As everyone takes their seat, if we could put up the first ARS question like we've been doing, for everyone else. But next up, very pleased to have Citizens Financial with us this morning, from the company of John Woods, Chief Financial Officer, Brendan Coughlin, who runs, consumer banking. There is a kind of a short slide deck, on their website, which, they're both going to take us through this morning, and we'll kick it off with John.
Okay, great. Thanks, and good morning, and pleasure to be here, Jason. Let me first say—just say that on the anniversary of 9/11, we at Citizens offer our condolences to the families who lost loved ones, and we celebrate the bravery of our first responders on that day. Okay, so moving on to what is on the agenda for our presentation today. I'll start off with a few comments about the state of our franchise. Then I'll cover how the balance sheet is positioned in light of recent proposed regulations, and I'll emphasize our balance sheet optimization efforts as part of that. And then I'll turn it over to Brendan, who will deliver an update on the launch of our Citizens Private Bank. So if we get on to the first slide here, I'll start off with some overarching comments.
You know, we're navigating extremely well against all of the headwinds and uncertainties in the macro and regulatory backdrop. We have a track record of strong execution and excellent capabilities built since the IPO, and therefore, we're poised to deliver strong returns through a challenging environment. This will rely on a strong defensive foundation. Key components of this include one of the highest Category One ratios in the peer group, liquidity levels well above requirements and growing. This is all based on a quality deposit franchise. You know, consumer deposits are 67% of total deposits, and 70% of our deposits are either insured or secured. This positions us quite well for the proposed changes coming down from the regulators, and I should note that a strong defense gives us the flexibility to stay on offense even during uncertain times.
We've launched a series of unique initiatives that we expect will contribute to our performance over the medium term, including, again, the recent launch of the Citizens Private Bank. Also, our recent entry into New York Metro, where we all are today. Hopefully, you saw some Citizens green on the way to the hotel today. And a number of others, such as Citizens Access, Citizens Pay, and private capital investments we're making in our commercial segment. On the left side of the next slide, it's exciting to see the growth and expansion of our franchise beyond our historically strong regional branch network, to now include the light branch network in DC Metro and Florida. We're also including the national customer and client coverage through Citizens Access and the commercial banking regional presence, coast to coast.
It's always rewarding to see customer satisfaction results and industry accolades presented on the right side of the slide as well. On this slide, I'll pivot to the balance sheet foundation, and you can see our exceptional capital strength, which grew to 10.3% at the end of the second quarter. We also had very strong deposit growth, which drove a decline in the loan to deposit ratio in the second quarter to 85%. And I already mentioned our high percentage of insured and secured deposits in the lower right. This next slide illustrates our retail-oriented deposit base, which is diversified across channel, which you can see on the pie chart on the left, and is diversified across product on the right side of the page.
On the next slide, this illustrates our capital position versus peers, which is maintained even after estimating the impact of deducting AOCI. Driving a little further on capital, you can see on this slide the impact of AOCI is approximately 100 basis points for us, where this impact is well above 200 basis points for the vast majority of peers. On the right side of the slide, we illustrate the impact of proposed waiver data to be approximately 4% for us. Taken together, we are well positioned to broadly meet minimum regulatory capital requirements, even on a fully phased-in basis around the end of the year.
We expect to return to our recent CET1 operating range of approximately 9.5%-10%, even before the likely beginning of the phase-in period, which includes fully phased-in impacts and excludes the impact of share repurchases. On slide nine, as previously mentioned, we have been building liquidity with a plan to increase cash and securities from about 22% of interest-earning assets at the end of the second quarter, up to about 25% of interest-earning assets by the end of the year. We're also planning to reduce reliance on Federal Home Loan Bank borrowings by issuing term ABS funding from our auto book and continued runoff of the non-core portfolio in general.
In the end, while waiting for clarity on proposed revisions to LCR requirements, we are increasing our pro forma LCR levels, which already exceeded existing Category Three requirements at June 30, and they were close to meeting Category One requirements, which we plan to also exceed by the end of this year. On slide ten, continuing on the theme of proposed regulations, some key points to offer about the long-term debt requirements. We estimate the need to grow our holding company long-term debt by approximately $4.3 billion to comply with these rules. We expect to accomplish this programmatically over the phase-in period and will be opportunistic along the way. The impact appears to be manageable, equating to approximately 1%-2% of EPS, assuming a reduction in other high-cost funding.
Turning to key strategic initiatives, we will focus on the top two, balance sheet optimization and Citizens Private Bank, for our discussion today. Although we have provided commentary on the others in the appendix for your convenience. Regarding balance sheet optimization, this slide illustrates the relatively rapid rundown of the $13.7 billion book by about $9.2 billion by the end of 2025. And on page 13, we indicate where we plan to redeploy this $9.2 billion. About half of this will go to building cash and securities, with the remainder used to reduce funding and support organic loan growth. In summary, this strategy strengthens liquidity and has already been a source of $3 billion of term funding ABS issuance year to date. It builds capital by reducing RWAs, and it's accretive to NIM, EPS, and ROTCE. With that, let me turn it over to Brendan.
Thanks, John. Good morning, everybody. We're really excited about this initiative to build out the private bank for Citizens. We've made no secret about our desire to continue to grow our wealth management franchise over the last few years and have had some really strong results in that regard. While the failures of SVB and FRB were challenging for industry, it did present an incredible opportunity for talent that was disrupted and in motion. So, we elected to play a little offense here to balance off a lot of the focus that we're putting on managing the balance sheet really well and non-core strategy that John hit on.
Hired what we believe to be 150 of our industry's best bankers in four key markets for Citizens: in Boston, New York, Florida, and planted a bigger flag on the West Coast in the Bay Area. These bankers, while 150, doesn't sound like the biggest number, these are super bankers. These bankers are the very, very best in our industry. They have very, very large books of business, and they were the cream of the crop, predominantly at First Republic. So we're very, very excited for that. I would also say, as we think about positioning Citizens for the future, one thing that differentiates the really large banks with the mid-sized community banks is often the presence of a well-run private bank to serve high-net-worth customers.
So we believe this move is very strategic for us in a lot of different ways, including making sure we've got the right diversified offering to play with the big boys over time. How are we thinking about the packaging and the brand, and how in the market? So what I would say is that we believe that the success here for our private bank will be grounded in offering a world-class, extraordinary customer experience. To play and win in the high-net-worth space, that's table stakes. And it's one thing with many flaws on some of the failed banks, and one thing they did incredibly well was to have a world-renowned service offering, and all of our strategy starts and stops there.
We also aim to bring together the breadth of the bank, from commercial banking, consumer banking, mortgages, wealth management, capital markets, to the client in a single integrated client experience. That's very differentiated, in particular, with some of the big banks that are a little bit too large to bring it together in that seamless way. And as you all know, a lot of high-net-worth individuals often have diversified needs, which includes businesses, whether it's multifamily, private equity, so on and so forth. So we've got the model coming together to connect end-to-end ecosystem of banking for this client segment. And again, really grounded with a world-class service.
Our belief is that when we can deliver that world-class service, the ability to earn trust, be their primary financial advisor, through life's journey and dislodge the wealth relationship, is right there for the taking for us. We're already off to a very strong start. While we're leaning in heavy to private banking, we do want to make sure that it's well understood some of the business guardrails, as we stand this operation up. While the 90% of the private banking activity that we brought in was really world-class, obviously, there are some business model corrections we're looking at that now with the benefit of hindsight, some of the banks that are no longer around had a few missteps.
First and foremost, this entire business model will be grounded in primary banking relationship business. We will not be offering out, capital and loans to those that don't fully intend to bank with us, end-to-end relationship business, period, hard stop. We do intend to have a pristine credit risk appetite, aligned with Citizens, and in some cases, even better than the average of what Citizens has on our balance sheet today. The credit quality here is traditionally very, very high, and we don't intend to take a step away from our strong credit appetite. We will grow this business with a strong self-funded deposit book, including operating deposits.
So our pace of growth here will be guided by our ability to do that and drive a strong deposit profile, both the quantity and the quality of the deposit book that we can that we can build. We'll offer relationship pricing, but it's going to come with some guardrails. We will absolutely ensure that the end-to-end relationship is ROE accretive for this firm, and we will not be leading with underwater lending rates that aren't justified with the end-to-end relationship that we're bringing forward. We'll be very disciplined about that. We'll have this grow at the pace that we can drive accretive profitability for the firm.
And so we're going to be very, very disciplined on how we think about standing this up and the offering that we bring to market, and of course, strong risk management front to back... The client segments that we're looking at here, we sort of bucket them on two sides. One is the businesses that we're targeting, and two is the ultimate individuals. The businesses that we're going after are those verticals that tend to have a connected ecosystem of high-net-worth individuals. So there's a connectivity here across these two segments that is very real. So on the business community side, private equity, venture, and multifamily are three of the target opportunities that we're going after. Obviously, with SVB and FRB not participating in the market anymore, there's a large void in private equity and venture banking.
We've hired some of the world's very best private equity and venture banking individuals to join Citizens to help stand up an operation. Obviously, we also participate in that space in our commercial bank. This offering will be grounded in day-to-day operating cash management relationships with these firms, ultimately then connecting into banking the LPs and the GPs from a personal banking perspective and wealth management standpoint. On the personal banking side, we're targeting individuals with $5 million or more in liquid assets, $10 million in net worth, and HENRY clients, to plant some seeds to build the bank of the future.
And you can see the product offerings that are going to be traditional for us to bring to market for these segments, whether it's capital call lines, certainly operating relationships, partner loan program, cash management. On the personal side, mortgage, home equity, in some cases, student loans, credit cards, and certainly wealth management is the prize for us at the end of this build. We've done a lot of work so far. The team is off to the races out bringing in clients, already, here at Citizens, but there's a lot left to do as we position this segment for success long term.
We sort of called the summer a bit of a beta, and now as we enter the fall and close out the year, we're intending to move from beta to sort of full market launch across the U.S. So, we do intend to launch a packaged brand in Q4. We're actively in the market hiring and scaling our wealth management team so they can participate and partner with these world-class bankers we brought on board to monetize the wealth opportunity in front of us. We are in talks in multiple locations around opening private banking offices for these new clients to come in, that will augment our retail branch network. We're making operating model changes across the bank to ensure that world-class service offering can come to life the way we desire it to be.
Of course, on the financial side, a couple of points. We've shared this in our earnings, but I'll reiterate it again. We do expect 2023 to be a year of investment. We think it's going to be $0.08-$0.10 dilutive to our EPS this year. And we think it's a very, very smart and appropriate risk-return investment for us. If you translate that into basis points of capital, it's a very modest investment for potentially a really large return.
And when you look at the multiple that wealth firms are trading at right now, the impact to capital is de minimis, and the upside is just so much more significant long term than if we had to go out and pay, you know, 20 x EBITDA for an RIA. So we're really pleased with the risk-return dynamics of the investment we're making. We do believe that in 2024, this investment will be accretive, the revenue will start to build and will be modestly accretive to the firm from an EPS standpoint, and over time, 5% EPS accretion as we think about stepping out to 2025. What you see in the bottom right is some of the key business metrics that we intend to target in the year 2025.
Ironically, the size of the loan and deposit buildup is fairly similar to the size of the rundown of our non-core segment. So if you think about strategically what we're doing, we're running down less important, lower profitability, less relationship-oriented businesses with indirect auto, some of the loan purchases that we had done over the years as we went through the IPO phase, and we're replacing it with highly strategic, highly return accretive customers and relationships with, you know, targeting $11 billion in deposits, $9 billion in loans, and $10 billion in AUM by the end of 2025. So there's a lot to do. We're off to a very strong start, and we're very confident, about, about the progress we've made and the market opportunity that's in front of us.
With that, I'm going to turn it back to John to close us out before Q&A.
Great. Thanks, Brendan. Just making some final concluding comments. I mean, really, what we're trying to leave you with here is that Citizens has a strong and growing capital and liquidity foundation. This allows us to stay on offense even during challenging times. You know, we believe our portfolio of strategic initiatives are unique and will contribute to outperformance over time. So these factors, along with our historical track record of execution since the IPO and excellence in capabilities, this will drive strong returns through a challenging environment. Thank you, and now we'll transition to Q&A.
Great. John, Brendan, thank you so much for those comments. Good overview. Maybe I thought we'd kick off Q&A with a broader question about the environment. Just kind of what are you hearing from your clients? You know, do you think we're headed for a soft landing? And maybe, Brendan, maybe specifically for you, just, you know, how different are we doing? I would kind of think of the CFG footprint as kind of, you know, higher income, higher wealth spectrum, you know, in terms of any changes in behavior, where are kind of deposit levels today versus kind of pre-pandemic, and just maybe more color there.
Yeah, maybe I'll just get started, and then I'll turn it to Brendan. I mean, I think overall, the U.S. has been strong, right? I mean, we've seen resilience, you know, with some, with the data coming in from ISM or from the jobs front, has all been quite strong. You know, and as a result, we've seen, you know, the rate environment kind of react to that.... I think we are cognizant of some of the downsides, though. I mean, one of the questions that we have is that, you know, it appears that recession odds are following. It appears that a soft landing is much higher likely, likelihood than it's been in a number of quarters.
However, how long can the U.S. sit on an island when you have the rest of the world dealing with some softness, and in particular, China and Europe? So that's something that we're cognizant of and that we keep an eye on. The second item I'll throw out there is with respect to the Fed. I mean, I think the Fed has kind of transitioned out of catch-up mode. I think we're now in calibration mode, right? They're taking a look at the data as it comes in, finally. And you know, maybe we are actually in a pause. Maybe we'll get a pause next week, maybe a coin flip for a hike later in the year. So I think it's not so much about how high will it go? It'll be, how long will it remain high?
I think that's where we spend a lot of time thinking about, and have had a view that it would be higher for longer for a period of time, and we remain asset sensitive, as a result of that. And then maybe I'll just touch on the commercial clients, well, and then turn it over to Brendan. I mean, I think what we're hearing from our commercial clients is some caution, right? I mean, they're combating input costs, rates are higher, operating costs are higher, and maybe a little hesitance to leverage too aggressively at this point in the cycle. That's playing out in our utilization rates. When you, when you look on the commercial side, our utilization for our corporate banking customers is around 31% or so, pretty stable quarter-over-quarter.
But historically, that would be more mid- to high 30s. So there's a caution out there that we're hearing. But that said, in the capital markets space, we're starting to see some pickup here after the typical summer lull. So from that standpoint, we're seeing a lot of momentum, and maybe with that, I'll turn it over to Brendan.
Yeah, thanks, John. Again, the health of the consumer is still very resilient and very strong. And to your point, our footprint skews a little bit wealthier, and then our business strategy inside of Citizens skews a little bit higher end in terms of mass affluent, affluent customers. If you were to decile the U.S., the bottom two deciles or so are back to paycheck to paycheck and have fully burned through their stimulus. Our customer, while we have some of those customers, are, yeah, relative to other peer banks, we have less of them than others. So our portfolio has probably been even a little bit more resilient than others, which we're seeing, and we see that in some of the benchmarking data around deposit performance in the consumer segment.
I'll give you a couple of stats. So, prior to COVID, our average customer had about $17,000 in deposits. At the peak of COVID, that scaled up to about $24,000, and now it's sort of reduced down to about $20,000. So the consumer is in generally a state of normalization, I would call it. But I'm not seeing any signs that would suggest there's anything other than a normalization happening. Deposit levels are kind of spending down slowly. It's starting to moderate a little bit, as you know, consumer confidence kind of bounces all over the place. And the credit side is the same. I'd say delinquencies, we were at 50-55 basis points of charge-offs pre-COVID.
We were a little bit below 30 at the peak of COVID, and now sort of normalizing into the 40s. So we're starting to see that normalized delinquency is ticking up a little bit, but nothing more than normalization. I'd say there's been a lot of talk about Citizens over the years and some of the growth portfolios that we've had, in particular, with student and Citizens Pay. Those are well under control and not normalizing any faster than any of the other portfolios. So there's nothing that I see in front of us in the near to medium term that is suggestive of any undue stress on the consumer.
I guess, John, you answered a lot of my questions. RWA impact, long-term debt impacts, even touched on liquidity, so we appreciate that.
Yeah.
But when you think about those, like, in tandem, can you maybe just talk how those changes impact the way you run the bank? And now that we've seen the capital proposal, maybe just does that change your thoughts on share buyback?
Yeah, I mean, I think, you know, it doesn't have a huge impact. I mean, we've come into this, to this cycle. We've run the bank at a higher level of capital than many and most, most of our peers. And I think that we're well positioned for the regulatory, you know, sort of, you know, you know, proposals that are out there. Now, on the capital side, that's pretty well, down the middle of the fairway in terms of the way we've been operating. We've been, we've been monitoring external developments, looking at where we could deploy capital. I mean, top of our list is, is, of course, allocating to our dividend, and, and supporting organic, you know, loan growth and RWA deployment, where we, we see, you know, deep relationships that we can deploy and, and commit to.
I mean, as it relates to buybacks, you know, we've been able to be, you know, supportive of modest buybacks, and we, we see that continuing. It, you know, will be, will be measured. We're going to continue to, you know, interpret and, and analyze the regulations as they come through, but I still think that we can achieve capital, you know, objectives, you know, as we mentioned, you know, getting back to our normal operating ranges by the, you know, sort of before the season even begins. Being compliant on a basis as you get towards the end of the, you know, as you get to the- I mean, that's a pretty, pretty good outcome that we're trying to, trying to support. So we're not really running the bank terribly differently.
We began, and over on the liquidity side, we began this, you know, sort of, balance sheet optimization, you know, and sort of intensifying on that front, even before the March disruptions. So, you know, we, we, elevated that a little bit, but in general, you know, mostly business as usual, you know, while, while acknowledging that the, the macro and the regulatory environment has changed a bit.
I guess maybe bigger picture for a second. In the beginning of the year, you kind of raised the medium-term ROTCE target by 200 basis points to 16%-18%.
... so 55% efficiency ratio, but that was with the 10, 9.5%-10% CET1. In your remarks, you kind of talked about a mid-teens ROTCE for 2023, although capital above that 10%. I guess, how quickly do you think you can return to that 16%-18% ROTCE? You know, what does that mean for a normalized interest rate and credit backdrop? And, you know, is that 16%-18% still the right number in a new capital regime?
Yeah, I mean, I think the banks adapt, right? So the world changes. We, the last time we gave a medium-term outlook, it was January of 2020. And ironically, you know, 60-90 days later, we had the pandemic. And early in that period, there was, you know, we were looking around and saying: "Okay, are we going to still hit this, right?" And we did, right? We did deliver our 14%-16% range, you know, approximately 3-ish years later. I think that, you know, at this point in the cycle, we remain committed to that 16%-18%. We believe that, you know, the conditions that will be conducive and supportive of that outlook will be a more constructive rate environment, right? I mean, I think the rate environment is inverted.
That's not exactly the best environment for a bank that, you know, operates as a, you know, a maturity, you know, transformation agent from, you know, short to long. I think an upward-sloping yield curve is likely to be, you know, in our futures again, a couple of years out. You know, I think we'll have some normalizing of credit. We have lots of opportunity on the expense side. So TOP 9 is going to be a big driver of what we do in 2024. And, you know, we've done nine. You can bet that there'll be a TOP 10 , you know, potentially on the horizon. But we see a lot on the expense side.
You know, this, you know, the investments that we're making from a strategic perspective, we think are large contributors to the outperformance over time. And so, you know, I think we're sticking to that medium-term outlook, which has some flexibility to it. But, we believe that we adapt, and the environment will be conducive to that kind of objective.
I guess, Brendan, you gave us a pretty view of the private bank, but just, you know, kind of an area we hear a lot of banks, regional banks talking about. So it's clearly competitive on both on the regional banks, big banks, you know, nontraditional players. Just, you know, what do you see as your competitive strengths in private banking? And, you know, I know you put up some goals, which you kind of talked about in the earnings call, but just, you know, I know it's early innings, but kind of how are you tracking versus those metrics you laid out?
Yeah, well, I think the competitive advantage really is going to come down to service. So almost all banks have the product offerings that I listed up there. And one of the unique uniquenesses to the model that we're building is the integration of commercial and consumer banking. And if we can deliver the service standard that we believe we can, we believe actually the market is very ripe for us to go in and fill a void. While private banking, in general, is competitive, the ability to actually de-silo the bank and bring it together in that world-class connected offer is actually pretty uncommon. It's an objective that banks have, but particularly the bigger banks have a hard time really uniting all their various different business lines under one umbrella, and that's exactly what we're aiming to do.
And so we're in a bit of a sweet spot where we're big enough to have the sophisticated capabilities, but small enough that, you know, Don McCree, who's my counterpart running the commercial bank, is half a phone call away and connecting the two parts of the organization in a distinct new segment with empowerment, with some rules that we've set to unleash them into the market in a very different way. So what we hear from clients is that that's really what they want, and one of the reasons they were at these regional bank, private banks, is because it wasn't a money center bank, because the service that they could bring together for them was very unique and distinctive. So, we believe that we can create that. That on its own will be very, very distinctive.
I'd so it's early innings, and we're not sort of disclosing kind of mid-quarter stats on performance, but I would say the customer inbound interest has been very strong. And so this is not an effort. We will, of course, be out in the market proactively driving customer growth, but it's not an effort that necessarily is fully dependent on that alone. The brand of these bankers that we hired is so strong with their clients. They banked at whatever organization they were at because of them, not the brand. And so we're taking an incredible amount of inbound calls right now, so we feel really good. It's early innings, but we feel really good that the numbers we put out there are very, very much achievable for us.
Yes, and then, John, Brendan talked about kind of consumer deposits, but maybe talk just bigger picture. Really, the deposit levels stabilized last quarter, but interest-bearing went up a lot and non-interest-bearing went down a lot. Just maybe talk to how trends are shaping up for the second qu—for the third quarter, rather, and just when do you expect to see a stabilization in that mix?
Yeah, that's a good question. I mean, I think the main story here is stabilization. I mean, we're seeing stable deposit levels and increasing stability in, you know, decelerating, I would call it, migration. So when... You know, we do think that our outlook for the second half of the year, we do expect to end the year right around where we were at the end of the second quarter in terms of non-interest bearing versus interest bearing. There are also, you know, migration within that low to high. But that number for us, around 22% or 23%, is about where we are on a mix-adjusted basis prior, you know, prior to the pandemic.
So we see ourselves—we ended in that spot around the second quarter, and we see that kind of, you know, stabilizing, you know, over the second half, and that's critical. And the levels of deposits have been quite stable over the last, you know, several months, so we're feeling good about that.
Maybe I should have asked, but last we spoke, we talked about a 49%-50%-
Yeah
... terminal beta. Any updated thoughts?
Yeah. No, that's where we think we're going to end up. I mean, our terminal beta being around 49-50 as you get around the end of the year. We were at 42 cumulatively through the second quarter. And I think the big message there is that you know, in prior cycles, we had higher betas, you know, kind of lower quartile in terms of performance. Right now, we think we're in the pack, and that was the objective. You know, better part of a decade of investments in our capabilities in consumer and commercial, and that's playing itself out. We think we're in the pack, if you will, with respect to cumulative betas, and we're feeling pretty good about that, you know, going out.
I'll add one quick point to that. Since 70% of our deposits are on the consumer side, for years now, I've been sharing with all of you my confidence in the transformation of the deposit business at Citizens. To John's point, we were sort of near worst in class in the last rate cycle. And the way to transform a consumer business on deposits is the ground game of highly engaged primary banking customers, direct deposits, so on and so forth. And we've done that. And when we look at benchmarking, it shows that we are actually beating peer average on the consumer segment, both in net relative growth and on cost, by a decent margin. And so, while we might be in the seventh or eighth inning, it's certainly the story's not done.
I think what we've been sharing over the last number of years is actually playing out in practice, that the health of the franchise is very much recovered. At minimum, it's peer-like. And, you know, that was maybe a reason to have a discount on the stock a couple of years ago. I think we're performing incredibly well on the deposit book so far. When you overlay Citizens Access to it, obviously, they put some more interest expense in the mix. But if you did a regression line on what you'd otherwise pay for that through, you know, the rest of the bank, actually, it's quite a good trade, and we're both fenced it off and not have kind of interest-bearing contagion flow into the rest of the bank with that strategy.
I guess, what was it? I guess on the July earnings call, talked about the establishment of this non-core portfolio to help you reposition the balance sheet. There seems to be a bid in the market to kind of sell some of these loan portfolios. Just any thoughts and the desire to maybe accelerate that prospect, and just, you know, how does that book behave from a perspective?
Yeah, I mean, I'll take the last point first. Credit perspective, there, there's no concerns with credit. It's, it's performing exactly as expected, and the credit's actually performing pretty well. When it comes to the capital and liquidity side of it, I mean, this was sort of a shock absorber portfolio for us with the excess deposits that, that flowed in. We didn't get, you know, quite as much as most, but but we did get a lot of surge deposits, during the pandemic and, and, you know, some went in securities, but a lot went into auto. And so that's the majority of this non-core book, in part because of the, the you know, we, we were clear about how the credit would perform, and, because we're a high prime, super prime lender in that space, and also has a short duration.
So it's kinda, it's kind of run off reasonably quickly. So that, plus the fact that we have quite a strong capital position to begin with, there's no need to actually rush out and have a fire sale in this rate environment for auto in order to achieve some capital objective. We're already. We're right along our glide path in terms of what we want to achieve on capital. When it comes to liquidity, there's actually ways to accelerate the liquidity without crystallizing losses, and we've been doing that. We've issued, you know, actually, we've issued $3 billion of asset securitizations against that book year to date, with you know, excellent execution on the last deal that we did.
Second deal we did just last week, where credit spreads came in, you know, the spreads that we were able to enjoy on that trade were quite heightened from the first transaction, so much more narrow. So we're feeling really confident that there's no need to rush out and accelerate something and crystallize some losses in the non-core book.
I guess, just given the impact of the balance sheet for optimization, you know, do you expect to see loan growth in 2024? And are you seeing differences in demand between consumer and commercial?
Yeah, I mean, I think that when you pull in the fact that we do expect some normalization on the in the commercial book, you know, as I mentioned earlier, utilization is at historic lows. We expect economic activity to pick up more in 2024, so we're going to see some loan growth out of C&I. In the consumer space, we have core relationship lending that we'll continue to do in the mortgage space and in student and in card and in home equity, right? So all of those. And then you add on top of that the private bank initiative, we do expect that we'll be able to drive some loan growth in 2024.
Got it. And then we're at the five-minute marker, and have not asked about the third quarter yet.
You can keep going with other questions, Jason.
I got
Your prerogative.
We'll get it in. I mean, you hint, you kind of foreshadow capital markets picking up. I know on the earnings call, you talked about, you know, NIM flattening out and holding in a 3% area, through the end of the year. Just, you know, a few weeks left to go in the quarter, just, you know, any changes in your outlook? You know, what do you expect?
Yeah, I mean, I think so really, generally as expected, right, across all of the key components. When you talk about net interest income, net interest margin, you know, skipping over fees for a second, I'll come back to that, expenses and credit all coming in as expected, and the balance sheet. So that's really great to see. So a lot of stability there. When it comes to fees, that's, you know, as I mentioned, fees, fee activity, capital markets is a very big driver of our fee performance, and that has really come out of the shoot quite nicely post-Labor Day.
That said, it's always sort of seems to be a race to the finish in capital markets, and so, you know, we're feeling pretty good about it, but, you know, it'll be a, you know, we'll see what happens, what crosses the finish line on this side of 3Q or what gets pushed to 4Q. But I'll mention that the momentum coming out of, you know, Labor Day, going into a seasonally strong, capital markets quarter, which we tend to perform quite well in, looks very good. And a lot of the reasons for that are in the M&A space. I mean, M&A is a big driver of cap markets, and buyers and sellers are starting to find ways to interact.
Whereas before, sellers were holding out for lower rates to get better prices, and buyers were somewhat unwilling to put in equity to make, you know, get financings done. We're seeing more capitulation on both sides and starting to see deals get done on the M&A space. And frankly, jumping over to equity, we're starting to see equity deals get done as well, IPOs and ATM transactions. So a lot of good things to see there as you go into the fourth quarter for capital markets.
And then you touched on, TOP 9 but, you know, in you've done one through eight or kind of working on eight and upside eight. I mean, how much more incremental efficiency could be achieved here?
Yeah. I'll hit TOP 9 real quickly, and I'll come back because I forgot to cover your other part of your question, which was on NIM. But the TOP 9 , I mean, this has been—you know, we asked ourselves that at TOP 5 , right? And we've found four more programs and transformational programs since then. You know, when we look at TOP 9 , we're excited about TOP 9 . We've got all of the traditional, you know, components, which include organizational simplification, third-party spend, you know, those kinds of things that we tend to do quite well. But there's a lot of new opportunities on the horizon, different ways to use automation tools to, you know, migrate from manual processes to automated processes. And then, of course, the big category of Gen AI.
We've got a number of interesting use cases that we are exploring and maybe wanting to get into next year. So stay tuned on TOP 9 . And we're feeling good about that. I mean, going back to net interest margin, you asked about the 3%. I'm feeling good about the 3% as you get into the end of the year. I think we're going to build liquidity, and so that'll have, you know, a net interest margin headwind, but not so much on NII. It's pretty flatish on NII. But you know, the offsetting aspects of that would include the fact that our non-core portfolio actually contributes to net interest margin when you get into the end of the year.
So you'll see some, you know, in the third quarter, maybe a similar decline in 3Q that we saw in 2Q, but then seeing that flatten out as you get into the end of the year. And as we're updating here in September, we still see, you know, around that 3%-ish NIM being a good number as you exit 2023. And also, I might add that, you know, jumping out into 2024 as we look out, we see some offsetting forces in 2024 as well, so that we still think that, as we mentioned on our July call, that exiting 2024, 3% is something that we see also.
Yeah. A minute left, so I'll use it for office CRE. You did, you did give us more details on the July debt, so we appreciate that. But maybe just talk to in terms of, you know, anything new you're seeing through the vacancy rate, sales, transactions. Obviously, you built a - you have a reserve. Just is that the right reserve? And just to kind of review on how things play out.
Yeah, the reserve looks good. The reserve, around 8%, we're likely to be around there, you know, possibly even a touch higher, but right around there as you get to the end of the third quarter ±. And that's after recording charge-offs in the second quarter, putting that behind us. We'll charge-offs in the third quarter, and we'll put that behind us. And nevertheless, we still have a similar, you know, ACL level against general office. So you're really kind of leaning in here when you do it in that manner. That 8% environment assumes approximately 70% decline in valuation, which would translate to a 50% loss rate on the book, translating to about a 16%, you know, kind of, default.
Those are pretty stressful environments, and, you know, and we're going to have that, you know, sort of protection at the end of the third quarter, even after cleaning up some of the book and with a strong capital base to actually, you know, be there for any unexpected needs beyond that. So we're feeling pretty good about it. It's the early innings. It's going to be a multi-year process for office CRE, as we know. But, you know, we're working our way through it and feel like we've got it handled from a financial standpoint.
Great. With that, please join me in thanking John and Brendan for their time today. Next up, Huntington.