Citizens Financial Group Inc (CFG) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Citizens Financial Group first-quarter 2016 earnings conference call. My name is Brad, and I will be your operator on the call today.

(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. I really appreciate you joining us. I know it's a busy day.

We are going to kick things off with our Chairman and CEO, Bruce Van Saun, and CFO Eric Aboaf, reviewing our first-quarter results. And then we will open the call for questions. We have also got in the room with us today Brad Conner, Head of Consumer Banking, and Don McCree, Head of Commercial Banking.

I need to remind everyone that, in addition to today's press release, we also provide a presentation and supplement, and those materials are available at investor.CitizensBank.com. And of course, our comments today will include forward-looking statements, which are subject to risk and uncertainties. We provide information about the factors that may cause our results to differ materially from those expectations in our SEC filings, including the Form 8-K we filed today. We also utilize non-GAAP financial measures, and provide information and reconciliation of those measures to GAAP in our SEC filings and the earnings material.

With that, I'm going to hand it over to Bruce.

Thanks, Ellen. Good morning, everyone, and thanks for dialing in.

Q1 was another good quarter for Citizens. Let me briefly cover a few of the highlights. We were pleased that we continue to achieve good loan growth. We're bringing new customers into the Bank.

We're doing a good job of delivering better risk adjusted loan yields, and in managing our deposit costs. As a result, our net interest margin was up 9 basis points versus Q4, with half the benefit resulting from the Fed December rate hike, and half coming from our own actions.

This strength in net interest income was partly offset by weakness in fee categories, which is partly the result of seasonality, partly market conditions, and partly some challenges in getting full traction on a couple of initiatives. That said, we are addressing the underlying challenges, and we're hopeful that market conditions are improving as the year goes on.

Our discipline around expenses remains excellent. We have a mindset of continuous improvement, and we recycle savings to fund investments in our growth initiatives.

I was pleased that our tangible book value per share grew by 2% sequentially to $25.21. Then we raised our quarterly dividend by 20% to $0.12 per share. Our CET1 capital ratio remains very robust at 11.6%.

Our credit metrics remain strong and stable. An increase in NPAs and reserves related to the SNC review of oil and gas loans was largely offset by improvements in retail loans, including a planned TDR sale that Eric will fill you in on, in a minute. We feel our oil and gas exposure is modest, and it is well reserved.

We continue to focus on delivering wealth for all of our stakeholder groups, including customers, colleagues and communities. I continue to see good progress across the board. In addition, we're focused on improving our risk and regulatory capabilities, and feel we put forth a strong effort on our CCAR and DFAST submission.

With that, let me turn it over to Eric to take you through our financials in more detail. Eric?

Thank you, Bruce, and good morning, everyone.

In the first quarter, we continued to make progress around our growth, efficiency and balance sheet initiatives. We're managing the balance sheet to generate attractive loan and deposit growth, and actively managing NIM.

We continue to control costs, and deliver strong operating leverage. Once again, our costs were [well behaved] as we navigate through the current economic environment. My comments this morning refer to our first-quarter 2016 earnings presentation, which you can find at CitizensBank.com.

Let's start on page 4, with our first-quarter financial summary, where we provide our GAAP results of $223 million and $0.41 a share. On page 5, on a linked-quarter basis, GAAP net income of $223 million was flat to the fourth quarter on strong NII, seasonally light fees, flat expenses, and stable provision. Compared to the first quarter of 2015, net income increased $8 million or 4%, with diluted EPS growth of 5% driven by positive operating leverage of 3%.

On a year-over-year basis, we grew revenue by $51 million or 4%. Net interest income of $904 million increased 8%, reflecting strong average loan growth. Non-interest income declined $17 million, or 5%, as growth in service charges and fees were more than offset by lower mortgage banking fees and the impact of a card reward accounting change.

Year over year, we continue to make measurable progress against our goal of enhancing our efficiency while reinvesting in the Franchise. Expenses were up only 1%. Our efficiency ratio of 66% improved 2% relative to the first quarter of last year. Provision was up $33 million on a year-over-year basis.

The first quarter of 2015 included the benefit of large commercial recoveries of $22 million. Importantly, credit costs also remained stable linked quarter, as commercial credit began to normalize and we saw improving trends in the retail book. Note that tangible book value per share is now $25.21, up 2% relative to year-end 2015.

Let's move on to page 6. We saw a nice lift in net interest income this quarter, which was up $34 million or 4% from fourth quarter, on the back of 9 basis points of NIM expansion.

We continue to generate attractive average loan growth of 2%, with strength in commercial, student and mortgages. On a year-over-year basis, net interest income increased $68 million or 8%, due to strong average loan growth of 7%. These results also reflect our improving net interest margin.

So, as you can see on page 7, our net interest margin increased 9 basis points linked quarter, as our loan yields expanded given the benefit of the December Fed rate increase, and we continue to shift our mix to higher yielding asset classes. We were also able to hold deposit costs flat, notwithstanding the Fed rate increase, on average, across our businesses. These benefits were partially offset by the impact of a lower Federal Reserve stock dividend.

The margin expansion this quarter came in a bit stronger than we had anticipated. While loan yields rose in sync with higher LIBOR and prime rate, our deposit costs remain low.

Specifically, we consciously lowered pricing of consumer interest-bearing deposits down 4 basis points, as we saw good DDA growth. Commercial deposit costs did move up in response to the Fed tightening, quite a bit less than expected.

While we do expect deposits to creep up in the future, and beta's to normalize, we are quite pleased with the results we produced this quarter. We will provide some more color on our NIM expectations for the second quarter shortly, as we are also keeping a close watch on the long end of the yield curve.

Relative to the first quarter of 2015, net interest margin also expanded 9 basis points, benefited by improved loan yields and mix, and a more efficient investment portfolio, partially offset by higher borrowing costs. We maintained a stable asset-sensitive position, and ended the quarter at 6.9%, compared with fourth quarter of 2015 at approximately 6.1%.

On slide 8, let's take a closer look at non-interest income. Our linked-quarter results reflect both the impact of normal seasonality in service charges and card fees, as well as some continued pressure from the market volatility in investment services, interest rate products and foreign exchange. This actually masked a rebound in our capital market fees.

I need to remind you that our results also reflect the $7 million decrease in cards fees related to the rewards expense accounting change we discussed last quarter. Without this change, card fees would have been down $3 million linked quarter, but up $5 million year over year or up 8%.

On a year-over-year basis, we posted 7% growth in service charges and fees, driven by both continued household growth, as well as our Treasury solutions pricing initiatives in both commercial and business banking. Investment service fees were up year over year, notwithstanding the recent market volatility, and we have now seen two strong quarters of FC hiring, which should help drive future growth.

In mortgage banking, we continue to see higher applications quarter on quarter and year over year, but the lower conforming mix and MSR valuations are impacting fee revenue. In the first quarter of 2015, our results benefited from higher gains on loan sales.

Turning to expenses on slide 9, we've continued to do a great job of self-funding our investment initiatives, as expenses were stable linked quarter, and up only 1% on an adjusted basis year over year. Linked quarter, salaries and benefits were seasonally higher by [$16 million] as payroll taxes and incentives increased, while occupancy costs were slightly higher. We offset this increase by spending less on outside services, as well as lower other expense, which included the impact of the cards reward accounting change. On a year-on-year basis, salaries and employee benefits were up modestly, reflecting continued investments in growth initiatives to help drive top-line revenue, partially offset by our efficiency programs.

Let's jump over to page 11. In consumer, we continue to grow balances at a nice pace, up 2% linked quarter and 7% year over year, driven by attractive opportunities, predominantly in student and mortgage. We're also seeing a nice uptick in our unsecured retail loans, which include the iPhone product. Consumer loan yields increased 11 basis points, reflecting the benefit of higher prime rate, as well as continued improvement in mix.

On slide 12, commercial loan demand was strong this quarter. Commercial loans increased 3% linked quarter and 9% year over year as we continue to build momentum in more attractive return areas. On both a linked-quarter and year-over-year basis, we generated growth across most of our target areas -- commercial real estate, corporate finance, franchise finance, mid-corporate, and industry verticals.

Slide 13 focuses on the liability side of the balance sheet and our funding costs. Average interest-bearing deposits grew $613 million, or 1% linked quarter, with particular strength in checking and savings and money market. Our deposit costs remained stable this quarter, reflecting disciplined downward pricing actions in consumer banking, as I mentioned earlier.

On slide 14, I will hit the highlights on credit quality metrics, which remain relatively stable with the fourth quarter in aggregate. Our NPLs were essentially flat at $1.1 billion, notwithstanding a $210 million increase in oil and gas non-performing loans, following the March SNC review and revised regulatory guidance related to multi-tier structures. This increase was largely offset by improvement in retail from several items: a roughly $100 million reduction in retail non-performing loans, due in part to the TDR transaction I will cover on the next page; a benefit from reclassifying a pool of FHA and Ginnie Mae guaranteed loans; and a broad overall improvement in retail credit.

Provision expense in the quarter was stable at $91 million. During the quarter we increased reserves in oil and gas portfolio by $30 million to $61 million, which included a $17 million overlay.

On slide 27 in the appendix, we provide more detail on the oil and gas portfolio, with reserves now at 6% for the more price-sensitive portfolios. This reserve build is partially offset by a release of roughly [$16 million] in reserves tied to moving the TDR portfolio to held for sale, along with favorable trends in retail performance.

Our allowance to loan ratio came in at 1.21%, while our allowance to NPL ratio was 113%, both of which were relatively flat to the fourth quarter. Overall, we feel good about credit quality and reserving levels, but we will continue to closely monitor the oil and gas portfolio.

On slide 15, we provide more details on our TDR transaction. As we continue to focus on optimizing the balance sheet and generating more attractive returns on capital, we've worked to identify additional areas like portfolio sales and securitization where we can drive benefits. During the first quarter, we identified a $373 million portfolio of consumer real estate TDR loans that we plan to sell late in the second quarter or early third quarter. We transferred these loans to held for sale, which lowered our NPLs by $97 million.

Once the transaction closes, given current home values, we expect to realize a moderate gain, as well as benefit our risk-weighted assets and provide a partial offset to third-quarter formulaic increase in FDIC assessment costs. On a net basis, these assessment costs are expected to have a very modest impact on second-half 2016 expenses, and no impact on our previous full-year guidance.

On slide 16, you see our strong capital and liquidity ratios. You also see that we executed a sub-debt buyback of $125 million in March, outside of the traditional CCAR process.

On slide 17, we've laid out the key initiatives that support balance sheet and [see] growth in our turn-around plan, as well as incremental initiatives, and assess progress during the quarter. We'll continue to lay strong foundations and gain momentum across most of these initiatives, and are intensely addressing some of our challenges in mortgage while making solid progress [in] wealth and asset finance.

Turning to slide 18, let me summarize some of what you can expect next quarter, but all in the context of the full-year 2016 outlook that we've previously provided and that we broadly reaffirm today. So, compared to the first quarter of 2016, we expect to produce linked-quarter loan growth of roughly 2%. We also expect net interest margins to be relatively stable, based on the curve as of March 2016, which reflects some pressure from the long end, as I mentioned earlier.

We are tightly defending the margin, and believe there's more we can do organically to control our deposit costs and improve our loan yields. We still anticipate the Fed moving twice this year, but will stay focused on what we can control. We do expect mid-single-digit fee growth without any Q2 security gains.

We expect modest expense growth in Q2, as efficiency initiatives will provide a partial offset to continued investment spend. We would expect to continue to generate strong positive operating leverage, thereby improving our efficiency ratio, profitability and returns. We expect underlying credit metrics to remain largely stable, with a modest increase in provision in Q2 driven by volume growth. And finally, we expect to see our CET1 ratio come in at 11.6%, and that we will manage the LDR to around 98%.

With that, let me turn it back to Bruce.

Thanks, Eric.

In short, another solid quarter in executing against our turn-around plan. The key takeaways are shown on slide 19.

With that, Brad, let's open it up for questions.

Thank you.

(Operator Instructions)

David Eads, UBS.

(inaudible)

Hi there.

(inaudible)

David, we're having a little trouble hearing you.

Is this better?

Yes.

I apologize for that. Can we start on the fee side and maybe on the mortgage hiring, you talked about -- it seems like the production is still little bit strong on the jumbo side. Is there anything you guys are working to do to improve some of - you know to broaden it and improve the conforming origination?

Why don't I start and I will put it over to Brad. One of the challenges we have had is that we put in a new system, I think we said on the last call, around the time that the RESPA TILA came in and we had to originate TRID-compliant loans. So that took some work, ultimately, to bed down the system and get back to good operational metrics.

That has slowed down our net hiring both in Q4 and Q1. We are treading water a bit, but we expect that now, I think we've got that under control. The operating metrics continue to improve.

We should now be able to move towards a positive net recruiting throughout the rest of the year. Part of that effort is to really focus on markets and producers that can deliver a greater mix of conforming originations compared to what we have had currently which has roughly been about 60% non-conforming and 40% conforming. I think part of it is selection and part of it is market geographic focus.

And then also, having that operational excellence because the conforming-oriented producers need to make sure that they can get their mortgages through the pipeline relatively quickly. So I will turn it over to Brad.

I would say you said it extremely well. The only couple things I would add to that is, as you mentioned, we implemented our new loan origination system in conjunction with TRID. One of the additional challenges that created for us in terms of conforming production is in order to get that system in, some of the product development work that we needed to do to get the right conforming and FHA products in place we had to put on hold.

So we are working really hard to get some new products in that will be more attractive to the conforming loan officers. Bruce, you made the point exactly right, which is we did have some operational stress and operational challenges. I think it's a little more painful in terms of attracting conforming loan officers than nonconforming loan officers.

We're working very, very hard. We really feel like we're turning the corner in terms of the operations. We did add capacity in terms of operations headcount.

We had a good turn of the pipeline particularly in March; a good strong closing month in March. We do feel like we're turning the corner and we will be able to start hiring and getting the traction with the more conforming loan officers.

Great. Thanks. And then maybe just a little bit on the increase in the dividend this quarter and I realize there's not a whole lot you can talk about this next CCAR, but if there's any color you can give on how that might influence -- how you guys think about the trade-offs between dividend and buyback going forward?

I think we want to maintain a strong and healthy dividend that grows. This is a step in that direction. We would like to be in a payout ratio of 25% to 30%. Taking care of the dividend is job one.

I think the next thing when we think about capital management, we want to make sure that we are funding loan growth. So where we have attractive opportunities to grow the loan book, bring new customers into the bank, we want to make sure we're doing that.

And then we also want to be shareholder-friendly and buyback our stock with the most that we can do. I think we are in a strong position at this point, given that relatively high capital ratios appears that we can do it all, for the time being.

So we are able to raise the dividend, we can fund reasonably aggressive loan growth and we can be, I think, reasonably aggressive at this point in time in terms of the buyback that we have been able to effect over the past couple cycles and we will wait and see what we're doing in this cycle. Eric, do you want to add anything that?

I'd just add that last year we obviously had our first non-objection, or pass, for CCAR. This year we were committed and did as much work as we did a year ago. We've kept up the internal pace of all the improvements, and remediation and making sure that we are leading the pack as opposed to just barely there on the requirements.

I think that gives us some confidence to put in for an appropriate return of capital to the shareholders while balancing the strength of the franchise. But as Bruce said, we have very, very strong capital ratios, top of the leaderboard and so that gives us some confidence.

Great. Thanks so much.

Vivek Juneja, JPMorgan.

A couple of questions, thanks. On the dividend increase, Bruce, Eric, do you all have to -- it seems like this was a little off cycle. Did you have to go get a special approval from the board or from the Fed or can you walk through the process a little bit.

Go ahead, Eric

Let me just take that. This was part of our annual CCAR app a year ago. We had [paced it], why? Because we wanted to pay dividend levels with income growth.

You've seen us deliver on that income growth quarter after quarter after quarter, driven by the positive operating leverage and the performance of the franchise. This is a natural time during that plan to raise the dividend and given we deliver on the income, we had done the app a year ago. We and the board went ahead with that increase.

We didn't need to have ask anything special from the regulators. The only place we did do that was on the sub-debt buyback which we did back in February/March time period. I think as I mentioned in my opening comments, that was a special app over and above the annual CCAR.

I know that you can't tell me about CCAR, can you talk a little bit about how you're feeling, given the very strong capital position you are still in? Either of you?

I think it's a little hard for us to comment at this point with the submission just filed. I do think we continue to invest in our capital planning and management capabilities. I think we really keep upping our game.

We know what we need to do to get strong in this area. So we feel good about the effort that we put forth and the progress that we are making. On the quantitative side, as we said, we've got relatively strong capital ratios to relative to peers.

And so I think you would expect us to be in sync with where we have been historically.

One more, nice job on the NIM. Can you talk a little bit about efficiency ratio and anything that we should think about as we look out, in terms of where you're expecting that to go?

Let me take it and Eric, I will flip to you. We are targeting ultimately to bring that down around 60%. The key to doing that is positive operating levels.

So the holy grail here, if you will, the mantra is that we've got to grow our revenues faster than our expenses. We've done that for a number of quarters in a row. You can see, again, this quarter year on year basis, 3% positive operating leverage.

If we keep doing that, that efficiency ratio is going to improve. It is 2% better than it was last year. I think you can see those kind of moves provided we continue to execute our plan. Eric?

I'll just add that we're going to keep chipping away at this quarter after quarter, [several] basis points year is 0.5 point a quarter. You can do the math. The NII growth will help, some of the seasonal rebound we expect from [fees] will help.

Then we've got to be extremely disciplined on our expenses. You saw them up 1% year over year flat sequentially. We've got to find a way to come in at the low-end of our expense guide and we've got to find a way to come in at a strong operating leverage and we have every intention to meter out and to carefully but invest but only behind revenues, as opposed to the other way around.

Great. Thank you.

John Pancari, Evercore.

Good morning. I just wanted to see if you can give us your updated thoughts on your ROE walk for the full year? What your updated expectations are in terms of what you're targeting for end of the year ROE and what are the main drivers there? Thanks.

I think we gave very detailed guidance at the January call. We let the ROTCE calculation to you. I think what we've said today as Eric went over the guidance is that we are broadly comfortable with that full-year guidance.

I think there will be some puts and takes. There is a little bit of headwinds starting out of the gate and fee revenue. Not just for us but for the whole industry, frankly.

We've got to try to make up ground there. If we end up a little light on the fees relative to that guidance, the places where we trying compensate, one would be trying to end up in the higher end of the range on net interest income which we are off to a great start on net interest income. And to grind down on expenses a little bit which we're -- you can count on us to be thinking of ways to do that on a regular basis.

If you average out those puts and takes we think we are tracking to our expectations for the year. I think the credit outlook, notwithstanding some issues in the oil patch, we are still comfortable with that initial guidance we gave for the full year. So you can do the math on that.

I do think that ROTCE will start to move higher as we deliver that positive operating leverage as we get some bigger EPS jumps as the year goes along and as we start buying back our stock when we get to the next CCAR cycle. Eric, do you want to add to that?

Let me just add that this is a marathon and not a sprint. We do it every quarter and trying to build on the last discussion about we've got to get the efficiency ratio improved quarter after quarter. We think as we do that, and then manage the mix of the top line and expenses we can make some headway on it.

Clearly we want to get out of the 6%, high 6% range to high 7% and we will figure how to get to the next step. It's going to be quarter after quarter, inch by inch.

And on that note is it fair to say that when looking at that full-year guidance, if you do achieve that you're in that 7% to 7.5% ROTCE range?

At this point there's -- you can do the modeling. I think that is what the modeling of the guidance suggests, that we gave back in January. And as we've said in the opening, we are broadly affirming that guidance and that includes the range that I think you just quoted.

Thanks, Eric, and one thing on energy. What do you include in the non-price sensitive portfolios for energy?

I think you just got the standard downstream retail, that sort of thing. I think if you -- we've been pretty standard with the others in the industry.

Midstream, downstream.

Midstream, downstream and some of the integrated players.

Okay. Thank you.

Matt O'Connor, Deutsche Bank.

Good morning. Just a couple of NIM questions, can you talk about much more, call it organic opportunity, there is to drive NIM higher over time whether it's mix shift or managing liabilities like you benefit from those quarters? How much left is there of that?

I think it's a never ending battle with rates where they are today. We've got a really night nice lift from the Fed hike that came through on the yield side both in consumer and commercial. There's a little bit left of that because some of that came in January, February for a couple of their portfolios, given how they're contractually repricing. A little bit of a tailwind there. On the other side of the ledger, the long end is a lot lower than it was before. That creates a bit of a headwind that we have to work through.

So given that, it means that we have to keep being intensely focused on our deposit cost kind of management and we've got to build balances and do them in a disciplined way. I think commercial clients will always be asking for a little more rate because their loans were priced. We've got to address that and we have to find a way to navigate that carefully.

And then I think on the loan yields mix side I think that is an area of tailwind that we have confidence in to continue. I think broadly stable into the second quarter, up or down a basis point or thereabouts, kind of in that range. I think the second half of the year will kind of depend on where the Fed goes and also where market expectations are, where the back end of the curve bounces around to.

And as we think about eventually further increases in the Fed funds, at least hopefully, do you expect similar leverage to the next one or two increases? Like how do you think about how linear leverages this quarter, you got four or five basis points to benefit, it seems like, from the Fed? Is that a good starting point in the next 25 or do you start having pressure on the deposit rates?

When we gave you that guidance in January the forward curve at the time presumed a -- I think it was June --

Yes.

-- increase and then a December increase. Which still looks reasonable to us. I'm not sure the market thinks that but I think the economic data and the anecdotes we have from what's going on with our customers, would indicate that would be a good course of action for the Fed to take.

But when we gave you that guidance we said there would be about a $35 million benefit this year from the June increase and $5 million benefit from the one in December, which only has a small impact on 2016 but obviously would benefit 2017. I think the -- there is still a good benefit from that, but I think as Eric pointed out, you have the curve flattened at the back end which is something to contend with.

I think the next increase will be nicely beneficial. Maybe not worth the $50 million a year that the first one was but something near that. What that would also do is put us in a position where you can't down shift as easily as we did for example taking our deposit cost down. We took them down 4 basis point this quarter. That's not the kind of thing we can repeat two quarters in a row. But let me tell you, we are looking at every part of the pricing structure. Every way we acquire clients and every way we manage that book and are trying to squeak out opportunities.

If you look at our yields relative to the peers, we've closed the gap almost all the way from where we used to have a fairly significant gap and where we still have a remaining gap is in our cost of funds. We know we still have work to do there.

Okay, thanks for that color.

Gerard Cassidy, RBC.

Thank you. Good morning, Bruce.

Hello.

Can you guys give us some color -- your capital is so strong and laid out very well in your presentation relative to the minimum requirements. What do you think it would take for you to be able to give back more than 100% of earnings? Will the Fed actually have to come out and give all of you and your peers that can do it, actual guidance?

Or can you read the body language and then take a chance and -- I'm not suggesting you do that this year, but in the future take a chance and ask for more than 100% of earnings.

I don't know, you certainly -- I don't think you want to go first. I would just say that we are comfortable with the glide path that we have been on. So when we were separated -- when the plan was announced to separate Citizens from RBS, the good news is that we started with an almost 14% set 1 ratio.

And over the past two and a half, three years, we have been gliding down to 11.6%, through paying the dividends and we did our conversion transactions which is effectively a buyback and then very strong loan growth in the 8% range. I think that still feels good to us.

We have just continued to glide this down. We are a relatively new company. I think our earnings are below where we'd would like them to be in the longer term.

We need to get our sources of capital up but it's good that we have the capital strength behind us that we can continue to take advantage of that. We can grow loans across the fleet, we can put in reasonably aggressive asks in the CCAR process. I don't really think it benefits us dramatically to think about going over 100 at this point.

In terms of the ideal capital level, at some point, we presume Citizens and your peers will get there? In your view, what is the ideal tier 1 common ratio that you think you can run the company at? I'm assuming the current level's too high.

I would say if you look at peers, probably the peer average or median is around 10%-ish. So most peers profess that they feel a little fat at 10% and they would like to get to something between 9 and 10. I think from our standpoint at 11.6%, we keep executing our plan, getting our earnings up, bringing that capital ratio down gradually.

I don't see any reason that we should be -- have that kind of new guide premium forever. There's nothing in our business model, or nothing in our stress test results that says that we need a premium relative to where the peer goes. I think it's really just as simple as you watch where the pack is going and we are trying to close in on the pack and ultimately we will get there over time.

Great. And then, just finally, your loan to deposit ratio obviously is in the high 90s. Where do you target that?

Are you comfortable where you are now or would you be comfortable going over 100% loan to deposits? What's your view on your loan to deposit ratio?

Gerard, its Eric. I think for the time being, we are quite comfortable with the 98%, 99% that we've been running at. It's a healthy way to run a regional bank, and we want to do it in a meat and potatoes way and just having the right set of deposits against loans is helpful.

I think we tend to run a little more -- a little higher in LCRs, but that's because we have a larger retail deposit base. That gives us the confidence run closer to that 99% than the 90% that others are at. I think over time what you'll find is the regulatory guidelines, whether it's LCR or an FFR, get baked in.

Right now we are at that kind of 90% LCR requirement, and we are well over that. We've said we are well over the 100% level. Once the NCSFR comes of age, I think at that point we'll see if it makes sense to recalibrate a little bit.

But for the time being we are quite comfortable at the level we are at.

Great. Thank you.

Ken Zerbe, Morgan Stanley.

Great. Thank you. Good morning. First question, it looks like student lending continues to grow really well. Are you seeing any noticeable increase in competition in the student lending market from other banks?

I will turn it over to Brad.

I would say we are definitely seeing some competition in the refi loan space. We haven't seen a lot of new players in the in-school space. We've seen players like SoFi and Darian and others in the refi area.

But I would say at this point, margins are holding nicely. There is still good strong demand, so we feel good about the opportunity. But yes, there is some competition in the refi space.

Not bad competition, right, because it creates awareness among borrowers, and you see TV ads out there so we don't have to spend on the TV. But it allows us for direct marketing and online channels to close loans.

I think it's very good point, Eric. There's a lot more awareness among consumers about the ability to refinance student data. I think you're absolutely right on that point.

Does that level of competition or increase ultimately change the pace of growth in student lending in the next few quarters?

Our view is, no. There is still an enormous opportunity in the marketplace in terms of consumers who are eligible for student loan refinancing, and the demand will remain strong for the foreseeable future.

I think the thing that we think about is -- as you maintain this growth rate, you come to, what's the theoretical asset allocation you want to that asset class. So I think this is a juggernaut that can continue to grow on our balance sheet and then do we want to have options to move some of those assets off the balance sheet through sales or securitization. I think it's a rich man's problem at this point.

Fair enough. Just the other question I have in terms of the capital markets business, can you just remind us how your business may differ from other banks? I know the first quarter is a very difficult quarter, but it looks like your capital markets revenue held up pretty well?

Don?

There's a lot of syndicated finance in our capital markets and a lot of bank content versus institutional content. Fourth quarter's obviously a tough quarter as the whole market basically shut down on the volatility of the high-yield market and the institutional market. We actually came through quite clean versus a lot of the competition, and we are able to take advantage of a few very attractive opportunities that were available in the first quarter.

That's really what drove the first-quarter revenue. As we move into the second quarter we see continued progress in that. The breadth of opportunities is growing and as we are getting a little bit of thaw in the broader capital markets, we're seeing transaction flow increasing.

It will be a little market dependent around actually how we close all of those and where they fall over the next few quarters, but we are quite encouraged about the breadth of activity

If you look at, historically, the second quarter has been a relatively strong quarter for capital markets fees, and I would say at this point our pipeline is tracking with those historic builds for Q2.

Great. Thank you.

Kevin Barker, Piper Jaffray.

Good morning. It seems like you obviously have a capital problem yet obviously need to grow revenue. You're attempting to do that. Why not look at potentially acquiring non-bank in order to accelerate the fee income growth and utilize your capital base?

I think at this point what we are focused on is just the organic opportunities that we have right in front of us. In our turnaround plan I think we can get good organic growth. We have to demonstrate that we can build our capabilities and run the bank better, which I think we are doing.

I do think, to your question though, there is a point where we will feel that it is appropriate to look for opportunities to deploy some of that excess capital into acquisitions. I think fee-based businesses would be of interest. Having said that, I think you have to be careful there because they typically are going to trade at premium valuations.

A lot of times their businesses -- if they're a business like a wealth business or a capital markets business where the assets go out the elevator every night, you need to be careful about how you structure those deals. I still think that's a bit down the road. I don't see us looking to do any acquisitions in 2016.

As we continue to improve how we are running, I think we will start to look, potentially in 2017 or 2018.

Is that decision being made -- is that primarily because of regulatory constraints, or due to your own decision to shore up the core operations as they stand now?

I think it's our decision. I do think you have to bring all of your stakeholders along when you start to move in that direction. I think shareholders want to see us running the bank better and we have said that there is a lot we can do in that regard. They want to see us deliver against that before we start getting distracted with doing more. I think regulators as well, have seen us make progress on things like CCAR and moving to heightened standards in some of the other things where the bar is going up and you have to stay focused on that agenda as well. I think you just need to demonstrate that you're running things well and I think all of the stakeholders will say, you have earned the right to go out and do some more.

But I don't think we are quite at that point, at this point.

And then, on auto lending, you've pulled back from the market and reduced the amount of capitol you allocated to auto (inaudible) charge-offs and (inaudible) rates increased significantly through 2015. Could you just give us a feel for what you're seeing in the market right now, and your expectations through 2016 and into 2017 regarding that market?

I will start and Brad and even Eric can chime in. I think that we made conscious decisions to move into the prime lending space from super prime. The increase in charge-offs tracks higher yields as well.

So the returns in the business have gone up over this period. I would say from Q4 to Q1, we have actually seen an improvement in terms of delinquencies and other measures around credit. I think we've stayed very disciplined.

We've expanded our risk appetite a bit, and we are disciplined in terms of terms and conditions and in terms of the different markets not playing in sub prime. But we needed to do that because the reality was that in super prime, you couldn't make a good return on capital. That's really what's behind that but I will let Brad provide some color.

Bruce, I think you said it extremely well. And to your point, 30-day delinquencies were down for us, 90-day delinquencies were down for us, charge-offs were down and the portfolios' performance are tracking right in line and we have made a conscious decision to grow our assets in other areas with a little bit higher risk adjusted returns, like student, like we talked about. We are actually quite comfortable with where we are at right now in auto, and feel very good about our credit performance.

What I've added is that tapping the brakes a little bit on our originations and slowing down growth gave us the opportunity to adjust pricing. That falls right to the bottom line. We might do that again at some point or this is a classic [asset clap], it doesn't have as high returns as you would like, it actually has a good stable credit dynamics, but not as high returns as you would like.

We will be looking at pricing, we will look at securitization, we'll look at all the things you can do to eventually optimize this more over time.

And you could expect that as a percentage of our total loan assets, this will decline over time as we see other opportunities to deploy our capital into better risk adjusted return areas.

Okay. Thank you for taking my questions.

Jason Harris, Wells Fargo.

Good morning, guys. Question on fees. So you, I think, affirmed the guidance this year for fee income growth in the 2% to 3% range.

But if I look at the guidance for Q2 and the Q1 result, it looks like these are trending down kind of low to mid-single digits for the first half. So I'm trying to understand where some of the improvement will come from in the back half.

Eric, why don't you pick that one up.

Yes, let me start. I think that anchor on fees, as we said, was service charges, right? And that -- given that, that is 40% of our book. I think, is you just work the numbers though, just remember the original guidance of 5% to 7% was on the old accounting basis but card fees actually impacts the reported results by 2% to three points.

Keep that in mind as you compare and contrast. That said, I think the real uptakes need to come on the investment side. I thought it was actually nice that we did. We were up 3% year on year notwithstanding the ugly markets we saw in January and February. You remember with those felt like. Mortgages, as we shift to conforming activity and we talked through that earlier in the call, gives us a very natural lift.

You could keep a pipeline coming and the originations coming, and if you could shift that mix by 5 percentage points or at some point, 10 percentage points, that's very powerful. A number of initiatives underway to do that. That takes time, but that will come.

And then I think there is a question on capital markets and a strong second quarter and a good second half of economic activity - you saw the economic signs out there, are quite positive now. Sharp contrast to what everyone felt like in January and February. That one can certainly pick up.

Every one of those has work to be done. But we feel like we need to keep finding ways to get there.

Eric, if I can chime in very quickly, I think you hit it well. You mentioned it in your opening comments, we have had two very good recruiting quarters in a row with financial consultants. Difficult quarter just because of the market volatility but we feel very good about the underlying trends both in hiring and sales results in investments. So I think we feel quite optimistic about the opportunity in wealth and investments.

One other quick thing to highlight, first quarter is a seasonally low quarter for deposit fees. So that's something to consider as well.

The other thing that I would just chime in -- it's Bruce again. In my earlier remarks I said there will probably be some puts and takes on the year. And we might end up a tad late on fees.

We have to make up for it with better net interest income or better performance on expenses. We broadly reaffirmed our overall guidance, but there will probably be some puts and takes, so don't forget that comment. In the second quarter, that guidance to mid-single digits, as Eric pointed out, that is assuming a zero securities gain and we typically have some securities gains.

If you put the same kind of security gains we had in Q1, that would push that up into a high single digit number. Just wanted to make that point clear as well.

Thank you for all of that great color and clarification. If I could, just as a follow-up, scroll down specifically into the card segment, which I know has been a key growth initiative for you. It looks like you saw nice improvement in the average yield in that portfolio this quarter.

With was that primarily a function of the higher prime rate this quarter? Or did you also see some improved revolve rates? And any commentary around penetration would be helpful as well. Thank you.

Let me hit the financials first, and then Brad will describe a little more of the business activity under the surface. The yields tend to do well in the first quarter, and probably was exactly as you describe. Primary came up and so the book reprice became a very nice lift. Probably you just had pay down activity on some of the book.

You roll through some of the acquisition fees that you may have seen in the third and fourth quarter and so you end up with more fully priced balances which gives you a second tick up. Those were the two on the financial side.

Eric, I think you hit it well. We launched a new card product last year, and it's a much improved value proposition which has improved revolve rates and card activation and usage pretty significantly, but it's also given us the ability to move away from the promotional rate. That's been an influencer as well.

Great. Brad, is there anyone else on the line? Do we have any more calls on queue?

Currently no further questions in queue.

Okay, great. Well, thank you everybody for dialing in today. We really appreciate your interest and have a great day.

Thank you. That does conclude our conference today. Thanks for your participation. You may now disconnect.