Citizens Financial Group Inc (CFG) 2015 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Citizens Financial Group first-quarter 2015 earnings conference call. My name is Brad, and I will be your operator for today's one hour call.

(Operator Instructions)

As a reminder this event is being recorded. Now I will turn the call over to Ellen Taylor, head of investor relations. Ellen, you may begin.

Thanks, Brad. Good morning, everyone. Thanks so much for joining us today.

We'll kick things off this morning with a review of our first-quarter results from our chairman and CEO, Bruce Van Saun, and our new minted CEO, Eric Aboaf. And then we'll open the call for questions. Also joining us on this call today is Brad Conner, our head of consumer banking. I'd like to remind everyone that in addition to today's press release we've also provided a presentation and financial supplement, and these materials are available at www.investor.citizensBank.com.

I need to remind you that during the call we may make forward-looking statements which are subject to risks and uncertainties. Factors that may cause our actual results to differ materially from expectations are detailed in our SEC filings including the form 8K filed today containing our earnings release and quarterly supplement. Additionally, any information about any non-GAAP financial measures including a reconciliation of those measures to GAAP measures may also be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website.

And with that I will hand it over to Bruce.

Thanks, Ellen, and good morning, everyone.

I'd like to start off by offering a tip of the cap to John Fawcett, who retires at the end of the month after serving us well for many years, and a welcome to Eric Aboaf, our new CFO who joins us for his first earnings call after being here for two and half weeks.

Good news is Eric's a quick study and I don't think will miss a beat. Turning to the quarter we're off to a good start. I'd highlight the following. We had solid financial results. We had a successful CCAR submission.

We've recruited some terrific top team members, Eric as CFO, and Don McCree, formally of JP Morgan as our new head of commercial. We supported the successful follow-on offering of RBS owned stock. RBS's ownership is now down to 40.8%, and we're navigating through the challenges posed by the environment, and we're executing well against our strategic turnaround initiatives.

So all in all as I said a good start. While we have a ways to go on a number of fronts to get the bank operating better, I'm pleased overall with the steady and consistent progress that we're making. Our people are working hard. They're taking good care of our customers, and they're executing well on our plans.

I'll let Eric cover the financials in detail, but I'd offer first a few high-level comments. First off we are pleased that we delivered positive operating leverage on a year-over-year basis. This is the key to delivering improved results, and we are very committed to that. We're doing a good job of intelligently growing our balance sheet, although in a sustained low rate environment it's been a challenge to keep our NIM broadly flat. In order to do that we're very focused on adjusting our business mix and risk appetite modestly over time to raise our asset yields.

In the first quarter we saw a strong loan growth in commercial, in prime auto, in mortgages, and in student lending particularly with our new refi product. We expect favorable trends here to continue over the course of the year. We have continued to benefit from favorable credit costs. We're doing a good job of shifting expenses to more productive uses, keeping overall levels broadly flat.

Our investments in getting our fee-based businesses to scale are advancing steadily. That said, the benefits from these initiatives will play out gradually over time. Mortgage and cash management made good progress in the first quarter, while wealth had a little bit of a tougher time. Lastly, I would highlight that our balance sheet remains strong. We completed a $250 million buyback early in the second quarter, and we had the capital and funding strategies in place to continue to grow loans at a good clip.

With that let me turn it over to Eric.

Thank you, Bruce, and good morning everyone. I'm excited to join Bruce and the Citizens team to help deliver on the strategy and the plans that have been laid out over the last few months. Citizens is fortunate to operate in attractive and growing market where it can play an important role in serving both consumer and commercial clients.

Of course execution is what really matters in banking, and my focus will be to help drive the business initiatives that will help accomplish our goals. Throughout my remarks, I will refer to the slides in our investor presentation that you can find on our website. To begin, let me take you through our first-quarter financials on page 3, which demonstrate a solid start to 2015.

Our first-quarter GAAP net income of $209 million was up $12 million or 6% from the fourth quarter and up $43 million or 26% from the first quarter of 2014. Diluted earnings per share were $0.38 up $0.02 from the fourth quarter and $0.08 higher than first-quarter 2014. This was driven by our efforts to drive revenue growth while actively managing expenses, as well as by the continued favorable credit environment.

Page 4 summarizes restructuring and other special items for this quarter associated with the productivity initiative that we launched as well as the separation cost from RBS. We reported $10 million in pretax charges this quarter, and while these came in lower than we originally expected, that really just reflects a bit of a shift in timing out of the first-quarter and into the second quarter. We still expect the same level of restructuring expense for the first half at $45 million to $50 million in total. I'll focus the rest of my comments this morning on the adjusted results, which exclude the impact of these items.

Turning to page 5, we posted strong operating results with net income of $215 million and EPS of $0.39, both of which were stable linked quarter and up 30% from the previous year. I'm going to cover a number of items highlighted on this slide throughout my presentation, but let me mention three important themes. First, revenue was relatively stable linked quarter in spite of the expected seasonal weakness. And they were up year-over-year as we more than replaced the foregone revenues from the Chicago branches sold last year.

Second expenses were flattish demonstrating the Company's discipline as we drove efficiency saving while also reinvesting in the business. And third, credit was benign and was further benefited by a large recovery this quarter. We continue to make strides towards our goal with 10% return on tangible common equity as we generated a strong return on an adjusted basis of 6.7%, which was up nicely from the prior year.

On slide 6 we dive a little deeper into the results for the quarter. On a headline basis, we grew net interest income $28 million or 3% over the prior year. But that was muted by the Chicago divestiture, which impacted NII by $13 million. So on an underlying basis we grew NII by 5%, which was driven by attractive earning asset growth with improving mix and our continued efforts to defend the margin despite the impact from a low rate environment on our asset sensitive balance sheet.

Over the course of the year we also grew earning assets by 8% or nearly $9 billion driven by strong performance in both consumer and commercial as we continue to better leverage our capital position and re-energize organic growth. Compared to the fourth quarter, net interest income was down as the impact of two fewer days and slightly higher funding costs was partially offset by continued loan growth and a reduction in paid fixed swap costs. Our net interest margin this quarter held up relatively well, particularly given the decrease in rates from year end. We saw a three basis point dip to 2.77% in comparison to the fourth quarter on a reported basis. As John Fawcett mentioned on last quarter's call, the fourth quarter margin included two basis points of nonrecurring items.

We held loan yields flat on a linked quarter basis through a combination of pricing and mix which I will describe in more detail later. We've defended the margin reasonably well, given the rates are below where we had expected them to be. In our outlook statement we indicate that this defending the NIM objective will continue until we see rates rise, hopefully soon.

We did see a full quarter impact of higher borrowing costs are we continue to diversify our funding base across multiple deposit categories and client segments and added a full quarter of senior debt costs, given that our issuance came in late December. We continue to maintain a highly asset sensitive interest rate position. The impact of an gradual rise in rates is consistent with last quarter at approximately 7% in the first year. This is driven primarily by the short end of the curve.

During the quarter, we modestly extended the duration on the securities portfolio as we sold 15-year agency pass- throughs to purchased twenty-year agency similar to our late their quarter transaction. Even with this trade, the average duration of the securities portfolio fell to 3.1 years at the end of March down from 3.5 years at year-end, given the prepayment impact to the drop in long rates. This duration extension trade resulted in a modest gain of $8 million.

On slide 7, we will cover non-interest income which is an important area of focus for us, as we are determined to shift our revenue profile over time.

We generated an $8 million increase linked quarter in non-interest income, which was driven by gains related to the sale of conforming mortgages and the previously mentioned repositioning of our securities portfolio which offset the seasonality -- seasonally lower results in other service charges and fee categories. Year-over-year, non-interest income decreased $11 million from the first quarter of 2014. But this reflected the drag from the Chicago divestiture of $12 million in fee income.

We also posted a $17 million reduction in securities gains, so on an underlying basis we generated non-interest income growth of approximately 5% with particular momentum in mortgage banking, service charges, and capital markets. Let me take you through each of the fee areas and describe what we are seeing on a year-over-year basis and how where initiatives are gaining some traction.

The largest area is service charges where we are seeing approximately 2% year-over-year increase in charges and fees once we account for the Chicago sale as our new checking product helps drive increased accounts and household growth. Card fees were relatively stable after accounting for Chicago, but we are in the midst of some new card launches that we expect to help drive usage through a more attractive rewards program. Trust and investment services fees were somewhat muted, but we continue to grow licensed bankers and add to our wealth advisors as part of our initiatives.

On the mortgage banking front we generated $33 million in revenues this quarter including a $10 million gain and sale of conforming mortgages which were previously held in portfolio. Outside of the gain we were pleased with our mortgage results. We generated nearly 60% underlying increase in our mortgage banking revenues from first quarter of last year as origination volumes were up 87%. We also continue to gain market share.

In capital markets our continued efforts to build out the platform and enhance our loan syndication efforts are paying dividends as we grew fees in this category by 22%. And similarly FX and interest-rate products which are often tied to new loans and loan syndications were up 5% year-over-year.

Moving on to non-interest expense on slide 8. We are intensely focused on driving continued improvement in the efficiency of the franchise. Our goal is to generate strong operating leverage by actively managing our expense base, while continuing to invest across the franchise to enhance both our distribution and product capabilities as well as fund our important regulatory work. Our adjusted operating expenses of $800 million this quarter reflected seasonally higher payroll taxes and increased incentive expense which drove salary and employee benefits up from the fourth quarter.

We also saw a decline in outside services, which were down from elevated fourth-quarter levels and included benefits from our efficiency initiatives. Year-over-year, adjusted expense was down slightly due to the $21 million Chicago impact, a variety of other expense initiatives that impacted multiple areas, occupancy, equipment, outside services and so forth offset by active investment in a number of revenue focused initiatives.

So net net on a year-over-year basis we kept our operating expenses flat despite increased investments to grow our sales force and invest in products and technology. We achieved an adjusted efficiency ratio of 68%, which was relatively stable with fourth-quarter 2014, but improved from the same period last year. Obviously this will continue to be an area of focus for us.

Now turning to the consolidated average balance sheet on slide 9, our total earning assets of $121.3 billion were up 2% from last quarter and 8% from the first quarter of 2014 driven by the benefit of our growth initiatives. In consumer we generated strong growth in auto, mortgage, and student over the prior year. Commercial growth has been broad-based with virtually all of our businesses, posting solid growth. Deposits continue to grow with average deposits in the first quarter increasing by $800 million or 1% over the fourth quarter.

Over the last year organic deposit growth was worth approximately $9.3 billion, or 11% more than offsetting the impact of the Chicago divestiture, which was worth $5.2 billion. As one of my first areas of focus as CFO I plan to dig into loans, deposits, and the NIM equation. On first look we are managing this well, but I want to see if we can do even better.

On page 10, compared to the previous quarter, consumer banking loans increased nearly $900 million, or 2% as we continue to ramp our own organic originations in auto, mortgage, and student. The growth in mortgage is net of the conforming portfolio sale, which I've mentioned earlier.

We also continue to focus on improving the underlying mix of the consumer portfolio in order to boost yields and offset the impact of low rates. This quarter we continue to be satisfied with the good growth in our auto business as we have been able to drive both balances and yields upwards in our organic book. As a result, we've decided to target SCUSA volumes at about $1.5 billion for 2015. We believe that strong demand for our student loan refinance product and our own auto originations will offset the lower purchases. We also made a tuck in student loan portfolio acquisition in Q1 with attractive yields and return characteristics.

On slide 11, commercial loans increased by $1.3 billion or 3% sequentially on strength and industry verticals, middle-market, mid-corporate, and commercial real estate notwithstanding continued aggressive competition. Yields cut down a few bits, and this is obviously an area where we are trying to balance pricing, fees, and returns.

Slide 12, focuses on the liability side of the balance sheet and our funding costs. We grew the combination of checking, savings, and money market balances, which comprise the bottom two categories by approximately 10% this year or $5.5 billion despite the impact of the Chicago divestiture.

We supplemented this growth was some term deposits, as well as a mix of FHLB and senior debt to further diversify our funding sources. On slide 13, you can see that our credit quality continues to be strong with net charge-offs at $54 million. Our provision expense came in lower this quarter at $58 million.

This includes a $15 million recovery from a single large commercial real estate credit, but even outside that we continue to see relatively lower levels of gross charge-offs across the rest of the book, despite continued loan growth. We also continue to benefit from the runoff in the non-core book. This was down nearly $200 million in the quarter to a balance of $1.9 billion.

Turning to slide 14, our capital position remains robust. This quarter we began reporting on a Basel III basis as part of the new regulatory capital rules for banks our size with the CET1 ratio of 12.2%, which is well above our regional peers. We are above our LCR requirement, and our LDR has been relatively consistent. Post the quarter end in early April we executed a $250 million preferred issuance and repurchased shares from RBS, which on a pro forma basis would impact our CET1 ratios by 23 bps.

On slide 15 we summarized many of our accomplishments and reemphasized our objective of becoming a top-performing regional bank.

On slide 16, we've laid out the key initiatives in our Turnaround Plan and assessed progress during the quarter and what the outlook holds for the remainder of 2015. We feel the program remains broadly on track. Heightened watch areas continue to be the initiatives where we are hiring in significant numbers for growing market share. We'll continue to monitor and report on these for you, and we can obviously discuss them more in detail during the Q&A.

On page 17 we summarized some of our key financial targets and our progress year-on- year. Our end 2016 targets are predicated on a rise in rates. That said we continue to develop additional revenue and expense initiatives to help offset any lag that may occur. We may have more color on this by next quarter's call.

Now turning to slide 20, let me summarize some of what you can expect next quarter, but all in the context of the full your outlook that we previously provided. We expect to have linked quarter loan growth that is consistent with the prior two quarters, so 1.5% to 2% with a net interest margin that remains relatively stable from this quarter. But we expect to see continued pressure from low rates (technical difficulty) needs defend against.

We would expect to generate positive operating leverage off a seasonably weak first quarter, thereby improving our efficiency ratio. We expect credit to continue to be strong overall but don't expect to see the same level of commercial recoveries that we saw this quarter, so provision expense should return to prior quarter levels which is roughly a quarter of the low end of our annual guidance range.

We are nearing completion of our restructuring and separation activities, so in the second quarter we plan to record $35 million to $40 million in restructuring expense, as we do things like rebrand a Charter One franchise. And finally we expect that our CET1 ratio will remain relatively unchanged from the pro forma level of around 12%, and we will hold the LDR at around 98% to 99%.

So with that let me turn it back over to Bruce.

Okay. Thank you Eric. So in short a solid start to the year.

With that, Brad, why don't we open it up for some Q&A?

Thank you.

(Operator Instructions)

Ken Zerbe, Morgan Stanley.

First question, just in terms of student lending we've seen a number of banks exit this business due to various reasons, but I know you guys are aggressively pushing into student lending. What is the difference? What makes you guys comfortable with the quality of student lending versus presumably the reason why people, other banks are trying to get out of the business? Thanks.

Well maybe I'll start and then, Brad, you can amplify my comments. But fundamentally you have to understand the difference in the private market and the overall government-backed market. And so a lot of the noise about whether this is poorly underwritten credit really relates to the government side. The private side has been, I think, at good risk-adjusted return characteristics.

For some of the big players, people like Chase, it just may not be a big enough pond to play in since the government has 93% of the market and the private side only has 7%. For someone like ourselves the fact that some of the big folks are exiting creates more running room for us.

I think we have very good technology. We have a good footprint with a good university system in our footprint. We've been very innovative in terms of designing products that really work for customers and benefit customers. Our ed refi loan is the latest example of that where a student borrower can refinance both government and private loans, kind of a unique product offering out there in the marketplace which is taking the market by storm.

So when at look at the credit quality, the yield we get related to the risk we're taking, we like it a lot. It also potentially brings in fresh customers to us as your demographic is aging that if you can get someone who has now a job and has a good credit score and can consolidate their debt and save themselves money, on average our loans save about $150 a month so that people who refinance, that person can grow with us and bring over their checking accounts and as they go through their life phases they can borrow money on a mortgage and accumulate assets, and we can manage their wealth as it grows. So all in all we think it fits our strategy quite well. Why don't I turned it over to Brad.

Yes, Bruce, I think you said it extremely well. The only thing I would probably add is there is, we've seen a big untapped need in the marketplace. You know you talked about it. I think our refinance product really hits a need in the marketplace as a lot of other folks have exited that need was out there.

And it -- we don't really think of it like a traditional student loan product. These are borrows who are out of school. They are in their early 30s. The profile of the customer that we are getting is sort of a 780 FICO score, someone in their early 30s, they've established themselves so they are a really great customer for the bank. Just very few people playing in the space, very attractive customer, very attractive returns, so just a good marketplace opportunity.

Okay. That's great and helpful. Second question I had just on expenses. Looks like very well controlled expenses versus our expectations.

When we look at that $800 million ex the restructuring is that -- because presumably -- I'm trying to think of how sustainable that number is, because presumably you are going to have less on the salary side just given first-quarter seasonality. But do you expect a rebound of some of the other line items, or is $800 million minus the seasonality kind of a good starting point for second quarter?

Well I think what you'll ultimately see is the -- there's a benefit obviously from the seasonality. But then we're also making offensive investments in some of the areas were trying to build origination capability. So we're still adding commercial lenders We're still adding mortgage loan officers, wealth advisors, and so our broad guidance for the year was that we're going to try to keep expenses as close to flat as possible. We kind of have that as a quarterly and annual objective.

And that's what we're working hard to accomplish. So I like to think of it as study that zero-base, take out -- constantly look for ways to take out expenses that you're not making a good return on those expense dollars. And use that to in turn fund the things that your going to allow you to build up your scale in the fee businesses and play offense.

Great. Thank you very much.

Matt Burnell, Wells Fargo Securities.

Good morning. Thanks for taking my question. Bruce, could you give us just a little more color on sort of your -- the outlook slide that you provided. I guess specifically in terms of maybe the comments related to wealth management where you're seeing challenges there. You mentioned in this slide that hiring maybe is a little bit slower than you had originally thought.

And I guess I am also curious about your middle-market outlook as well. You mentioned that that business is exceptionally competitive. We've heard that from other banks. Is there any way that you guys can sort of break through that competitive environment, or is it just sort of hand to hand combat?

Yes, sure, both good areas to focus on. I would guess firstly on wealth, and Brad can augment my comments again, but we have effectively a pyramid distribution strategy to match the pyramid of consumers that we have in the bank.

So we have a tier called licensed bankers kind of at the bottom that handles the mass. Then we have another tier called premier bankers who have full licensing to sell multiple products. Then we have a tier that dedicated financial consultants who simply sell the wealth products with full licensing, and then we have the very tippy top of the pyramid is our private banking office.

In three of those tiers we I think made decent progress in the first quarter, so we hired up -- we probably grew licensed bankers about 10%. We grew premier bankers around 10%, and we grew private banking teams at the tippy top from 9% to 12%. So we're making some traction. The place where we really did not make traction at all in Q1 was financial consultants.

So we had roughly 300 financials consultants, and we ended with roughly 300 consultants at the end of the period. So it was kind of a quarter where you win some you lose some. And that's I think just a sign that this is an attractive area for all banks and market participants. It is not just banks. It's insurance companies, independent broker-dealers, and so actually pulling those people in can be tough.

We have had good success on a year-over-year basis. I think we're up 10% in the FC's count, but I would just flag that this quarter it seemed like competitive conditions had tightened a bit at that layer of the pyramid. So we're still -- I think our strategy makes sense. I think the lead generation coming from the branches is good and improving, so we still have good hopes and ambitions for that business, but you're not always going to fire and go four for four on all four cylinders. Do want to add anything?

Another job well said. The only thing I would add is that part of Matt's question was for how you break through. It has been hand-to-hand combat with the financial consultants, and as you said we didn't really make a lot of progress. The one opportunity for us to break through is for us the licensed banker program is really a brand-new program.

So we're less than a year into the licensed banker program, and while we've had a difficult time getting that growth out of the financial consultants just from pulling them from the outside, the view is that that license banker program can become a very attractive feeder program for our financial consultants as it gets more seasoned. So I think that is the opportunity going forward is that we transition (multiple speakers)

You pull from within.

We have not had the opportunity until we built the licensed banker program so I think that's (multiple speakers)

So we're -- and, Matt, just on that, the licensed banker program, we're probably somewhere around 370 today trying to get to 600. So we're maybe 65% of the way through getting that up to scale.

Second point on the middle-market that is a very attractive area for commercial banks to play in. Often you can really -- it's a small -- either small syndicate or you're the sole banking relationship, and so you get a fair amount of cross sell that goes with those relationships. And so what we've tried to do is focus more on account acquisition. There's a huge number of middle-market companies in our footprint. And I think we probably -- we've been building up coverage officers. We haven't had a pure kind of what we call BDO, a real sales oriented calling program. And so we're putting that in place.

We're hiring up about 15 people to actually pursue more new account acquisition. Then we're also making sure we're running surveillance on existing back book customers where they might have a high interest rate and might be susceptible to refinancing with us or away from us and trying to make sure that we have the back door closed as well. We are seeing some signs of progress on both elements of that. I think that overall originations were up in Q1. The pipeline looks good for Q2.

So, again, I think we're shading that one amber just because under kind of the rules of the road for kind of this color coding, if we're trying to gain market share in an area that's one that you just have to monitor more carefully. But I'm actually pleased with some of the steps that we've taken to combat some of the competitive forces and we're starting to show progress from those steps.

That's great color. Thank you very much. And then just a quickie for Eric. Eric, you mentioned higher yield in both auto and student. How much of the higher yields was due to an acquisition or maybe multiple portfolio acquisitions you've made in the first quarter in those businesses? What can we expect for those yields going forward?

Matt, good question. The -- what's attractive about this franchise from our perspective is we have a very effective ability to drive originations through our organic channels like, as you kind of highlighted, whether it's auto, whether it's stu and it gives us an ability to actually drive those a little more quickly and actually offset some of the natural compression that we get from some of the longer duration products like mortgages which invariably have yield compressions.

So what we are seeing is really a mix effect here that is boosting the yields. We've got mortgage yields in the portfolio roughly down about 20 basis points year-over-year for example. And we have auto on the other hand up about 30 basis points. We have student up a good bit as well, and so what we are seeing is an ability to kind of average up the yields and kind of defend the NIM as we've described.

Brad, do want to add to that?

Yes. I'll add a little bit ti that. Really most of the improvement from NIM is coming from the organic originations, so we've talked about this quite a bit in Auto. We've gone to a more mainstream prime credit spectrum as opposed to just playing at super prime, and what that's done is it's driven our -- our origination yields are up significantly over the organic portfolio.

And in student, what's happened is as we originate more organic production like the education refinance product, our historic student loan portfolio had some FELP loans and things like that in there, and that's helped to drive it up. So --

And then the other thing, Brad, too is that in the auto we've now got a much more sophisticated platform with many more pricing cells. I think we've gone from 1600 to 160,000 something like ridiculous multiples. So we're able to actually price very precisely for the risks that we're taking and get a little more yield out of that. So, Matt, the short answer is really organic. We had SCUSA as a kind of a jumpstart to get faster into prime, but our organic book is migrating very quickly to the places we want to see it.

And, Matt, it's Eric. The other thing that we are -- we've become more intense on doing is actually tracking the organic and the acquisition mix of growth. Because it's important that we can drive that organically from our own tools, processes, sales forces and so forth.

And so if you kind of step back and look at the mix, the mix of organic growth this quarter, and this quarter was about 60/40. That's up a good bit from where it might've been two, three, four quarters ago. And we kind of like that mix because it gives us a little more control on the credit, a little more control on yields, and I think it's a more reliable engine of growth for us.

Great. Thanks for the information.

Matt O'Connor, Deutsche Bank.

Good morning. I was wondering if there's anything you could elaborate on in terms of the comments of working on some additional revenue and expense efforts to help offset the low rate environment. I realize you just told us that you'll give us more details in Q2, but any just big picture comments that you can elaborate on that?

Yes sure. So big picture those initiatives I would say fall into three buckets. There's some additional expense initiatives that we can take more around kind of the organizational design. There's some pricing initiatives in areas where we have complex price structures, for example like cash management. And then there's some overall revenue initiatives that really focus on maximizing our distribution channels and retention of our best customers.

Whereas our first broad program we'll call that top one was a number of, a vast number of relatively modest initiatives with a few big ones thrown in. The top two, if we're going to call this new initiative top two, is just kind of up to maybe a dozen larger initiatives that are more complex and take more time to basically figure out and design and then project manage. We parked some of these initiatives when we went through the first program just to get the first program off the ground and start to get the benefits flowing in.

And so now we've gone back and we're doing the work to develop these other ideas, and so they are fewer but bigger impact ideas. For example on the expense side of the equation, we're looking at what we're calling ops transformation which is looking at the rhyme and reason of how where organized to see if we can gain some efficiencies.

We also think there is more opportunity in kind of vendor consolidation and vendor management which was part of top one, but I think there's more bites of the apple on that one. On the revenue side, I mentioned that looking at how to keep your best customers in the bank, and then also how to cross sell better using all your channels fully. We've engaged some consultants who have been in other shops in our peers and had some success, and I think there's no reason why some of those programs can't be very effective here as well.

So that would be some of the color, Matt, but as it was in the road show when people wished I had all the answers and all the details, I didn't. I think we're making progress in getting a clearer pictures on these things, but we don't really have the full details to go into today.

And then the comment about the balance sheets being managed well on loans and then the deposits, but there might be more to do, does that fall into one of these three buckets, or is that an additional call it side project?

I think that's just BAU good management. I think one of the things that having Eric here now given his background as Global Treasurer of Citi he certainly understands balance sheets quite well. And so having a fresh set of eyes as to how are we going about our deposit raising strategies. How are we pricing our assets and looking at risk appetite and the business mix?

Is there more that we can do to kind of squeeze out NIM improvements? I think that's a good first thing for Eric to sink his teeth into.

Okay. That's something we can look for more details Q2 as well?

Yes. Probably, yes.

Okay. Thank you very much.

[Vec Nienja], JP Morgan.

Couple of questions, Bruce and Eric. As you look at your on the consumer side, you've been -- Bruce, you're talking about turning that around. We've seen some consumer growth there on the deposit side. Can you elaborate on which markets you're seeing more success?

Geographically or?

Yes. Geographically.

I think we -- we're pretty strong, pretty evenly distributed in terms of our success. I would say in the first quarter, the Northeast was probably hit the hardest with some of the weather concerns. I don't want to use the weather as an excuse, but I think factoring into that seasonality we probably lost two or three productive days in the branches in kind of the New England region and not so much in the mid-Atlantic and in the Midwest, but New England was hit pretty hard.

But we do a very comprehensive evaluation of the entire, all the branches in the system and looking at it in the footprint and we forced rank and see how things are doing, and I think we have -- there's no big variances from the mean. I think that New England and Mid-Atlantic and the upper Midwest regions that we have are all kind of pretty tightly bunched. I don't know, Brad, if you want to - -

No, you said it exactly right, Bruce. A little bit of slowness in New England from the weather, but other than that no real trends geographically that stand out.

And, Bruce, shifting to commercial deposits. They were down a little bit this quarter. You had shown some nice progress last quarter. Can you just comment on what's going on there?

Yes, and then, Eric, you can add to this, but I think it's just really seasonality. So we brought in some deposits at year-end, and some of that went out. There's tax payments and if you look at kind of the period end, we saw that tick up again by the end of March.

So that will move around a little bit, but I feel very confident that we're developing good strategies to grow the commercial deposits. If you look at our LDR on the commercial side, we're probably up in the mid-180s which will me look at our peers, there probably 140 to 160. I think partly that's just the result that we didn't need the funding because we were shrinking the balance sheet for years.

And so we've had to I like to say go back in the gym and get some muscle back in terms of having good deposit raising strategies and a good focus and a good game plan to do that. And you can see the year-on-year growth in commercial has been extremely good. So we brought the LDR in that business at one point it was like 230 so we're down to the mid-180s and I think we can keep growing and raising deposits cost-effectively. Building up the cash management business is a key element of that.

We've brought in talent. We've spent a lot of money of technology. I think we're under punching our weight in terms of market share there so that's critical plank in the overall program. Eric, you want to add to that?

Yes I think the commercial deposit opportunity is one that continues to be significant for us. We're up in the deposits on the commercial side 26% year-over-year, largely because we had never really tried to grow deposits there, right. The bank had roughly been deposit funding on the consumer side, and we made commercial loans.

That actually in a way creates quite a bit of opportunity, a lot of which you saw over the last year. And what we continue to do is now go down to the next level of detail which is what industry segments in which geographies are either a little more credit needy, and so we can -- we can drive middle-market or which of them are more cash-rich or which of them have both?

And that's the kind of second and third level analytics that we can put to it. I think the good news is we have a very strong sales force and banker force out there who knows their customers extremely well. And we've been able to channel that energy and one of the things I will be doing more of is just focusing which segments, which sub segments, which industry verticals and continue to find more opportunities out there.

One last thing if I may on a completely different topic. The restructuring charges you said pushed out a little more to the second quarter. Should that mean that will be driven by -- for the headcount should that mean we'd see little bigger pickup in cost savings in Q2 and later?

Well, some of the costs that are coming in in Q2 are really around rebranding, last stages of separation costs from RBS, the Charter One signs coming down and the Citizens unified brand around Citizens. So I don't think there's any direct link to the expense forecast, although what I would say is we're working on the forward view of trying to keep expenses as flat as possible. So there's a constant stream of initiatives and efficiency initiatives that's taking place.

And then to Ken's first question, there's reinvestment going back in the growth area, so I think we're - we still have a very positive view towards expense management the rest of this year. And the one wild-card I think are some of those extra levers that we talked about if we can get ops transformation geared up, that could create some additional benefits to the equation as well as the vendor initiatives that we're taking, so stay tuned.

Thanks.

Scott Siefers, Sandler O'Neill.

Good morning, everyone. Bruce, I was wondering if you could spend just a moment talking about the differentiation between growth that is coming from just the underlying organic growth within the franchise and the internal building you guys have done versus the loans you're purchasing. I only ask just because one of the criticisms I hear on you guys periodically of how much of the growth comes from purchased loans. But if the underlying growth is stronger does that do anything to your need or reliance on purchased growth as you look out over the next you're so?

I mean that's kind of legend out there, but I don't quite understand it, because from the get-go when we laid out our plan, we said that we would use loan purchases kind of in the beginning of our Turnaround Plan to use capacity we had on our balance sheet until we were able to build up our own capabilities in which case we would get the originations to the levels that made sense within our strategy.

And so if you look at I think where we were last year to where we are now, in the current quarter, we had probably three quarters of the overall -- it's slightly more. It's actually closer to 80% of our loan growth, was organic and I think it was 22% or 23% was purchased. So the purchases that we're doing now really the SCUSA agreement is one. We purchased $2 billion in auto last year.

We said in a prepared remarks that we're going to target that at $1.5 billion this year because we are seeing I think really good growth in organic auto as dealers increasingly accept us to handle the full credit spectrum including prime customers. So SCUSA was always viewed as a bridge until we were in that position, and so are seeing the fruits of our investment there. And then also in student, we're a bit surprised to be upside about the take-up on this refi product, and so we have I think we've outperformed our expectations in terms of student growth as well.

And occasionally there'll be some portfolios that we can buy like we did a tuck in one in Q1,but even with that tuck in we still were predominantly organic. And I think over time you'll see that as we move into 2016, there's an open question as to how much SCUSA we will need, but I don't really see us needing to do much anywhere else.

And, Scott, Eric, just to put that in context. We're at 75% or 80% organic today, quarter-over-quarter. If you go a year ago it would've been 60/40. So we're kind of continuing to move into that direction, and that's part of our objective.

Okay. That's perfect I appreciate that and then if I could switch gears just for a second. I don't want to jump the gun too much on sort of that cost initiatives or anything you might have more detail on later. But Bruce, can you just talk for a second about the balance between finding the additional cost savings versus kind of hitting the target you've got for the most visible is 10% return on tangible [common say]?

I think just mathematically there are ways you could cut costs pretty quickly and still be comfortable to get toward your target, But if it was a more measured pace it might kind of put things at risk. How do you sort of weigh that balance as you look at things?

I think in explaining our plans, one of the things that we did initially was we benched ourselves in terms of measures to assets to scale. So if you look at our expense load to deposits or to assets, we're actually quite good relative to peers. I think we're at the bottom of the first quartile.

And if you look at revenue productivity, relative on the same measure, we've got a revenue hole. So we weren't making enough income off the balance sheet, our fee businesses were not at scale. So the hypothesis coming in when I came across was we think we have the right level of expenses, but we probably aren't spending those expenses were we need to. So let's go attack that.

That was the basis for the $200 million program. And then let's self fund that investments that we need to get more originators, so we can drive more asset growth and fee businesses like mortgage, like wealth, like capital markets, up to a scale level, so that we could ring the cash register on fee opportunities that go with the size of our loan book and the size of our branch infrastructure, et cetera.

So that's -- the real objective here is to get the revenues growing at a faster clip to grow into the potential of the franchise while keeping expenses very muted. I don't think there's a different strategy, the alternate of saying could you just start whacking the expense base down and that's a way to propel yourself to the 10%. I don't think there's enough in that to actually do it, and even if you could do it, it wouldn't put you in a sustainable position where you're really maximizing the benefit of the franchise.

So that's kind of how we set it up, and I still think that holds. Having said that we will be very vigilant and constantly looking for ways of continuous improvement. How can we be more effective in how we serve our customers and more efficient in how we do that at the same time? And that's the mindset that we're trying to instill within the Company.

Okay. That's perfect I appreciate the color, so thank you very much.

Geoffrey Elliott, Autonomous.

Hello there. A couple of questions on capital. Firstly just to clarify on the share repurchase that you announced after CCAR. You told us about the $500 million through the end of 2015, but you didn't say anything about the first two quarters of next year which fall into the same CCAR. So can you let us know if there's a possibility of repurchasing more shares then or if you have to wait until - -

What we've been approved for was $500 million, and what we've said is that we want to do that front loaded. So we did it about as front loaded as you can buying back on April 1, the first $250 million. I think in Q3 we're planning to do kind of the next $250 million very early in July. That basically leaves us no dry powder until the next CCAR cycle. And so we have our dividend in place. We have asset growth in place, but over this period we were approved to do the $500 million, and we will do that $500 million quickly.

And then following up on that you mentioned in the presentation at the time of the IPO $500 million in buyback in 2015, $250 million in 2016. Given that the capital ratios look pretty strong in the stress scenarios of CCAR and that you've now been through that exercise successfully. Is there any possibility of getting more aggressive than the $250 million in 2016?

Yes, I guess what I would say to that is that the last $250 million was really part of what we refer to as our conversion transaction. So originally we had converted all of the capital securities to equity and now we're trying to put the leverage back in the capital structure, and the number we were targeting was $2.75 billion. With this $500 million that's just been approved we've had -- that will be $2.5 billion.

So that leaves $250 million. We didn't say that that was all we would do. That was just kind of the tail of the overall transaction or the conversion transactions. We are -- we've targeted an 11% CET1 ratio by the end of 2016, and we'll just have to see what kind of asset growth opportunities we have.

We'll have to see is 11% still an appropriate number? Is there an opportunity to basically move that down if our peers are lower than that number which they are today? So there's a number of things that would come into play when we consider the next CCAR submission in terms of what we want to do in total.

So I would just simply say that the $250 million is kind of a lot because it completes the program and then what else we do is dependent on the future circumstances.

Thank you.

Gerard Cassidy, RBC.

Thank you. Good morning guys. Bruce, I jumped on late, so I apologize if you have addressed this. But in the success that you're having in the student loan program, is it more coming from that new product for the student loans for parents, or is it more coming directly from the student loans to the students?

Well, I'd say it's the parent launch just was very recent, so there's really nothing to reflect at this point. It's the refi product has been very, very strong. So I think we're first to market on that product, and it's been -- had a very good market reception. And then there is the traditional what we called our true fit product which was the student loan for students who are going to college.

And that is a seasonal product that tends to be taken down not in the first quarter, so when you look at the mix of what happened in the first quarter, it's really the lift in this refi product is providing the impetus. And if you then forecast out Q2 would be similar. We have a very big pipeline on that refi product as we look into Q2.

And then Q3 will be a little more balanced with the true fit because that will be the seasonal peak.

Yes, exactly right.

And on the refi product what kind of yield are you earning from the refi student loan product?

Right now the yields are in the mid-5%s.

Great. And terms are 10 year fixed or?

We actually offer multiple terms about 60% fixed 40% variable, but we do offer various terms on the product.

And the FICO scores are quite high. They're over 780.

780 -ish, correct. Very, very high quality.

I agree the student loans for banks is totally different than the government of course. Moving over to automobile, obviously you guys have had some real good growth here as well. What out of the $13.2 billion of outstanding set the end of March, what percentage would you define as sub-prime or lower FICO score loans?

Very, very little.

None.

I'd say - - I don't know if we could say none but technically none. It's certainly less than 3% or something. We're not intending to play in sub prime. We historically played in super prime. We are migrating into prime, but that's still very good credit quality paper.

Sure. And the paper that you're buying for the SCUSA is prime them not sub prime paper back

Yes, the average FICO score on that is probably 710 to 715 somewhere in that ballpark.

Great. And just finally you mentioned about growing your licensed bankers to 600 in total. I think you're in the low 300s today. What kind of timeframe do you have to get there?

We're actually closer to 360, 370, but we intend to get there by the end of 2016. So all the goal posts in terms of getting mortgage loan officers from 350 to 700, licensed bankers from 300 to 600, those are all targeted to deliver by the end of 2016.

And I guess just one follow-up on that. When you're looking for -- it's not so much the licensed bankers but the wealth management area, you mentioned it's a challenge to try to find people. What is it is it a compensation challenge, or is it just more people don't want to leave the established companies they are with? What are you finding to be the biggest challenge to bring people in?

I think again -- I don't know if you heard me going about the tiered strategies, but it's probably easier at the lower tiers because you're presenting opportunities and training for people in many cases. When you get into the FCs, a lot of those people have a comfort zone kind of where they are, and we don't just want to compete on price the way to some of the independent broker-dealers do. So someone who moves has to move their clients with them, and there'll be some leakage from that.

And they have to weigh that versus if they come to your branches how good is the lead generation and the opportunity to build their book with us. And so that's the calibration that goes through when people decide whether they're going to move or not.

I appreciate the color, thank you.

David Eads, UBS.

Thanks for taking the question. Maybe following up on the question here on the advisors. Can you just talk a little bit about what you're seeing in terms of competition and availability for the mortgage officers?

Sure, Brad, you want to take that?

Yes, I would say we've had good success hiring. You've seen our net -- we've been net growing, and we've had good success hiring. I would say one of the things that we've -- that has happened is we have seen a little bit higher attrition rate of our loan officers then we had expected.

But overall we are having good success hiring. It's a competitive marketplace out there. Application volume has been really strong for the first quarter. So we've got a nice pipeline building. And again, it's like a lot of the other sales job families, just a lot of competition in the marketplace for good talented people.

I think what we're successful bringing in people overall given that we're playing offense so we're trying to build the business. We have I think an ability to warehouse. We're taking jumbo mortgages onto our books. We have a fairly broad product capability, so we can do the things that folks find attractive to serve customers well. And so -- and we've attracted some strong sales leadership into the house.

So I think those things are going well for us, and we just have to get better as Brad said in making sure that when people come they can get their production right up to levels and they can be effective on our platform and we can keep them here. So we've had a little issue with attrition, but I think overall we are heading in the right direction. We're kind of getting close to the 450 mark, and we started at 350, and we're on our way to 700.

We did a 42 in Q4, 29 this quarter, if you map out where we need to be, we've got to be kind of reproducing these quarters on a consistent basis. We've got a be putting in 35 to 40 people per quarter for the next 7 quarters to get to that 700 mark.

Great. And then maybe if you could just touch a little bit on the -- what you're kind of seeing and the commercial real estate area. That's obviously an area were we've heard a lot of other folks seeing your really intense competition on pricing terms and but you guys have had pretty good growth there. So I was just curious what you guys are seeing there.

Yes, I think it's always a fairly competitive market. We hadn't played in a while as part of RBS, and so we've just kind of put some oxygen back in the system with some higher limits and some real targeted strategies where we want to grow. And I think we've focused more on the high-end projects so institutional investors who are well-known that's one area, the high-end office market.

We've also done a good job looking after REITs, and so that may not be the highest yielding portfolio, but the credit quality is very good, and the cross sell for other products and services is high. And I think we have to also look at where there are opportunities to play where we can pick up a bit of yield, because if we simply stay fully at that end of the market we won't make the kind of overall yield on our commercial real estate. And that's something that we're looking at gradually building that up and building up a little bucket of higher-yielding stuff that we still think is very safe from a credit standpoint. So that's what we're focused on.

All right. Thanks.

Ken Usdin, Jefferies.

Two quick ones. First of all to your prior comments on future uses of capital and your comments also about now the organic loan growth kind of taking over for the initial acquired. I'm just wondering where portfolio acquisitions akin to the one you did in the fourth quarter of the energy book, would be also part of that future capital consideration.

Ken, I -- that was really a one off that energy book was just a cleanup of RBS and Citizens separating, and I think that activity should have always been in Citizens. A reserved based lending business is more of a bank business than an investment bank business, but RBS was there first and so as they've reconsider their strategy and narrowed their focus, they said, look you always wanted this, this should be yours. So we moved that across.

I don't really think we will do any loan acquisitions on the commercial side, because we've been growing that at 8% to 10% organically for a consistent period of time, four or five years, and we're on that trajectory again this year. So wouldn't see it there.

On the consumer side, we've used whole loan purchases last year before we were able to start building up our mortgage loan officers. We've also used the SCUSA as a bridge until we bring up our own bigger auto capabilities in prime. And occasionally we will see a student book that we like, but I think a $50 million in the last year. We maybe bought a $200 million one in this quarter, but we also sold some. We've tried to get rid of some of the FELP exposure that we have, so net net I don't think we're adding -- we haven't added any real loans net in student from a purchase standpoint.

So we will be opportunistic. I think one of the things we've found in a low spread environment is when we enter into these flow agreements for people who want to use a balance sheet, there's not enough vig in it to pay the servicing of fees away and then also for us to make a good return. So I think again, we're migrating towards having the capabilities to grow loans at the pace we want organically.

Understood. And my second one just on consumer service charges. Proportion of revenues is relatively high for you guys versus others. I am just wondering if there's anything we need to be considering as far as the future either on ordering or CFPB, et cetera as far as growth potential or future drags that are in that part of the business. Thanks.

Look, we've made all of the policy changes that put us square on the side of the regulators and good business practice. We've also made certain adjustments to kind of over drafting for small items under $5 that we don't think is right that our customers should pay an overdraft fee on that, so all of those changes are in the run rate.

So the only thing that really in the comps you looked at on service charges, in the first quarter last year we had Chicago in the numbers, so it doesn't look like we've grown, but we actually have grown the service charges 2% on an underlying basis. And then in Q4 going to Q1 you just have seasonality and we would to see that recover in Q2 quite nicely.

Yes. Understood. Thank you very much.

And due to time constraints we will turn the call back over to Mr Van Suan at this time.

Okay. Well, thanks, everybody for dialing in today. Again I think we're continuing to execute well against all of our initiatives and feel that we've delivered another solid quarter. And we look forward to keeping you apprised of our progress. Thank you and have a good day.

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