Citizens Financial Group Inc (CFG) 2019 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Citizens Financial Group Third Quarter 2019 Earnings Conference Call.

My name is Brad, and I'll be your operator today.

(Operator Instructions) As a reminder, this event is being recorded.

Now I'll turn the call over to Ellen Taylor, Head of Investor Relations.

Ellen, you may begin.

Thanks so much, Brad, and happy Friday, everybody.

We're really pleased to have you all join us.

First up this morning, our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, will provide an overview of our results and our outlook, and then we'll reference the earnings presentation, which you can find at investor.citizensbank.com.

Then we'll be happy to take questions.

In the room with us today are Brad Conner, Head of Consumer Banking; and Don McCree, Head of Commercial Banking and they will be able to provide some additional color.

So now for some quick housekeeping, our comments today will include forward-looking statements, which are subject to risks and uncertainties, and you should review the factors that may cause our results to differ materially from the expectations on Page 2 of the presentation and in our 2018 Form 10-K.

We also utilize non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and to utilize the information about these measures and the reconciliation to GAAP in the Appendix.

And with that, Bruce, it's all yours.

All right.

Thanks, Ellen, and good morning, everyone.

Thanks for joining our call today.

We're pleased to announce another strong quarter.

In spite of interest rate and yield curve headwinds, we grew our revenue 5% versus a year ago and 1% versus last quarter.

Our earnings per share was up 5% versus a year ago and up 2% sequentially.

The keys to these results were strong performance in our mortgage business, continued good expense discipline and robust capital return.

We progressed well on our efforts around TOP 6 and on some of the strategic investment initiatives that we outlined last quarter.

We continue to actively manage the balance sheet through our BSO program, and we've maintained a loan-to-deposit ratio of around 94%.

We managed deposit costs down aggressively in the quarter with interest-bearing deposit costs down 6 basis points versus last quarter, and we expect deposit betas to tick up as we see further rate cuts.

Our credit metrics remain strong overall and both Consumer and Commercial are in really good shape.

Our view is that the economy is holding up reasonably well though growth has slowed somewhat versus a year ago.

While we don't see a recession on the horizon anytime soon, we are being duly cautious in selective areas on new loan originations.

So overall, I'd say we've executed well year-to-date and we feel we are positioned to close out the year with a good fourth quarter.

Our formula for 2020 will remain consistent, namely grow our balance sheet prudently, deftly manage our NIM, continue to invest in our fee businesses and reap the returns, carefully manage the expense base by finding fresh efficiencies and then self-funding new initiatives, stay disciplined on credit and actively manage our capital base.

We celebrated an important milestone during the quarter, the fifth anniversary of our IPO, on September 24.

It's been quite a journey.

We've made much progress in building a great bank, and we are now delivering better and better for customers, colleagues, communities, shareholders and regulators.

We know there is more work to do, and we are energized by the challenge.

I'm confident that our track record of strong and disciplined execution will continue and will differentiate us from our peers.

And there is no reason the next 5 years can't be even better than the last 5.

With that, let me stop and turn it over to our CFO, John Woods.

Great.

Thanks, Bruce.

Good morning, everyone.

We're pleased to report a strong quarter with record fee income, good expense discipline and continued execution against our strategic initiatives.

Let me kick off by covering the important highlights of our underlying results on Page 4. On a year-to-date basis, our EPS is up 11% and for the quarter, we delivered EPS growth of 5% year-over-year with PPNR up 2%.

This reflects relatively stable net interest income as 3% loan growth helped offset the impact of the decline in net interest margin to 3.12% given rates and the yield curve.

We delivered record fee income of nearly $500 million, up 19% year-over-year illustrating the diversity of our business model.

Commercial and Consumer loan growth were each up 3% year-over-year as we seek attractive areas to deploy our capital and grow our customer base.

Strong deposit growth was paced by continuing momentum in Citizens Access, which grew to $5.6 billion by quarter end.

Our spot LDR was 94.5%, providing us with funding flexibility as we head into the end of the year.

Given the environment we remain highly focused on expense discipline and continue to execute extremely well on our TOP programs.

We now expect to realize a pre-tax run-rate benefit for our TOP 5 program in the range of $105 million to $115 million by the end of the year, this is a $10 million increase over our prior estimate.

Overall credit quality remained strong with a stable nonperforming loan ratio of 67 basis points and an allowance for loans ratio of 107 basis points.

On an underlying basis, the effective tax rate was 22.3% as the reported rate of 20.5% includes a $10 million tax benefit associated with an operational restructure.

We delivered underlying ROTCE of 12.6%, and tangible book value per share was up 14% year-over-year to $31.48.

This quarter, there was some noise in several line items due to an aircraft lease restructuring in our noncore portfolio.

This was triggered by a client merger and reflects our continuing efforts to accelerate the rundown of the noncore lease portfolio.

This reduced PPNR by about $3 million with an increase in expense of $10 million and a $7 million increase in fees.

Charge-offs and provision loss of $5 million tied due to this transaction.

Before the impact of this restructuring we delivered positive operating leverage of 30 basis points on a linked-quarter basis and an efficiency ratio of 57.8%.

On Page 6, net interest income was relatively stable year-over-year despite the impact of a challenging yield-curve environment.

Loan growth of 3% helped largely offset the impact of a 10 basis point decline in net interest margin to 3.12% given the rate backdrop.

Contributing to the decline in NIM was a 3 basis point impact year-over-year from higher premium amortization tied to significantly lower long-term rates.

This was partially offset by the benefit of higher interest-earning asset yields, given continued mix shift towards better-returning assets and modestly higher short-term rates.

On a linked-quarter basis, the margin decreased 9 basis points, including a 3 basis point impact from premium amortization.

On a positive note, we managed deposits well with a 6 basis point decrease in interest-bearing deposit costs.

Given the challenging rate environment, we have continued to actively manage our asset sensitivity, which came in at 2.7% to a gradual 200 basis point rise in rates, versus 2.9% in the prior quarter.

Year-over-year, our asset sensitivity has come down, which was driven by the addition of approximately $7 billion of net receive fix swaps over the past 4 quarters, including a net $2 billion forward-starting position we added this quarter as well as evolving expectations for balance sheet mix.

The cumulative effect of our hedging activities over the last year, plus our balance sheet mix changes had the effect of shifting our sensitivity to the long end of the curve with about 20% to 25% of our exposure now tied to 6 months and shorter.

Our current outlook is for an additional rate cut in October.

However, we expect to see in a lower level of NIM compression in the fourth quarter reflecting further declines in interest-bearing deposit costs, broadly stable premium amortization and the benefit of our hedges.

These factors, along with an expected resumption of loan growth should help support net interest income in the fourth quarter.

Moving to fees on Slide 7. As I mentioned, our fee-base businesses delivered record results this quarter with fee income hitting 30% of revenue.

Noninterest income was up 7% on a linked-quarter basis and up 19% year-over-year driven by strong results in mortgage banking, card fees and foreign exchange and interest rate products.

Service charges and fees were up $2 million or 2% linked quarter reflecting seasonality and card fees were up 5% sequentially driven by seasonally higher volumes.

Our acquisition of Franklin is playing out as we hoped and serves as a nice hedge against a backdrop of lower rates.

Mortgage banking fees were up $55 million, as the origination business led the way with production revenue up $31 million on higher volumes and improved gain-on-sale margins.

Overall mortgage services revenue increased $24 million given favorable MSR hedging results and our larger servicing portfolio.

Capital markets fees came in at $39 million this quarter which represents the lowest level since the first quarter of 2018, in the face of overall market weakness.

Even so, we increased our market share and positioning.

Syndication fees were down linked quarter reflecting the impact of a significant slowing in the middle-market activity and seasonality, while bond-underwriting fees were higher as fixed income markets picked up later in the quarter.

We are entering the fourth quarter with a strong overall capital markets pipeline, which includes the impact of several deals that were pushed out from the third quarter to the fourth quarter.

Wealth fees were 6% lower linked quarter from record second quarter levels, as investment sales were impacted by volatile market conditions.

In FX and interest rate products we executed exceptionally well despite challenging conditions, delivering near-record level fees in line with second quarter in what is typically a seasonally slower quarter.

We are pleased with the progress we've made diversifying our fee revenue by broadening capabilities, executing well on strategic initiatives and integrating key acquisitions to build scale in mortgage, expand our M&A business and enhance our wealth capabilities.

And as we look forward, the investments we have been making across the platform over the past 5 years should continue to gain traction, as we seek to do more for our customers and be their trusted advisor.

Turning to Page 8. Underlying noninterest expense was up $10 million linked quarter, reflecting the impact of the lease transaction.

Excluding this impact, expenses were flat illustrating our strong commitment to expense discipline as we continue to deliver efficiencies from our TOP programs.

We continue to recycle cost savings from TOP into revenue-generating opportunities.

Salaries and employee benefits remain relatively stable, and equipment and software expense was up 3% given our ongoing technology efforts.

Compared to the year, underlying noninterest expense before the impact of acquisitions and the lease restructuring was up 3% as we efficiently managed our costs while investing for growth.

Let's move on to Page 9 and discuss the balance sheet.

Average loans were relatively stable linked quarter largely reflecting the impact of second quarter loan sales as well as relatively higher repayments and lower line utilization in Commercial.

Year-over-year, average loans were up 3% driven by growth in both Commercial and retail with some modest headwinds from asset dispositions.

Adjusting for the impact of the loan sales in the first half, loan growth was 4% year-over-year.

Commercial loans were up 4% year-over-year with strength in C&I and were down slightly linked quarter due to relatively high repayments and the impact of lower line utilization as well as planned reductions in Commercial leases.

On the retail side, loans were up 3% year-over-year and 1% linked quarter, given growth in mortgage, education refinance and our merchant finance partnerships.

Regarding the lease restructuring this quarter, I should mention that we have done a nice job running down the noncore leasing portfolio and the total noncore book which are both down about 30% year-on-year, while the overall credit quality of the book continues to improve.

Overall, period-end loans were up 1% linked quarter, providing momentum for fourth quarter loan growth.

Moving to Page 10.

We saw nice deposit growth of 1% linked quarter and 6% year-over-year.

We continue to benefit from our Citizens Access digital platform, which has contributed nicely to our funding diversification and the optimization of our deposit levels and costs.

At the end of the quarter, we reached $5.6 billion in Citizens Access deposits.

Given the rate environment we have been aggressively executing our deposit playbook to manage down our deposit costs across all channels, reducing CD rates, retail money market promo rates, and taking down the savings rate in our direct bank.

We've also been reducing rates for some Commercial clients where it makes sense.

As a result, our total deposit costs were well controlled, down 5 basis points linked quarter, a nice improvement from the 3 basis point increase last quarter.

Interest-bearing deposits were down 6 basis points linked quarter.

Next let's move to Page 11 and cover credit, which continues to look quite good overall.

This reflects an improving risk profile in retail and a relatively stable risk profile at favorable levels in Commercial.

Net charge-offs came in at 38 basis points in the quarter, up modestly from relatively low second quarter levels.

Net charge-offs were up $27 million year-over-year with a $16 million increase in Commercial, largely driven by a small number of uncorrelated losses, as the broader portfolio risk profile remained relatively stable.

Retail net charge-offs increased $8 million reflecting expected seasoning in our growth portfolios.

Provision for credit losses of $101 million was up from prior quarter and prior year levels reflecting the higher charge-offs.

The nonperforming loan ratio of 67 basis points was relatively stable linked quarter and improved 6 basis points year-over-year.

Nonperforming loans decreased 5% year-over-year driven by improvements in retail.

On a linked-quarter basis, nonperforming loans increased 3% driven by an increase in Commercial primarily tied to a small number of loans, while we saw improvements in retail driven by home equity and education.

Our allowance to loans coverage ratio remained relatively stable, ending the quarter at 107 basis points.

The NPL coverage ratio was also stable linked quarter at 159 basis points.

On Page 12, we maintained our strong capital and liquidity positions, ending the quarter with a CET1 ratio of 10.3%, which compares well with peers and gives us excellent financial flexibility.

During the third quarter, we repurchased 14.1 million shares of common stock and including dividends, we returned $662 million to shareholders, up 25% year-over-year.

Going forward, we continue to target a dividend payout ratio of 35% to 40%.

And our planned glide path to reduce our CET1 ratio remains on track.

Let's move to Page 13 and discuss CECL.

We expect that the day 1 impact for CECL on a pro forma basis will be about a 30% to 35% increase in the existing reserve, which was about $1.3 million (sic) [$1.3 billion] at the end of the quarter.

From a capital perspective, this represents about 22 to 25 basis points of CET1 on a fully-phased-in basis or approximately 5 to 6 basis points in year 1.

This range considers the current economic outlook and mix and credit characteristics of the portfolio.

In addition, a key factor is the impact of longer duration loans such as education, home equity, auto and residential mortgages that tend to attract a higher level of reserve.

At the same time, the Commercial portfolio is generally shorter duration and so is expected to require less reserves than it does today.

Ultimately, the impact of the initial impact will reflect both the portfolio mix and the macroeconomic outlook when we get to the end of the year.

On Page 14, I want to highlight a few exciting things that are happening across our bank.

First, we ranked #4 in the 2019 J.D. Power U.S. Home Mortgage Satisfaction survey.

Since last year, we moved up 6 positions in that survey, which is a real testament to the hard work our mortgage colleagues have done to integrate Franklin American while relentlessly focusing on our customers.

We are also very excited to announce that we've just entered into a new Consumer Banking partnership with an iconic technology company to be announced shortly.

We will provide more details around the launch of this program, which is later this quarter, but this is another great example of our commitment to innovation and strong focus on the customer experience.

In Commercial, we are really progressing well with the client migration to accessOPTIMA, our best-in-class cash management platform.

About half of our clients are on the platform, and we expect the transition to be complete by the end of the year.

And in addition to TOP 5, which I mentioned earlier, substantial work is underway on our TOP 6 program, which is targeting a pretax run rate benefit of about $300 million to $325 million by the end of 2021.

Our outlook for the fourth quarter is on Page 15 and it reflects continued good positioning of both our top and bottom line results.

Our current view is that we expect an additional rate cut in October, and as a result, we expect net interest income to be relatively stable in the fourth quarter as loan growth should offset further, but less net NIM contraction due to rates.

Our outlook for loan growth reflects stronger period-end trends, coupled with healthy pipelines driven by our geographic, product and client-focused expansion strategies.

Also, we expect a moderation of third quarter Commercial pay-down and utilization trends as well as continued growth in mortgage, student and other retail.

We are expecting noninterest income to be down modestly from the record level last quarter.

Strength in capital markets revenues should largely offset a decline from record mortgage fees.

Given our continued focus on expense discipline, we expect noninterest expense to be flat to slightly down.

Additionally, we expect provision expense to increase by about $10 million.

And finally, we expect to end the year with a CET1 ratio of approximately 10.1%.

To sum up, on Page 17, our results this quarter demonstrate our continuing strong performance as we execute against our strategic initiatives, grow customers and revenues, carefully manage our expense base, deploy new technologies and improve how we run the bank.

Now let me turn it back to Bruce.

Okay.

Thanks, John.

Operator, Brad, let's open it up for some Q&A.

(Operator Instructions) And we go to the line of Ken Zerbe with Morgan Stanley.

First of all, a great job on reducing your interest-bearing deposit costs this quarter.

We've heard from other banks that deposit competition is still really aggressive and Bruce, I know you mentioned that you expect your deposit betas to increase next quarter.

Does that imply that some of that deposit competition might be easing?

Do you want to take this?

Yes.

I'll go ahead and start off there.

Again, I mean I think it's a number of factors.

I mean when you have a rate cut like we had in September, it's just a natural operational lag, if you will, and we talked in previous calls that there's a deposit lag that maybe call it 3 to 6 months.

And so as you -- as we get further away from that September cut, the impact of that cut gets pushed through operationally, and we're going to see deposit betas increase from 3Q into 4Q and therefore we expect interest-bearing deposit costs to actually decline by a larger amount than they did this quarter.

Okay.

Great.

And then just my second question is in terms of your energy exposure, we had 3 other banks that I cover announce higher energy charge-offs this quarter.

And I know you guys didn't mention it at all, which is certainly a positive, but can you just address what you're seeing from a credit perspective in your energy portfolio?

Yes.

So Ken, it's Don.

I talk about that for a second.

We've actually been working through our energy exposure for a little over a year now.

Our NPLs are way down, they're down from about 25% of our total NPLs to 9%.

So we've restructured, and worked through a lot of them, our overall portfolio is down.

And I think one of the things that we have in our portfolio, I don't know what other banks have, is a very low exposure to oil field services and that's where a lot of the distress, it looks like it's happening in the oil sector.

So we tend to be good RBL structures and good midstream structures and we're pretty comfortable, we don't see any incremental distress in the portfolio of any significant respect.

And we move to the next question with John Pancari with Evercore.

Wanted to see if you can give a little bit more color on the Commercial credit front.

I know your Commercial nonperformers were up 25% linked quarter and you'd noted in the release that it's small number of uncorrelated credits.

So just wanted to see if you can give us a little bit more detail on the industry, on maybe the sizes and the types of loans as well?

Right, do you want to go again, Don?

Yes.

I'll take that one.

So we did have a couple of charge-offs in the quarter, one in the real estate division which is a regional mall, where we took a small charge-off to basically position ourselves to hopefully exit out of that credit with a sale or a restructuring in the near future.

We -- our nonperformer move was really one credit, which is in the automotive linked sector which we've been working through, is well reserved.

We don't think there is a significant charge-off there when we took it nonperformer, not nonperformering.

It's a restructuring deal that we did about a year ago, there's a significant amount of junior capital below us now we feel okay about the credit, but we thought it was prudent to take a nonperformer given the cash flow dynamics of the company.

And I would add to what Don mentioned on that first credit, we're close to having that one resolved, which would allow NPAs to fall back down in Q4.

And I think more generally, as I think John said, we feel good about the general trends in the portfolio, where we feel like we're identifying any issues early.

We're aggressively addressing them.

We're trying to move them off the portfolio to the extent we said we think there's future risks.

So we're trying to move through anything in the portfolio where we think has any significant loss factored into it.

Yes, be proactive.

Good model.

Okay.

Got it.

Got it.

And then Bruce, you indicated in your remarks that you're being cautious, prudently cautious in certain lending areas, where -- what type of areas are they?

And what are you seeing that's making you get more cautious?

I could throw that one to Don as well, but I'll kick off here.

But I think in general, there's some very competitive conditions in certain parts of the market, particularly middle market.

We have a lot of nonbank competition there.

And so we're competing where we want it hold up our relationships with our customers, but we're not being aggressive to try to grow the book there and take on tough spread situation or tough term situation.

So that's one.

I think, in certain areas, like restaurants, we're certainly actually taking a posture towards reducing exposure and not adding exposure.

And I think we're also being proactive there and we had some good momentum there.

So I'd just say it's around the edges, being disciplined and then seeking out areas of growth, our specialty verticals.

We get some better spreads there.

We're moving upmarket and competing effectively in mid-corporate.

So we think we'll see some growth there.

And I think we did indicate that we will see a return to overall loan growth in Q4 and also in Commercial in Q4.

So our pipelines look quite good.

We have seen in Q3 elevated pay downs, refinancings, lower line utilizations.

So even though we had a pretty strong quarter in terms of originations, we're fighting against that a little bit, but I think, in Q4, we would expect to see less of that and we're continuing to see a nice pipeline.

Don, you can add now.

Yes, I'll just give you a little more sense of that.

Kind of a year ago, we were seeing pay downs drive about 2/3 of our originations, they were basically one-to-one this quarter.

So we really got hurt on the new originations side from pay downs.

I think there's a combination of things slowing -- going on that I think particularly in the middle market, but in general we are seeing people deleverage in anticipation for uncertainty in the next year.

So they're not putting on incremental debt, there's not as many special dividend deals going on, there is not as many release in capital or buybacks that we're seeing in the core of our portfolio and that's resulting in people just saying we're going to take your utilization down.

We are seeing senses -- some sense of that moderating, so that will drive some of our loan growth going forward.

As Bruce mentioned, some of the challenging portfolios, our restaurant portfolio is down by about 50% from where it was at the peak, so we are working that down.

We're purposely working on our leasing portfolio now and focusing on our core business.

We've been working.

Our multi-family real estate portfolio is down.

So there's a lot of things that we're actually trying to address from a portfolio standpoint that is lagging the numbers on a net basis.

And then as you've heard John talk about, we are actively involved and engaged in BSO and where we don't see adequate returns over the next, say 2 to 3 years on exposures that we have, we'll consider moving them off the balance sheet.

So I think the new business feels good in areas that we've actually grown from a regional standpoint, from industry specialty standpoint, feels good, and it's just a little bit of adjustment going on in terms of the overall book of business that we're trying to run.

And just to echo what Bruce said, it is very competitive as people search for loan growth out there and we want to stay disciplined on both the terms and conditions and a pricing standpoint, so we can maintain the terms of the book.

And we'll go to the next question in the queue, comes from Scott Siefers of Sandler O'Neill.

Maybe, John, first question, that's for you.

I'm hoping you can just put a little bit of a finer point on the fee guide for the fourth quarter and, including some of the expected drivers.

You mentioned capital markets in the pipeline in there, but I guess I'm just curious given that you had pretty substantial MSR benefit.

So sort of right off the bat, it could be kind of a $25 million hole or up to $25 million hole.

Just curious if you can talk a little bit more detail about the puts and takes, please?

Yes, sure.

I'll start off, and Bruce can add.

I mean I think the main point here is that as we mentioned that capital markets pipelines were quite strong.

When we look at 3Q, that was a little bit more of a down quarter at $39 million.

When we see the outlook in the 4Q, we have some deals push out of 3Q into 4Q.

We had a very soft syndication quarter in 3Q, that looks to be firming up into the fourth quarter.

M&A advisory was an area that was flattish from 2Q to 3Q and we look to see that being meaningful and significantly up in the fourth quarter.

So I'd say that when we -- we tend to look at this in the early part of -- July, we looked at our pipelines and how that would play out in 3Q and now we're looking at the pipelines in early October here and it bodes well for a really nice rebound in capital markets.

I should also mention that the service charges and card, which were -- which had a nice quarter in 3Q look to be up a bit further.

And trust, I mean, I think, there were some choppy market conditions that impacted trust and investment services and I think that you'll see that our expectations are that, that will improve going into the fourth quarter too.

So it's a couple of different levers that will all tend to have an impact into 4Q that would largely offset as we said, the mortgage decline.

Okay.

Perfect.

And then a broader question just on rate sensitivity.

You've pulled back a little bit of the asset sensitivity this quarter as well.

Wondering if you could just comment on whether there's a sort of an end goal as to where you want the company's rate positioning to be.

I mean, obviously, it's kind of tough given all the volatility in rates, but just what the broader or long-term thinking on rate sensitivity is at this point?

Yes.

And I think you've seen us take our asset sensitivity down over the last year, and I think that we've been prudent on that front.

As you know, a commercial bank has a natural asset sensitive profile and we use derivatives and other techniques to frankly, dampen that profile.

So I think you would see us in a low-to-moderate asset sensitive position over time, maybe converging towards neutral as we see -- as we get towards the end of the easing cycle, if you will.

And so I think we're getting pretty close to a stable place.

We do like and have the view that we are at historically low long-term interest rate.

We've changed our sensitivity from a majority exposure to the short end of the curve over the last year to now the majority of our exposure is to the long end of the curve.

So we have a view over time, but that long end of the curve will rise and we've executed our hedging activities with that in mind, and with a general sense that we should take some asset sensitivity off the table.

And that's just on the net interest income line.

And, as you know, mortgage provides a very nice overall revenue lift when and if rates were -- declined by a lot which was what happened in the third quarter.

So it's not just our derivatives and not just our sensitivity on net interest income, we look at how we try to preserve revenues overall and you saw the power of that diversification in the third quarter.

Next in the queue, we've got Brian Foran with Autonomous.

I wonder if just conceptually on net interest margin once the Fed stops, I guess, we'll have to decide when that is, but let's say it's mid-2020, the Fed stops easing.

There's one school of thought that the banks could actually get a little bit of a bounce-back at margin because of the deposit repricing lag you mentioned and that will catch up.

And then there’s another worry that while the assets don’t all reprice immediately and you're still going to have that kind of rollover of fixed rate assets to lower rates.

If -- I guess, as you think, about it, not getting into the basis points of what the actual margin is going to be, but just conceptually, when the Fed stops as your bias kind of a roughly stable margin or up on the deposit repricing or still some pressure on the asset yields rollover?

Yes.

I mean I'd say a couple of things.

I mean, I think you mentioned the deposit lag, and I think that provides a tailwind.

Once you get 3 to 6 months out, that's helpful.

I think it matters where long rates are.

As I mentioned earlier, if the Fed gets to the end of its easing cycle, and we end up with a positively sloped yield curve, I think you could see some positive impacts in net interest margin over the, call it, 2, 3, 4, 5 quarters out into 2020.

And so that's an important aspect.

And I think that front book back book dynamic, given the fact that we are roughly split 50-50 with a fixed loan portfolio and a floating loan portfolio, you raise it, but when rates fall we could see immediate impact on the floating part of the portfolio.

But the fixed part provides that buffer.

And if we -- we can see some lift on the long end, we could see stabilizing to rising NIMs after you get 3 to 6 months beyond a Fed easing cycle.

So I think you’ll see some stabilization here over the next quarter or 2, and with those dynamics I mentioned, possibly even some lift when we get towards the end of 2020.

The other thing I would add also is that if we get a little more loan growth, which we expect in the fourth quarter and to be able to sustain that in 2020, that facilitates more BSO actions in terms of kind of the loan side of the balance sheet.

And so hopefully that would kick in and then be accretive to our NIM as we go through 2020.

One small one, I don't mean to jump into the weeds, but on Page 20 of the supplement, I had a few people ask about this negative $48 million in the provision for unfunded lending commitments.

Can you just talk through, was that a release or was it more like a transfer because the loan draw -- drew down.

What drove that negative $48 million provision for unfunded lending?

Yes.

Thanks for the question.

I'm looking at our supplement, we are brief with that.

I didn't look at it.

Someone else pointed it out to me.

So yes, it is exactly as you mentioned.

It was -- we had an unfunded loan where over time we’ve built the reserves on the unfunded part of the reserve in the ACL, if you will.

But all of it is the provisioning and reserves happen while it was unfunded.

And then once it was fully reserved, it's funded and then got transferred and needed to get transferred over to the ALLL so overall really the driver was a transfer of an unfunded fully reserved loan that...

It actually was a backup letter of credit.

Yes.

Ultimately drew down and we moved it over.

Yes.

I think we released some reserves because we moved it and held-for-sale as well.

And we'll go to next question in the queue, that will come from Matt O'Connor with Deutsche Bank.

Fees were obviously strong this quarter and you gave some pretty good granularity in your thoughts on the fourth quarter.

But just looking out more medium term, can you talk about the magnitude of fee growth you think you can generate and some of the drivers?

I mean obviously it's incrementally important from here given now the pressures on net interest income.

And I’m trying to maybe quantify the growth that you expect and against some of the drivers?

Well, I think, Matt, I'll start.

It’s Bruce, John can pick up.

But when I think about what -- where we've been and how we've grown through time, we’ve pretty much been growing Commercial fees probably high single digits keeping pace with recently robust loan growth over that period.

And that's reflective of the investments that we've made in building out the platform, hiring some great bankers, standing up our own global markets, FX, and interest rate business, investments in the cash management business, acquisitions of M&A shops.

And I think we're really just gaining traction and reaping the benefits of those investments.

So I would expect to see continued good growth on the Commercial side.

Q3 was a little bit of an air pocket.

We think Q4 is going to be a bounce-back quarter.

On the Consumer side, we've had a harder time growing.

I think we addressed some of those issues we've been investing organically and building out the sales force and coverage folks in wealth and in mortgage.

But I think the acquisitions that we've done, particularly mortgage looks very timely in light of being able to catch the refi wave.

But I think there’s a lot we can really do with that business.

So it's really scratching the surface of its potential in terms of building out more tools for the correspondent and wholesale customers that we have.

So I think we can grow our market share there very nicely and then get better penetration into our branch channels which we continue to add Los, so even though we came off a high with the refi wave, I think that will continue some through Q4 and early into the first half of 2020, but there's other levers to continue to, I think, gain market share in the mortgage business.

And then wealth, we’ve now addressed the high-end of the pyramid with Clarfeld and we're looking frankly to do more in terms of acquisitions to further that growth on the wealth side.

So if we average the Commercial and then the slower growth on Consumer, I think with the rearview mirror, we probably we're in the mid-single digits range and certainly we’d think that that's a goal we could set going forward when we think out a number of years to at least be able to continue to do that.

That was helpful.

Can you just elaborate on the type or just maybe size of wealth deals that you’d be open too?

I think you did a relatively modest one.

Yes.

I think all of these deals we've described as bolt-ons, and I think what we really need to make sure of is it has a good strategic fit that the company has a great culture that's going to mesh well with us and that we can get attractive financial terms.

And I think if you buy smaller, you can get a little better handle on all of those things.

If you buy bigger, it’s a little harder to achieve those 3 objectives.

So I would think you'll still consider these deals smart, but more in the bolt-on category.

So you probably need to do several to continue to scale up our business.

And we can go to the next line in the queue, it will come from Saul Martinez with UBS.

So I wanted to -- I know you've addressed this to a certain degree, and I know there's a lot of volatility and then probably some seasonality in this, but can you just give a little bit more color on how we should think about what a more normalized run rate is for mortgage income, assuming the long end of the curve stays where it's at?

You had, I think, $80 million of production revenue, which is very strong, the MSR valuation gain.

As we think about that going forward, how should we think about the sort of the moving parts there and what it could trend to not only in the fourth quarter, but just beyond that?

Yes.

Thanks for the questions.

It’s John here.

I'd say, you could break that down into 3 P&Ls right.

And you talk about production and servicing and then the MSR valuation out of the economic hedge, right?

So when you go across each of those 3, going forward, I think, you could see production being -- production P&L basically coming down a bit, right, in the fourth quarter, but I would call it higher than where it was in the second quarter.

We had a good quarter in the second quarter, we had a phenomenal quarter in the third quarter.

So I think maybe coming off those highs, but kind of stabilizing at higher levels than what we've seen in the past in production.

We’re really excited about that.

Very strong production, really strong margins, which is important to how we generate those revenues and just a growing integration of the Franklin platform.

So that's how I see that as part of the P&L.

I'd say a similar comment on the operating servicing part of the P&L where we're having -- we're retaining all the UPB's that was previously being sold by this platform before we acquired it.

So our servicing UPB is growing nicely as well as the servicing fees and ancillaries that we're recognizing on that P&L.

So that P&L is stabilizing and rising and we're completing the full integration and in-sourcing of the servicing platform from what Franklin was using, which was an outsourced platform, to bring it in-house which will give us more control over data and direct access to the customers.

So we're excited about that.

And then the last one, of course, is the MSR valuation net of economic hedge.

During the quarter, when we see large swings this past quarter, these are positioned to benefit if mortgage spreads were to widen out, when we get to extremes we tend to moderate positions and assume that they will revert over time and it did.

That's something that I think you could see more of in the future and that will jump around a lot, but I think we've demonstrated a really solid job of managing what was otherwise a volatile asset for the last 4 quarters that we’ve added this platform, going into the fifth, we've managed that really well with a flat to upward bias on the MSR net of economic hedge on.

And Brad, you might just want to add a little bit some of innovation and the new technologies that we’re delivering in the mortgage business because I think it is quite exciting what's actually taking place.

I was actually just going to do that, just one thing I'll also chime in with John.

I think you hit it spot on.

And one thing to keep in mind, the industry is quite full of capacity right now and that gives us great optimism around margin maintaining for a period of time.

So those signs are good from a margin perspective.

But the point, Bruce, that you made, we've invested heavily in our digital capabilities in the mortgage business.

And so we put a new digital front-end onto our origination platform.

This past quarter alone, we saw more than 1/3 of our applications come through the front-end digital platform, which gives us efficiency opportunities for one, but also gives us more opportunity to build our direct-to-consumer -- the direct-to-consumer side of the business.

We also invested in digital capabilities on the back-end of the business with our digital and mobile servicing application.

We’re seeing a lot of our customers transition over to using that digital platform on the back-end.

So a lot of good things happening other than just the rate environment.

I mean, I think the integration, as you said, has gone extremely well and we're starting to reap the rewards of the investments that we made in the digital capabilities and the service capabilities.

That's great.

That's great color.

If I could switch gears and also ask a question on reserving and on CECL specifically.

I mean, the day 1 impact is not a big deal from a capital standpoint.

How do we think, John, about the day 2 impact of CECL because a lot of your growth, if you look at the balance growth over the last year, a relatively large portion of it is coming from education, it's coming from other retail lending that tends to either have longer tenors or higher loss content than others and obviously has a higher provisioning load as you originate those loans.

How do we think about the loan loss provisioning outlook in light of that loan growth and mix shift into 2020?

Yes.

I mean, I think -- so we’ve just kind of come out with the first real quantitative outlook for where this adopting the standard will affect us in early January.

So I mean I would say couple of things, but also caveat that we have more work to do and we're continuing our parallel runs and completing all the validation of our models.

So with all of that said, I think there are 2 big forces that you have to think about.

One is with all of those portfolios that are longer duration, we have a very -- we have a big back book and the dynamics that we're dealing with is the fact that we're being asked to reserve over the entire life of the entire back book for those longer duration loans in early January.

And so going forward, if our models are reasonably accurate and reflect the future which is a big question for all banks, then really the provisioning for that entire back book is really behind us, and it's really already up on the balance sheet, so what you're left with is the other side of double ledger, which is the front book, and the front book originations that you have to basically put through P&L all of the reserves over the life of the loan.

So portfolio by portfolio, the gearing of ratio, if you will, the benefit of the fact that the back book is no longer being provisioned, which would otherwise have been provisioned in the incurred loss model under the existing standards is now going to be already handled and probably be closer to 0 against the magnitude of the front book.

And I think the answer with respect to whether that's positive, negative and neutral is varies by portfolio and that's going to play itself out.

And that -- what I would say just to add to that is that we're working through our kind of 3-year strat plan that we finished in July.

So kind of overlay portfolio by portfolio what’s the interplay between those dynamics that John described back book, front book and then how does that play out from an accounting standpoint over, say, the next 3 years.

There may be certain product twists that we're offering a longer duration version of a loan, and it may not make as much sense.

We might tweak something, but I would say that at the end of the day, the economics are the economics and the accounting something we have to contend with, but we'll get on top of it and then obviously when we do our guidance in January in the next call we'll be able to take you through that in some more detail.

But we're working at it, we're analyzing it, and I think we feel broadly fine about it.

And next in the queue, we'll go to the line of Gerard Cassidy with RBC.

Bruce, you touched on growing the fee revenue and I wanted to zero in on the Capital Markets business since you guys have had good success in expanding that business.

And I understand the second quarter, if I read that press release correctly was a record level, third quarter came down a bit.

So 2 questions.

One, you mentioned the pipeline is very strong going into the fourth quarter.

Can you compare that pipeline to prior quarters, is it higher or lower?

And then second, what will it take for you guys to bring this business up to maybe a $70 million a quarter run rate?

Is it hiring more people or expanding geographies?

How can you grow it to that level?

I'll let Don take that.

Yes.

So I think about -- I'll talk about a combination of fee lines for the Commercial Bank activity.

So you saw our FX and interest rates and that commodity hedging activities for clients mostly running at incredibly strong levels over the last couple of quarters.

So maybe it was a little volatile this quarter, it hurt us on the Capital Markets side, it benefited us on interest rate and currency side, and we're seeing that continue.

On the Capital Market side, we generally play in the middle market and middle market leverage finance space.

And what happened this quarter was that market goes way down year-on-year and effectively the markets overall were closed for about 6 weeks in the middle of the summer as the Fed changed its interest rate posture.

We saw a great lift in September on the back of opening up for the bond market, and we saw high-yield activities grew exponentially.

So that all being said, I think that we’ve got the pieces in place to allow us to take advantage of the opportunities that present themselves a really great growth area over the next quarter or 2 is going to be M&A as the acquisitions begin to kick in.

So we've been wanting to cover between 4 [peak of 8], back to 4 in terms of M&A fees, those should go up significantly this quarter in the pipelines look very, very strong.

So our strategy is to get that fee line even higher or a couple fold.

One is high-yield business, we started a high-yield sales and trading activity this quarter, which should allow us to take larger positions in high-yield underwrites and our splits on those transactions could double or triple.

So that will drive the high-yield side of the business.

We've been building credibility in our loan syndication of leverage financing capability over 4 years, and we're seeing larger transaction and even more transactions as we build our comparables (inaudible) and a reputation for execution with our clients and with our investor base.

And we're seeing this general activity growing in the fourth quarter.

Whether that continues in the first quarter, second quarter, third quarter, it's a little too early to say, but I think there's upside on all of those key elements.

The other thing we try to do is grow our client base.

So as Bruce said, at the time of the IPO, we moved into the mid-corporate.

industry vertical sectors, we’ve built very strong corporate finance industry advisory teams.

So the way we're engaging with our clients, I would argue maybe 4 or 5 years ago was very much around provisioning credit and now it's about advice and basically ownership transition and complex financing and it's only been the last couple of years where we've had all those pieces in place, and they’re integrating and gelling well.

I think they're gelling well as I've seen any time in my career and we're just (inaudible) a lot of interesting conversations with our client base, so that should give us good momentum.

I would just add to that, Gerard.

We have knocked down on the door of $60 million quarter before.

I hate to put my neck on the line, but I think this fourth quarter shapes up potentially to be a record, a new record quarter for us in Capital Market.

So we're not that far away on that $70 million a quarter.

I don't think we really need to hire more people or acquire another M&A boutique to get to that kind of a level it would require.

I think that the markets are healthy and open over the next year and then some of the investments that we've made and the approach to how we cover, all that would have to continue to progress and come to fruition, but there's not a lot of incremental investments that we need to make in order to continue to drive higher revenues in this business.

And further to that point, Gerard, just the question earlier about pipelines.

Our pipelines in early October are up across the board whether you're looking at the combination of syndications and bond underwriting or FX, IRP and M&A in particular, they’re all up since early July when we look in early October, just to close that up.

Great.

And Bruce, since the BB&T/Suntrust merger, many investors and myself all thought more deals were going to be announced.

Obviously, nothing has happened.

But when you look at the BB&T stock, it's outperformed the general bank indexes.

So it looks like the markets supporting that type of transaction.

Is that something Citizens could ever consider in the future?

Well, I think, the stock answer to that is we're going to always consider anything that benefits our shareholders, but I would say whether that deal proves to be a good one depends on the quality of the execution.

And so you've had -- and I've been part of a big MOE in Bank of New York and Mellon, and the spreadsheets when you announce the deals always look great and then comes down to do you make the right personnel decision, do you get the culture to mesh and do you fundamentally execute well?

So we'll see if that happens.

I think for us, right now, we're very focused on continuing to run the bank better.

And we're in a period of very rapid change in terms of customer expectations, new technologies, and we're very focused on being on the front foot with our TOP VI program, some of our strategic investments.

I think, we can carve a parth that’s very exciting and fulfilling for our stakeholders by really staying focused on our own current agenda.

One of the risks of getting involved in larger transactions is it can be distracting and take your eye off the ball in a period where you really have to be all over the current agenda.

So -- anyway, those are a few thoughts, Gerard.

And our next question in queue comes from Erika Najarian with Bank of America.

I just had one follow-up question.

It's really what sort of Brian Foran was asking earlier.

So as I think about what's unique to Citizens as we look out over the next few quarters, obviously, you've done a lot of work in terms of driving your business momentum upward and accelerating it.

And second, you do have high deposit costs.

So as we think about beyond the fourth quarter, right, and you're still feeling good about loan growth, you're still feeling good about the economy.

And based on the forward curves, should we think that the worst-case scenario for NII next year could be stable?

I'm trying, Ellen.

Erika, it's John.

I mean I think we -- stay tuned for January, right, we'll be -- we'll come out with relatively specific expectations for what 2020 will be on NII.

But I think you have the broad contours and the direction correct.

I mean we expect -- when you think about where our loan growth has been year-over-year we're in the neighborhood of that 4% range, which is 1% or 2% above GDP.

So next year, we want to aspire to continue to grow the platform at levels that are similar to that or better.

And that plus all of the work that we're doing on the net interest margin side of things, I mean we did have, as you know, maybe some betas that we're -- when we're in a tightening cycle, we had some deposit cost rises that were higher, but that's starting to retrace itself here and we'll see our deposit betas rising in the fourth quarter and continuing to reflect the fact that we've done an amazing amount of work on our deposit betas...

In fact, we've been outperforming now through the cut cycle on the deposit side.

Yes.

We have.

So in the second quarter, we did; and we outperformed in the third quarter, we did.

And I think you can almost consider a trajectory there that we expect -- I'm sorry, in the third quarter, we did.

In the fourth quarter, we're going to have a meaningful improvement in the interest-bearing deposit cost decline.

So we're excited about that.

So I think a few levers will cause that kind of stabilization that you're talking about, but stay tuned, we tend to try to...

Hold off guidance now till January.

Yes.

January.

Good try there.

Trying to open up a little bit.

I understand the timing is odd but it just sounds like if you're relatively stable next quarter with pressure from October and the underlying pressure from what's happened so far so quickly with only taking your deposit costs down the way you did, it seems like the -- stable seems like a potential.

Just -- I guess I'm not asking to confirm that, but that's just how I was looking at that.

So I appreciate the color.

That wasn't actually a question.

I'm going to take myself off the queue now.

We want you to have another question.

I think you have a question.

Next we'll go to line of Ken Usdin with Jefferies.

Maybe just a follow-up on the overall balance sheet.

You guys have shown really good deposit growth in the money market accounts and then the noninterest-bearing.

And obviously, we're starting to see the term deposits come down against that and Citizens Access kind of flattening out.

Can you just talk us through just that mix and how you expect just overall balance sheet to traject from here, especially as loans look to be still growing and securities you've kind of flattened out just given where that rate dynamic is?

So I guess just talk about the earning asset base and the mix within and how you'd expect that to go forward?

Yes.

I mean, I think -- so overall, you're seeing the fact that we continue to -- year-over-year, we're growing deposits at 6% and loans a bit less than that.

So you look at the LDR ratio around 94.5% in the third quarter.

That's down reasonably significantly less.

So we're going to do the 98% or so probably 1.5 years ago -- 1 year or 1.5 years ago.

So I think the balance sheet strength is quite good, really solid liquidity position as we head into the end of the year.

Deposit growth has remained a bit greater than loan growth.

That gives us optionality in terms of how we execute our playbook in terms of deposit pricing and that's part of how we've been able to drive deposit cost down is all of the good work that we've been doing in terms of generating deposits.

On the loan side, we gave you that color about the fact that year-over-year, trends during that 4% range or so, that's something we'll aspire to accomplish over time, but deposit costs will continue to fully fund loan growth.

And I think that's our main...

I think one piece of color I would add, Ken, is that we're quite pleased that we've been able to grow our demand accounts and outperform relative to peers.

Brad, you might want to add some color on that.

But really, the focus on the mass affluent customer and some of the investments we've made in customer experience and customer journey, we're gathering them, targeting them, getting them in the door using data analytics and then they stay.

And so retention is up there and that's really fueling that growth in demand accounts.

Yes.

That's exciting.

You've nailed it, Bruce.

I think we've talked quarter-on-quarter about our investment in analytics and that has given us the ability to really target the right customers, improve the value proposition, which we've done that with a focus on the mass affluent client, which is deepening our relationship with them and that we're getting them active quicker than we were in the past and they were improving our attrition.

And our Net Promoter Scores are showing that they're much more satisfied customers, and we think that what's fueling the growth in noninterest-bearing deposits.

Understood.

And one follow-up on the securities book.

So the securities book, you mentioned that the premium amortization was a 3 basis point hit to the net interest margin.

I'm just wondering at this point, where you're able to reinvest cash flows out versus the back book, if you could try to isolate for what's happening aside from the premium-am?

Yes.

I mean, I think on the front book, back book trends here, I mean, you’ve got reinvestments in the third quarter are around, call it, 250 or thereabouts, and you still have a positive front book, back book and securities with runoffs between the neighborhood of 220 – 223 or so.

So, I mean, I think, we’re feeling, it’s like against this backdrop, we’ve done a reasonably good job of holding our cash and investing and deploying that cash at points during the quarter where rates were a little higher

That's foresight.

Yes.

I mean it's hard to do that all the time, but the last couple of quarters we've been holding our powder a bit until some of the big declines in rates moderate and then we put all the cash to work.

So like I said, we still got a positive, call it, 25 basis points or so of front book, back book on the securities portfolio.

And one quick one just on the premium-am.

If rates stay flat, does that 3 basis point headwind just go away?

Meaning does it -- it goes to 0 as an increment if you expect -- if you realize it on like a realized basis?

And is there a lag to the premium-am that will continue to roll forward just because of where rates have gone to?

Yes.

I think you've hit it.

There's a couple of factors.

I mean, I think our outlook is that it's going to be relatively stable quarter-over-quarter such that the drag of 3 basis points this quarter was because there was an increase from 2Q to 3Q.

Our current outlook with this outlook for rates, et cetera, is that, that will be flattish from 3Q to 4Q.

So therefore, no longer a rise.

And then over time, maybe that can moderate, but even -- again, back to 2020, I'll get back to you on that later, but yes, it will be flattish from 3Q to 4Q.

The next question in queue will come from the line of Peter Winter with Wedbush Securities.

As you guys get ready to implement the TOP VI initiative, are there any thoughts maybe that you'd be willing to delay investments or maybe accelerate some of the planned cost saves just to ensure you generate positive operating leverage going forward?

Well, first off, we’re trying to get this thing off the ground and we have a number of work steams basically 7 or 8 work streams with individual leaders.

And as soon as they’re good to go and launched, we're already moving ahead.

So we’ve given the green light on 2 of those work streams already and we’ll have more that launch in the fourth quarter.

The bulk of the TOP program is accretive right away.

So we want to get those things going quickly.

The places where we would be in turn reinvesting the next-gen tech is one of the big work streams, that has probably the most value of any work stream to the bank in terms of how we're running the bank and how we can deliver for customers, but it's somewhat reliant.

It doesn't generate immediate savings.

It requires some investment and then the saving come later.

But as long as the rest of the streams are moving ahead, then our disposition is we got to move on that because it's really, really critical.

When we announced the TOP VI program, we also talked about some strategic investments that we were assessing and prepared to make and those include further expansion of Citizens Access, our digital bank or -- of our point-of-sale merchant finance platform or new ways to cover business -- small business customers and lower middle market customers with more digital and data applied.

And so we're working through those.

I think we have an ability to gate those based on how fast the savings comes through on the other streams and then also the overall macroenvironment next year.

And so we do have this commitment that we've held fast to since the IPO of trying to deliver positive operating leverage and that's probably the lever that we have would be to gate some of those investments.

But our objective, our hope is that we can move on those because I think there are really exciting and I think they really will drive medium-term revenue growth for us.

Great.

That's really helpful.

And I guess when I look at the medium-term profitability targets that you laid out, obviously, the rate environment is much different than when you originally gave that.

And so you're -- I'm assuming you're still expecting to see then continued improvement in the profitability in terms of the efficiency and ROTCE?

Yes.

I mean that's the only way to really get it is you're going to have to drive the operating leverage.

One of the things to keep your eye on is if some of these trade tensions and concerns that are holding back the economy a little bit abate.

That obviously is going to be a tailwind into next year and that could also result in the long end of the curve moving back higher.

That's actually been a bit of a crusher when it looked -- when you look at ROTCE because year-on-year, growth in OCI related to the growth in the value of the securities portfolio actually is, what, 75 basis points of ROTCE.

So if you had this long end move back, you could actually throw that right back onto the equation.

So there's a number of factors there, but yes, commitments to operating leverage key in terms of continuing to drive forward and reach those ROTCE goals.

And we'll go to our next question in queue, will come from Marlin Mosby with Vining Sparks.

And this is a good question to follow that last question.

When you look at banks, there's so many intricate details that we've spent all this time talking about, but really investing in it comes down to 3 different metrics.

One is return on tangible common equity, the other is dividend yield and third is basically how can you -- how fast can you grow tangible book value.

So while your ROTCE has been under pressure, one statistic that hadn't really been talked about was your growth in tangible book value was 14% over the last year, which is the counter of that.

So when you look at those 3 metrics, let's say, assuming, we don't have a credit event or credit downturn, how do you see those 3 metrics moving forward over the next, let's call it, 12 to 24 months given the environment that we have?

Do you see progress in those metrics?

Or where we're at right now is very positive, I think the valuation reflects some deterioration in those metrics.

So just wanted to get your take on that?

Yes.

I mean, obviously, the objective is to be driving the ROTCE and driving the tangible book value per share higher.

And if we execute well and the environment stays okay or improves, I think, we'll certainly be able to do that.

If we do that, the stock should reflect positively.

So our dividend yield would go down, which wouldn't be a bad thing.

Ultimately, we're still committed to raising our payout ratio and getting to a 35% to 40% dividend payout ratio, but the yield obviously is a function of the stock price.

And then, John, I want to dive into a very – so from a big picture to a really minutia type of question.

Given that what we’re seeing as consumer allowances are going up precipitously on the CECL and commercials are going down, while that day 1 impact is negative for those who have more consumer, what I’m trying to get at is, as we go into day 2 through 200, is the consumer because it is less lumpy and the commercial is getting impacted because of how low we are in the cycle right now and their losses tend to come in in big pieces, is the consumer possibly going to be less volatile over a cycle versus commercial when you have big pieces coming in and out having to adjust those factors when you go through those economic cycles?

Yes.

I -- it's -- we're still, I would say, developing our intuition about this new standard and how the models will work.

I think there are a series of factors that impact both sides.

I think just the prevailing market conditions and expectations of how your reasonable and supportable projections will revert over time, I think, could have meaningful impacts on both portfolios, to tell you the truth.

It's one of the reasons why we've all been scratching our heads about why this standard was necessary.

It's going to be very difficult to compare across institutions for a period of time, and it's going to be a lot more difficult to frankly anticipate where P&L impact will go over time.

All of that said, as you heard earlier from Bruce, economics are still something that we have to keep our eye on that ball and we’ll deal with the capital impact as necessary.

But I don’t know that I’m ready to say that one of the 2 portfolios is going to be less volatile.

I think it’s possible that either portfolio could contribute to significant volatility in any given period.

And stay tuned for the continuing disclosures that we’ll do on this in the first -- in January as we finish out, frankly, our parallel run in our model validations which are happening here as we speak in the fourth quarter.

No further questions at this time.

All right.

Very good.

Well, thanks, everyone, for dialing in today.

We always appreciate your interest and support.

Have a great day.

Thank you.

And that does conclude the call for today.

Thanks for participation.

You may now disconnect.