, one of the other things you've talked a lot about is capital return.
Yep.
So I think you've given us the number already, obviously for 1Q, but basically for 2Q as well. What's your latest thought in the back half of the year and, you know, what that buyback might look like versus what the loan growth might look like?
Yeah, well, it's basically squeezing a balloon. So I think loan growth is gonna pick up in the second half, so that means we'll have less free capital after funding the loan growth to return to shareholders. But we'll still probably have some. We're still profitable. And that'll be our priority. I don't see M&A you know sucking up any dollars really in the immediate future. So you basically you know pay your dividend, fund your organic loan growth, and then whatever's left over, you can buy back the stock. And I've said this on the earnings call, so I'm happy to buy my stock back here because I think it's a great value.
Maybe let's shift gears to credit. No surprise, office CRE has been a pain point for you and for the industry. I think your reserve is now almost 11%. You've, you've taken a little bit more charge-offs already than most, so your cum losses in the mid or even high teens now. Do you think that issue is put to bed and kind of just use the reserve going forward, or is there anything still bubbling up there?
You know, there's still a lot of uncertainty, but I think we feel that we're well-reserved, and that we have our arms around every loan in the portfolio. So we have, you know, a deep forensic review of everything that... Ranging from the best to the most troubled. And we have great people assigned to try to come up with really solid outcomes for the bank and for the borrowers. And, you know, it's just a situation that's gonna be with us for some time. So I think we'll be in workout mode through 2024 and through 2025. The dynamic around when we can start drawing down on that reserve is a little hard to call at this point.
But I would say, hopefully, you know, in the not too distant future, we'll be able to start drawing down and using some of that reserve. But at least for the next couple of quarters, I think we might be on a pay-go basis and kind of keep that reserve high until we see a little more visibility in kind of the path of rates and the migration of return to office, how's that going, et cetera, et cetera.
And if we set office CRE to the side, rest of credit, you know, what's the overall assessment? Any pockets that you're-
Yeah, no, I'm really happy with the credit performance broadly. So the consumer credit is in great shape. The C&I book is pretty much in great shape, and most of the rest of CRE away from office, we feel really good about. So, it's really just kind of honing in on that office and working it out over the next, you know, year or two.
And then maybe let's kind of come back to the expense discussion. You've done a nice layout of kind of, here's how much we're investing. When you take away those investments, here's what everything else looks like, and I think it's basically flat or even down a little bit this year. You know, give us a peek under the hood. What are one or two areas that serve examples of how you are generating that down expenses or flat to down expenses, ex the discrete investments?
Yeah. So I think that the top programs to be able to do 9 top programs in 10 years, one was a two-year program, you know, I'd say it's pretty unique, pretty special. But we have this mindset of continuous improvement, that we have to keep looking for ways to run the bank better and more efficiently and effectively, and that means embracing new technologies, seeking out the best ideas from outside the bank, consultants, looking inside the bank for pockets, what ideas do people have to how to run the bank better?
And so, you know, the consistency of being able to do that, I think, has allowed us to keep up our investing in the things to reposition Citizens, while kind of maybe if we were growing our expenses 5% for the past decade, and we could kind of show 3.5% because we were saving 1.5%, allows us to get positive operating leverage, allows us to grow our return on equity. That's been a linchpin of our ability to improve our return on equity. And so I don't think we're done. I think there's new areas of, you know, AI, clearly is a big opportunity.
We just had an off-site with our executive team in Rhode Island the past couple of days, and we had a whole afternoon segment on getting everybody up to speed on AI, so they could be more alert for opportunities about how to deploy it inside the bank. So, so I think that's one, and I think there's been areas that we go back to the well time and again. We look at the org structure and design, and try to figure out how to optimize that. We look at all our vendor relationships and how can we optimize that. I think there's a real focus on technology and moving infrastructure to the cloud and having our applications all be kind of cloud-based.
There's a huge savings potential when you achieve that, and we should be out of all our physical data centers by the end of 2025. I think we're one of the leaders in that migration, which feels great. And then continuing to look at our distribution points of distribution, and if there are ways to rationalize that and optimize that.
I know I kind of led the witness, linking technology with cost saves, but, I'm sure you feel there's also some offense through these technology investments. Maybe give us a sense of, you know, where technology is enabling rounds of growth, enabling, you know, revenue or, or balance sheet growth in the franchise.
Yeah. Again, the kind of migration to the cloud, moving to, kind of cloud-based applications that can take advantage of APIs, has just allowed us to be much faster and more innovative in what we're delivering for our customers. And so the cumulative effect of that just cements customer relationships and raises retention. So there's a lot of benefit from that. I think we're also focused on digital and trying to keep pushing more of the business into digital channels, offering self-service for customers. The advantage of self-service is it's cheaper for us, and it's a better experience for the customer. So, like, looking at end-to-end journeys and trying to digitize all the way from the front to the back is a big effort that we continue to focus on.
And then just using data, making sure our data is structured well, so that we can use it for some of the AI applications we wanna do. And then, in terms of how we serve customers and personalizing offers to customers, data is another big push. So it's pretty broad, but, you know, banks are not just banks, they're kind of technology companies, at increasingly so, I would say.
And then maybe to follow up on the AI opportunity, because it's clearly a focus of the market. I guess two things: One, for banks, for you and peers, is this something that's happening today, or is it, you know, kind of experimenting with it today? And then two, you know, when you think about that half day, going through the list of opportunities, you know, what would be one concrete example where you'd say, we'll look back in 2026 and say, you know, artificial intelligence has really changed this for Citizens?
Well, you know, what I would say is, you have to walk before you run. So I'd say, we and most banks are putting the policies and the governance in place to make sure that we're using the tool appropriately, and we're protecting data appropriately. But, there's some right down the fairway use cases that you can, you can have a contact center assist in terms of how they're—how you're serving your customers. You can kind of circumvent actually talking to a person and get the answers a lot quicker if you have a bot doing most of the work for you. So that's one that we're pretty advanced on. There's, you know, helping your applications developers be more effective in terms of a code assist.
They can write code for the developer, that the developer can do the quality assurance, but can become a lot more effective. There's new fraud tools that you can use, that you can improve the customer experience in terms of how you have to interact. And so was this you, et cetera. So, there's those are just a number of ones, but you could go through kind of each of the business areas and just see plenty of opportunities that... I think one of the challenges really for banks, and I credit this to McKinsey.
I was at a gathering of their folks, and they were talking about their own journey, and they said: "Make sure that you're focused on the big use cases that align with your strategy, that have the maximum kind of benefits and NPV." Because what you'll find is, everybody will want a piece of the action, and then if you have a thousand flowers bloom strategy, you'll start spinning your wheels, and you won't actually make the real impact and harness the technology the way you should.
So, that's also part of what, you know, we've been on a journey since the IPO to just get better at prioritizing, 'cause everybody wants to do something in their area of the company, and you just can get pulled too thin, and then the big stuff doesn't really advance as quickly to seize the opportunity as it should. So I think we've gotten better at that, but this is just another place where we're gonna have to really focus on the things that really kind of drive the change down the field, and kind of not get pulled in too diffuse a way.
And I should mention, there's a couple of questions teed up here, but for anyone who hasn't done it already, there's the Pigeonhole system, and feel free to submit it, and it'll pop up on my screen here. But before there, regulation, you know, there's the whole alphabet soup of things coming, Basel III Endgame, AOCI and the capital, LTD rules, liquidity, LCR rules, the stress test. You know, rather than go through each one, maybe you could just highlight where you think Citizens is best positioned for regulatory change coming, and anywhere where you'd highlight that might require a little bit of lift.
Yeah. Well, I think the regulators always have good intentions. They wanna keep the system safe and sound, but they tend to swing the pendulum too far in the wake of an event, which was the West Coast bank failures last year. And so I think there's been a good back and forth through the comment process about, you know, let's try to get this right, and let's get this calibration right. So, I do think some of these initial proposals will be revised and will come in kind of more appropriately than what they came out of the chute.
Having said that, you know, I feel good about how we're positioned relative to all of that because the Basel III Endgame on capital wasn't gonna have a big impact on the regional banks. And in the end, we were arguing about risk weights and where they were raising risk weights on credit was gonna starve certain sectors, like mortgage capital to low-income people or small business lending and things like that. So anyway, I think those adjustments will be made, which we feel good about. But anyway, we have the number two capital in our peer group on a post-AOCI basis. I think we're number three out of 10 on a pre-AOCI basis, so got plenty of capital.
We've been issuing long-term debt, so we've become a frequent issuer. So I don't see that... I'd like to see that tailored. I think the proposal is too high, but anyway, we've embarked on a journey to have kind of more senior funding outstanding. And then, you know, liquidity as well. I think we have a very significant consumer customer base. I think we're number two in the group in terms of percentage of consumer deposits, which tend to be very sticky. But in any case, I feel it's appropriate in light of what we saw to kind of build up our liquidity more.
So if you kind of look at the balance sheet a year ago, and you look at today, we have a bigger securities portfolio, holding more cash than we did before. And as a result of that, if we do the kind of Category 1 bank LCR calculation, we come in at 120 in the first quarter, which is ahead of all the mega banks. And I think there's maybe Goldman Sachs and Wells Fargo are higher than us, so we're kind of really good on liquidity. So these things will come down the pipe, but we've always had a philosophy to try to run the bank's balance sheet in a conservative fashion with plenty of capital, good liquidity and a good funding structure.
We've improved that even over the past year to new levels, which I feel quite good about.
If I could follow up on the long-term debt rule comment, what is it that you'd like to see tailored or or-
Well, they have a calibration of 6% of RWAs, which seems, you know, too high ultimately. Ultimately, when you compare that to what the Category 1s have, it's not just a percentage of our... It's not an LTD, it's a different calculation, but it is even more onerous on kind of the Cat 4s. And so, I think ultimately you could see that potentially get tailored to a lower level. So we'll see how that plays out. Everybody's been focused all on the Capital One, and so the other ones kind of are coming next down the pipe.
Yeah. So from the audience, maybe a little bit about your markets. We hear a lot from the Southeast banks about the in-migration and the tailwind that creates. When you look at your footprint and some of the geographies that have less population growth or even out-migration, how meaningful a headwind is that? And does it change the growth prospects at all?
Well, it's kind of a two-sided coin because the markets that we're serving are very deep, have strong GDP, strong business formation, so an affluent kind of residents to serve. So, there's a lot to like about kind of the principally Northeast and Upper Midwest market that we serve. Having said that, we've been migrating more of the bank commercially down into the Southeast. We have a big office in Charlotte, big office in Atlanta. We have two offices in Texas. We have now our big presence in Northern California, plus a commercial team in Southern California. So, there's opportunities for us, I think, to tap into some of the dynamism that we see in different parts around the country.
We just hired a new head to run our middle market banking strategy in Florida. Florida's a great market for us to serve. We've got some branches from HSBC. We have a wealth center we just opened in Palm Beach that where one of the big First Republic teams is gonna operate from, and there's more that we can do in Florida. And again, you know, California is still a huge GDP. It's the center. Northern California is the center of the innovation economy, and with what we have with JMP, and now three big private banking teams, we know kind of everybody in the VC and PE ecosystem, and all the tech innovators and wealthy folks there.
So anyway, you know, I feel good about we have enough sails out to catch some wind around the country in kind of unique ways. I don't think we need to have the full ground game with going in through consumer into new parts of the country to be effective.
And then, following up on your M&A comments, you mentioned unlikely to be a big use of capital for you in the near term. But from an industry standpoint, what do you think the biggest hang-ups are to consolidation restarting among banks?
We're starting to see some, you know, kind of at the, at the smaller end of the spectrum. And so I would say we're still in a high rate environment. There's still, you know, the, the deal math is difficult. And, you know, over time, that'll improve as the AOCI kind of burns down. But, you know, lower rates certainly would help facilitate that. So I think that could be a catalyst. And then it's unclear, the regulatory posture. I mean, obviously, the folks who just announced deals think they're gonna get approved, or they wouldn't have announced them. Got, you know, the Capital One Discover deal out there, which is a very large petri dish, or a bigger transaction as to what the regulatory posture will be on that.
So, I think more clarity from the regulatory side, plus potentially lower rates or the passage of time and, getting that burned down, should potentially open things up again. Because there are certainly more pressures from regulation, more pressures from keeping up with the tech investment, going digital. The cyber defenses that you need is gonna continue to put a squeeze on kind of smaller and mid-sized banks.
We've got about two minutes left, so I'll do a last call. The last two I have in the queue here are, with loan growth not really materializing yet, are you starting to see people compete on pricing, or spreads in commercial lending starting to worry you at all?
Not really. I think we're trying to be very disciplined in two ways. One is, if we're bringing in new relationships, we want it to- we wanna be the primary... as close to the primary bank or one of the primary banks as we can be and have deep relationships with deposits and cross-sell to fee services. And we also wanna get paid for the credit. We wanna get paid fairly for the credit. So, I think there are opportunities, particularly if you've got great bankers, and you can deliver great service and great advice, you can still, you know, attract new clients without having to be overly competitive on price.
And then obviously, growth in private credit has been a huge theme. Can you talk about where that presents competition to Citizens?
Yeah
... and also where that presents opportunities for the bank?
Yeah, that was, that was another topic that we raised yesterday because it's so much in the news these days. But I think we see it as healthy competition in some respects, but also a huge client opportunity for us, 'cause we know the sponsors all very well, and these private credit firms, they have needs. Sometimes they're buying our paper. We're originating, and they're buying our paper. They're financing many times. And so, you know, and a lot of the business that they're looking to do are more leveraged transactions that are hard for banks to actually hold on their balance sheet.
So being flexible and finding partners, if a particular borrower wants more leverage, can we have a specialist private credit firm that wants to take a mezzanine slice and put that in, and the banks have more protection underneath the senior facility? I think we're thinking about things the right way, staying flexible, staying close to those folks, and trying to figure out ways to turn them into bigger clients. And when we actually looked at last year, how much revenue do we think we lost from having private capital win business that we would like to have had, versus how much new revenue did we make, from the services and, you know, delivery that we have to some of these private capital folks?
It was, it was definitely the seesaw was favorable. It was actually we were making more money than we were losing, which is always a good thing.
Maybe in the final few seconds, I'll just take one for myself. You mentioned the success growing the commercial business outside of the traditional footprint. It's something several of your peers have highlighted as well. It has been a big shift over my career. I can remember the days when it was like a loan production office, and it was a-
Yep
A three, four-letter word, even though it's only three letters. What, what's been the shift? You know, why can the commercial bank kind of grow so successfully, independent of the traditional footprint?
Well, I would say a couple of things. One is your client selection really matters, and so, if you go out of your footprint and you go into the middle market, which may be a little tougher credits, you could easily -- to try to grow your market share, you could have adverse selection. So, you have to get the right team in the market who really knows the companies and the lay of the land, and you have good credit people in the market, and you stay kind of a little at the upper end of middle market and into mid-corporate. And that's a little safer from a credit, and they have bigger wallets, and you can do more cross-sell there.
So that was the blueprint we established when we kind of went into Atlanta. We brought a head of the region, came from SunTrust, and then he brought a bunch of folks in that he knew, and we've had huge success in growing that business down there in the Southeast. So it starts with talent, and I think there's folks who kind of have migrated off of the big bank platforms, who actually view the super regionals as having you know a good culture and a good place that they can really focus on taking care of their customers and growing their books.
The super regionals have built out all the product capabilities now, so they're not kind of going in as a one-trick pony, just trying to make loans and take deposits, but they can deliver all the services. So I think that's changed over time. Over the decades since our IPO, that's a pretty significant development.
Well, that's great. I'll leave it there. I wanna keep you on schedule, and thank you for your time, as always-
Sure.
-and appreciate you doing this conference with us each year.
Sure. Thanks, Brian.