Citizens Financial Group Inc (CFG) 2019 Q4 法說會逐字稿

Good morning, everybody, and welcome to the Citizens Financial Group Fourth Quarter and Full Year 2019 Earnings Conference Call.

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

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

I'd now like to turn the call over to Ellen Taylor, Head of Investor Relations.

Ellen, you may begin.

Thanks, Brad.

And happy new decade to everyone.

We're really pleased to have you join us.

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

And then we'll be happy to take questions.

I'd also like to mention that Brad Conner, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are here to help us with that.

And now for some additional 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 for you to review our GAAP results on Page 3 of the presentation and to utilize the information about these measures and their reconciliation to GAAP in the appendix.

And now I'm going to hand it over to Bruce.

Okay.

Thanks, Ellen.

Good morning, everyone, and thanks for joining our call.

We're pleased to announce another strong quarter today.

In spite of continuing interest rate and yield curve headwinds, we've been able to maintain stable revenue as strong results in our fee businesses and attractive loan growth have worked to offset pressure on our net interest margin.

For the full year, we grew our earnings per share by 8%, and we hit most of our guidance for 2019, even though the interest rate and yield curve environment turned out much different than we had assumed.

We continue to demonstrate strong expense discipline, good performance on credit and robust capital return.

As we look back on 2019, I'm very pleased with the progress we've made in building a great bank.

We're gaining customers and market share in both commercial and consumer given our focus on being a trusted adviser and delivering an excellent customer experience.

The investments we've made in technology are paying dividends, witness our success with Citizens Access, over 20 fintech partnerships and the rollout of several new core platforms.

We've attracted great talent.

We've built a collegial customer-focused culture, and we've developed strong leaders.

The development of an exciting TOP 6 program, along with several big strategic initiatives designed to grow medium-term revenues and renewed vigor around our balance sheet optimization effort, give us a great underpinning for success in 2020 and beyond.

Looking out at 2020, we anticipate that we will have a moderately good economic backdrop.

We anticipate loan and deposit growth relatively consistent with this year, which will offset the impact on NIM of the Fed's 2019 rate cuts.

We see a stable to modest rise in NIM over the course of the year, starting in Q1.

Our fee growth should continue to outpace peers, given the investments we've made and our expanding customer base.

And while we continue to make growth investments, we nonetheless are targeting a modest level of positive operating leverage.

And credit should stay in good shape, though CECL introduces some new wrinkles that John will cover in a few minutes.

So to summarize, we're pleased with our progress in 2019, and we're excited to start the new year with all its hope and all its promise.

Before I turn it over to our CFO, John Woods, I would like to note that this will be the last earnings call for our Vice Chairman of Consumer, Brad Conner.

Brad has been a great partner and has done a terrific job in positioning our consumer bank for future success, and we wish him well in retirement.

We were pleased to be able to promote from within to fill the leadership going forward, a sign of the strong talent we've assembled at Citizens.

With that, over to you, John.

Great.

And thanks, Bruce, and good morning, everyone.

We're pleased to report solid results this quarter and a strong finish to the year with record fee income, good expense discipline and steady execution against our strategic initiatives.

We are well positioned for a successful 2020 given our consistent track record of disciplined execution.

Let me kick off by covering important highlights of our underlying results, covered on Pages 5 through 7. For the full year, our EPS was up 8%, with PPNR up 6% despite a challenging yield curve backdrop.

A key driver was fee income growth of 17%, with record results across each of our major fee income businesses as we've continued to expand our capabilities organically and through disciplined strategic acquisitions.

We also continued to maintain good underlying expense discipline.

We leveraged the benefits of our TOP programs to fund investments that drive future revenue growth.

For the quarter, EPS growth was 1% -- was up 1% year-over-year.

This reflects relatively stable net interest income as 4% interest-earning asset growth helped offset the impact of a decline in net interest margin.

We also generated record fee income in the fourth quarter of nearly $500 million, up 16% year-over-year, highlighted by continued strength in mortgage and wealth and record revenues in Capital Markets and FX and IRP.

We continue to strengthen and diversify our business model and the results are evident.

We delivered strong deposit growth of 7% year-over-year with growth across all categories.

Our spot LDR was 95%, leaving us well positioned as we enter 2020.

On a linked-quarter basis, net interest income was relatively stable, with good loan growth in the quarter and decelerating pressure on margin.

Importantly, we continue to manage our deposit costs well, bringing interest-bearing deposit costs down 15 basis points during the quarter.

We remain highly disciplined on expenses and continue to execute extremely well in our TOP programs.

We delivered pretax run rate benefits of about $125 million for TOP 5, which is above our initial estimates for the program.

And our transformational TOP 6 program is well underway with a target of approximately $300 million to $325 million in pretax run rate benefits by the end of 2021.

I'll spend a few minutes on that and some of our strategic revenue initiatives shortly.

Overall credit quality remained strong across retail and commercial, and both the nonperforming loan ratio and the allowance coverage ratio showed nice improvement linked quarter and year-over-year.

We delivered ROTCE of 12.5%, and tangible book value per share was up 12% year-over-year to $32.08.

On Page 8, net interest income was relatively stable linked quarter as a pickup in loan growth offset a 6 basis point decrease in net interest margin.

This reflects the impact of lower rates and higher prepayments on asset yields partially offset by the benefit of improved asset mix and deposit pricing discipline.

On a year-over-year basis, net interest income was down 2% as our loan growth of 3% helped to largely offset the impact of a 19 basis point decline in net interest margin to 3.06 given rates.

On a positive note, we lowered funding costs by 7 basis points, reflecting the improved funding mix from deposit growth and the benefit of lower rates.

In the face of the shifting rate environment and related balance sheet dynamics, we are actively managing our asset sensitivity, which remained broadly stable at around a 3% impact to a gradual 200 basis point rise in rates, with about 75% of this exposure tied to longer rates.

Moving to fees on Slide 9. Our fee businesses continue to perform very well, reflecting the significant progress we are making in strengthening and expanding our capabilities, which is helping to further diversify our revenue.

This includes our mortgage banking and wealth management businesses on the consumer side and capital and global markets in commercial.

Noninterest income hit record levels at nearly $500 million for the quarter and was up 16% year-over-year as our fee income ratio improved 3.5 points to 30%.

Noninterest income was relatively stable linked quarter as record results in Capital Markets and foreign exchange and interest rate products offset lower mortgage banking revenue, which, as expected, declined from record third quarter levels.

Capital Market fees were up $27 million linked quarter as loan syndication fees were higher with strong volumes leading to a record number of lead-left transactions, which increased 11% year-over-year.

M&A advisory fees were also higher, reflecting a strong contribution from Bowstring, which we acquired early last year.

We also continue to gain traction in underwriting fees.

Foreign exchange and interest rate product revenues also reached record levels and were up $14 million linked quarter, driven by increased client activity as sentiment improved with easing trade tensions as well as a benefit from CVA.

Wealth management posted a solid performance with trust and investment services fees up 4% sequentially as market conditions improved.

Mortgage banking fees were lower by $37 million from record third quarter levels, reflecting the impact of higher long-term rates and seasonality on originations, which contributed to a $20 million reduction in production revenue.

In addition, MSR valuation hedging results declined by $21 million from higher levels in the third quarter.

Providing a partial offset were mortgage servicing fees up $4 million driven by growth in the servicing portfolio, which increased by 4% sequentially to over $98 billion as well as by lower amortization expense.

Turning to Page 10.

Noninterest expense was down $5 million or 1% linked quarter.

Excluding the impact of the lease transaction in 3Q '19, noninterest expense was relatively stable and demonstrates our ongoing efforts to improve efficiency.

We continue to utilize savings from our TOP programs to reinvest in the revenue-generating opportunities.

Salary and employee benefits were down 1%, reflecting the impact of our efficiency programs as well as lower incentive compensation.

Outside services expense was up 7% sequentially, largely reflecting the impact of higher retail loan origination activity and seasonality.

Year-over-year, our noninterest expense was up 5% or 4% before the impact of acquisitions, reflecting our funding of growth-oriented investments.

Let's move on to Page 11 and discuss core loan trends.

Average loans were up 1.5% linked quarter with a modest drag from balance sheet optimization initiatives as we moved $1.1 billion of non-relationship mortgage loans to held for sale late in the quarter.

Average loans were up 1.8% before the impact of this loan sale activity.

On a linked-quarter basis, commercial loans were up 1% as we continue to execute well against our geographic, product and client-focused expansion strategies partially offset by planned reductions in commercial leasing.

Retail loans were up 1.7% linked quarter and up 2.4% before the impact of the loan sales activity, given growth in mortgage, education and merchant partnerships.

Year-over-year, average loans were up 3% and adjusting for the impact of loan sales activity, were up 4%, with 3% growth in commercial and 5% growth in retail.

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

Moving to Page 12.

We saw nice deposit growth of 1.4% linked quarter and 7% year-over-year as we benefited from investments we've made over the past several years to expand and enhance our capabilities.

Our DDA growth was 3% on a linked-quarter basis and relatively stable year-over-year, which compares favorably to industry trends.

Additionally, our Citizens Access digital platform, which reached $5.8 billion in deposits at the end of the quarter, continues to contribute to our funding diversification and the optimization of our deposit base.

Given the rate environment, we continue to aggressively execute 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 digital bank.

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

As a result, our total deposit costs were well controlled, down 12 basis points linked quarter, a nice improvement from the 5 basis point decrease last quarter.

This includes the benefit of interest-bearing deposit costs, which were down 15 basis points linked quarter.

Next, let's move to Page 13 and cover credit, which continues to look quite good overall across retail and commercial.

Nonperforming loans decreased 5% linked quarter and 8% year-over-year, and the NPL ratio of 59 basis points improved 4 basis points linked quarter and 7 basis points year-over-year.

Net charge-offs came in at 41 basis points in the quarter, up modestly linked quarter, reflecting seasonally higher losses in auto and expected seasoning in other retail, partially offset by modestly lower commercial losses.

Provision for credit losses of $110 million was up from the prior quarter, largely driven by continued seasoning in retail growth portfolios.

Our allowance to loans coverage ratio remained relatively stable, ending the quarter at 105 basis points, while our NPL coverage ratio improved to 178%, up from 171% linked quarter and 162% versus a year ago.

On Page 14, we maintained our strong capital and liquidity positions, ending the quarter with a CET1 ratio of 10%, which compares well with peers.

During the fourth quarter, we repurchased 10.9 million shares of common stock and including common dividends, returned $558 million to shareholders.

For the year, we repurchased a total of 34 million shares and including common dividends, returned $1.84 billion to shareholders, up 23% from 2018.

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

Let's move to Page 15 and discuss CECL.

On the slide, we have provided some high-level information about our methodology and the key macroeconomic variables that are drivers of the outcomes.

We still expect the day 1 impact of CECL on our reserves will be an increase in the 30% to 35% range, which represents about 22 to 25 basis points of CET1 on a fully-phased-in basis or approximately a 5 to 6 basis point starting in -- impact starting in 2020.

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

Ultimately, the amount of the initial impact will reflect our view of the macroeconomic outlook and some fine-tuning of our reserve models, so we plan to provide you with the final number when we issue our 10-K in February.

Our estimated day 2 impact results in 2020 provision expense in the range of $475 million to $575 million, with expected charge-offs in the $475 million to $525 million range.

Let me note that under CECL, quarterly volatility of provision could be potentially higher due to changes in the macroeconomic forecast and the mix of loan growth and runoff.

On Page 16, I want to highlight a few exciting things that are happening across our bank.

First, Forbes ranked us second among financial institutions and 16th overall on their 2019 list of America's Best Employers for New Graduates.

We are really proud of that because it shows that we are doing a good job of developing young talent, and it's a reflection of all the exciting things we are doing as we build a top-performing bank.

We also announced the second year of our leadership-level national partnership with Feeding America to combat hunger, and this is just one of the important things we do to help people in the communities we serve.

Since our last call, we have now launched an exciting new merchant partnership program with Microsoft for their Xbox All Access program, which is distributed through Amazon.

We are really excited about this program and our opportunity to partner with great merchants to help build deep and lasting relationships with our customers.

We are also hitting on all cylinders with the work we've done to expand our fee businesses and build out our capabilities.

We have virtually completed the integration of our Franklin American Mortgage acquisition, which, again, saw very strong results this quarter with strong originations and improved year-over-year sales margins.

And in the commercial business, we are very happy with our progress moving up the syndication lead tables, coming in at #3 for middle market and increasing our number of lead-left transactions.

We've also been enhancing our capital and global markets capabilities, building our M&A advisory business and client hedging capabilities, and both of these businesses saw record results this quarter.

Also, in our Treasury Solutions business this quarter, we completed the client migration to accessOPTIMA, our best-in-class cash management platform.

On Page 17, let me provide you with an update on the progress we're making and our expectations for the TOP 6 program.

The TOP programs have been instrumental in driving efficiencies that allow us to self-fund investments and continue to deliver future growth.

Overall, we expect to deliver $300 million to $325 million in pretax run rate benefits by year-end 2021, with about $175 million to $225 million of that coming by year-end 2020.

Our TOP 6 program consists of 2 parts.

The first being the transformational program, which is designed to transform how we operate and deliver for our customers and colleagues.

I'll give you a few examples of what we're doing.

We aim to deliver a more customer-centric, efficient and agile environment by modernizing our IT practices and our cross-organization operating model.

This IT work will further modernize our infrastructure and platforms and transform our technology delivery approach.

We are accelerating migration to the cloud, utilizing data and artificial intelligence more ambitiously and digitizing end-to-end processes.

We are converting ourselves to an agile company over the next 12 to 18 months.

This will make a huge difference in terms of the speed to market for everything we do and will significantly enhance our ability to innovate, adapt and deliver for customers.

The second part of the TOP 6 program is a more traditional improvement program, similar to those that we've successfully executed over the last 5 years.

On the efficiency side, we are accelerating our retail network transformation, modernizing our branches and rationalizing our footprint to better serve and advise customers.

We are looking at ways to simplify our organizational and improve the way our back office operation support the business and work more efficiently.

Costs to implement the program are estimated to increase to approximately $75 million over the course of the year, but we will look for strategies to offset these notable items as we've done in the past.

Importantly, the benefits of TOP 6 will help to mitigate the impact of the rate environment and ensure we maintain our commitment to delivering operating leverage and improving our efficiency and the way we run the bank.

Moving to Page 18.

We expect to utilize some savings from the TOP programs to fund the strategic revenue opportunities we are going after.

For example, we are looking to significantly expand digital strategies across the bank to reach more customers.

We plan to expand the product set offered through Citizens Access to further extend our national reach beyond our branch footprint.

Our first wave of additional products should launch by late this year.

We are also planning to launch a new commercial customer digital offering.

We envision developing a simple, integrated, self-service and fully digital platform to serve small businesses and lower middle-market customers with tools to help them run their businesses better and enable frictionless deposit and lending capabilities.

Another example is our effort to leverage the success we've had with our merchant finance partnerships to enhance the payment experience at point-of-sale, while helping customers responsibly make larger ticket purchases.

Taken together, these revenue opportunities would require roughly $40 million investment in 2020, about 70% of which would be in CapEx.

If executed well, the investments should really benefit our medium-term revenue growth and provide about a 1% boost to ROTCE by 2024.

Moving to Page 19.

Looking ahead, we are very optimistic about the coming year and the opportunity we have to continue building a top-performing bank that delivers for all stakeholders.

The capabilities we have built and that have delivered success from the IPO up till now give us the confidence that we can sustain our progress into the future.

We have a strong customer-focused culture and an experienced Board and management team.

We have a proven ability to execute and a commitment to excellence that will propel us going forward.

Additionally, we have demonstrated strong execution on our enterprise initiatives, such as our TOP programs, which are quite differentiating and demonstrate the mindset of continuous improvement.

We also have made good progress on balance sheet optimization as we have developed initiatives for both sides of the balance sheet to further build capabilities and optimize our position.

We also continue to make important investments in our future.

We are thinking about the long term, making good decisions about how to prioritize where we spend money and balancing that with the need to deliver progress near term.

As we look out into the medium term, we remain committed to our ROTCE target of 14% to 16%, with details in the appendix.

Clearly, we've had to contend with a changed rate environment, so it's taking longer, but we remain confident in our ability to deliver given a reasonable environment.

On Page 20, we review our 2019 performance against the guidance we provided at the start of the year.

And despite a pretty dramatic shift in the rate environment from the beginning of the year, we executed well across our targets and delivered overall on the bottom line.

Keys to this overall performance were delivering strong fee revenue reflecting our initiatives to expand fee-based capabilities, delivering solid loan growth in areas with attractive risk-adjusted return profiles and maintaining strong expense discipline and stable credit quality, all while returning significant capital to shareholders.

Now turning to our outlook for 2020 on Page 21.

We expect modest NII growth of around 1% to 2% as the benefit of 3% to 4% loan growth is partially offset by the impact of lower rates relative to a year ago.

Given our current expectation for the Fed to remain on hold through the end of the year, we expect net interest margin to be down in line with 2019 results as pressure on loan yields is partially offset by improvements in deposit pricing.

We expect to continue to leverage our more diversified business model and enhanced capabilities to deliver noninterest income growth in the range of 4% to 5.5%.

We also will target modest positive operating leverage in the 50 basis points range and a stable efficiency ratio by maintaining good expense discipline while continuing to make important investments to drive future revenue growth.

We expect underlying credit quality to remain well controlled, and we currently expect provision expense under CECL to be in the range of $475 million to $575 million, with charge-offs in the range of $475 million to $525 million.

We expect our CET1 to end the year in the 9.75% to 10% range, with a dividend payout ratio towards the upper end of our 35% to 40% target.

Let me note that this outlook does not include notable items.

We expect those costs to be in the range of approximately $75 million over the course of the year.

Our outlook for the first quarter on Page 22 reflects historical seasonality of first quarter revenues and expenses.

We are expecting net interest income to be up slightly as loan growth and a stable to slightly up net interest margin are partially offset by a $10 million impact from day count.

The fee income outlook for the quarter reflects seasonal trends, resulting in a mid-single-digit increase from strong fourth quarter levels.

That said, pipelines in our fee businesses look good early in the quarter.

Noninterest expense is expected to be up in the low single digits, largely given seasonal payroll tax and compensation impacts.

The provision is expected to be modestly higher in the $115 million to $120 million range.

Finally, we expect the tax rate to remain stable around the 22% level and for the CET1 ratio to end the first quarter at around 10%.

To sum up on Page 24.

Our results this quarter demonstrate our continued strong performance as we execute our -- 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.

Thank you, John.

Brad, operator, let's open it up to Q&A.

(Operator Instructions) And our first question here will come from the line of Matt O'Connor with Deutsche.

The revenue outlook seems a little bit better than expected and better than some peers.

Obviously, fees is a big component of that.

Could you just elaborate a bit on the drivers of fees?

You had a very good fourth quarter in cap markets, mortgage, the rates, FX.

But talk about the kind of drivers on a full year basis?

And why you're confident in that high fee revenue growth?

Yes, sure.

I'll kick off, John, and then I'll pass it to you.

But Matt, I think it's been a journey here on investing in our fee businesses and building out our capabilities, and we have a growing customer base.

We're growing households on the consumer side.

We've upped the number of accounts and clients we service on the commercial side.

So making that all kind of work in harmony, so that those expanded capabilities can get delivered as we become a trusted adviser and provide advice to our customers.

We're really starting to see the fruits of that.

So you could see that hit and accelerate as we go through 2019.

And I think as we look into '20, there's more juice in the lemon, so to speak, to squeeze on that.

So with that overview, why don't I give it to John, and then maybe Don and Brad, you could comment on each of your businesses.

Yes, I think that's well said, Bruce.

I'd say the outlook for 2020, if you start looking forward, you'd see our expected strength in both businesses, and Don and Brad will comment.

But Capital Markets, for example, is an area of ongoing strength.

We've been making investments and capabilities there.

We -- I think there's a balance, and this is a little bit of a theme of organic investments being combined with the synergies from small bolt-on acquisitions that we've done over the last couple of years, and that's evident in the M&A advisory space within cap markets going forward.

We've made lots of organic investments in the Global Markets space, and we've had some record results here recently, I think, 2 quarters in a row in IRP.

On the consumer side, I'd say that mortgage and wealth are the 2 areas that I would point to.

Solid expected underpinning in mortgage going forward given that helps to diversify some of our fee businesses.

And then in wealth, the ongoing integration of Clarfeld and the synergies there, combined with the investments in the FA advisory -- adviser space.

I mean our FA advisers were up 4% over the year.

And as that -- the full year effect of that as you get into 2020 and the productivity that you expect in that sales force looks good, along with maybe a more constructive long -- mid- to long-term rate environment, which will help to relieve some of the pressure on some of the transaction revenues we have in the wealth space looking forward.

So all in, we feel pretty good about the outlook for 2020 on fees.

Don, do you want to go next?

Yes.

And then I'll just amplify a little bit.

I think John and Bruce covered a lot of it.

But the other thing that I focus on is share gains.

We are, as John said, moving up the league tables nicely in all the relative league tables, which says, even in a market that was a little bit quiet, like the syndicated loan market, through a large part of the year, we captured more than our share when we're right up there with the big money centers at this point in that sector.

Second thing I'd just point to is diversification.

We've really diversified out our fee stream.

So if you look back 3 or 4 years ago, it was really a syndicated loan story on the Capital Markets side.

We've built a nice -- couple of nice equity partnerships.

We've built a high-yield business out.

And when different markets are accelerating, we're able to generate revenues.

And the third thing is we've just hired a lot of extremely strong people on the origination and corporate finance side.

And I think we're pitching really well in the marketplace, and we're winning more than our fair share of business.

So I feel very good about where the business stands.

And as John said, I sit here today, our pipelines look a lot better today than they did a year ago.

So we're entering the year quite strongly.

Great.

And Brad?

Yes.

Again, I think you both did a nice job of teeing it up.

Just a couple of things to add.

I agree completely with what John said on the wealth side.

I think we have a significant opportunity to leverage the Clarfeld acquisition in 2020.

We had good progress in 2019, but a lot of that effort was around the integration work and building the right foundation, and I think we're really ready to leverage and launch that platform in 2020 and feel really good about where we stand with the integration and the capability we now have to serve the high net worth and ultrahigh net worth business.

And on the mortgage side, certainly, we may see the refi activity come down just a little bit in 2020, but we really think we can overcome that with significant opportunity in our third-party businesses.

We've been investing -- one of the things that Franklin American gave us was a diversified origination platform, where we now have wholesale correspondent and retail capabilities.

And we've been making significant investments in all of those businesses around making the experience better, investing in digital capabilities, and we really believe that we're ready to launch those capabilities, particularly on the wholesale and correspondent side.

So I feel very optimistic on the mortgage front.

Ken Usdin with Jefferies.

On the loan growth side, it looks really good, especially even on commercial, in light of the industry numbers that obviously don't look anywhere near as good.

And I know you talked about balance sheet optimization continuing underneath.

I'm just wondering just how much do you see still in the uptake of your recent adds and your vertical expansions?

And what are you just seeing on the customer demand side underneath that to continue to propel, especially on the C&I side?

Yes.

So why don't I take that?

I think it's a tricky environment out there, just because competition is really heavy and there's not a lot of huge demand for new money.

Now with the trade first phase behind us, I'm sensing already a little bit of optimism in the client base, but it's way too early to really see it translate into the numbers.

I will say that our pipelines -- our originations and our pipeline for originations were as strong as they have ever been last year.

They were offset by a lot of pay downs.

So you saw a lot of working capital efficiency in the form of borrowers, and you saw quite a bit of refinancing into the public markets and in the institutional markets.

So there's lots of puts and takes in terms of loan growth.

What we are benefiting from is our geographic expansions.

We moved into the Southeast this last year.

We moved into Texas and California.

So we are adding new clients and that is generating an element of our loan growth.

I would say, our core middle market has been relatively flattish, and we expect it to stay relatively flattish.

So as we kind of go through day-to-day, it's really picking and choosing our spots, making sure we contain credit quality, making sure we actually earn adequate returns on the capital we're deploying, but we actually like the volume that we're seeing.

So I think our projection for this year is like low single-digit loan growth.

I will say that if you look in the underlying numbers, we had quite a strong CRE growth last year.

That was due to several large transactions at the end of the year, which were purpose-built transactions for large corporates, which popped our numbers a little bit and made our CRE growth look a little higher than we had expected it to be when we're sitting here midyear.

But very safe...

Great credits.

We actually -- we like the business.

Sure.

Got it.

Great.

And then one question on deposits.

It's nice to see also Citizens Access still growing even with the change in the rate environment.

Can you just talk about deposit pricing?

And just what happens now that we get to a point where hopefully rates are more stable?

Yes.

I'll go ahead and jump in there.

And I'd say it this way, I mean, I think they're -- we've seen really strong deposit growth.

I should hasten to add that we're really proud of not only Citizens Access, but also all of the organic work that's going on in the businesses to drive DDA and other low-cost deposits.

I think that's been an area of real benefit for us over the last several quarters and that continues.

So that's very helpful.

In terms of the -- you saw our interest-bearing deposit costs down by 15 basis points this quarter, you're just really starting to see the impacts of those rate cuts being -- it takes a little bit of a lag to see that kick in.

I would say that we would expect to see continuing prices for deposit pricing come down as you look into the first half of 2020.

As you get out into later in 2020, you could see some of that dissipate.

But we still see pricing opportunities as you look across not only our branch footprint, but also with respect to online pricing as you head into the early part of 2020.

And we'll go now into the next question in the queue.

It will come from Peter Winter with Wedbush Securities.

Consumer loan growth was particularly strong this quarter, would you -- and the consumer overall is pretty strong.

Would you expect consumer loan growth to kind of lead the growth in 2020?

I'm sorry, could you repeat the question?

The question is consumer loan growth has been relatively strong in the second half of the year.

Do we expect strong loan growth as we go into 2020?

Right.

Yes.

I'll go and start off on that, and if others can add color.

But I'd say it this way.

But more broadly, we feel pretty good about the balanced profile of our loan growth into 2020 on both the commercial and consumer or retail side of things.

And I think that's been a strength of ours more recently, which we were underweight in the commercial side, and I think that will help us as -- across varying environments.

With respect to consumer -- specifically within consumer, again, diversification is a good story there.

We see some strength in the resi side in the past, and we see that continuing into 2020.

But from a balance sheet optimization standpoint, we see some of those portfolios that we really like from a risk-return standpoint, such as education and some of our merchant businesses, really helping to drive some uptake over the next year as well.

And actually, I'd hasten to add that, that helps balance exposure from a CECL standpoint also.

So it just looks to be relatively good momentum on both sides of the ledger there.

And I'll stop there and see if Brad wants to add.

Yes.

I -- what I would add there, I think, was where you started, John, which is it's well balanced, and we're seeing relatively strong demand across almost all the asset classes.

I mean you look at the fourth quarter, we had good demand on the home lending side.

ERL, the education refinance product was strong.

We're seeing really good momentum on the merchant side.

We've talked about this a couple of times already, but the consumer just appears to be strong, and we're just seeing the demand.

I mean we've talked about running down our auto book, which we have done intentionally.

But even there, we're seeing that become a little bit more attractive asset class as you're starting to see margins widen out a little bit.

So overall, it's just good, strong demand.

I think -- it's Bruce.

And I would flag ed refi and the merchant partnerships as being the shining stars as we head into 2020, where we would expect to see growth, and it's very attractive from a risk-adjusted return standpoint.

We have made investments in our card business.

So I think we'll see some growth in card as well.

In mortgage, we're, kind of, note the sale that we've just announced that we're going to try to cull thin relationship mortgages and recycle that capital.

So we've done some of that with auto.

We'll do some of that in mortgage.

We're still fighting the trends in HELOC, so we still have a little bit of drag there.

So there's a few things that are going to be working against us.

But I think on a net basis, we'll still have solid outlook for consumer loan growth in 2020.

Got it.

That's very helpful.

The 2020 margin outlook of stable to slightly up versus fourth quarter, I guess, it's assuming no rate cuts in 2020.

And the question is, what if the Fed does cut rates?

And just what are some of the puts and takes to the margin outlook?

Yes, I'll go ahead and cover that.

I'd say, as you mentioned, the outlook for NIM is to be up slightly, given a couple of things.

I mean we're seeing some stabilization on the loan front.

I mean we've had a lot of pressure on loan yields as the industry has, and we see that stabilizing in the first quarter.

Nevertheless, we still think, as I mentioned earlier, that we'll see some benefit from deposit costs declining, that -- along with the issue of day count when you go from 4Q to 1Q.

All of that would lead to uplift in the first quarter with respect to NIM.

And we think that, that can hold and possibly even kind of show some opportunities for improvement thereafter within 2020.

Now that said, to the extent that there's a rate cut, I mean, we are -- we still are asset-sensitive and positively so.

And so therefore, that asset sensitivity is around 3%, as I mentioned in my remarks, and so we would have some negative impact to that.

And we tend to manage that through some of the hedging that we've done and what have you.

And I would just add, Peter, that the markets are not looking for any further reductions for some time.

And I think all of the public commentary by Fed officials is that they've eased and created looser conditions, monetary conditions, and they want to wait and see how that affects the economy and the data.

So I think we're in the clear for a reasonable period of time before we really have to worry about whether there needs to be further reductions.

I personally think that if the economy picks up some steam here because of some of those easings and because some of the macro overhangs, like trade tension and what's going to happen with Brexit, as those things have eased, to me, there's probably more of a upside breakout bias here than downside as we look in 2020, all things considered.

And so our feeling is that the next move might be up.

If we're at these very tight unemployment levels and inflation is starting to trickle up, you could see a scenario where the Fed pauses and stays on hold for a long time, but then ultimately feels the need to do some retracement up.

Yes.

I was just going to add one other point.

With respect to a few quarters ago, we shifted our asset sensitivity to the longer end in an environment where we think a steepening is -- we have a bias towards steepening of the curve as well.

And so that to me is an important mitigant to any environment.

And I think, historically, when you've seen the Fed go on pause, [the 2s to 10] spread has steepened usually in the range of 50 basis points, and so we're still roughly at half of that.

And certainly, that would create a little kick here to NII.

And our next question here will come from the line of Scott Siefers.

I think I just wanted to ask a follow-up on some of the digital offerings with Citizens Access.

So as you get more time under your belt and the volume continues to grow, what are you finding about the elasticity or price sensitivity of that customer as time marches on?

I'll go head and just -- I'll kick off there.

I mean I think we've seen the betas in that space are pretty typical, something in the neighborhood of 60% to 70%, on the way up.

We've been able to retrace that as rates have come down.

I think more broadly, though, as we mentioned before, this has been a home run for us in terms of diversifying our funding sources, and the pricing of it actually has been accretive to our NIM with respect to being much better able to optimize our pricing, our promotional approaches to focusing on deposit primacy and et cetera within the branch footprint.

So going forward, we feel like there's pretty good pricing power there.

But the whole point of that platform is more of a strategic deepening with a customer segment that we find really attractive.

And as we mentioned in some of our remarks, we plan to add to that platform later this year and are excited about broadening our approach to that customer segment.

I've been -- extremely well said.

I think we've learned that the betas behave the way we would have hoped on the way up.

And there is an affinity to the customer experience that we're providing.

And we're finding that they're quite sticky when we raise rates as rates -- or excuse me, lower rates as rates come down.

So yes, we feel quite good about it.

Yes.

And I was going to add that as well, Brad, that I think we spend a lot of time designing the experience and making it really terrific for folks.

And so as long as we're paying competitive rates, there's no reason really for them to switch.

And if we can come along with these rollout of additional products and have even deeper relationships that makes it even more sticky as time goes by.

Yes.

Okay, perfect.

And then maybe, John, if you could expand upon a couple of your comments regarding rate sensitivity.

I know you guys have taken some efforts over the last few quarters to moderate the level of asset sensitivity to where you are now.

I guess I'm curious for any updated thoughts on what the end game would be for a sort of stable rate environment.

Do we want to neutralize the sensitivity or maintain some modest level of asset sensitivity?

How are you thinking about that dynamic?

Yes.

I mean, I think as you heard earlier, I mean, we have a bias that the Fed is likely on hold here and a bias towards the fact that there's some steepening potential in the yield curve that -- particularly given the recent events on trade and other factors in the macro.

So all of that said, I think a low-to-moderate asset sensitivity position is a more durable expectation going forward.

As I mentioned earlier, we did shift some of our asset sensitivity out to the longer end.

So now we're, call it, in the 75% range of our 3% sensitivity is really tied to longer rates, and so a little bit less volatility with respect to the moves on the short end.

So we think that's the appropriate positioning, and I think that will serve us well to manage the NII issues going forward.

Yes.

And one thing, Scott, is that we are constantly running simulations and calibrating what the market expectations are and making adjustments to those hedges on a regular basis.

So we feel good about the kind of quality of analytics and the people we have running those analytics.

And you have to start with a view, as John said, and then you tailor your position there, but we're constantly looking at well what if we're wrong and what if this happens, have we covered off different scenarios.

So I feel good about the capabilities we have there.

And next, we'll go to Erika Najarian with Bank of America.

So the company has outperformed both results and outlook, and it's clearly reflected on the stock price performance.

I thought it was interesting that you've reiterated, once again, your medium-term ROTCE of 14% to 16%.

Consensus for both '20 and '21 has ROTCE in the low 12s.

And I'm wondering, Bruce and John, if you could help us with a walk in terms of getting from -- to your medium term of 14% from the 12.8%.

In other words, what is consensus missing and that they don't have you even approaching that range over the next 2 years?

Yes.

Well, let me start, John, and then you can pick up.

But one thing, Erika, that we'd like to highlight in the release is the fact that with the change in rates, we've had an increase in the value of our securities portfolio, which is a good thing when it comes to book value per share, but it raises your overall equity.

And so the impact of that was 85 basis points from where we ended up Q4 to where we were Q4 of 2018.

So one of the things that could really help propel us back towards the 14%, which we had briefly touched in Q4 of '18, was it would be a steepening in the curve.

And I don't think analyst consensus, I don't think people really go and model that and carry it through to what the impacts could be on OCI.

So there's that element that I would just kind of lead off with and say, if we got in a rate environment where the curve started to steepen and the economy stayed strong next year, that would certainly help propel us higher.

I think beyond that then, it really boils down to continuing to deliver that positive operating leverage.

And in a way, I would say, if you think about 2020, we're still going through a period of transition to deal with the impacts of the Fed moves in 2019, and they'll have an impact as you can see in the guidance, and so you won't have as much operating leverage as you've had in the past.

You'll have to fight the tape a little bit on NIM, so earnings per share growth won't be as much as it's been historically.

But to me, 2020 is a really, really important year because we have teed up some very significant efforts.

We have TOP 6 and that positions us really well for the future in terms of how we deliver technology and serve customers and run the bank more efficiently.

And with that, we have identified some really great opportunities, we think, that we can build on capabilities we have and really start to invest in these 3 strategic initiatives, which are outlined in the deck, which I think we're duly cautious on how long it's going to take to build those businesses and scale those businesses.

And we say that you look out in the medium term and there's a 1% boost to our ROTCE coming from those initiatives, and we'll work really hard to do everything we can to try to accelerate that.

So I think 2021, if we execute well through 2020, I think there's a fair amount of upside to -- if you're in a constructive environment, and we've pulled through the TOP programs, we've got some oomph behind these strategic initiatives that we could set up ourselves very well to get back to something where there's more operating leverage and a more rigorous rate of EPS growth.

So anyway, I'll stop there, and John, you can add to that.

Yes.

No, that is well said.

I'd say just, Erika, in terms of puts and takes on that, I mean, I think when we look out into the future, we see opportunity for ROTCE expansion in a number of areas, just to list a couple.

Certainly, in the NII space, the way that we're growing the balance sheet and how we're going to use balance sheet optimization with more momentum there, frankly, to really drive ROTCE uptake, I think, is a real opportunity.

You heard about TOP.

I think -- our TOP program, I think, is differentiating.

It's driving ROTCE improvement.

We're going to invest some of that in the strategic initiatives, which will also be, as we mentioned, possibly a point of ROTCE over the medium term.

And Bruce mentioned the denominator, OCI, and capital-related items that will be a tailwind.

I mean I think all of those things, we have a good line of sight to.

There are some takes to that, right?

I mean, I think credit, although still quite good and strong, I mean, it's -- things have -- you see credit getting -- not exactly fully normalizing, but credit not being quite as perfect as it was a year or 2 ago.

And the rate environment is also a little bit of a headwind to full build-in.

So all those things together give us a lot of confidence in that statement.

And next, we'll go to the line of Saul Martinez with UBS.

Thank you for the color on -- the additional color on CECL, that's helpful.

I wanted to ask about your CECL outlook.

And maybe this is going into the weeds a little bit for an earnings call.

But John, if I take the midpoint of your true-up range, 30% to 35%, I get to an ACL ratio, not an ALLL ratio, but an ACL ratio of about 144 bps.

And if I forecast that out next year using your provision and your charge-off guidance plus your loan growth, it implies that, that ratio is kind of flat to down-ish a little bit over the course of the year, which suggests your net new loan growth has loss content that's similar to maybe even slightly lower than what your back book is.

So I guess my question is, am I thinking about that right?

Because it does seem counterintuitive a little bit to me that you're growing in -- part of the story is that you're growing in the higher-margin segments, especially on the retail side, which presumably should have a bit higher-loss content over the life of the loan than your back book.

And I guess, shouldn't we be thinking that your ACL or your ALLL ratio, however you want to think about it, over time, under CECL, if that balance sheet optimization continues, actually migrates upwards.

So I guess, I'm just trying to think about the provisioning guidance relative to charge-offs and sort of net new loan growth and the loss content of that under CECL?

Yes.

Well, thanks for that.

I'll add a couple of points.

First, as we mentioned, we're still working with finalizing our models.

And this is all new to the industry, but we spent a lot of time on it and have some thoughts that we can share.

And we'll add more thoughts and talk about this further in future -- in future calls.

But -- so just to comment on your point.

I think what you have to do is be reminded of 2 important thoughts.

One is, as we mentioned before, we have a pretty diversified loan growth outlook.

So when you think about those loan categories that have lower CECL content, which is the commercial space and, call it, mortgage, and if you look at what -- our expectation is that commercial and mortgage are a pretty big part of what we're doing from a dollar perspective because those are big portfolios and they're growing at good rates.

So that drives a lot of dollar loan growth.

Whereas the other portfolios that we're growing from a BSO standpoint that we're excited about, which is on the education and merchant front, are higher percentage growth, but they're not -- they're off of smaller bases.

So when you look at the dollars, you're pretty well balanced from an outlook into 2020 from a CECL standpoint between those loans that maybe have a higher CECL loan loss content versus those that have a lower CECL loss content.

All that said, charge-off's unaffected, and so that's maybe something you could think about when you're looking for that outlook.

Okay.

That's helpful.

So basically because of the much bigger dollar value on C&I and mortgage, which may have a lower loss content, it sort of balances out, and it really doesn't change your ALLL ratio going forward.

Is that sort of the thought?

Yes.

You got it.

Okay.

And then just changing gears a little bit on deposit costs and the outlook there in your NII guidance.

So far your -- I think your deposit costs are down since the second quarter about 21 bps on 75 basis points of cuts, so already a 28% beta.

How -- what's kind of baked into your guidance for sort of the beta on the downside?

Because you're assuming the Fed funds rate stays where it's at, how much more in deposit cost reductions?

What's the sort of through-the-cycle beta that you're assuming?

Yes.

I mean I don't know if betas are quite as useful in a period where you think the Fed is going to be on hold, right?

I mean, when you look at the in-period betas, if the Fed doesn't -- which is our expectation, if Fed's on hold, but nevertheless, we expect deposit costs to decline in the first quarter, then you're going to have an infinite beta.

So I'm not sure the in-periods make sense.

But in terms of the cumulative beta, I think we're getting up towards 40% and may be able to drive that higher in terms of what -- since the down cycle began, and it's in the second quarter, if you use that as the base, 2Q of 2019.

So yes, I mean, I think that as I...

The other point you made earlier, John, is the farther away you get from the Fed pausing, then the less opportunity there is.

So we're still going to see some of that in Q1, and then that will start to ebb as we get through the year.

Exactly.

I'd say 1H 2020, we still see opportunities to continue to cause deposit pricing to come down.

And then the ongoing -- throughout the rest of the year, there's still balance sheet optimization activities to even consider whether there's some opportunities thereafter, but it does dissipate, as Bruce mentioned.

So that's really the thinking.

The other thing I'd just add is that there's a front-book, back-book dynamic on CDs for our term deposits that are rolling over that has been positive, certainly, over the last half of 2019.

And then we expect that to be a positive dynamic as you get throughout most, if not all, of 2020.

Got it.

No, that's helpful.

And the 40%, just to be clear that, that's on the 75 basis points?

So my question is more just on the 75 basis points that's been cut already, how to think about the deposit cost relative to that?

I guess, the 40% is on that 75, right?

Yes.

Yes, it is.

It's cumulative on that.

We're up to that.

And all those other things would -- that we just talked about would influence that into 2020.

And next, we'll go to the line of Brian Foran with Autonomous.

Most of my questions have been asked.

But one that comes up sometimes is merchant partnerships, obviously, been very successful and a really good initiative for you.

One concern sometimes investors bring up is what if a merchant decides to move the relationship.

So can you talk to how you make the relationship sticky, things you do to add value beyond just providing the loan, any contractual provisions you have?

Anything like that for someone who might be worried about one of your partners moving over time.

Yes.

Yes.

It's a great question that we do get quite a bit.

Listen, I hate to be too motherhood and apple pie, but the way to make them the stickiest is to provide great customer experiences.

I mean, at the end of the day, what we're doing is we're helping our merchant partners sell more product, and we think we've done that in a very big way.

With all the partners we've had, we've been -- I've even lost track, 3 or 4 years now with Apple, and we feel like we have just a tremendous relationship with them and that we provide a very unique customer experience.

That has been the entrée for us opening up with other partners.

We do look at other things that we can do to deepen the relationships, providing data back to those partners and so forth.

But at the end of the day, it really comes down to just providing a unique and a very exceptional customer experience, and I think our partners would say that we do that well.

And we'll go to the next line in the queue, John Pancari with Evercore.

Just on the expense side, just a couple of quick things there.

On the comp expense, you had a good linked quarter decline in comp expense despite the strength that you saw in the capital markets and FX and other fee areas.

So could you just talk a little bit about what helped drive that?

Yes.

I would just mention that, even though we've talked a lot about TOP 6, really TOP 5, from a more traditional standpoint, has been kicking in as you get into the later part of the year.

And we went out with numbers that were smaller than the $125 million that we're communicating today, so we've been able to upsize those benefits with respect to TOP 5. And we tend to use those programs to fund investments we would like to make, but also to maintain profitability and maintain our trajectory that we'd like to see in terms of going forward.

Headcount came down just below 18,000.

So after Franklin, I think we've been up in the high teens, continue to look for efficiencies.

Okay.

Okay, got it.

And then more broadly on expenses.

If the operating environment does get tougher than you think on the top line for next year, whether it's rates or growth or whatnot, can you just talk about your flexibility on the expense side?

Yes.

I'd say a few things on that.

I'd say we have a relatively big strategic agenda in 2020.

Those are -- we consider them to be critical to maintaining our balance of focusing on the short term and the long term, and that's our outlook.

That said, if something were to be -- if there were some stress that would start to be introduced into the system, there's a significant amount of discretionary investments that we could moderate...

Slow down and pace some of that.

Yes, exactly.

And so that's something that we keep an eye on.

And that's something that we're, in detail, focused on, on a month-to-month, quarter-to-quarter basis, what our investment capacity is, and that would -- we would modify that capacity if things were to deteriorate.

Okay.

Yes, got it.

And then my last one is just on CECL.

Could you just discuss a little bit if the -- if CECL in itself and the day 2 impact has influenced your willingness to -- or your appetite to grow in any of the consumer areas where you've been growing?

Yes.

I mean I think it's not the number one issue.

I mean, I think we're trying to serve our customers.

We're trying to invest in the markets that -- where we'd like to play.

And we have a very diversified consumer and commercial lending platform, such that, as I mentioned earlier, a lot of the way CECL impacts some portfolios, much worse than maybe some others, tends to be mitigated through that diversification.

So we really focus on providing that capability, and it's something we'll think about.

I mean, it is an additional capital charge to some portfolios, and we'll just make it part of our balance sheet optimization activities going forward.

Yes.

I would say, John, at the end of the day, it's the economics that we're concerned about, and so we don't want to withdraw capital because of a accounting issue.

But having said that, we will look at the new accounting framework.

And if there's tweaks that we need to make to certain product offerings that could end up with a better capital treatment, we'll do that.

But I'd say, fundamentally, we're going to continue to follow the economics.

And next, we'll go to Ken Zerbe with Morgan Stanley.

Two questions.

The first one, in the press release, you had mentioned that you have several portfolio actions that are expected to boost NIM and ROTCE, that those are under consideration.

Are those already included in your financial targets for 2020, or are these -- or part of your TOP program?

Or are these in addition to what you've already announced?

These, Ken, would be incremental.

So I'd say we're running hard with our balance sheet optimization, and we're constantly trying to develop new ideas and approaches.

And say, in an environment where it's hard to make huge progress in the near term on ROTCE for the industry, are there certain things we could do to reposition part of the balance sheet that could create some upward momentum there?

So stay tuned on that.

We're not making any promises, but we wanted to socialize the idea that we're looking at some things.

And obviously, we try to do them in a capital-efficient and capital-neutral way, so that's kind of the trick of it.

And would these be considered more sort of incremental like maybe 10 basis points on ROTCE or something more material?

Too early to tell.

Too early to tell.

I don't think it's -- it would be massive, but we'll -- if they're worth doing, they should have some visible impact, but I'm not going to say they'll be massive by any stretch.

Got it.

Understood.

Okay.

And then my second question.

Just in terms of your CE Tier 1 targets, obviously, it looks like your medium-term targets match largely your 2020 targets.

I mean, is it fair to assume that once we're into 2020 and certainly into 2021 that capital return becomes a much smaller piece of your overall sort of ROE?

Or how you think about, I guess, that capital return could be a lot lower than what it was in years past?

I mean, obviously, I know you're doing a lot to bring down your CE Tier 1 ratio by 40, 50 basis points per year, and it seems at this point, it's going to be a function of your ROE rather than excess capital return.

Is that the way to think about it?

Yes.

I'd say, look, we're still looking to be friendly to shareholders in terms of our capital return.

But increasingly, we're going to look to the organic growth and where we're allocating our capital to drive earnings performance.

And so I do think more will come from the numerator in getting to that, with the exception potentially of the OCI impact from a steeper curve.

But we'll still look to, I think, prioritize organic growth and having a strong dividend payout ratio.

And if we have capital after that, we'll return it to shareholders.

But I still think that can still be a pretty good payout ratio going forward.

It just won't have the same kick and tailwind that it's had as we've been on the glide path for the last 4 or 5 years.

And next, we'll go to Gerard Cassidy with RBC.

Don, can you share with us -- you've had success growing your portfolio in the new markets that you pointed to earlier.

Can you share with us what kind of industries that you're seeing this growth in the commercial loan book?

And then second, what are some of the strategies you're using to win this new business?

So a couple of things just to refresh people's memory.

As we went into the new markets, we articulated a strategy that we wanted to bank larger, more financially flexible companies.

So it is not a middle-market strategy because I'm very worried about smaller companies and adverse selection.

So the credit underpinning is midsized companies.

The real driver of the growth is -- and I wouldn't say it's any one industry, it's pretty much across the board.

But what we've done in each of the markets is hired people that have been longstanding senior participants with clients in those markets, and they're bringing clients with them because of their relationships.

And as we interview, as we talk to the teams, we are very focused on who can actually individually move clients from bank to bank.

And then if you think about disruptions that are going on in the industry per se, there's a lot of clients that are looking around for other banks to work with them.

So I'd say it's, one, who we hire; two, it's the intensity with which we're covering these markets; and three, it's a broad-based industry strategy.

There's a fair amount of activity in the Southeast, which is driving a lot of it because we're longer there in terms of presence on the ground.

Texas is beginning to come in a little bit.

That's not an energy strategy.

We have an energy team already, we have for years, and California is very early days.

And the other thing we've done is we've upgraded in the Midwest and brought a new Head of the Midwest in because we haven't been satisfied with the progress we've made in those markets.

Very good.

And then circling back, Bruce, on capital or capital return, I should say.

Obviously, you guys had a nice increase in the dividend today.

It looks like it's about $1.56 annualized now, which is about, I guess, between 35% and 40% of 2020 earnings estimates.

Is that the long-term, kind of, dividend payout ratio we should think about, 35% to 40%?

Or would you consider similar to some of your peers that are now talking about 40% to 50% dividend payout ratios over the longer term?

Look, I think it's important to have a good yield on a bank stock and so have a good dividend payout ratio.

So we've always aspired to do that when we took the company public, and I think we're getting it up to around 40%.

And for now, I think that's a good level to be at.

We still have significant organic growth opportunities, and we want to make sure we're balanced in terms of how much we pay out and how much we can retain to support growth.

So that's where I'd see it for now.

I think we have -- we're going on a bit here.

So maybe we have time, Brad, for one last question.

Sure.

And that will come from Brian Klock with Keefe, Bruyette, & Woods.

I just have a quick follow-up on CECL.

John, I guess, when you think about what 30% to 35% impact on the day 1 gross up to the ACL, what's the impact on the commercial that's embedded in that?

So is there a decline in the commercial ACL?

Yes.

I mean, more broadly, we're not really going out line-by-line here.

But sure, there's a reasonably large decline on the commercial side.

I think that's true for most portfolios you see out there, given the way we handle incurred loss typically versus where CECL would articulate it.

And then that's offset by some of the portfolios that are maybe more longer duration on the consumer side.

So would it be similar to what you're seeing some of your other peers have broken out commercial versus consumer impact on day 1?

So would it be something similar to them?

No, I don't focus on...

That's not what we're focused on.

Yes -- focus on our numbers.

But I mean, I would say, I mean, I think that shouldn't be -- come as a surprise that really CECL -- when you talk about lifetime losses, if you have long-duration loans, you're going to end up with a higher charge for the longer duration stuff on the consumer side and then less on the commercial side.

And back to the balance.

I mean, I think, overall, we're not seeing a lot of big change in our outlook in 2020, in part because a lot of this stuff has been diversified across our broad lending base.

And so that's really, I think, one of the messages you could take away.

Yes.

And I think, Brian, if you look at the industry and what analysts expected based on composition of portfolios, and they had us kind of pegged in this range.

I don't think there's any big surprises.

The folks who have more consumer loans have a higher bump to the reserve and ones who have less, obviously, are lower.

So I think it's playing out probably the way most analysts and investors thought it would.

Well, I'm going to thank everybody for dialing in today.

We certainly appreciate your interest and continued support.

Have a great day.

Thank you.

and that does conclude the conference for today.

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