Citizens Financial Group Inc (CFG) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Citizens Financial Group Second Quarter 2017 Earnings Conference Call.

My name is John.

I'll be your operator today.

(Operator Instructions)

As a reminder, this event is being recorded.

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

Ellen, you may begin.

Thanks so much, John, and good morning to everyone.

We really appreciate you joining us for our second quarter earnings call.

Our Chairman and CEO, Bruce Van Saun, and our CFO, John Woods, are going to spend some time reviewing our second quarter results, and then we're going to open up the call for questions.

We're really pleased to also have on the call today with us Brad Conner, Head of Consumer Banking; and Don McCree, Head of Commercial Banking.

I'd like to remind everybody that in addition to our press release today, we've also provided a presentation and financial supplement, and these materials are available on investor.citizensbank.com.

Of course, our comments today will include forward-looking statements, and those are subject to risks and uncertainties.

We've -- we provide information about the factors that may cause our results to differ materially from expectations in our SEC filings, including the Form 8-K we filed today.

We also utilize non-GAAP financial measures and provide information and a reconciliation of those measures to GAAP in our SEC filings and our earnings materials.

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

Okay, thanks, Ellen.

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

We're pleased to report another quarter of strong results as our momentum continues.

We've got a terrific leadership team.

We continue to execute well on our strategic initiatives.

We're balancing our desire to build a great franchise for the long term with our need to deliver consistent financial progress near term.

We're turning the quarter, so to speak, from our turnaround phase to a new growth phase, with a desire to become a top-performing regional bank.

I believe our customer-centric culture, our mindset of continuous improvement in how we run the bank and our commitment to excellence in key capabilities are the unique ingredients that will allow us to stand out in a crowded banking landscape.

As to current performance, the highlights of the quarter from my perspective include strong revenue growth, good expense discipline and positive operating leverage.

Our fee-based businesses continue to gain traction, and our credit quality, our capital, liquidity and funding position all remain excellent.

Revenue growth was 10% year-on-year, and operating leverage of 7.4% on an underlying basis before lease impairment impacts.

ROTCE at 9.6% is approaching 10%, and our underlying efficiency ratio was 60.4%.

John will take you through our outlook in a few minutes.

But in short, we continue to have a positive outlook, and we believe there's plenty of fuel left in the tank to propel the next leg of our journey.

We announced our TOP IV program today, which is now following a seasonally predictable pattern.

We've assembled a series of revenue and expense initiatives that we project will benefit pretax income by about $100 million by the end 2018.

These TOP programs have been pivotal in our ability to deliver consistently high levels of operating leverage while also creating the capacity to invest in growing our franchise and our capabilities, including some great progress that we're making in digital, data analytics and process automation.

We've done a good job of analyzing how banking, technology and consumer behaviors are changing, and increasingly, we're playing offense and making investments that will strengthen us well into the future.

We also announced a 29% increase in our quarterly dividend, with CCAR approval for another 22% in early 2018.

Combined with authorization for $850 million of share repurchases over the next 12 months of the CCAR period, we aim to deliver strong return of capital to our shareholders.

Our CET1 ratio will continue to normalize back towards peer levels with time.

So with that, let me turn it over to our CFO, John Woods, to take you through the numbers.

John?

Thanks, Bruce, and good morning, everyone.

Let me start with our second quarter financials and start on Slide 4.

We generated net income of $318 million and diluted EPS of $0.63 per share.

Our reported net income was relatively stable compared to the first quarter, which, as a reminder, included a benefit of approximately $23 million related to the settlement certain state tax matters that contributed $0.04 to EPS.

On an underlying basis, excluding this benefit, net income from the second quarter was up 7% and EPS was up 11% in this quarter.

Year-over-year, net income was up 31% with EPS up 37% year-over-year.

Our second quarter results included a $26 million pretax charge related to impairments on aircraft lease assets, primarily in our non-core portfolio, which is in run-off mode, reflecting a more recent continued decline in the value of select categories of aircraft.

The impact of these impairments reduced noninterest income by $11 million and noninterest expense by $15 million.

In order to better understand our underlying performance, we have prepared a supplemental schedule, which backs these impairments out of PPNR and re-classes them as credit-related costs.

On this basis, our total credit-related costs came in at $96 million, which was stable compared with the first quarter and up modestly year-over-year.

On a reported basis, we delivered positive operating leverage of 5% year-over-year.

Excluding the impact of the lease impairments, our operating leverage was 7.4%, reflecting revenue growth of 10.1% and expense growth of 2.7%.

The net interest income of $1.03 billion increased 2% linked quarter, driven by loan growth of 1%.

Our net interest margin increased 1 basis point linked quarter and 13 basis points year-over-year.

We will spend more time on the margin in a few minutes.

Noninterest income of $370 million declined $9 million on a reported basis but was up modestly before the impact of these impairments.

On a year-over-year basis, noninterest income was up 4% or 7% on an underlying basis.

For the second quarter, on a reported basis, our efficiency ratio came in at 61.9%, but this was impacted by the lease impairments.

On an underlying basis, the efficiency ratio improved 132 basis points to 60.4% and 435 basis points year-on-year.

We delivered second quarter ROTCE of 9.6%, which was relatively stable with first quarter but increased from 9% on an underlying basis and from 7.3% year-over-year.

These strong results reflect continued execution of our strategic initiatives and our commitment to driving revenue growth while maintaining operating expense discipline.

As you know, we are always looking to find ways to run the bank better and leverage the potential of our franchise.

In a few minutes, I'll walk you through the next phase of our TOP program, which will contribute to further efficiency and revenue opportunities for us while funding investments to drive future growth.

Taking a deeper look into NII and NIM on slides 5 and 6. We continued to deliver strong balance sheet growth, which helped us drive a 2% increase in NII for the quarter.

We grew average loans 1% linked quarter and 6% year-over-year, and I'll provide some additional detail on the growth in a few minutes, including the impacts of our balance sheet optimization efforts.

Net interest margin improved 1 basis point linked quarter and 13 basis points year-over-year, which reflects the nice improvement in loan growth given the pickup in short rates and the benefit of our balance sheet optimization efforts, which are improving the mix of our portfolio towards higher-return categories.

These benefits were partially offset by a 2 basis point drag tied to increased securities premium amortization as the average 10-year yield decreased by about 20 basis points linked quarter.

We also saw an increase in funding costs this quarter.

We issued $1.5 billion in senior debt in May, given very attractive market conditions, which was a bigger and earlier issuance than planned.

Deposit costs were higher, reflecting a rise in short-term -- short rates and the impact of seasonally lower DDA balances.

Note that we grew period-end deposits by over 1% in the second quarter and the spot LDR declined modestly to 96.6%.

Turning to fees on Slide 7. Noninterest income was down 2% linked quarter, including an $11 million impact from the lease impairments recorded in other income.

Excluding the impairment, linked quarter fees were up slightly, driven by another record quarter in Capital Markets due to continued momentum as we leveraged the investments we've made in talent and broadening our capabilities.

Markets continued to be strong in the second quarter, which helped drive robust activity in loan syndication.

We grew loan syndication fees 23% as we increased the number of lead or joint lead transactions by 34%.

We also saw record mortgage banking fees, which were up 30%, reflecting higher origination volumes and loan sale gains.

Linked quarter service charges were up from a seasonally lower first quarter.

Letter of credit and loan fees increased 7%, driven by an increase in commercial loan prepayment fees.

Most remaining fee categories were stable in the quarter.

On a year-over-year basis, we delivered very good noninterest income growth of $26 million or 7% on an underlying basis.

We were pleased by strong contributions by the -- from the Capital Markets business, given our outstanding capabilities, and from mortgage banking, which benefited from higher production fees.

We also some momentum in card fees, which reflected the benefit of revised contract terms for processing fees, which commenced in the first quarter, along with higher purchase volume.

Turning to expenses on Slide 8. We saw a $10 million increase in linked quarter expenses, which includes a $15 million impact from the lease impairments recorded in other expense.

Before these charges, expenses were down $5 million primarily due to a seasonal decrease in salaries and benefits.

Occupancy costs were also slightly lower as costs associated with our branch rationalization efforts and seasonal maintenance costs were higher in the first quarter.

Outside services costs were $5 million higher as a result of an increase in consumer loan origination and servicing costs.

Year-on-year expenses increased 4%, including higher other expense, driven by the $15 million in lease impairments, but were up 3% excluding this charge.

Salaries and benefits expenses were stable as the benefited of the change in the timing of incentive payments for the first quarter this year offset an increase in compensation and the impact of strategic hiring.

We continue to look for ways to self-fund our growth initiatives and are doing a good job of finding efficiencies and staying disciplined.

Let's move on and discuss the balance sheet.

On Slide 9, so you can see we continue to grow our balance sheet and expand our NIM.

Overall, we grew average loans 1% linked quarter and 6% year-over-year, driven by strength across most of our commercial business lines and in education, mortgage and unsecured retail on the consumer side.

The growth in commercial loans was partially offset by the sale of $596 million of lower-return commercial loans and leases near the end of the quarter associated with our balance sheet optimization initiatives.

Our period-end loan growth would have been 1.4%, excluding the impact of the sale, in line with our guidance.

As I mentioned, NIM was up 1 basis point in the quarter and 13 basis points year-over-year.

Our loan yields continued to improve given our balance sheet optimization efforts, along with continued discipline on pricing.

We also benefited from higher LIBOR rates during the quarter.

We remain well positioned to capitalize on the rising rate environment, with assets that contribute to a gradual rise in rates at 5.5% versus 6% last quarter.

Our asset sensitivity is naturally moderated given the rising rate environment.

On pages 10 and 11, we provide more detail on the loan growth in consumer and commercial.

In consumer, 7% average year-over-year growth was led by continued expansion in residential mortgages, education and other unsecured retail loans, which continued to be driven by our product financing partnerships and our personal unsecured products.

We also seeing ongoing benefits from our focus on enhancing our portfolio mix by driving growth in higher-return categories.

As I mentioned on the last call, we are slowing growth in auto, and that should continue in the second half of the year.

As a result of these efforts, in addition to higher rates, we've expanded consumer portfolio yields by 12 basis points in the quarter and 30 basis points year-over-year.

We also saw nice growth in commercial with average loans increasing 6% year-over-year, where we continue to execute well in Commercial Real Estate, Mid-corporate and Middle Market, Industry Verticals and Franchise Finance.

The increase in rates and enhanced rigor around product portfolio return have helped drive a 16 basis point improvement in yields linked quarter and a 52 basis point increase year-over-year.

On Page 12, looking at the funding side, we saw a 7 basis point increase in our total funding costs, driven by an increase in deposit costs, which included the impact of seasonally lower DDA and the impact of a $1.5 billion senior debt issuance.

Year-over-year, our cost of funds were up 14 basis points, reflecting a continued shift to greater long-term funding, along with the impact of higher rates.

This compares with asset yield expansion of 27 basis points.

Next, let's move to Slide 13 and cover credit.

Overall credit quality continues to be excellent, reflecting the continued mix shift towards high-quality, lower-risk retail loans, paired with growth in the larger company segment of our commercial book.

The nonperforming loan ratio has decreased 3 basis points to 94 basis points of loans and improved from 101 basis points a year ago.

The net charge-off rate decreased to 28 basis points from 33 basis points in 1Q.

Retail net charge-offs improved modestly from the first quarter while our commercial net charge-offs were lower by $500 (sic) [$5 million].

Provision for credit losses of $70 million was $5 million less than charge-offs.

This was a decrease of $26 million from first quarter levels.

However, including the lease impairments, total credit-related costs were stable at $96 million.

As we increase the mix of higher-quality retail portfolios in our overall loan book, our allowance for total loans and leases ratio has come in at 1.12% while the NPL coverage ratio has remained relatively stable at 119%.

This also reflects continued runoff in the non-core portfolio.

On Slide 14, you can see that we continue to maintain a strong capital and liquidity position.

We ended the quarter with a CET1 ratio of 11.2%.

This quarter, as part of our 2016 CCAR plan, we repurchased 3.7 million shares and returned over $200 million to shareholders, including dividends.

It's also worth noting the total amount returned to shareholders in the 2016 CCAR window was $957 million, including dividends.

As you know, we received a non-objection to our 2017 CCAR Capital Plan, which includes up to $850 million in share repurchases.

We announced an increase in our dividend today by 29% to $0.18 per share, and we also have the ability to increase the quarterly dividend again to $0.22 per share in early 2018.

On Slide 15, we show the benefits from executing against our strategic initiatives.

We are intensely focused on developing strong customer relationships and growing the franchise in a profitable and sustainable way.

In the consumer business, we're committed to building stronger relationships with our customers and through our tailored advice product strategies, along with enhancing our distribution network and digital offerings.

These investments are well aligned with our wealth efforts as we also continue to enhance our adviser capabilities and build out our mass affluent and affluent value propositions.

We continue to drive attractive loan growth across a number of areas, such as in our education refinance loan product, which has attractive risk-adjusted return.

As we optimize the balance sheet, we continue to reduce the auto portfolio in order to enhance returns.

In wealth, we saw a nice lift in fees year-over-year, with total investment sales up 14% linked quarter and 27% year-over-year.

We continue to make progress on a year-over-year basis in shifting the mix of our sales towards more fee-based business, which came in at 38%, up from 20% in 2Q '16.

In addition, our FC headcount is up 12% year-over-year, which is contributing towards the scaling of the business.

And in mortgage, we continue to make progress, including our secondary originations, which were up 14% year-on-year, an increase as a percentage of total originations from 33% to 38%.

In commercial, our expanded capabilities helped deliver another record quarter in Capital Markets, as we continued to leverage the investments we've made in broadening our capabilities.

Treasury Solutions is on the right track with fee income growth of 8% year-over-year, with strong momentum in our commercial card program.

Mid-corporate and Middle Market have benefited from our initiatives to deepen customer relationships, with loan balances increasing 4% and deposits up 11% year-on-year.

We have seen strong balance sheet growth in our expansion markets and more modest growth in established markets.

Moving on to Slide 16.

the TOP programs have successfully delivered efficiencies that have allowed us to self-fund investments to improve our platforms and product offerings.

In 2015, our TOP II program delivered $105 million in annual pretax benefits across our revenue and expense initiatives.

We have largely completed the actions needed for the TOP III program, which launched in mid-2016 and is expected to deliver run rate benefit of approximately $110 million by the end of 2017.

Slide 17 has the details on our TOP IV program, which is a further example of our commitment to continuous improvement in delivering value to our shareholders.

Through a combination of initiatives to enhance revenues and realize efficiencies, we are targeting a run rate pretax benefit of $90 million to $155 million -- $105 million in 2018.

On the revenue side, we are focused on building new channels primarily through enhancing our digital capabilities and building out our direct-to-consumer mortgage program and leveraging our call center to offer solutions to our customers.

We also plan to add corporate partners in installment lending, expand C&I lending in the Southeast and expand our commercial real estate offerings.

We will also continue to build out our fee generation capabilities in the mortgage business and securitization capabilities to serve commercial clients.

On the efficiency side, we will continue to focus on simplifying our organization, leveraging centers of excellence and rationalizing roles and responsibilities throughout the bank.

We'll take a hard look at reengineering key processes to leverage automation and become more efficient.

We will optimize our technology infrastructure and streamline our network support.

The management team is committed to realizing the full benefits of our TOP program to serve our customers better, make the company stronger and deliver long-term value to our shareholders.

On Slide 18, you can see the steady and impressive progress we are making against our financial targets.

Since 3Q '13, our ROTCE has improved from 4.3% to 9.6%.

Our efficiency ratio has improved by 6 percentage points over that same time frame from 68% to 61.9%, or by 8 percentage points to 60.4% on an underlying basis.

Our EPS continues on a very strong trajectory as well, more than doubling to $0.63 from $0.26.

This rate of growth and improvement continues to outperform peers over the period, but we realize we still have work to do.

Let's turn to our third quarter outlook on Slide 19.

We expect to produce linked quarter average loan growth of around 1%.

We also expect net interest margins to continue to expand by about 3 basis points linked quarter, given continued improvement in our earning asset yields and improved funding mix.

We continue to project full year loan growth to be within the 5.5% to 7% full year guidance range.

In noninterest income, we are expecting to see a modest decrease given seasonal factors such as the strong second quarter results in Capital Markets.

We expect expenses to increase slightly in the third quarter, with a relatively stable efficiency ratio.

Additionally, we expect provision expense to be higher in a likely range of $85 million to $95 million, with a modest increase in net charge-offs.

And finally, we expect to manage our CET1 ratio to around 11% and expect the average LDR to be around 98%.

With regards to the full year 2017 outlook, we expect to come in above the high end of the range for NII and operating leverage and below the range on provision and within the range for loan growth.

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

Well, thanks, John.

On Slide 20, we've included our updated vision, brand and credo statements.

We are turning the corner, moving out of our turnaround phase and shifting gears to focus on what it takes to be a truly top-performing bank.

The key to sustainable success is to stay focused on our customers and colleagues to bring out their best.

On Slide 21, we lay out what will distinguish us in a crowded banking landscape: a strong culture focused on the customer, a commitment to financial discipline and achieving excellent capabilities in key areas.

And on Slide 22, we make the case that there's plenty of fuel left in the tank to propel our ROTCE higher.

The same levers that propelled us from roughly 4% ROTCE to 10% are still in place, and the management team has a proven track record of execution.

To sum up, on Slide 23, our strong results this quarter demonstrate our ability to execute against our strategic initiatives and continue to improve in how we run the back to drive underlying revenue growth and carefully manage our expense base.

Our outlook remains positive as we work to becoming a top-performing regional bank.

So with that, John, let's open it up and we'll take some questions.

(Operator Instructions) Your first question comes from the line of Erika Najarian with Bank of America Merrill Lynch.

My first question is on future capital return.

Clearly, the announcement out of the 2017 CCAR was very strong, and you have stronger loan growth than peers.

That being said, the 11% target for the end of third quarter on CET1 seems robust still relative to your risk profile and size.

And I'm wondering, as we look further out over the next 2 or 3 years, should we expect your capital -- total payout to continue to grow?

And Bruce, maybe give some insight on how you're thinking about dividends versus buybacks in future CCARs.

Yes, sure.

So what we've been progressing through time since separation from RBS is what I'd refer to as the glide path of normalizing our capital ratios.

And this year, we gave guidance range that we'd likely end at 10.7% to 10.9%, down from roughly 11.2% when the year started.

I still think we'll achieve that, so we're on track to come in within that range.

And I think we can continue to follow our glide path down in subsequent CCARs in this -- in the second half of this CCAR cycle, i.e., the first half of 2018, and then in future CCAR cycles.

So our view is that we so far have been a bit prudent as a new company, keep a little bit of a capital buffer, give us flexibility to both grow loans and return a good level of capital to shareholders, and we can continue to do that into another cycle or 2. There's no reason at the end of the day that our -- we should have to sustain that buffer.

Our loss profile -- credit loss profile, we're below the median versus peers, so I think we have a good level of discipline and risk appetite, and we certainly can manage down towards the median level of peers.

And I think what you're hearing from peers is they don't like to be lower as well.

So we're following them down.

And if they continue to move down, then we can continue to move even further.

So with respect to dividends versus capital, I think we have always viewed it important to have a good dividend on the stock and have a good yield.

And now that, that appears to have no longer a bright line at 30% payout ratios, we're going to start moving ahead of that, and I think we have confidence in our earnings trajectory that we can continue to raise that dividend and raise it at a good clip and be able to sustain that dividend and take it even higher.

So that's really important to us.

We also will continue to repurchase shares.

I think that $850 million is up meaningfully from what we've repurchased last year.

So as earnings grow and our capital generation grows, it gives us the flexibility to kind of have our cake and eat it, too.

We can raise the dividend, we can buy back stock and we can grow loans.

I don't know, John, if you wanted to add anything to that?

No, I'd just say that the -- with respect to the buybacks, I think that we're feeling very strong about that outlook.

And I think that the one thing we're trying to do is to balance our opportunities to deploy capital internally against returning that to shareholders, and I think we'll have a really nice opportunity to do that going forward.

Okay.

That was clear.

Just as a follow-up question, given your more robust loan growth prospects than peers, and you're also mentioning your TOP IV initiative, expanding commercial lending in the Southeast, in light of a 97% LDR, how should we think about your deposit gathering strategies from here?

Really, how do you -- how should we think about pricing from here in terms of trying to keep up the pace of loan growth and deposit growth and whether or not buying deposits further down the line is part of the plan?

I'll start, and then, John, you can chime in.

But I think we've done a good job of sustaining good deposit growth that's kept pace with the loan growth.

So obviously, when we sold the Chicago franchise, we took the LDR from roughly 93% up to 98%.

And now, basically, we're -- we've been on a treadmill where when we grow loans, we grow deposits at a similar clip.

Where we've focused has been on the commercial side where -- when the -- RBS ran into difficulty and we ran the balance sheet down, we ran off a lot of the commercial deposit base.

And so we've been now on a mission to go out and get the operating counts and grow interest-bearing deposits on the commercial side.

I'm pleased to see that this quarter -- by quarter-end on a spot basis, their LDR was below 160%.

It had been as high as 250% at one point.

So I think there's still more room to run in terms of leveling that out and maybe ultimately getting that commercial LDR in a 140% to 150% range, which I think is broadly where our peers are.

So we have that going on the consumer side, continuing to focus on better tools, better data analytics and the customers so we can make more tailored offers and we can bring in incremental funds that our customers have away from us that we'd like to bring onboard into the bank.

And I think we can find ways to do that cost effectively without raising the overall cost of our back book.

So those are some of the initiatives that we'll continue.

But I think we've demonstrated a good track record of being able to manage in a basis of kind of high 90s, 97% to 99%.

I think over time, we'd like to bring that down a bit, maybe 95% to 97%, but we're very comfortable with where we are.

Our LCR is really, really strong, so the fact that we have so many consumer deposits and we've termed out a lot of our wholesale borrowings with the senior debt issuance and terming out some of our FHLB advances, we have a very strong overall funding profile.

John, you want to add to that?

Yes, just a little bit more.

I think the growth in our deposits is tracking in line with our expectations.

We're optimizing our balance sheet across businesses targeting higher-value customer segments and looking at longer-term growth in checking and cash management businesses.

And on that last piece on the commercial side, while we're seeing some growth, we've made some investments in our technology, the platform, and we think that's going to pay us some nice growth on the deposit side going forward.

And one other point.

We've been able to deploy these deposits at very attractive returns.

And that's double digits, well above cost of capital.

And so we feel very good about where these deposits are getting deployed given our unique opportunities on the asset side.

Yes.

And just to your last point there, Erika, I don't think we're in the market or in the hunt to go out and buy deposits.

I think -- we think we can grow them.

We'd probably look at a digital strategy to gain some additional deposits before we go out and actually go purchase deposits.

You're next question comes the line of Matt O' Connor with Deutsche Bank.

I was hoping you'll kind of elaborate a little bit on the outlook for about a 3 basis point increase in the NIM.

On the one hand, it's a little bit better than I think most peers are pointing to, but it's also coming off of a second quarter NIM that was up only 1 basis point.

And obviously, you're one of the more asset-sensitive banks, and I think in your prepared remarks, you mentioned there is an increased drive from the bond premium amortization in the 2Q run rate.

So just kind of putting all the pieces together, if we look at the 2-quarter progression of NIM, I guess I would have thought so maybe a little bit more expansion given the positioning of your balance sheet.

Yes, maybe I'll start briefly.

And then, John, I know you can handle this one.

But our -- what I would say is the -- there were some idiosyncratic factors in Q2 that muted the increase that we expected to see.

The first one was that not only did we not get a parallel shift when the Fed moved, which can dampen the full benefit of your position, your asset-sensitive positon, we actually saw a flattener, so the 10-year on average was down 20 basis points during the quarter.

So that was a drag that was not anticipated, and that creates the securities premium amortization.

And that roughly had a 2 basis point impact upon the NIM.

And John, you can talk about third quarter, but in brief, the -- we would not expect to see the 10-year move dramatically.

It'll be range bound.

So we're not relying on a rebound in order to get the 3 basis point lift.

So the hit happened in Q2 was actually upside beyond the 3 basis points in Q3 if you saw a reflation of the back end of the curve, just to be clear on that point.

The other thing that was idiosyncratic to us was that we went out and issued $1.5 billion in senior debt.

And we had anticipated an issuing size of about half that, but as you're seeing, it's been very conducive in the market when rates have come down to go out and issue and lock in spreads and attractive financing terms.

So we upsized and we went earlier than we had anticipated, which I think is the right thing to do.

Again, it's -- that locks in -- it was a bit opportunistic, but it locks in a very good piece of debt in our funding structure that will benefit us many quarters into the future.

So we can take a basis point there on the chin for being opportunistic, and you should feel fine about that.

So that will not recur in Q3 either.

So that's why when you look at the things that hit us a little bit in Q2, we would not expect to see those things hit us in Q3.

And we should get the full quarterly run rate benefit of the Fed hike, which came relatively late in the second quarter.

John, over to you.

Yes.

So on Q2, I think you covered it, Bruce, I would just say to reiterate the point, we've been very -- the 2 points were related.

The securities premium amortization, we had a -- both the 5-year and the 10-year were down close to 20 basis points quarter-over-quarter, and that led to a desired upside that made that offering.

So as you mentioned, those are related.

So -- and when you look out to 3Q, couple of points I'd make there.

I think you made the point that we're not relying on increases in the 5- and 10-year in order to support that outlook.

So I think that's important to note.

We're just be indicating that the actions of that drag is what we're expecting given that we the think more of a range down view.

And then the other point I'd hasten to add is loan yields are expected to expand similar to the second quarter.

We had strong loan yield expansion in the first and in the second quarter.

We're expecting to see that in the third quarter.

The June hike, of course, we'll see that fully layer itself in the C&I book.

But I'd also mention the fact that we're going to see the full quarter effect of the March hike on our large HELOC portfolio.

As some of you may know, we only get 2 months of benefit in the second quarter with that portfolio, and we're going to get a full 3 months in the third quarter.

So those are the reasons I'd highlight as to why we feel good about our guidance for 3Q.

Your next question comes the line of Ken Zerbe with Morgan Stanley.

I guess 2 questions in particular.

One of your peers was BB&T, but they now serve -- that they had asked the Fed for an accelerated buyback earlier than sort of now over the average of the year.

When you asked the Fed for approval to buy back shares, did you put in any kind of acceleration that more buybacks would be done in the first half?

Or did you spread it equally over the course of the year?

Well, we typically haven't called exactly how we've staged that, Ken.

But generally speaking, we've been pretty much averaging on that.

We will take advantage of ASRs during the quarter to get a bump by taking those shares out at day 1 of a quarter.

So we've been doing that.

If we wanted to accelerate, we would have to make a new request to do that.

Got it.

Okay, that helps.

And then second question.

Just in terms of provision expense, obviously good quarter this quarter.

Your guidance is better than what I was expecting for next quarter.

But when we look out to, say, fourth quarter, first quarter of next year, is the factors, the underlying drivers of improvement in credit quality, is it enough to keep provision expense/reserve release happening over the next several quarters?

Or is there a point where provision does start to tick up, all things equal?

Well, I think we've -- going into this year, we had roughly, if my memory serves me, $325 million or $330 million of charge-offs -- of provision last year.

And coming into this year, we took that up to potentially -- I think maybe it was around $425 million to $450 million or something, to $475 million.

So our expectation was that as we continue to grow loans, we'd need to be building our provision and that the commercial business, which had very, very low level of charge-offs, would start to normalize.

We called out today that we think for the year, we'll certainly be well below the left goal post of that range.

You can see what we're tracking to.

And I think the reasons for that, one is that our commercial has still stayed relatively pristine.

We don't see any material trouble spots or migration areas.

You can always get hit with a so-called Scud missile, but we hope you don't see any of those.

But in any case, commercial outlook continues to be good.

And then on the consumer side, the kind of assets, the high-quality assets that we're putting on in those portfolios continues to keep us in very good standing over there, and delinquencies look really good as well.

So I'd say the trend -- our expectation is it'll continue to be favorable until it's not, I guess, so, we'll -- we should start to see some gradual rebuilding of those levels over time.

Stay tuned for the guidance for next year.

But in terms of this year, we still are pretty optimistic about both Q3 and then the Q4 outlook.

I don't know if anybody here wants to chime in.

John?

No, I just -- I think that's exactly right.

I mean, we've got a very good process now that we call through the portfolio and have a lot of early warning signals.

So we can see out a few quarters in terms of general trends in the portfolio.

And as we do continue to participate and grow in this market, we're staying -- we'll try to stay very disciplined from a new originations standpoint, bearing in mind that the markets are very aggressive right now, so.

And Brad, you said -- maybe you could comment.

You've had the runoff of some legacy core assets, which is -- we're getting some recoveries there.

And that's helping, and it creates some room for you to grow some of your...

Exactly.

And as you said, Bruce, the stability of the assets that we're putting on remains very good.

Delinquencies look strong.

We had given a little bit more detailed guidance a few months back about what our range of losses would look like over the next -- through the next 1.5 years or so, and we remain very confident in the guidance that we gave there.

All the trends remain right in line with what we've talked about.

Your next question comes from Gerard Cassidy with RBC Capital Markets.

Bruce, you mentioned your desire to become a top-performing bank, and you gave us, I think it was on Slide 20 and 21, some of the internal cultural issues that you guys are focused on.

Can you share with us what some of the financial metrics will be that you're looking at to be -- to achieve this top-performing status?

And when do you think you might be able to reach those metrics?

Yes.

So I think it's a little premature, Gerard, to tell you what the next set of metrics are.

I want to achieve the ones that we've set out to achieve when we went on the IPO journey.

And we're getting damn close, so that feels quite good.

But stay tuned.

I think we will, in due course, be raising -- putting out the ROTCE target, obviously, efficiency ratio, ROA.

Those are the measures that investors look for.

And I think, as we've said, we have plenty of fuel in the tank to continue to execute our strategy.

What's worked for us going from 4% to roughly 10% should work for us going forward, and we should -- we have plenty of capital to put to work to grow the balance sheet, reduce the share count.

I think we've been investing in these key businesses to broaden our capabilities and figure out how to deepen relationships with our customers whether they're on the commercial side or the consumer side.

We're starting to see some benefits flow from those investments, which has been great to see.

And I think we have a real fanatical commitment to positive operating leverage in terms of trying to find ways to run this bank more efficiently and more effectively, serving customers better at a lower cost point, and we'll continue with that.

So if we can continue to pull those levers, I think it won't be too long, but we'll be able to put out a new set of goal posts.

Very good.

And then, John, you mentioned -- or on Slide 29, I should say, you guys show the interest rate sensitivity trend, and you highlighted here that as rates goes up, the asset sensitivity has naturally migrated to about 5.5%.

As you look out over the next 12 months, where should we see that trend progress to?

Yes, good question.

I mean, we like where we are right now.

I think that we plan to remain an asset-sensitive bank, and we plan trying to keep that upside potential and gas in the tank, as you heard from Bruce earlier, hoping for that pressure over the interest rate tightening cycle, which is pretty natural.

But like I said, we'll continue to -- we don't have an outlook for exactly what that will be, but we expect to maintain a strong asset-sensitive position over time and continue to participate in the upside on the rate tightening cycle.

And one thing you can note, Gerard, is that I think we were at about 6% and you've had 2 hikes since then.

And we've now -- are positioned at about 5.5% to the gradual rise -- 200 rise scenario.

So I think that'll give you an indication that just naturally, as you get deeper into the hike cycle, that sensitivity starts to fall.

So we're not fighting that.

We're just kind of letting that drift down.

But relative to peers, we're still one of the more asset-sensitive banks.

You're next question comes on the line of John Pancari with Evercore.

On the expense side, just given know that you've layered on the TOP IV program and on top of the progress you've made on TOP III and all that stuff, I wanted to see if you can give us some color on what that means for the positive operating leverage outlook for when you look at '18.

And maybe another way to put it, what type of efficiency ratio can we expect for '18 as they start to get layered in?

Just trying to get an idea where we're going with this when it hits the numbers.

Yes, it's a little early to give the '18 guidance.

I think what we've seen from these TOP programs historically is we're pushing that operating leverage to a 3% to 5% guidance range.

I think if you went back a couple of years ago, it's probably 2% to 4%.

So it's helpful in that -- in continuing to sustain a good level of positive operating leverage.

So I'd probably leave it there for now.

We're not ready to give 2018 guidance, but it's certainly helpful to enhance modestly and sustain the operating leverage outlook.

It also creates funding capacity for us to reinvest in the businesses, to go out and hire more corporate bankers and mortgage loan officers and wealth advisers and invest in some great, new technology offerings in digital and data analytics and the things that we're doing.

So it's incredibly helpful.

And I think what you've seen is that we don't just consume it with other expenses and investments, we've actually been able to be disciplined and let some of that flow through to the bottom line and keep the parts of operating leverage close to the top of our peer group on a consistent basis.

Okay, all right.

And then separately, just on credit.

And I'm sorry if you provided some detail already, but I know you mentioned that your trends are intact on the consumer side.

More specifically, in terms of the auto trends, clearly we see the stress that the industry is going through and the severity implication of the lower used car values and all that.

I wanted to get your updated thoughts on how you're trending there on the loss -- I mean, on the credit side within the auto book.

And then separately also on credit, I know you mentioned what -- that your percentage of the lead arranger status you have with your Shared National Credit is up.

What is that as a percentage of your total Shared National Credit book as of today?

I'll let Brad go first; and Don, you can follow.

And John, feel free to chime in.

Yes.

So in auto, let me roll back a little bit and remind that we will expand the credit of the -- to get the better risk-adjusted yields or returns in auto.

So we have seen the auto...

And we're just really super prime.

We're super prime, and we...

And then we moved into the prime.

Exactly.

So you're seeing that migration.

And I don't think anything's out of bounds from what...

And it's exactly where I was going.

You're seeing that migration.

You're seeing a little bit of losses come up exactly the way we had projected it.

And the losses are moving right in line with what we had...

And it's important to note that -- the flip side of that is higher yield on the book.

Exactly, higher yield on the book.

And so, I mean, look at the trends.

I mean, certainly, we're seeing a little bit of reduction in used car values but very much in line with what we had projected.

We talked about that the last quarter in terms of making an adjustment to our provision for that expectation.

That's turning very much in line.

And in fact, what I would say we saw this quarter, the used car values stabilized.

So that was a good sign for us.

So...

The other thing, Brad, that you might point out is, many of the autos that we're financing are in favorable subsegments of the market.

Correct.

Correct.

So we're highly concentrated in pickup trucks and SUVs, which have had -- which have performed better in terms of used car value, and the projection of those assets -- or of those car classes are also better.

So again, I think I'll just go back to where we started, which is, we're very much in line with what our expectations were at the time that we priced the vintages.

We're seeing the trends move very much in line with our expectation, and there are really no areas of concern.

Great.

Any color on that, Joe (sic) [John]?

Yes, we're just -- the -- or like l said, the risk-adjusted returns by going into prime are quite attractive, and we feel good about deploying the capital in that space and like that balance between the super prime and prime.

So as Brad mentioned, no surprises on that front.

Okay.

Now, Don, on the...

Look, John, the -- on the SNC book, I really don't think about it in terms of what's the league position.

I think the league position, I don't have the exact number, is in the 20% range, if I had to guess, of course, the overall SNC portfolio.

But the important thing there is 2 things.

One is, on the origination side, you'll see in the Cap Markets space we're climbing the league tables very nicely.

So we're kind of top 5 in all the relevant league tables for Middle Market originations, which we're really pleased about, and we're leading many more deals on the Capital Markets side.

And then on the overall SNC book, the -- a real key to me is, are we earning an adequate return on each of those capital commitments?

So we have a very disciplined process as we deployed capital to make sure we think we can cross-sell and generate adequate returns on the capital deployment.

And as Bruce and John mentioned, we are going back to the book and, as part of our optimization program, exiting those credits where we're not making good progress in terms of building broad relationships.

And the important thing for me is, we're just, every quarter, adding incremental capabilities to be able to service the clients and operate in at a high-quality way.

And the acquisition of Western Reserve this quarter was an important addition to the arsenal in terms of being able to provide high-quality M&A advice.

(Operator Instructions) And next, we go to the line of David Eads with UBS.

When we look at the loan growth outlook, maybe if you could just give a little color on what you're hearing in terms of customer demand, I guess, particularly on the commercial side.

And then, is the outlook you guys are giving kind of expecting sort of the same dynamic where you have fairly steady growth both on the consumer and the commercial side?

Yes, I'll start and flip it to Don.

But I'd say we're pretty consistent with the outlook that we gave in Q2.

So we had kind of a 1.5% spot expectation, which we hit if you exclude the late-in-the-quarter loan sales.

And partially, that's a reflection of some of the uncertainties still down in Washington that -- we saw the boost in soft data after the election that people were hopeful that there's a Republican president and -- in the Congress and that we should be able to affect the pro-growth agenda, and it's been a long time in coming.

So that uncertainty, I still think, still keeps some of our customers on the commercial side a little reluctant to go full board and really take down lines that they have or generate some new momentum in terms of capital expenditures or some acquisitions.

So that's been, I think, the situation until it changes, and it looks like we'll go through Q3 in a similar position as what transpired in Q2.

I think the consumer generally has been healthy, and we've sought out areas where -- little pockets where we can be distinctive and find some risk-adjusted return areas like education, refinance loans and personal unsecured or installment partnerships that we have with Apple that have expanded now to Vivint and to HP.

So I feel good that the balance we've achieved with growth on the commercial side and the consumer side can continue.

But why don't I flip it to you both, John, for some quick color?

Yes, I completely agree with that.

We're seeing a lot of engagement with clients, but a lot of it is around refinancing.

So the net new money demand is still pretty tepid out there.

So I'd say about 50% of our -- of growth is probably net new money and 50% of our growth is refinancing of other banks' clients.

So we still -- we feel very good about what we're seeing on our origination pipeline.

We'd love to see a boom in cash-financed M&A, but we're not seeing it yet.

We're seeing private equity flow.

Really a lot of properties being passed back and forth between private equity firms, so that's not creating net new demand.

But we're able to capture more than our fair share.

I don't see any reason that that's going to change.

Part of our expansion efforts into the Southeast and growing New York metro and growing the Midwest, where we've had -- added a lot of bankers and new leadership in those markets will allow us to add net new clients, and that's what's going to drive the balance of our net new money growth, as we had looked forward (inaudible) stock.

Yes.

And we just brought in a new head of the health care industry in as well.

Brad?

I think you said it pretty well, Bruce.

I mean, on the small business side, probably a very similar story to Don, which is, the demand that is somewhat tepid.

But it's been that way for a while.

Obviously, the mortgage refinance activity is down just with the rate environment.

But in the other consumer areas, it's been relatively stable and strong demand.

As you've said, we carved out some nice niches that seemed to have quite a runway to them, and our view going forward is a relatively similar position.

Good.

Great.

And then just one on the securities book.

It looked like the end-of-period balances were down a little less than $1billion.

Your average was pretty much unchanged.

Was there any kind of repositioning?

Or anything going on there that we should be aware of going forward?

Yes, no repositioning here, just the same approach.

That approach is we look at that as a liquidity backstop and a way to moderate our interest rate risk profile.

And it drives where our LCR levels are, which are quite strong.

So nothing to (inaudible).

As far as maybe that we were holding some money out when rates were lower in terms of reinvesting the cash flows would probably be the only thing I'd highlight there.

There are no further questions in the queue.

And with that, I'll turn it over to Mr. Van Saun for closing remarks.

Okay.

Well, thanks again, everyone, for dialing in today.

We certainly appreciate your interest.

Again, we believe we're firing on all cylinders.

We'll continue to focus on disciplined execution of our plan.

Thank you, and have a good day.

Ladies and gentlemen, that concludes today's conference call.

Thank you for your participation.

You may now disconnect.