Citizens Financial Group Inc

NYSE:CFG

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, everyone and welcome to the Citizens Financial Group First Quarter 2022 Earnings Conference Call. My name is Tony and I will be your operator today. [Operator Instructions] As a reminder, this event is being recorded. Now, I will turn the call over to Kristin Silberberg, Executive Vice President, Investor Relations. Kristin, you may begin.

[Kristin Silberberg, Executive Vice President, Investor Relations]

Thank you, Tony. Good morning, everyone and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our first quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color.

We will be referencing our first quarter earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also referenced non-GAAP financial measures, so it’s important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix.

With that, I will hand over to you, Bruce.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Thanks, Kristin. Good morning, everyone and thanks for joining our call today. There clearly have been changes in the external environment relative to what was expected coming into the year, along with significant volatility. We feel we have executed well in this environment and are positioned to perform well over the course of 2022. Among the highlights of the quarter, we had a successful conversion of the HSBC branch and online customers, which was then followed by closing the Investors acquisition on April 6. We continue to take actions to position our balance sheet well for rising rates and we have made further progress on our strategic initiatives, including our digital agenda and TOP 7 program.

With respect to our financial results, we are off to a good start with underlying EPS of $1.07 and ROTCE of 13%. This is generally our softest quarter from a seasonal standpoint given fewer days in the quarter and the impact of payroll taxes on expenses. Net interest income was up 2% sequentially, given 3% average loan growth and higher NIM, which more than offset a sizable drag from lower PPP loan forgiveness revenue and day count. We saw lower revenue in capital markets and mortgage given the environment, though high volatility benefited our Global Markets hedging business. We maintained strong deal pipelines in capital markets and remain optimistic for a significant revenue pickup if markets stabilize. We managed expenses well in the quarter and turnover has normalized somewhat. Credit metrics are all excellent and so far both our consumer and corporate customers are navigating well through the current challenges.

Our balance sheet remains in great shape with a CET1 ratio of 9.7%. We have the capacity to grow loans, pursue fee-based bolt-on acquisitions, raise our dividend in the second half of the year and buyback some stock. Our loan growth has picked up on the commercial side and we plan to throttle back our growth in mortgage and auto a little, which will maintain an attractive LDR.

I’d like to shift gears to emphasize a few key points that are topical for investors at the moment. First, and to be clear, we will benefit nicely from the accelerated path to higher rates. Our funding base is vastly improved from where it was entering the last rate up-cycle. We have a 7% benefit from a 200 basis point gradual rise in rates, a 10 basis point cost of interest-bearing deposits and an 83% loan-to-deposit ratio. We project roughly $300 million in higher NII given the current curve, which annualizes to much more in 2023. This will more than offset roughly $100 million in lower fee income from the environment. John will take you through this in detail in his remarks.

Second, while inflation pressures are real and the possibility of recession in 2023 has increased, we feel our credit risk position is in very good shape. We have maintained a super prime to high prime risk appetite in consumer and over time we have migrated our credit exposure in commercial to bigger companies who have better credit profiles. As a result, our overall credit profile has improved over time. Our real-life and CCAR stress test results demonstrate that our credit profile is slightly better than middle of the super regional pack and we have carefully assessed investors’ credit book and loss history and remain confident in their positioning, which we will further harmonize over time.

Lastly, with respect to acquisitions, I would like to highlight that our focus in ‘22 is on integrating the acquisitions that we made last year and getting each of those off to a strong start, particularly our New York City Metro area initiative. We will still look for acquisitions in the wealth space, but we are highly disciplined acquirer and have not been able to get much done as a result. With respect to Florida, we now have 8 branches in the state and job one is bringing them to network performance levels. There does not appear to be much to do that’s attractive inorganically and the likely path is that we will open several more wealth centers in additional cities down the road. In short, you can count on us to maintain the strong financial discipline we have exhibited since the IPO. All-in-all, we feel very good about how we have started the year and how we are positioned to navigate the challenging environment. Given the significant move in rates and the closing of the two bank acquisitions, we have provided detailed guidance in our earnings presentation to assist analysts and investors in updating their models. We continue our journey to building a great bank that can do ever more for our stakeholders.

And with that, I will turn it over to John.

[John Woods, Chief Financial Officer]

Great. Thanks, Bruce. Good morning, everyone. First, I will start with our headlines for the quarter. We have reported underlying net income of $476 million and EPS of $1.07. Our underlying ROTCE for the quarter was 13%, which includes the impact of a modest credit provision benefit.

Net interest income was up 2% linked quarter, driven by strong loan growth and a 9 basis point improvement in margin. Period-end loan growth was up a solid 2% linked quarter. Our retail loans are up about 3%, while commercial loans are up 2% or 3% ex-PPP impacts. Average loans are up 3% linked quarter paced by commercial, up 3% or 4% ex-PPP and retail up 3%. Fees were down 16% linked quarter, driven primarily by lower capital markets fees off a record prior quarter given market volatility, seasonal impacts and some pull-forward of transactions into the fourth quarter. On a positive note, we had our best quarter ever in interest rate and commodities revenues as we help clients manage through the volatile environment.

We remain disciplined on expenses, which were up 3% sequentially, excluding acquisitions, reflecting seasonal payroll tax impacts. Year-over-year expenses were up a modest 2% excluding acquisitions. We recorded an underlying credit provision benefit of $21 million, which reflects strong credit performance across the retail and commercial portfolios. The near-term macroeconomic outlook remains positive though we are monitoring whether Fed actions to slow inflation can do so while engineering a soft landing for the economy.

The underlying credit benefit for the quarter excludes $24 million for the double count of Day 1 CECL provision expense tied to the HSBC transaction. Our ACL ratio stands at 1.43%, down slightly from 1.51% at the end of 2021 and the 1.47% Day 1 CECL level. Our tangible book value per share was down 10.5% linked quarter, driven primarily by the impact of rising rates of securities and hedge valuations that impact AOCI. We continue to have a very strong capital position with CET1 at 9.7% after a 20 basis point impact from the HSBC transaction.

Next, I will provide some key takeaways for the first quarter while referring to the presentation slides. Net interest income on Slide 6 was up 2%, given strong loan growth and the benefit of higher rates more than offsetting the approximately $41 million combined impact from lower day count and the reduced benefit from PPP forgiveness. The net interest margin was 2.75%, up 9 basis points, reflecting the benefit of higher rates with front book yields rising, which more than offset reduced PPP benefit. Margin is also benefiting from lower cash balances as we continue to redeploy some of our excess liquidity into loan growth. Of note, PPP spot loans were down to roughly $400 million at quarter end and forgiveness benefit headwinds are substantially behind us. We made continued progress lowering our interest-bearing deposit costs, which are now 10 basis points, an all-time low, down 3 basis points linked quarter.

Moving to Slide 7, given the Fed’s recent rate hike and the expectation for Fed funds rate to end the year in the 225 to 250 basis points range, we thought it would be helpful to discuss why we are confident that we will realize meaningful benefits from rising rates as the forward curve plays out. We entered this rate cycle with a much higher level of asset sensitivity at 10% before the first rate hike in March. This is already starting to benefit NII in the first quarter and is driving the significant improvement in our full year outlook and those benefits will continue to accumulate into 2023.

Importantly, our expected asset sensitivity reflects how we have completely transformed our funding base since the IPO. We are beginning the current up-cycle with a very strong liquidity profile. Our LDR is much lower. Our deposit costs are as low as they have ever been and our overall funding profile was greatly improved. Our period end demand deposits are now 32% of the book compared with 27% at the beginning of the last rate cycle. And within our interest-bearing deposits, our consumer CDs are now less than 3% of total deposits compared with about 10% at the start of the last cycle. We are also starting this cycle with a much lower level of floating wholesale funding. This improved deposit profile reflects the significant improvements we have made to our deposit franchise since the IPO with improved and expanded retail and commercial deposit offerings.

We have also enhanced data analytics that allow us to attract and retain more stable deposits. With a better starting position and the improvements in our deposit mix and capabilities, we expect our interest-bearing beta to be about 35% over this freight cycle, which is meaningfully lower than the last cycle. Our overall asset sensitivity stands at 7% at the end of the first quarter. This is down modestly from 10% at the end of 4Q, with the decrease primarily driven by the denominator impact of our higher NII outlook given the benefits from the April 6 forward curve and the evolution in the balance sheet.

Pro forma from the Investors acquisition, asset sensitivity is slightly over 6%. Since the path of the rate cycle is uncertain, on the bottom left side of this page, we have given you an estimate of our sensitivity to further changes in rates either up or down from the forward curve. Essentially, a 25 basis point instantaneous change in the forward curve is worth about $20 million to $25 million a quarter, with most of that coming from our exposure to the short end of the curve. This includes the pro forma impact of Investors.

Moving on to Slide 8, we delivered good fee results this quarter despite headwinds for capital markets, demonstrating the strength and diversity of our businesses and we drove solid performance across other key categories. Capital markets delivered solid results despite the market volatility, seasonal impacts and some pull forward into the full fourth quarter of 2021. Given the strength of our pipelines, capital markets fees could rebound nicely as markets settle down and there is more certainty regarding the path of the economy. Demonstrating the diversity of our business, we delivered our best quarterly results ever in global markets, a 46% linked quarter as we worked with clients to manage their foreign exchange, interest rate and commodity exposures.

Mortgage fees were down 9% linked quarter against a backdrop of lower industry origination volumes, given rising rates and seasonal impacts. Strong competition and excess industry capacity continue to pressure margins. Mortgage servicing income improved as higher mortgage rates resulted in slower amortization of the MSR. Card fees and service charges and fees were slightly lower linked quarter given seasonality. Debit transactions and credit card spend continued to exceed pre-pandemic levels and wealth fees also remain strong.

On Slide 9, expenses were well controlled, up 3% linked quarter and just 2% year-on-year, excluding acquisitions. Our TOP 7 efficiency program is well underway, targeting $100 million of pre-tax run-rate benefits by the end of the year. Period-end loans on Slide 10 were up 2% linked quarter. We were pleased to see strong commercial loan growth again this quarter, up 2% or 3% ex-PPP. Average loans were up 3% linked quarter. Driving this was average commercial loan growth of 3% or 4% ex-PPP impacts, led by C&I with growth across almost every region, including our expansion markets. Average retail growth was also 3%. Line utilization began to rebound a bit with an increase of about 150 basis points to a little over 36% on a spot basis, primarily driven by corporate banking led by manufacturing and trade as companies look to build inventories to get ahead of supply chain issues and rising input prices and facilitate some M&A activity.

On Slide 11, our period end deposits were up 3% linked quarter as we added $6.3 billion of lower cost deposits with the HSBC transaction. Excluding HSBC, period end and average deposits were down slightly, given seasonal impacts as well as continued normalization from elevated liquidity levels.

Moving on to credit on Slide 12, we saw an excellent credit results again this quarter across the retail and commercial portfolios. Net charge-offs were up slightly at 19 basis points for the first quarter, with good performance across the portfolio. Non-performing loans increased by $87 million linked quarter, primarily driven by residential real estate secured loans exiting forbearance. Other credit metrics continue to look excellent across the retail and commercial portfolios and criticized loans were lower. While we are mindful of inflationary pressures and the higher possibility of recession, we feel good about the improvements in the portfolio we have made over the last few years and the overall positioning of our credit risk.

In the appendix on Slide 21, you will see that the risk profile of our commercial portfolio has significantly improved given changes through the pandemic, including prudent lending and a focus on growing the bigger mid-corporate credit portfolio, which is higher rated as well as reductions in stressed sectors such as retail malls, education and casual dining. On the retail side, we continue to focus on the super prime and prime segments. Our risk profile has improved given our disciplined risk appetite and changes in our portfolio mix, including the runoff of our personal and secured product. Of note, the Investors portfolios have performed well in prior cycles and we feel good about them.

Moving to Slide 13, we maintained excellent balance sheet strength. Our CET1 ratio remained strong at 9.7% at the end of the first quarter after closing the HSBC transaction, which had a 20 basis point impact. We also wanted to mention that we have widened our target CET1 operating range to 9.5% to 10% from 9.75% to 10%, reflective of the continued progress we have made in improving profitability, revenue diversity and overall risk management. Our fundamental priorities for deploying capital have not changed as you can expect us to remain extremely disciplined in how we manage the company.

Shifting gears a bit, on Slide 14, you will see some examples of the progress we have made against the key strategic initiatives and other work we are doing across the bank to better serve our customers and make Citizens a great place to work. As you know, we closed the acquisition of Investors at the beginning of April, further expanding the foothold we established in the New York City Metro area through the HSBC branch transaction and significantly advancing our growth plans. In the consumer business, we were excited to complete the upgrade of Citizens Access to a fully cloud-enabled core platform, which enhances the capabilities of our national digital bank and is the first step toward our multiyear objective of convergence with our core banking platforms. We also recently announced Citizens ever value checking, a new overdraft free checking account designed to meet bank on national account standards and increased banking access for underserved communities.

On the commercial side, we continue to perform well in the league tables, consistently ranking in the TOP 10 as a middle-market and sponsor book runner. On the right side of the page, we have included some digital metrics. We are very excited with how our digital first approach is increasing engagement with our customers and how this is all translating into a better experience and higher satisfaction.

Given the significant change in the rate environment and the closing of our two bank acquisitions, we provided a comprehensive update to our 2022 guidance on Slide 15. The good news here is that our guide is up for our standalone business. Rates are helping NII more than offsetting the fact that we are down a little on fees. So, PPNR is higher and there is no change in our positive view on credit and we remain confident in the outlook for the bank deals.

I will focus my comments on the full year outlook, including both HSBC and investors, but we have also added the standalone outlook without the bank deals to help isolate performance. We have also included a comparison to our original guide from January to help highlight what is driving the overall improvement in the full year outlook. The rate scenario used in our outlook is based on the forward curve as of April 6, which implies a Fed Fund’s target of 225 to 250 basis points by the end of the year. On the long end, this rate curve implies the 10-year treasury to be about 270 basis points at the end of the year. It is also useful to keep in mind that the cumulative benefit from rates would also represent meaningful full year effect upside to NII in 2023.

For 2022, we expect NII to be up 27% to 30% driven primarily by the improved rate environment and solid average loan growth of 20% to 22%. On a standalone basis, NII is about $290 million to $330 million better than our prior guidance given the higher rates. Average interest-earning assets are expected to be up 14% to 16%. Fee income is expected to be up 3% to 7%. On a standalone basis, fee revenue will be about $100 million lower than the January guide as the environment will impact mortgage revenue as well as capital markets somewhat.

Non-interest expense is expected to be up 16% to 18% given the full year effect of HSBC and Investors as well as our commercial fee-based acquisitions. Credit is expected to remain excellent with net charge-offs broadly stable to down slightly for the year and we expect to end the year with a CET1 ratio of about 9.75%, which incorporates an anticipated increase in our dividends in the second half of the year. Our capital projections include the impact of our expected notable items for the year, including the integration expenses for the acquisitions and our TOP 7 costs. You can see those in the appendix on Slide 20.

Importantly, we expect to deliver positive operating leverage of approximately 2% on an underlying basis for the year, excluding the acquisitions. And if you set aside the impact of PPP, that would be over 4% operating leverage. Including acquisitions, we expect operating leverage of over 4% and over 7%, excluding PPP. Overall, we expect our full year ROTCE to land solidly within our 14% to 16% medium-term target range.

Moving to Slide 15, I will walk through the outlook for the second quarter. On a standalone basis, we expect NII to be up 6% to 8%, driven by the benefit of higher rates and solid loan growth. With the bank acquisitions, we expect NII to be up 27% to 29%. On a standalone basis, average loans are expected to be up 1% to 2%, led by commercial, with interest-earning assets up slightly. Fees are expected to be up 3% to 5% on a standalone basis, reflecting some improvement in capital markets and seasonal benefits. Including the acquisitions, fees are expected to be up 7% to 9%. Non-interest expense on a standalone basis is expected to be up 1% to 2% given higher revenue-based compensation. Including the acquisitions, expenses are expected to be up 12% to 13%. Net charge-offs are expected to be broadly stable, and we expect our CET1 ratio to land at around 9.75%.

To sum up with Slide 17 and 18, we started ‘22 with a solid quarter. We have a winning strategy and are well positioned to succeed given the strength and diversity of our businesses. We are very optimistic about the outlook for the rest of 2022 and beyond. We expect to materially benefit from a higher rate environment and strong loan growth. Our capital markets business is well-positioned as markets stabilize and we are very excited about the opportunity to grow our business in the New York Metro region as we integrate and build on HSBC and Investors. We will continue to focus on execution and building a top performing bank that delivers for all our stakeholders.

With that, I will hand it back over to Bruce.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Okay. Thank you, John. Operator, let’s open it up for some Q&A.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Scott Siefers with Piper Sandler. Your line is now open.

[Scott Siefers, Piper Sandler]

Good morning, guys. Thank you for taking the question. I was hoping maybe you could spend just a moment discussing sort of the magnitude of recovery you are assuming in the capital markets environment in the forward guide. It looks like you assume some recovery in the second quarter, but of course, moderated the full year target a bit. Just curious for some thoughts or color on how you see things trajecting from here?

[John Woods, Chief Financial Officer]

Yes. I will go ahead and start off on that. I mean I think you had number of impacts there that we are building into the guide. I’d say that we mentioned our $100 million guide over guide, which is driven primarily by mortgage. But there is some capital markets implications there as well given the fact that 1Q, we had some pull forward into the fourth quarter. If you look back at the fourth quarter, we had a record quarter, but our pipelines look excellent. And so there could be a little bit of time to build that back into delivering in the last three quarters of the year. But as markets stabilize, we really think that the momentum there is strong. And so maybe Don can cover.

[Don McCree, Head, Commercial Banking]

Yes, I think it’s a tale of a couple of different cities. So, one thing we are seeing is quite a bit of strength in the loan market, the syndicated loan market. So, while the bond market is particularly high yield and the equity markets have been pretty much close for the last few months, we are seeing some rotation into the syndicated loan markets as the liquidity there kind of rebuild and you have seen quite a dramatic rally in the loan markets over the last couple of days actually. And that’s been quite supportive. So, I think the second quarter will be really a story about syndicated lending. And then if we get a reduction in volatility, we think we are going to begin to see the bond markets reopen a little bit and the equity markets reopen. I will say what John said, which is our pitch activity, our pipelines and our mandates are extremely strong. And so, it’s really a matter of waiting for the constructive in the markets to return and then we will begin to bring deals. And we saw three or four deals start to emerge last week, which we were on and we feel pretty good about, particularly in the back half of the year.

[Bruce Van Saun, Chairman and Chief Executive Officer]

The other thing you didn’t mention is the M&A pipeline, which I think still looks really, really good. And again there, if the market stabilized a little bit, I think we will start to pull those deals through and it’s typically seasonal that the fourth quarter is huge, which it was for us in 2021. And then the first quarter is usually softer seasonally, pipelines look good. And I think as the year goes, we should see a nice build in M&A revenue.

[Don McCree, Head, Commercial Banking]

Yes. I will also just amplify that, Bruce, to say a lot of our capital markets and M&A activity surrounds private equity. So, private equity is still flushed with cash and they actually are looking at quite interesting valuations in the market right now. So, it’s a matter of matching sellers kind of desires and buyers desires and that will just take a little time to kind of work through the system.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes, good.

[Scott Siefers, Piper Sandler]

Wonderful. That’s good color. Thank you. And then, John, was something you could talk just a bit about how your rate sensitivity changes as the cycle progresses meaning effectively, how do the first few rate hikes look in your mind versus the next several?

[John Woods, Chief Financial Officer]

So did you say asset sensitivity or was it just – I missed the...

[Scott Siefers, Piper Sandler]

In other words, how much more powerful are the first few rate hikes than the next two?

[John Woods, Chief Financial Officer]

Yes. I mean, I’d say that the – we mentioned our $20 million to $25 million per instantaneous 25 rate hike, and that’s really an average. So you get a little more on the front and maybe a little less as you get to the end of it. And that’s really driven by deposit betas, which are going to be extremely well controlled in the first 100. And then that starts to build into the second 100 and then beyond. So yes, I think you will see possibly a bit more on the front end. When we’re seeing those lag effect in deposit betas contribute a touch more and then it will be a little lower on the back end. I will mention is the other point that 20% to 25% is an average, but it’s also a first year average. And so there is actually more upside when you get into – even if it’s instantaneous, you still get a lag effect benefit from the asset side as well as assets reprice. So you might see, for example, in year 2, even for an instantaneous 25 basis point change, you would see upside from there in the 15% to 20% range on top of that as you get into rolling year 2.

[Scott Siefers, Piper Sandler]

Perfect. Alright, thank you very much.

[Operator]

Thank you. Your next question comes from the line of Erika Najarian with UBS. Your line is open.

[Erika Najarian, UBS]

Thank you so much for Slide 7. And I guess, John, maybe let me start my line of questioning here. So your current asset sensitivity from here is pro forma for Investors. I wanted to understand the comment that was made earlier about acceleration, right? So on one hand, we do expect deposit betas to accelerate as we are deeper into the rate cycle. But on the other hand, you have some drops on your portfolio today. Can you talk a bit about the interplay of both? And how should we think of this asset sensitivity as we move forward in the rate cycle? And does the swap portfolio give you a different trajectory for enhanced sensitivity later?

[John Woods, Chief Financial Officer]

Yes. Thanks, Erika. I think if you’re on Page 7, I mean, I think that the drivers there are that we’re entering this cycle were much better positioned than the last cycle. When you think about just the starting point with interest-bearing deposit costs being at 10 basis points, an all-time low for us, we started the last cycle at 34 basis points. And the balance sheet position, the mix on the deposit side is much better with 32% noninterest-bearing. So we feel – just we’re much better prepared to benefit from rising rates this time around. We still benefited from rising rates last time around, by the way, but we’re much better prepared to benefit from this side around – this time around on deposit betas, given all of the strength on the balance sheet.

I’d say when you ask about balance sheet, I mean, I think – and swaps, you really have to think about in the context of the entire balance sheet. So we do have a significant amount of asset sensitivity left to play out. That will decline over time as NII keeps rising, as I mentioned in my remarks, the denominator effect as we update and increase our NII, that alone reduces the percentage of further benefit that could occur for future rate hikes, just dollar for dollar, it’s fine, but the percentages fall. But I do think that there is significant firepower left, both with respect to the balance sheet loan growth part of the story as well as much more hedging left to do before asset sensitivity gets anywhere near neutral. So that’s how I would describe it. I mean in terms of deposit betas, again, 2022, you’re going to see a lot of lag, a lot of lag in the first 100. It will start to catch up maybe in the second 100. And then if we really do get to 300 basis points in Fed funds, you’ll see some of that catch up in 2023. And then I’ll just close out with our conversation about NII being up $290 million to $330 million guide over guide is an important thing to focus on, and that’s on a gradual rate rising scenario. It may be – it could be – it’s much higher in a full year effect when you get to 2023 approaching maybe 2x that.

[Bruce Van Saun, Chairman and Chief Executive Officer]

And I would just add, Erika, that we’ve been I think, very keen to leave the asset sensitivity high and not do significant additional swaps we’ve done a bit. But anyway, we’re still, I think, of the view that rates could go even higher here. So feel good about how we’re positioned right now.

[Erika Najarian, UBS]

Got it. And the second question is for you, Bruce. The stock is having a good start to the day, but the valuation on tangible book value is underneath your ROTCE landing point for the year, either on a standalone or a pro forma basis. I guess what do you think in your estimation that the market doesn’t understand about the improvement that the bank has made since the IPO? And wondering, I think part of that is the asset sensitivity and deposits. Wondering if you could answer that question as the way – however way you want to, but also could you give us a sense of how much checking accounts you have, for example, on the consumer side versus previous? And maybe remind us why you have to keep what seems like a 50 to 100 basis point higher capital level than a lot of your regional peers?

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes. There is a lot in that. I’ll try to unpack that, Erika. But I think partly the – our objective here is to continue to perform well through cycles. And so we’re a relatively new company with a relatively fresh management team. And so I think when the market goes into a risk thought posture, some assumptions how are they going to do, we’re not as – we don’t have the historical track record of some of our peers, I think. I think we’ve done a good job of dispelling some of those worry beads when we went through the pandemic, and our credit performance was very good. I think there was some concern for law that we’ve grown the balance sheet fairly quickly to get releveraged after the IPO and was that going to end in tiers. And we’ve said all along and we’ve been very disciplined in terms of where we were lending money and how we were allocating capital, and I think that’s borne fruit.

I think now with an up cycle, at the beginning of the year when the environment looked like rates were going to go up gradually to use a Goldilocks example, that was the page was just right scenario. And so our stock performed quite well out of the chute. I think once it became clear that the Fed was behind the curve and was going to start to raise rates much more aggressively, I think then you kind of tipped into it, well, maybe the is too hot. And will our deposit betas go up too fast and curtail some of the benefit from higher rates. And I think, again, with all the work we’ve done and analysis we’ve provided, we’re quite confident that the liability side of this bank is much, much better than it’s ever been. We’ve done a lot of hard work on that. And so we still think whether the path is fast or whether it’s more gradual, we’re going to benefit significantly in terms of interest rates. I’d say also on fees, there is probably a concern that we’ve built up some areas that maybe are more volatile in capital markets and mortgage is kind of a big fee elements for us. Having said that, I think you’ve seen that there is good diversity in our fees. And so in a pandemic period, when capital markets were a bit softer, mortgage revenues were really, really strong, given lower rates, and we see – we can see that flip around. But I think the fact that we’ve assembled an excellent commercial bank with very strong capabilities and have targeted focus on private capital and serving private capital and helping the industries that really are the engine of the economy, technology, health care with our JMP acquisition, I think we’re very confident that we can grow revenue sustainably in capital markets and they’ll move around a little bit from quarter-to-quarter. But I think the trend line is upwards and to the right. And again, on the mortgage business, I think we’ve built that out to have a nice diversity of revenues across wholesale channels in our retail channel. I think we can combat some of the lower production volumes by building market share. So we plan to hire more this year. So I think all of these aspects are take time for the market to come around and fully appreciate, and we will just keep doing what we’re doing and putting up good results and executing well. And then I think, ultimately, the stock will take care of itself.

With respect to the non-interest-bearing liabilities, I mean, the DDAs as a percentage of the total deposit base is up to about 32%. I think when I walked in the door at the time of the IPO that was probably in the low 20s. So that’s been a dramatic improvement, focusing on total value proposition to certain target customer segments on the consumer side and then also on the commercial side actually just building out our capabilities and investing in our core platform and cash management offering. And so it’s just been a gradual improvement over time as we enhanced our abilities and our targeting and we’ve had nice growth as a result. So I think I’ll stop there. Does anybody want to add to that, Brendan, do you want to talk about consumer deposits and Don on the commercial?

[Brendan Coughlin, Head, Consumer Banking]

I’m happy to give – Erika, you had asked about sort of the counts of checking account customers. Just kind of a couple of quick points, when you look at total relationships in the consumer bank, when we went public, we had about 2.9 million to 3 million customers. We now have over 7 million customers in total. Now some of those are loan customers. So when you unpack that to core deposit customers, that number is sort of we went from 2.9 million to 3.5 million customers. So that’s good growth, but that’s really not where the action is in the story versus sort of heading down this path really under the covers on that growth, which we’ve been in sort of top quartile growth of our peers has been a quality transformation. So there is been a dramatic overhaul in how many customers view us as their primary bank. And more than 100% of the growth in the household base has come from mass affluent and affluent customers. So when you combine the higher quality customer with deeper relationships, that’s what’s driving a lot of the improvement in DDA and non-interest-bearing deposits, which is very sustainable. That’s kind of ground game a lot of work over multiple quarters over a lot of years to get that to scale. And look, we still have some running room. I think there is still oxygen left in tank for us to continue to improve the quality of the customer base. We’ve made a lot of progress in catching up to peers, but we still have momentum. It does not seem to be slowing. I think you should expect more and more of that putting aside what happens with the excess stimulus deposits under the coverage, the quality story is still continuing and continuing at scale. The other point I’d make mention obviously you think about betas for this up cycle last time because of the low DDA balances that we had in consumer, we had about $10 billion in CDs. Now we start that period with only $3 billion. And so – when we look a lot more like a bigger sized bank in terms of deposit composition than we do smaller-sized bank where we’re not as rate sensitive in how we’re driving deposits because of that quality transformation that you see in the customer base.

[Don McCree, Head, Commercial Banking]

Yes. And I’ll just emphasize, Bruce, what you said in terms of – we’ve gone through a complete reconstruction of our treasury service business. So it was frankly a basket case 6 years ago. And now I would put it up against any other company’s treasury service business, and that’s driving an above trend growth rate, 7% to 10% in terms of year-on-year growth and also driving a skew towards non-interest-bearing deposits. And we didn’t even have a deposit team 6 years ago. And now we have a built-out team, which has got fantastic analytics and bringing new offerings like green deposits in the ESG agenda and also building a liquidity portal. So, it’s a totally different place and we’re seeing the results in terms of deposit levels, and we’re seeing the skew towards non-interest-bearing also.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes. So we’re giving you a long-winded answer, Erika, but I wanted to just come back to the last thing you touched on which was ROTCE and also our capital targets. So I think we’re pleased that we can say that we will be solidly in the range for our medium-term targets this year, the 14% to 16%. And you can see that where we were in the first quarter, that should ramp, and so we could be even stronger, I think, as we exit the year. So feel very good about that. We did move the targets from 9.75 to 10 to 9.5 to 10. So we moved them modestly. I’m still a big believer in being somewhat conservative on the capital, particularly as, as I said, we’re a relatively new company. And so I think all our stakeholders from maybe being slightly higher than our peers. But if you look at it over time, we’ve been converging to peers. And honestly, when you look at the CCAR results and our risk profile, there is no reason that longer term we will need to have that premium.

[Erika Najarian, UBS]

Thank you for the complete answer.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Sure.

[Operator]

Thank you. Your next question comes from the line of Brian Foran of Autonomous. Your line is now open.

[Brian Foran, Autonomous]

Hey, good morning. Maybe to follow-up on deposits, you have been very clear and convincing on the improvement in the book. So that’s appreciated and great information. As you think also about the ability to grow deposits over the next 2 years, I wonder – and there is a lot of moving parts. There is no one answer. But if you could just give your thoughts on the ability to grow deposits overall and maybe I’ll touch on consumer versus commercial and how that might behave as rates go up?

[John Woods, Chief Financial Officer]

Yes. Great question, Brian. I appreciate it. I think that if you basically look at excellent opportunities for our deposits over time as our product lineup on both consumer and commercial have improved. And I think if you separate the expectation for – as rates rise, there is some impact on how those deposits play out. There is also the surge deposits that came in, in the pandemic that all appear to be a lot stickier than maybe a lot of us thought when they first showed up. I do think more broadly when you think about the macro, deposits have grown consistently over the last several decades under a number of different macroeconomic scenarios even through quantitative tightening and the like, the banking industry deposit growth seems to continue to chug along. So we’re optimistic that the industry as a whole and we, in particular, given our significantly expanded product capabilities, we will be able to continue to drive really strong deposit growth on both consumer and commercial side. So maybe I’ll just turn it over to Brendan and then maybe Don.

[Brendan Coughlin, Head, Consumer Banking]

Yes. Look, I think we’ve demonstrated in a variety of cycles, the ability to deposits at scale. The question is always at what cost? And I think we’re in a dramatically different position in up cycle than we were certainly in the last up cycle, we continue to make improvements sort of on the consumer side, starting with just the breadth of the levers that we’ve built, whether it’s the Citizens Access platform nationally to raise deposits away from our core book the new markets that we’re entering, where we’ve got a solid and stable deposit base, but we think there is a lot of up running room. And in fact, we’re starting to see signs already. We’ve got $100 million in inflow of balanced sales already in the New York market from great execution and solid sales. So we’re optimistic continuing to go forward, that can continue. And as we bring convert the customer base from investors closely they want into the platform, we think that same opportunity will exist in New Jersey. And then our analytics have improved materially over the last couple of years, which allows us to be even more targeted. And when you marry that with what I said a minute ago around just the quality and engagement of our customer base, the confidence of being able to grow deposits with highly engaged customers at more market rates than needing to reach for promo rates. So I feel really good that we will be able to grow at the pace we need with a much more moderate cost.

[Don McCree, Head, Commercial Banking]

Yes. I’ll just – I think I said a lot of it in the last comment around treasury services and the growth of that business. But also remember, we’re expanding aggressively in terms of our client base. So we’re in expansion markets. We’re adding a lot of clients and with that comes the opportunity to gather deposits at reasonable costs. So we feel pretty good about it. But I’ll go back to what Brendan said also, it’s really a matter of the day-to-day balancing of volume versus cost and managing that against the asset side of the balance sheet and where we can redeploy capital. So it’s something that we manage carefully, but I feel confident that we’re going to continue to expand the deposit base.

[Brian Foran, Autonomous]

I appreciate all that. I will say I’m a Citizens Access customer. I am not loving the renewed beta assumptions you’re making, but I guess I’ll have to live with it.

[Brendan Coughlin, Head, Consumer Banking]

Well, you can count on us continuing to be disciplined yet competitive.

[Brian Foran, Autonomous]

Thank you very much. Appreciate it.

[Operator]

Thank you. Your next question comes from the line of Betsy Graseck with Morgan Stanley. Your line is now open.

[Betsy Graseck, Morgan Stanley]

Hi, good morning.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Good morning.

[Betsy Graseck, Morgan Stanley]

Two questions. One was just on the most recent conversation that we had on deposit growth. I was intrigued by that. Relative to Bruce, your comment about flowing resi and auto lending growth to, I don’t know, if this is the right word, but keep the LDR, protect the LDR at around the 83% level. So I guess I just wanted to understand if that comment about LDR was more about the deposit growth rate that you were talking to just now? Or was that because of the just opportunities in resi and auto that you’re not seeing as much as maybe you have had over the past few quarters?

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes. I’d say it’s kind of a factor of a number of considerations. One is that we’re already seeing very strong loan demand on the commercial side. We’re seeing line utilization tick up. So there can be somewhat of a rotation over into more growth on commercial. Therefore, when we look at consumer and in the higher rate environment, some of the margins on the lending in areas like auto and mortgage aren’t what they used to be. And so we can still get to the loan growth assumptions that we had coming into the year with that rotation up to more commercial and throttling back a little bit on the consumer side. And we could keep the pedal to the floor and keep pushing on bringing in those consumer assets, but we think we don’t need to do that at this point. We’ve got NIM going up. The rate hikes is providing a big lift. And if the marginal return on that incremental lending in the consumer side for mortgage and auto isn’t hitting our hurdles, and we have no problem backing off that. The net result of that is that, that benefits the LDR versus keeping the pedal to the floor. So we think that’s a trade-off we’re taking.

[Betsy Graseck, Morgan Stanley]

Okay. And then just your – I guess the underlying question is how high are you willing for LDR to go? And then I also had just a quick question just on yields in general. This past quarter, you had some nice uplift in resi and the securities book, other retail loans. And I’m just wondering was that a function of swap activity that drove up those yields 2Q or was there – it didn’t look like the balances would have driven that 2Q. So just wondering how the deals went there? Thanks.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes. Let me start off and then maybe John and Brendan can add on the yield question. But we’ve been – historically, since the IPO, we’ve had a relatively higher LDR that we worked hard to bring down from the high 90s down into the mid-90s. And then with this big influx of liquidity into the market, we’ve been able to bring the LDR back down to 80-ish and it’s inching up a little bit here with all the loan growth that we’re experiencing. I think we should still be able to manage that in the ‘80s, and I can’t really call exactly where that’s likely to be partly depends on the amount of loan growth that we see. But I think just the way we, over time, brought it from high 90s down into mid-90s and I think we can take another step function here with all the liquidity that we have in the house and continue to manage that in a reasonably conservative position with lots of liquidity. So that would be my answer there. John, maybe you want to pick up the yields?

[John Woods, Chief Financial Officer]

Yes, I’ll start off on securities and maybe Brendan can take mortgage. But I can tell you, overall, that it’s not swap activity that’s having an impact on either of those. And as it relates to securities, just to give you a sense, there is two dynamics going on there. One is the front book where current yields on the stuff coming into the portfolio are north of 3%. So we’re in the 300 to 330 basis point range, that’s a driver in 1Q. It wasn’t at that level during 1Q, but it was well over 2%. It was probably 230 to 250 during the first quarter, and that was compared to maybe 175 in 4Q. So that’s the dynamic you’re seeing 1.75 in 4Q, 2.30-ish in 1Q and announced over 3%. So that will continue into the second quarter. The other dynamic is the back book premium amortization tends – declines when rates rise. So you’re seeing the tailwind from that into the securities book. And so that’s the driver there. And maybe Brendan can talk about mortgages.

[Brendan Coughlin, Head, Consumer Banking]

Yes. There is a handful of things on the consumer side. So on other retail, there is a good percentage of that book that’s variable linked to the market with our merchant partners and such. And you’re going to see that kind of ramp up as the market changes. On the resi side, we’re obviously a very big lender in HELOC, which is essentially all variable. And we’ve had four sequential quarters in a row and net balance sheet growth and I believe we’re the number one originator in all of the United States and HELOC. So really striking well the iron is hot and taking advantage of that business. So you’re seeing that flow through in the resi book with the yield improvements there as the rates kind of March north. On the mortgage side, there is a couple of things. One is front book pricing. We’ve been disciplined on front book pricing to the point of being a lot on the market at times as the market lags capacity, but we’re going to make sure we’re using our balance sheet for deep relationships and try to push our rates up as fast as we can with the market. The other just technical dynamic that you’re seeing, if you’re looking at linked quarter on mortgages in Q4, we did have a one-time reserve adjustment to the yields in Q4 that is non-recurring and didn’t happen in Q1. So if you look back a couple of quarters, you’ll see a little bit of noise on what you saw in Q4, but that’s kind of gone. That’s sort of washed out, so we should start to see the mortgage book begin to climb with the percentage of that book that is in variable rate and continued expected discipline on front book pricing.

[Betsy Graseck, Morgan Stanley]

Got it. Thank you.

[Operator]

Thank you. Your next question comes from the line of Matt O’Connor with Deutsche Bank. Your line is now open.

[Matt O’Connor, Deutsche Bank]

Good morning. I was hoping you guys could remind us with investors, is there any portion of the loan book or securities book that you’re looking to kind of deemphasize or runoff?

[John Woods, Chief Financial Officer]

I’ll just start off there. I mean I think that the securities book and investors looks as a profile that we would migrate and frankly, have already been migrating to our profile, which is mostly clean duration plus mortgage-backed securities, agency-type paper. So we’ve been in the process of migrating the securities book on that front. In general, we like the loan book that comes over from investors has performed well from a credit perspective. They have a nice core portfolio over there. Maybe Don can talk about anything else that might be migrated at the margin.

[Don McCree, Head, Commercial Banking]

Yes. There are certain elements of the book that might be a little bit different as we move forward, but it’s not going to be quick and aggressive. We are going to do it – we are going to migrate it over time. But a lot of the business that they do is very diversifying for us. They are in different elements of the CRE business than we are. So, it looks quite different. And then a lot of the C&I business is smaller company business banking, and we are looking to grow that segment as we move forward. So, you will see some adjustment at the margin, but no aggressive asset sales, I think out blocks.

[John Woods, Chief Financial Officer]

Other than – I will say, Matt, on my side, we are doing roughly $1 billion to $1.2 billion of DSO adjustments on the Citizens side, and you will see us do some of that as we move around low-yielding assets that we might be acquiring, but we don’t have full plans on that yet.

[Don McCree, Head, Commercial Banking]

Yes, balance sheet, optimization and…

[Matt O’Connor, Deutsche Bank]

And then I guess, obviously, there are some opportunities as well to essentially cross-sell. But as we think about layering in investors to the kind of medium-term, do you think it will have any net impact as we think about your loan growth, either a little bit less than standalone or a little bit more or roughly the same?

[John Woods, Chief Financial Officer]

Well, I mean I would look at it as what Don and Brendan has been able to accomplish when we go into expansion markets, right, in particular, Don’s business and commercial when we entered the Southeast is a good playbook for how we have been able to grow those expansion markets a little faster for a period of time until it converges over time. So, I think you would expect that once we get the engine running with respect to all of the integration and conversion, and we have been able to make our investments that we plan to make in New York Metro. I would suspect for a number of years, you could see the growth rates once that all settles out and baseline, you can see those growth rates actually being higher than Citizens standalone for a number of years until it balances out in terms of the expected market share that we plan to take in that metro.

[Don McCree, Head, Commercial Banking]

Yes. John, I will also add that they have a very limited product set on the C&I side. So, bringing in the variety of products that we can offer and capabilities that we can offer, we think there is an opportunity to go after larger companies and also serve their clients in a much more substantial way.

[Brendan Coughlin, Head, Consumer Banking]

Yes. The same comments on the consumer side, our product set is significantly more diversified than both HSBC and investors, which is great. And we didn’t build those revenue synergies into the deal model. So, we are seeing early signs of significant sales opportunity in New York. We are delivering on that. We are starting marketing middle of the year. We are going to convert early on mortgage and wealth for investors inside of 2022, and then the rest of the platform will convert in 2023. So, it will take some time, but we see an outsized opportunity for sustainable revenue growth over time.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes. Let me just chime in here as well, is that we think these deals are going to be a big success, and it’s really not just the expense synergies, which we are going to go get. But if it’s a big success, it means that we were successful in cross-selling more to the customers who haven’t had the benefit of our broader products and services and then just gain market share. And I think we have some very clear ideas about how to go after that, both on the commercial side and the consumer side. And really none of that is – has been put into our forward forecast at this point. So, goal would be like within 3 years to 5 years, if New York starts to take on a look and feel of what we built in Boston and what we built in Philadelphia, is going to be a home run for us.

[Matt O’Connor, Deutsche Bank]

Thank you very much.

[Operator]

Thank you. Your next question comes from the line of Ken Usdin with Jefferies. Your line is now open.

[Ken Usdin, Jefferies]

Hi. Thanks. Good morning. I had a question about reserving and provisions. So, just looking back at where you are 130 – 143 ACL is pre- ISPC and then just with all the CECL stuff going on, just wanted to kind of understand where do you think that the reserve lands vis-à-vis a blended day one? And what does that mean for further release or provision growth relative to your expectations that you laid out for charge-offs? Thanks.

[John Woods, Chief Financial Officer]

Yes, that’s a good question. I mean I think the first thing I would say, when you were saying blended, if you were speaking about investors on a blended basis, I think that their profile is actually quite good. And when you look back in different cycles, their loss rates actually are lower than not only ours, but the regional bank peer set. So – and given the collateralization, etcetera, and a number of other things that help that profile. So, pound-for-pound, they come on with a slightly lower ACL and CECL hit to what CFG standalone is not by a lot, and they are smaller, so it won’t have a huge impact, but they come in a little lower than and call it, the 143 that where we are. So, from that perspective, it gives you a sense for how that might cause us to tick down on a blended basis. CECL day one was 147, we are at 143. We have cleaned out a lot of the portfolios of concern that might have existed back at the end of ‘19 when CECL was adopted, and there has been significant as we mentioned earlier, and we have in the slide deck in the appendix, significant improvements in both commercial and kind of retail businesses since then. So, you could see some opportunity all else equal for back book needs as long as the macro holds for those needs to tick down. I think all of the variability will be on loan growth. And so we are just going to provide for our loan growth and all-in probably be a little lower than we are here, but not by a lot.

[Bruce Van Saun, Chairman and Chief Executive Officer]

The other wildcard, obviously, Ken, is what is the kind of long-term or the medium-term macro forecast look like and can the Fed engineer a soft landing. Is there a higher possibility of recession, which could change that dynamic somewhat. But I think, certainly, right now, with respect to 2022, we feel really good about how we are positioned from a credit standpoint. I would – if you ask me to make a call, I would say it’s unlikely we will have a recession in ‘22. So, at least the clean credit metrics should continue for a while. Whether we can still show net benefits on the provision line, I think those days are probably numbered. But in any case, I think there is still going to be good numbers. And as John said, the ACL may tick down a little more from here, but kind of starting to feel like we are not going to go a huge amount lower.

[Ken Usdin, Jefferies]

Yes. And Bruce, as a follow-up to that, it was nice to see the commercial line utilization up 150 basis points you talked about. You are reiterating your full year loan growth guidance. Just wondering if you can give us some on-the-ground color about business activity, supply chain constraints? Just in terms of – and also the trade-off possibly between loans going on the balance sheet versus out the door in capital markets. And just kind of a feel for just how the commercial side of the economy is feeling and how that influences your views on commercial growth? Thanks.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Let me just say a word and then Don really has the best color. But clearly, it’s nice to see the line utilization pick up. Some of it is a little defensive in nature. So, people have been worried about their supply chain and inventory levels. And so when they can get a hold of the materials that they need to go out and buy it. So, I would say inventory build in light of supply chain issues probably has been the biggest driver and a little of that also is inflation, which is causing those materials to cost more. So, that would be, I would say, number one. There is still – people doing deals, doing smaller deals and playing offense in terms of growth. There is a little bit of that kicking in as well. I think what continues to give us confidence is the thing that Don mentioned earlier that there is private capital has amassed tons of firepower to put to work in the markets and is looking to get deals done. And so there is still deal-related activity that should continue to fuel some loan growth. But with that, let me turn it over to Don.

[Don McCree, Head, Commercial Banking]

Yes. So, I think you covered most of it. And back to the second half of the question, a lot of the capital markets activity we do is in the leverage buyout area and things like that. So, that’s an origination for distribution business, which it should be. We don’t want a lot of that on our balance sheet, and we continue to maintain average holds of about $12 million in our sponsor business. So, very diversified, very careful from a risk profile. I will say that the utilization trend that we are seeing is actually even a little bit higher as we sit here in mid-April. So, that trend really is driven by cost of goods. So, there is an inflation aspect and some of the stockpiling. But the broader question is we are hearing generally positive things from our customers. Credit quality, as we said, feels pretty good. There is a little bit of pressure on margins as companies have varying degrees of an ability to pass on cost increases where they ire seeing them. But remember that these companies have been through hell over the last 2 years with the pandemic, and they have cut their costs. They have restructured their businesses and they are entering whatever we are entering, whether it would be a slowdown or something that’s just slower growth in a much better position from a management standpoint than they were just 2 years ago. So, that gives us a lot of confidence. And certain clients are being opportunistic where they are seeing, as Bruce said, where they are seeing competitors that are slightly weakened, we are seeing a little bit of M&A activity in the middle market channels that are companies are buying each other right now.

[Bruce Van Saun, Chairman and Chief Executive Officer]

The one last thing you might also add Don is on subscription line financing some of the securitization…

[Don McCree, Head, Commercial Banking]

Yes. So, we are seeing significant volume in our subscription line financing for private equity and significant volume in our asset-backed securities businesses in the warehouses. So, those markets are very strong and we continue to see growth in the loan books on both of those activities.

[Ken Usdin, Jefferies]

Great. Thanks for all the color.

[Operator]

Thank you. Your next question comes from the line of John Pancari with Evercore. Your line is now open.

[John Pancari, Evercore]

Good morning. I appreciate the color you gave there in terms of the commercial drivers and the trend behind the demand. Are you able to perhaps help unpack the high-single digit loan growth expectation ex the deal and ex-PPP for 2022 in terms of how you think about C&I growth and perhaps growth in your CRE portfolio as well? Thanks.

[Don McCree, Head, Commercial Banking]

Yes. So, why don’t I start with that. So, we are down to basically almost nothing on the C&I side on PPP. So, that’s in the rearview mirror. So, that’s not in any of our loan growth projections. So, the loan growth that we have referenced is really CFG loan growth. We have assumed a little bit of growth on the investors bank side, but not a lot for the rest of ‘22. So, all the comments we are making are CFG specific. I would say subscription lines are growing the fastest. C&I is growing the second fastest and CRE, we are seeing very, very modest growth. And we are basically on our pre business really still focused on purpose-built office, industrial and life science and a little bit of multifamily, but not a lot. We are really off risk on hospitality and retail. So, not a lot of CRE business there. The issue that we are fighting and continue to fight although it’s getting a little bit better is our originations are really strong, and we are seeing lots of activity both coming into the book and also in the pipeline, but pay-downs have been quite high. And this was the first quarter where we saw pay-downs begin to decline. Maybe that’s a little bit of the volatility in the capital markets, maybe that’s a little bit of the loan market aggressiveness right now, but we are seeing a little bit of a benefit from lower pay-downs, which were running very, very high last year for almost the whole year and really eating up a lot of the origination activity that we are receiving.

[John Pancari, Evercore]

Okay. Great. That’s helpful. And then separately, on the credit side, I just have a question there. In terms of the increase in the NPAs and the increase in the 90-day delinquencies, I know you indicated that’s mainly mortgage coming off forbearance. Just want to give you – if you could give us a little color in terms of your confidence there in terms of the resolution of those items? And then separately, in minds of faster-than-expected credit normalization on the consumer side, perhaps in your merchant partnerships or anything? Thanks.

[Brendan Coughlin, Head, Consumer Banking]

Yes, it’s Brendan. I can take that. On the mortgage side, this is fully expected. These are sort of an administrative move of customers that have been in forbearance for quite some time. We have done extensive analytics on how much loss exposure we have to folks that are coming off of forbearance on to a full repayment schedule and its de minimis. Especially on the mortgage side, we have got very significant coverage on our loan to value. And so we feel really confident in that. Just broadly on the consumer book, we haven’t seen much of any early signs that we are starting to see a tick up in return to normal. We are expecting one, but the delinquency levels generally remain in very strong spot and significantly depressed. Some of the newer portfolios that we have talked a lot about over the years on these calls and others around student loans and merchant point-of-sale maintain incredible strength and have not shown any signs of uptick in early delinquencies whatsoever. So, we feel really confident around the outlook, the state of credit and consumers that the lowest levels it’s ever been, and we continue to sort of beat to the positive almost every month on what we are seeing on NTO. So, I feel really good. And I think – and when you look at the other side of the ledger for the average consumer, they are still showing a lot of excess liquidity, the money in consumer checking accounts is still at all-time highs, really hasn’t moved down. While we are seeing a lot of velocity in customers using credit cards and spending and paying for things, it’s not adding to outstanding. So, in order to believe that you will start to see a meaningful correction on the credit line, I think you would have to see some deflation on the excess cash built up in the consumers’ wallet and start to see a rebound in receivables building up in the credit card. So, we haven’t seen that. So, all the early indicators just aren’t moving yet. Of course, we do expect it will, but just right now, it’s not. So, we will take it.

[Bruce Van Saun, Chairman and Chief Executive Officer]

I would just add to that, John, is all the early warning signs are flash and green, which is great. So, on the consumer side, delinquency roll rates, some of the things Brendan quoted, all appear really, really good. Similarly, on the commercial side, the crit/class ratio continues to go down and the heightened. There is very few credits that are in heightened monitoring. So, that also bodes well for the future. You can – at these very low levels for things like charge-offs and NPAs you can see kind of one item can kind of move that number around a little bit. But overall, we feel really, really positive about the outlook for credit for certainly the balance of this year.

[John Pancari, Evercore]

Thanks.

[Operator]

Thank you. Your next question comes from the line of Peter Winter with Wedbush Securities. Your line is now open.

[Peter Winter, Wedbush Securities]

Thanks. I was just curious, are there any plans to manage the available for sale securities portfolio just given the rising rates or any plans to move any of it into like held to maturity or hedge some of this?

[John Woods, Chief Financial Officer]

Yes, it’s a good question. I mean I think we are in about a little bit less than 10%, call it, high-single digits with HCM, if you – in the first quarter. I think you will see that, that number will rise in the second quarter based upon a number of things that we are doing. We are putting a lot of securities to work just in CFG standalone, just given the environment, now that there is a highly attractive place to grow the securities book at north of 300% yields, just on standalone. And then we are, of course – we have closed on the acquisition of investors and there is about $4 billion of securities there that we are rotating out of the profile that they had into the profile that looks like the kind of securities that we own. So, there is lots of opportunities to address that, and you are likely to see the HCM percentage rise in the second quarter.

[Peter Winter, Wedbush Securities]

Okay. Thanks. And then just secondly, just on the HSBC acquisition, I think at the time of the announcement in May, there was about $9 billion in deposits and you closed it with $6.3 billion in deposits. Do you think at these levels, deposits hold steady, you can grow them? Just – if you could just talk about that change in the outlook.

[Brendan Coughlin, Head, Consumer Banking]

Yes. Pre legal day one, the rundown in deposits is principally driven by their online business and a segment of international customers that we are rotating into banks that have more global capabilities. And so the good news on that is that we didn’t pay premium of any kind for those customers that we weren’t really going to get at our core. We had modeled in essentially twice the level of deposit attrition post legal day one than you would normally expect in a deal like that, given the profile of the customers that were banking at HSBC. The good news is since legal day one, it looks like a lot of that attrition had accelerated pre-legal day one, and we have seen the portfolio at a broadly stable level with good sales, very strong sales and normal expected is in outflows on the back book. And so we do expect that to be stable now and start to get into growth mode as we ramp up our marketing activities, which would obviously be a bit of a benefit on the deal model side offsetting some of the shortfall in deposits we got on legal day one. So, we feel really, really good on the early signs that we are seeing here we are six weeks or seven weeks in.

[John Woods, Chief Financial Officer]

Just to add, we had the transition pre legal day one that we didn’t have to pay for it, and it produces the trend with the attrition happening post legal day one. I just want to add that plan.

[Peter Winter, Wedbush Securities]

Okay. Thanks a lot.

[Operator]

Thank you. Your next question comes from the line of Gerard Cassidy with RBC. Your line is now open.

[Gerard Cassidy, RBC]

Good morning.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Good morning.

[Gerard Cassidy, RBC]

Bruce, you said in your opening comments that obviously, the focus this year is to integrate the acquisitions you did in the Metro New York marketplace, but in the wealth space, if something was priced right that would be something you would consider. Thinking about the Florida franchise as you build that out, if a depository came up at attractive pricing and, again, I know you have played is full with what you are doing in New York, is that something that you could consider, or you really know, we just we are going to wait until we get these things fully integrated before we consider a deposit deal?

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes. I don’t see us looking at a depository there anytime soon. I think we have got enough on our plate that getting off to this really great start and launching New York Metro is job one. We do have a strategy in Florida that I think is interesting. So, we had a couple of de novo wealth centers, one in Palm Beach and one in Naples that we focused on launching and starting to get those to the right customer levels and the right staffing so that we can really make some traction in those markets. And then we had five or six come over from HSBC, very attractive locations and branches with good staffing in the Miami area. And so again, that’s job one is to try to really make that work, what we have and really drive up the performance of those sites and keep getting smart in the market and keep talking to people, keep trying to figure out kind of where with the next city where we think we could come in and make an entrance and gain some share. So, that’s to me, the focus, and we will keep trying to get smart on the market, but let’s suggest what we have and make that productive. The other point I would make with respect to Florida and elsewhere where we are kind of outside of our core footprint is we are investing heavily in the digital bank. And very recently, we have migrated to a new cloud-based core platform, which is really exciting for us, it’s going to unlock the ability for us to really broaden our offerings and integrate those offerings on the digital platform. And so that’s kind of also twinned with some light branches in markets like Florida, can we really start to bang the opportunity through our digital platforms. And then over time, we will figure out what physical presence do we need to complement those digital offerings. So, it’s pretty exciting. We have a similar opportunity in the Greater Washington area, where we picked up, I think it’s nine or ten branches from HSBC. So, we can try to attack that market through digital and decide is nine or ten the right number, are they in the right locations, do we need to alter that and then using test and learning from Florida and from DC. Are there some other attractive cities where we might want to go next and really put effort into growing digital presence combined with some thin branch presence.

[Gerard Cassidy, RBC]

Very good Bruce, and to pivot the next question is on deposits. How do you guys weigh and you talked about how certificates of deposits have come down dramatically. You have got a very strong DDA balance core now much higher than when you went public, of course. But with rates moving up so quickly now in the 10 year is almost at 3% today, when does long-term funding with low-cost CDs make sense? And then Don, when do your customers start asking for higher compensating balances as rates move up? Have you guys seen more discussions there as well on the compensating balances on the commercial side?

[Bruce Van Saun, Chairman and Chief Executive Officer]

Yes. I will go ahead and start a couple of thoughts there. I mean I think that as you heard from Brendan earlier, and you saw on our Slide 7, our CD portfolio is much smaller than it was before. And what that – at the start, and I think what the point there is that CDs could be part of the story. And we would do it in a way that’s connected to a deep customer relationship rather than sort of a pseudo wholesale funding approach, which is I think how things got played out early in the last cycle for us, whereas this cycle is all going to be about customer relationships. I think the other thing to keep in mind is that over the last cycle, we expect CD betas to be lower during the cycle and part due to how quickly you think the cycle is going to go. The last cycle took a longer time, 2 years to 3 years. And so you kept getting that ratcheted up cost of CDs every time they came to maturity. So, I do think CDs can be part of the story given deep customer relationships and a shorter cycle, CDs can absolutely be something a tool that will utilize coming off a lower base. So, that’s the first point. And the second point is that on the commercial side, you will have balanced migration, that’s natural as compensating balances that don’t need to be quite as high to get as earnings credit rates actually rise over time. So yes, there will be some of that migration that’s built into the deposit betas that we articulated earlier and built into our deposit costs overall. And so – but it’s the same point there that given the number of ways that we can interact with our customers on the commercial side, we are deepening our relationships there and expect that those migrations will be well controlled and as expected.

[Don McCree, Head, Commercial Banking]

Yes. I think that’s exactly right. And we have actually gone out over the last month or so with a full or information package with all of our bankers to discuss deposit and pricing levels as part of the overall relationship, with all of our relationship managers. So, we are well on top of it. We have had some people pull deposits, but we haven’t had a problem backfilling and bringing in other deposits to basically cover any outflows.

[Gerard Cassidy, RBC]

Great. Thank you for the color.

[Bruce Van Saun, Chairman and Chief Executive Officer]

Okay. Alright. I think that’s it for the questions in the queue. And let me just close by thanking everybody again for dialing in today. We appreciate your interest and your support. Have a great day. Thank you.

[Operator]

That concludes today’s conference call. Thank you for your participation. You may now disconnect.