Citizens Financial Group Inc (CFG) 2015 Q2 法說會逐字稿

Good morning. Welcome to the Citizens Financial Group second quarter 2015 earnings conference call. My name is Brad, and I'll be your operator for today's one hour call.

(Operator Instructions)

As a reminder this event is being recorded. I would now like to turn the conference over to Ellen Taylor, head of investor relations. Ellen, you may begin.

Thanks so much, Brad. Good morning, everyone. We really appreciate you joining us this morning for our call particularly on such a busy morning. We're going to start things off with our Chairman and CEO, Bruce Van Saun and our CFO, Eric Abauf, reviewing our second quarter results, and then we will open up the call for questions.

Also joining us on the call today is Brad Conner, our Head of Consumer Banking. We would 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.investors.citizensbank.com. I also 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 our earnings release and in the quarterly supplement available on our website. And with no further ado I will hand it over to Bruce.

Thank you, Ellen, and good morning, everyone. We're pleased with the progress that we've made in the second quarter as we're executing well against our strategic priorities. We continue to achieve good loan and deposit growth, we're doing a great job in controlling expenses. We see some lift in fee revenue this quarter. We continue to deliver annualized positive operating leverage of over 5%, which is really the key to improving our profitability.

Our credit provision was up in the quarter towards more normalized levels. In prior quarters where we show the comparisons, we had large commercial recoveries, but with our portfolio so clean it is now unlikely we will continue to see such meaningful recoveries. In spite of absorbing the higher level of credit provisioning in this quarter, we still showed EPS growth versus linked and prior quarter given our good operating performance. And the credit trends remain very favorable as NPLs declined $86 million or 8% versus last quarter. We feel we're making good progress in delivering for our stakeholders, investors, customers, colleagues, communities and regulators.

We have adjusted the timeframe for some of our initiatives given market conditions, and we have developed some new ones which we will describe in more detail in a few minutes. This morning we filed two S-1s, one covering RBS's intent to continue their sell down and the other covering our planned issuance of $250 million in subordinated debt with proceeds to be used likely to buy back stock from RBS through their participation in their next stock offering. Our capital plans are progressing well, and we continue to have a very strong, solid and clean balance sheet.

With that let me turn it over to Eric to give more color on our financial results. Eric?

Thank you, Bruce, and good morning, everyone. We are pleased with our overall performance in the quarter as we continue to drive positive operating leverage and good loan and deposit growth and strong execution of our growth initiative. As I take you through some of the details of our financials, I will refer to slides in our investor presentation that you can find on our website. Let me start on page 3 for the second quarter financials which demonstrate our strong progress in executing on our strategy.

Our second quarter GAAP net income of $190 million was down $19 million or 9% from the first quarter and down $123 million or 39% from the second quarter in 2014. Diluted earnings per share $0.35 down $0.03 from the first quarter and down $0.21 from the second quarter of 2014. Linked quarter results reflect revenue growth offset by a $30 million increase in restructuring charges and special items and a $19 million increase in provision.

Prior year quarter results reflect a previous year's gain from the Chicago divestiture. Page 4 summarizes restructuring and other special items for this quarter associated with the productivity initiatives that we've launched as well as the separation cost from RBS.

We recorded $40 million in pretax charges this quarter which brings us in line with our expectation for the first half of the year of $45 million to $50 million in total. I will focus the rest of my comments this morning on our 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 $0.40. Net income was stable linked quarter, but with roughly10 million reduction share count, EPS was up $0.01.

Relative to a year ago net income was up 5%, and EPS was up 8% percent as PP&R growth of 13% was partially offset by a $28 million provision increase from very low levels a year ago. Operating leverage continues to be strong at 1.3%, linked quarter and 5% year-over-year. Revenue was up $17 million linked quarter on growth in both net interest and non-interest income and also up year-over-year as we more than replaced the foregone revenues from the Chicago branches sold last year.

Expenses were flat modeling quarter basis demonstrating good discipline as we drove efficiency savings while also reinvesting in the business. And Credit costs were up from prior periods which had benefited from strong recovery in commercial but remained at benign levels.

We continue to make measurable progress towards our goals with a 67% efficiency ratio and a 6.7% return on tangible common equity, both improved versus the prior year. On slide 6 we analyze net interest income which grew $7 million or 1% over the prior year, but that was needed by the Chicago divestiture which impacted NII by $13 million, so 2.5% in effect.

Over the course of the year we also grew earning asset by 6% or $7.2 billion driven by strong performance in both commercial and consumer as we continue to put our strong capital position to work to serve our customers. Compared to the first quarter net interest income was up slightly as the impact of 2% loan growth and an additional day was needed for the continued impact of the low rate environment.

Turning to slide 7, our non-interest margin this quarter were impacted by several factors including your compression on loans, higher premium amortization cost in the securities portfolio and slightly higher deposit costs. Commercial yields picked up modestly this quarter as we continue to see [back slip] run off at yields that were higher than the origination.

Consumer yields were down as mix evolved towards higher credit quality products, and prepayments worked against us this quarter. Given that market interest rates are below where we had expected them to be, we've taken some additional steps to defend the margin, and we believe that we have likely reached a bottom for NIM. Specifically on the asset side, we're actively emphasizing originations in select products that exhibit wider margins and stronger returns, such as student lending, and middle market and industry verticals.

And on the liabilities we are actively managing deposit rating strategies across our businesses and products to slow the increase in costs we've seen lately. We also continue to be highly asset sensitive. The impact of a 200 basis point gradual rise in rates off the forward curve is considered with the last quarter, approximately 6.8% in the first year.

This is driven primarily by the short end of the curve. On slide 8, we generated a $13 million increase in linked quarter non-interest income which was driven by a strong uptick in capital market syndication, card fees, trust and investment fees and service charges. Year-over-year, non-interest income increased $8 million from the second quarter 2014 in spite of the drag from the Chicago divestiture of $12 million.

And on an underlying basis we generated not interest income growth of approximately 6%, with particular momentum in mortgage banking and capital markets. Taking a moment to pause on the key drivers of year-on-year growth, you can clearly see the progress of our mortgage initiative.

We've increased our front line origination capabilities with mortgage officers up 23% year-over-year and improves originations by 68% as the market is firming and we 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 15% year-over-year.

Our [lead lap] and joint lead [rider ranger] transactions were up 18% the first half of this year versus first half last year. Moving on to non-interest expense on slide 9. 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 product and distribution capabilities. Our adjusted operating expenses of $801 million this quarter was relatively stable as a decrease in salaries and employee benefits and occupancy expense was offset by increased outside services, equipment and software amortization.

Year-over-year, adjusted expense was down $32 million or 4% largely due to the $2i million Chicago impact aided by our efficiency initiative which more than offset the [inforden] investments to drive growth and effectiveness. And we have kept headcount flat, too. As I mentioned we have achieved an adjusted efficiency ratio of 67% which was down 95 basis points from the first quarter and down 353 basis points from the prior year quarter.

While we're pleased with our progress we will continue to focus on new initiatives to improve our efficiency and drive revenue growth while controlling our cost savings. Now turning to the consolidated average balance sheet on slide 10. Our total earning assets of $123.2 billion were up 2% from last quarter and 6% from the second quarter 2014 driven by the benefit of our growth initiative.

In consumer we generated strong growth in auto, mortgage and students over the prior year. Commercial growth has been broad based with growth in commercial real estate, industry verticals, corporate, franchise finance and corporate finance. We continue to improve our deposit gathering capabilities with average deposits in the second quarter increasing by $2.79 billion or 3% over the first quarter.

Over the last year organic deposit growth of approximately $10.9 billion or 12% more than offsetting the $4.5 billion impact of the Chicago divestiture. On slide 11, consumer banking loans increased $680 million or 1.4% sequentially as you see the results of our growth initiatives and we continue to ramp our own organic originations in auto, mortgage and student.

Because of this success and our focus on enhancing a return profile, we have chosen to tactically reduce our SCUSA flow arrangement by more than half to around $200 million per quarter with an annualized target of $750 million going forward. Last quarter we made a tuck in acquisition in the [up of a] student portfolio. In this quarter in addition to closing on the purchase of a $200 million high quality student portfolio for SoFi, we agreed to purchase another $300 million over the next three quarters.

These purchases represent a transition out of auto to more attractive risk adjusted return categories. And these actions come out of a balance sheet review that I've been involved with since joining. We will continue to make refinements to our strategies in order to improve the underlying mix of portfolio in order to boost yields and offset the impact of low rates. On slide 12, commercial loans increased $1.2 billion or 3% linked quarter, and you see the results of some the tactical adjustments that we have made.

Middle market continues to rebound as we emphasize growth in this bread-and-butter business since late last year. Asset finances were flattish as we shifted towards an originate to sell model which should deliver better returns. Our commercial real estate team continues to drive volume and earnings fair share of deals in the market, and we continue to gain momentum in franchise finance. The commercial market is highly competitive, and this is an area where even maintaining yields requires both strong client relationships and strong discipline.

We've recently added additional pricing analytics to help our bankers take advantage of the price dispersion in what can be an opaque market. And we have been reinforcing this with a roll out of enhanced return calculators over the last few months. Slide 13 focuses on the liability side of the balance sheet and our funding costs. We grew the combination of checking with interest, money market and savings and [churn in time] by approximately 17% this year for $10.5 billion despite the impact of the Chicago divestiture.

We implemented this growth with a mix demand deposit -- or supplemented this growth with a mix of demand deposit, FHLD borrowings and senior debt to further diversify our funding sources. On slide 14, we played out our key initiatives that support the balance sheet and fee growth in our turnaround plan and assessed progress during the quarter. We continue to believe that we are broadly on track overall, and we are actively adjusting these initiatives to improve execution or adapt to market conditions.

Heightened watch areas continue to be the initiatives where we are hiring in significant numbers. We have extended the timeline to hit our targeted coverage force in both mortgage and wealth by growth by about a year given experience to date. Bruce will comment on several these in his closing remarks today. On slide 15, you can see that our credit quality continues to be very strong on a relative basis with net charge offs at $78 million and provision of $77 million.

I will remind you that first quarter results included a $15 commercial real estate recovery while this quarter's results reflect a return to more normalized level. More generally we continue to see relatively low levels of gross charge offs across 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 $2.7 billion.

Asset quality remains very, very good. Our NPLs were down $86 million 8% in the quarter, and the allowance to NPL ratio improved from 106% to 114%. We do not see any meaningful issues in our relatively modest [fry] synergy portfolio. Turning to slide16, our capital position remains robust. This quarter's debt one ratio was 11.8% which is well above our regional peers.

We are above our LCR requirements, and our LDR has been relatively consistent. In early April we executed $250 preferred issuance and repurchased shares from RBS which on a pro forma basis impacted our set one ratio by 23 basis points but had no impact on our tier 1 ratio. On slide 17, we summarized our accomplishments in delivering for our various stakeholders with sustain progress against our plans to reach.

Now turning to slide 18, let me summarize some of what you can expect next quarter, but all in the context of the full year 2015 outlook that we previously provided and that we broadly reaffirm today. Compared to the second quarter of 2015 we expect to produce linked quarter loan growth of roughly 1.5%. This includes a little seasonality in the commercial book, and we expect that Q4 will be seasonably stronger. We also expect net interest margin to remain broadly stable from this quarter.

We are hopefully-- we are hopeful that we have reached the bottom of [anance] compression which will require active management until rates move higher. We would expect to continue to generate positive operating leverage thereby improving our efficiency ratio and profitability. We expect modest expense growth in Q3 from investments tied to our growth initiative. We do not expect any additional restructuring costs in 2015.

We expect credit to continue to be strong overall and within expectations. Finally we expect that our CET1 ratio will remain relatively unchanged from around 11.75% and we'll hold LDR around 97% to 98%. With that let me turn it back to Bruce.

Okay thanks, Eric. On slide 19, we've mentioned for some time we've been working on further revenue and expense initiatives, and we lay these out here. When we first launched our plan before going public we indicated that our initiatives would be managed dynamically given that the environment and our ability to execute would differ over time with our plans.

We have a mindset of continuous improvement, and we've worked hard to finalize and launch several additional initiatives that are larger and more complex than those in our first [laid] program that we called Top I. These new initiatives which we are referring to as, Top II cover efficiency, pricing and revenue enhancement. Overall they tilt slightly to revenue.

The biggest initiative overall is ops transformation which is underway and will deliver some benefits in the second half and a meaningful benefit to 2016. You can see that overall we target a 2016 P&L benefit of approximately $90 million to $115 million. Turning to slide 20, we talk about how to think about this benefit in the context of our forward forecasts. First off we are affirming 2015 guidance provided early this year with some swings and roundabouts, otherwise called puts and takes.

We have seen lower than expected revenues offset by favorability on expenses and credit, and as Eric mentioned this should continue in the second half. We expect the Top II initiatives to deliver around $25 million or so in second half benefits offsetting other pressures and thereby protecting our outlook. For 2016 the roughly $100 million in targeted Top II benefits will also undergird our ability to deliver the self-improvement part of our plan.

This is needed to offset some of the environmental pressure on NIM and a slower build on some of our fee based businesses. We will continue to look to add to these initiatives as we go forward, and that is what you should expect of us. While we won't provide 2016 guidance until January 2016, it now appears highly likely that it will take longer to hit our 10% Q4 2016 growth fee target given the current forward set funds curve.

Nonetheless we feel good about the progress we are making in running the bank better and about our ability to continue a steady upwards financial trajectory. To sum up page 21, we are executing well on our overall agenda, and we feel that we have good momentum in both the consumer and the commercial business. Our new initiatives are designed to continue our upward financial trajectory.

We've maintained a stable level of active sensitivity and will pick up a nice tailwind once the feds start to lift rates. And our balance sheet remains exceptionally strong, and our credit quality is excellent. With that, let's open it up to some questions. Brad?

Thank you Mr. Van Saun.

(Operator Instructions)

David [Eints], UBS.

Maybe if we could start off on the initiatives you announced for the second wave here. Can you talk about what you are doing different and what approaches are incremental to what you guys talked about before -- previously?

Sure, David, each of these initiatives really is completely incremental to what we have done in the prior initiatives although they help to support and reinforce what we're trying to achieve. If I look at the categorization, you have some dealing with the cost side of the equation and efficiency, some -- we see some pricing opportunities where we can sharpen our pricing strategies and then lastly, broad revenue enhancement.

If you want I'll just run through those briefly. But operations transformation, we've looked at how we're organized across what is in the central service unit and distributed across in our businesses. And I think some of that just grows up from a historical legacy standpoint. So we have taken a step back to figure out how can we better organize and distribute that work and find some efficiency.

That has been quite an undertaking. It has taken us a while to assess that and come up with a plan, but now we're in the process of implementing the plan. And as I mentioned we'll already start to get some immediate benefits from that project in the second half.

Procurement is pretty self-explanatory, so we're working on I guess in general looking to consolidate vendors and then have tighter standards and compliance with contracts. There's more opportunity there. We did some of that in the first Top program, but I think there was more to do and we have been able to ferret that out. In pricing, most of this is on the commercial side and then the cash management business.

We're been able to segment customers, looked at competitive pricing, and we see some opportunities to tighten pricing. With two down below on revenue enhancement, one is there is opportunities for us to better use our distribution channels on the consumer side, deepen relationships with customers, understand their needs better. And then deliver products that really are suitable for their needs.

I think we can sharpen -- again, it is sharpening our game and then on the commercial and consumer second initiative, what we're -- they're trying to do there is really hold on to our best customers and reduce attrition, so make sure that we have proper segmentation strategies. And we're really smothering those customers with lots of attention and the right product capabilities.

We have plans against each and just like you saw in our Top one we assign accountability out to people, so people know where the ownership resides across the bank. And we have regular meetings to make sure we are delivering and that we're staying on track.

Okay so it sounds -- these are all kind of business as usual type processes, just kind of getting better at each of these -- incremental opportunities to get better, Eric.

Yes. I think that is right. It is not anything that is out of the box. It is just continuing to sharpen how we're running the bank would be a succinct way of categorizing the whole program.

Great. And then you talked a little bit about this -- acquiring some student loan portfolios.

Can you talk about what you're looking for in those acquisitions, and would you consider doing something a little bit bigger? It seems like that's a pretty good opportunity for you guys.

Why don't I turn that over to Brad, and Brad's driving on point of those acquisitions both with auto and now the shift over into student. Brad?

I would say the acquisition that we did looks a lot like our ERP, education refinance product. We really like that segment of student lending. It's very high quality.

You're dealing with customers that have a proven track record of repayment. They have a job, so we really like that segment, and this segment that we acquired looks very much like our organic loan origination. I think in terms of other opportunities we like the student loan segment, so we wouldn't back away from future acquisitions. But we don't have any I would say specific designs around that at this point.

I would say look we have very good own loan organic originations right now capabilities, so I think we can be very selective in terms of what we do as evidenced by our dialing back on the [scusa] arrangement. Our own auto originations have ramped up, and we're now able to originate more prime paper thereby there is less need for that. I think the good news here is we're getting very solid organic originations, and we can be opportunistic when we see attractive portfolios.

Great. Thanks for the color.

Scott Siefers, Sandler O'Neill & Partners.

Eric, maybe for you. You alluded to some of the things that you have done on the balance sheet maximization that you have been looking at. Are those all, just so I understand correctly, are those all included in the top two initiative, or are those mutually exclusive?

No, I would say they are part of the BAU process for running the bank, and a few of them are in Top two. The initiatives are, we talked about around product mix. We have a very strong origination strength in all of our businesses. So we can tactically shift a little more from one business to another.

I think I highlighted a couple of those already. Student loans comes in at 110 basis point better yield, and a couple hundred basis points better return that our other opportunities. And we are emphasizing that as an example, and similarly there are areas like that on the commercial side.

Because we have the ability to originate and grow the balance sheet at this 7%, 8% per year, we really have an opportunity to emphasize a little more and accelerate in some areas and actually curtail -- actively curtail in others that we find a little less remunerative as time moves on.

Okay. That's good color. I appreciate that.

Either, Eric or Bruce, I am trying to square the revenue walk that you guys have given originally with what would be implied in the updated numbers. And is it a fair characterization to look at it as the $90 million to $115 million you disclosed today? That basically captures what might've been a shortfall on the revenue side. And then the only need to extend the revenue walk is based on the way the forward curve has softened relative to when you guys were initially doing the IPO call it roughly a year or so ago or 10 months or so ago?

I will start and Eric you can chime in. I would say where we have had pressure on the initial revenue walk, principally it has been in building up our fee based businesses.

And so the pace at which we can attract the quality and depth on both the mortgage loan officer force and the wealth advisor force, it has been a little bit tougher sledding. We still are making great progress, and we still think we'll get there, but it's probably going to take us another year. And we have slowed down a little bit in business banking hiring as well.

There's a little bit of headwind on the fee trajectory. There's a little headwind on net interest income related to NIM and some of the pressure on the back both rolling off into a lower rate environment than what we had anticipated. So we have done everything we thought we would do and more on expenses, but we have been a little light on revenues. So that is really what we're trying to protect is to make sure overall that these initiatives allow us to deliver what we said we would deliver.

If there's a little left over to partly offset the Fed moving later and more languidly than expected, great. But that is potentially a sizable impact that is hard to fully offset. So really that is the thing where we still have that coiled spring. When rates go up we will start to benefit from that, and if it takes a little longer, it will push out our realization a bit, and we will stay on top of that.

And will steam those initiatives are about 60%/40% revenue to extend. Right, we know the extent is quite -- we had a lot of confidence there. Revenue is always a little soft --

The softening side of the revenue is also pretty foreseeable, so it's really the revenue enhancement ones which we have to really work hard to execute against.

Alan Straus, Schroders.

Just a quick question -- your outside services, are there ability to cut a lot of expenses there?

Let me take that. That is an ongoing area where there is always ability to do more. Every third-party vendor whether it is marketing and advertising firms, whether it is paper and pencils, whether it is equipment, whether it is technology, consulting, there is a wide range of areas there.

And one thing is we just have to be incredibly disciplined in bidding out every time things come up and also finding ways to simplify what we buy. And that is just part of how we do business, and we are going to continue to do -- to actively manage those spending areas.

Are there a lot of consulting expenses that --?

Yes, I think, Alan, in going through the period of change and all of the various initiatives and separating from RBS and getting up to snuff on CCAR we have used consultants more heavily than we have in the past, and they are also helping to guide us to some extent on some of these new initiatives. I would say we are probably at a higher run rate than we were historically, and that should come down with time.

John Pancari, Evercore.

Couple quick questions regarding the ROTCE expectation. What is your updated Fed assumption that is baked into the 10% ROTCE pushback, and also what are you now expecting?

Separately, what type of timing do you think is now more appropriate for that 10%? Is it in the first half of 2017, or is it by the end of the year?

What we do in terms of forward forecasting is we just use the forward rate curve. So I think that the Fed funds in the rate curve we used when we put the plan together was about 175 basis points at the end of 2016. Today it is about 110 basis points.

When we had the original rate curve, the Fed was moving as of June, so you get a cumulative benefit from having already moved for a longer period of time, and now it looks like the initial rate move will be late in Q4. If you run that forward, there's -- you'd probably lose about half of the benefit versus the $300 million that we had initially assumed when we did the ROTCE walk.

We are not giving guidance on 2016, so with respect to your second question, I think it is safe to say that we are just saying, at this point it is hard to cover that much of an impact. Having said that, the curve does move around, and you could see it snap back and maybe the Fed -- the economy is trucking along, has the confidence to go a little faster or in bigger increments. But in any case we will just monitor that, and our policy is we will give guidance for the current year in January of that year. And that is when we will tell you our views, and we will have I think a more fresh view on the level of interest rates and the potential impact from that.

My second question is around expenses. Giving your top two initiatives that they both impact -- they impact both expenses as well as revenue, sorry if you already commented on this, but can you update us what your thoughts are around your long-term efficiency ratio? Where do you think Citizens ends up normalizing, barring a major change in your rate outlook or anything, where do think you normalize in terms of volume efficiency?

I think when we have shown our target of getting to the 10% we have had a series of other numbers underneath that that are all consistent with getting 10%. We had a 1% ROA, and we had an efficiency ratio down in the low 60%s near 60%. We are making progress here so one of the good news again if you look at the last several quarters, we continue to generate positive operating leverage which is moving our efficiency ratio down.

This past quarter it went down by 95 basis points. We need to continue that positive operating leverage.

I think there will be an accelerant when rates are to go up. That is almost free money. That is revenues that are going to flow through the bottom line without needing to add any expenses. So that is an accelerant to positive operating leverage which will drive that efficiency ratio faster towards where it needs to get to.

Kevin Barker, Compass Point.

On the student loan side we noticed that you acquire a series of loans from SoFi, but you also originated a bunch of your own refi loans during the quarter. Could you expand upon some of your comments that you made earlier about your overall strategy here on whether you're going to focus on refis as the primary originations or maybe look at acquiring additional loans from SoFi or other sources?

I will start and then, Brad, you or Eric, you can chime in on this.

But we feel good about how we are positioned in the student market. We've been achieving good organic growth both on our underlying bread-and-butter product which is the basic student loan. We call it true fit. And then our Ed refi product was fairly innovative that we were first to market with that in Q4 of last year, and we have been originating somewhere between $300 million and $350 million in the last two quarters.

We are growing the portfolio well organically, but when we look out there, we had opportunity to engage with SoFi who really I think targets the highest end of the market, the super prime quality borrower. And we think the paper that we can buy from them from a risk adjusted return standpoint is very attractive.

We didn't need to do that, because we're growing well organically, but since we were originating auto paper from SCUSA, and we did a comparison and said, hey, you know what? This SoFi paper here's an emerging company that needs some financing partners and we can step in and we can do an initial transaction of $200 million. And then we've committed to buy $100 million for each of the next three quarters. That is what we signed up to.

At the same time, we have had some flex in the arrangement with SCUSA, and so we are able to adjust that one down. It is really that straightforward. We are not on the prowl for lots of other flow agreements.

What we have found in the past, in this low spread, low rate environment, there is not enough for two people to eat at the same trough if you will. And it is hard to have these deals actually work for two parties, but occasionally you can find that, and you have to be opportunistic.

The nice thing that we have is we have a lot of capital flexibility. We have an ability to use our balance sheet to grow loans and put good assets on the books and change that mix to the better. And so we will continue to seek opportunities to do that. I don't know if Brad or Eric --

I'm not sure there's a lot left to add. I think you said that well.

The core strategies, organic origination, we've been very pleased with the demand in the marketplace for the refi product. We've been -- it is a product that hit the market well. This was an organic -- an opportunistic opportunity, and I think the core strategies are organic originations.

So when you think about your -- the economics of a refi versus buying those loans, do you feel that you can achieve higher yields on your own refis versus what you are going to get buying or providing financing for SoFi or other participants in the market?

It is about the same. So if you look at the net yield after the servicing costs in the SoFi arrangement it is about the same yield that we're making on the EdFi originations when we've load in our cost to originate those loans.

Because we compare those yields and those returns across the bank, across all the consumer businesses and commercial businesses. As we look at these flow arrangements we are looking for an uptick, something a little wider in spread and a little higher in return. And we'll do them just if they come in that average.

A quick question, we've seen a lot of your competitors put on commercial loan swaps in order to extend duration given the outlook for rates right now. Have you considered doing that, or is it something you would consider doing given the top-line headwinds you are facing right now?

I think right now we like to position that we run where the asset sensitivity is primarily at the front at of the curve, the very front end, which is the one, two, three month just because we have the option to not raise deposit rates as the Fed starts to move. The data is particularly in our favor.

I think we would rather, and we don't want to have a rate call discussion here, but typically you'd rather like into some term structure whether it is five year, seven year, three year. It is somewhat higher rate than where we are today, so we will do that over time. We will do that while we think our good level -- it is hard to convince yourself that you want to go long right now.

Our asset sensitivity is the one of the things Eric mentioned in the prepared remarks, we've kept for that 200 basis point gradual ramp in the Fed funds rate to our benefits over the first year have been fairly consistent at around 7%. And our view is that we will keep that so-called spring coiled and benefit once rates are start to move, and hopefully we're getting closer to that date.

(Operator Instructions)

Matt O'Connor, Deutsche Bank.

Can you talk about the deposit pricing in your markets? Some competitors in some of your markets are starting to increase ahead of Fed rate increases, seems to be little bit of an inconsistent strategy out there in terms of some raising rates and some actually cutting a little bit.

Yes, primarily what we see is we tend to see some of the smaller community banks out there with some lead money market rates and CD promotions. They don't have the path that we do and the large banks do so they are out there.

And sometimes what we need to do is match that to defend the market by market. But then you can imagine margin we're trying to be quite disciplined in pricing and think that we are still quite confident that the deposit pricing will lag for the first move or to as rates trend upwards.

Just from a high-level point of view can you remind us why you think your deposit base might be little bit stickier in terms of mix or geography or size?

It is really that -- I don't know that is stickier, I think it is about average data in the industry. I think we quoted about 60%. I think the range is 50% to 70%. I think we have confidence in that because we are being a bit more conservative than we -- than what we saw in the last cycle, on one hand.

On the other, we have a real healthy mix of retail deposits -- a little more retail than versus commercials then peers. We have it in both city centers but also in more suburban areas, and there we think we will do reasonably well.

Geoffrey Elliott, Autonomous Research.

If I look at the revenue initiatives in particular, maybe starting with pricing, can you give us a more concrete examples of where you think this goes to customers and ask for more than you have been historically, where's the room there what are the examples?

Let me give you one example so in our cash management area, we haven't raised prices in more than five years. We also have a series of waivers that are granted based on committed volumes, and we haven't done a great job of compliance to make sure that the volumes are there so the waivers have continued in place.

What we have done is we have stepped back, and we have looked at what is going on in that space in terms of competitive pricing actions. And in fact many of our peers, if not most, have continued to take annual price adjustments, and they are also I think much sharper in staying on top of some of these waivers. We have developed I think a market segmentation approach to categorize customers into different buckets and then go back and look for opportunities where we can tighten.

And in some cases we have basically saw we are going to raise your prices unless you start to go back and meet the committed volumes. If you are a multi banking you have directed some of the volume away, direct more back to us, and you can avoid the price increase, and we win either way.

It is really opportunities like that where I think we're being very disciplined, very systematic in terms of our approach. And we don't really see much of a risk of customer pushback, because frankly they have been getting a good deal for too long. I do not know Eric if you want to add to anything.

No [ed and stab and cash max and stick weather] there literally 600 different fees and services that you price, and so it's mini -- it's down in the detail and if you actually go through that you can benchmark that. You can benchmark it against peers, and you can benchmark it for client size. And so there is a rich data set by which there really determine what is fair pricing, you can play that back to clients who just want a fair price and say look here is the range, and here is where the averages and here is where you are.

We have had some good early successes, and that will be part of what we do in a disciplined way over time.

And then to fully wrap the same question around the $30 million to $40 million of revenues enhancement?

Sure, Brad maybe you could briefly describe the distribution channel effectiveness, which again is I think doing a better job of marshaling the resources we have in the branches and in the contact center to reach out to customers and engage with them whether it is physical meetings in the branches or phone conversations with some of our specialist to make sure we're doing all that we can to satisfy their needs.

The key really on that particular initiative is, customer behaviors have been changing over the last few years, and people are using alternative methods for making deposits. They're not coming into branches as much, they are using online and mobile. And one of the things that we know is your height conversion rate in terms of sales conversations with customers if you can get face to face with your customer.

This initiative really is about having conversations with our customers, inviting them into the branches and being able to have conversations with them about what are their financial needs in a face to face way. So the initiative at this stage is just reaching out to our customers, inviting them into the branches and then being able to measure and see the effectiveness of that. And we've had some very, very good early success with that.

We are actually piloting in a couple of markets, and we're seeing some good success. We're just learning as we go and expecting to continue to roll that out across the broader distribution network.

That is one that I would say again that we've had some help from consultants in setting up the program, and they have seen this approach work effectively at other banks. So combined with those insights and then our own piloting efforts, we think that these revenues are a pretty good estimate of what we should be able to achieve. And then on the retention program, I don't know if I should throw that back to you again or some of that's on commercial as well.

It is, and I can talk a little bit about the consumer side. Some of it is commercial. The real issue on retention is just making sure that at every point of interaction with our customers we understand what the satisfiers and the dissatisfiers are and breaking down those dissatisfiers in a way that we include overall customer satisfaction and retaining our customers.

So there is a very systematic approach to understanding what all of those points of, like I said dissatisfiers are and breaking them down, and we're seeing some good early signs. If you look at particularly in checking we're seeing steady improvement quarter-on-quarter in terms of our retention rates of our customers, and now we're taking that across all of our products sets.

I think on commercial some of it is really surveilling the back book and looking for situations where we think a company might want to refinance, and we can go proactively to refinance that company to make sure they stay with us. There's a number of initiatives on the commercial side as well, but again similar to the first one I just mentioned, we have had outside help helping us design this program. We have seen the effectiveness at other institutions, and so we have a reasonable degree of confidence that these are attainable numbers.

Vivek Juneja JPMorgan.

A couple of questions, Bruce and Eric. Firstly a quick one, the SoFi loans that you've purchase what percentage of those are guaranteed -- the parent guarantees that you'll normally get?

Relatively small [co-sign and rab] about 45% I believe. Most of these, Vivek, since these folks are typically graduates of graduate programs, and they have high income and good jobs, there is less need for the guarantor than in a straight student loan. But having said that, the FICO scores on this portfolio I think are (multiple speakers) 780 plus so I was off by two so it is quite attractive.

Bruce, another question you mentioned earlier, your last year you were spending a lot on regulatory stuff as you were building out your systems and making sure you got through CCAR which obviously worked. Are you seeing any opportunity to reduce those upfront expenses, or has that already begun?

I think we've got in our run rate what we need to continue to make progress on our regulatory agenda. We did last year to get caught up on some of the models to really do a good job with CCAR. We expensed some of that and considered that more one time in nature.

But we mentioned that we needed to hire about 70 to 80 people. And by year-end we probably had 60 of those people in house and so by now, at the turn of the middle of the year, we have got all of that in our run rate.

I don't really see any opportunity for a quote unquote peace dividend and time soon. I think there's still a sustainable amount of work to do as the regulators push the bar higher we need to keep pace. I would say we're I put it is that we've got the right amount of resources, we're working hard, we're making progress, but it still going to take us some time to get fully where we need to be.

Matt Burnell, Wells Fargo Securities.

Eric, maybe a follow up for you in terms of a comment you made a think earlier today about the repricing initiatives on the commercial side. You said that your customers have gotten a good deal for too long. You haven't really moved prices in that business across several products for about five years.

Can you give us some color there as to what kind of customer attrition you are thinking about? I would think in this environment a bank coming to a customer, looking for higher fees might think about what other options there may be and other banks are certainly beefing up there cash management businesses. Could you provide a little bit of color about how you're thinking about that?

Actually it's Bruce, and I was the one who made those remarks. But I think the amount of attrition that -- we built a little bit, I think it is a low single digit number into our overall estimates, and that is informed by again having some consultants working with us who have seen this and other institutions.

But if you look at the uplift from the pricing up, and a very small subtraction for people frankly who aren't paying us what they should for those services, the seesaw tilts much, much more in favor of going ahead and taking those price actions. I think I'd categorize it as a fairly miniscule level of attrition, and really we're just bringing the book back to fair and average market pricing relative to peers.

That make sense. And, Bruce, in terms of your outlook for rates, it sounds perhaps reading between the lines of that a bit that you all are maybe as a result maybe a little more sanguine on the credit side of things. Is that a fair characterization?

Yes, I think what we have seen clearly over the last six or eight quarters is the flip side of having lower rates for longer, is there is less stress on borrowers. So wherever you look in our book, whether it's any the consumer portfolios or any of the commercial portfolios, borrowers are doing well and delinquent loans are very manageable and trending in the right direction. I think hopefully we can continue to sustain that good credit performance.

There is still probably a little normalization to go, because we have on the commercial side had some significant recoveries, which, once your book gets completely clean there is not much more that you can recover. So we might see a little bit of increase, and we are growing the portfolio which potentially creates a little bit of increase. But in terms of when you look at the charge off rate as a percentage of loan, we have been hanging around the low 30s and our [true to] cycle average is probably 45-ish.

And I think it is hard to see how you're going to approach that through the cycle average anytime soon, hopefully not famous last words. You can always get hit with a SCUD missile, but we don't see anything really in the book at this point that gives us any grave concerns that we're going to go up meaningfully from where we are.

There are no further questions in the queue. With that I'll turn it over to Mr. Van Suan for closing remarks.

Okay, great. Thanks, everybody. Appreciate your dialing in today.

Again we feel very good about the progress that we're making. We continue to execute against our key strategic priorities and look forward to the next time. Thanks and have a good day.

That does conclude today's conference call. Thanks for your participation. You may now disconnect.