Citizens Financial Group, Inc. (CFG) Q1 2015 Earnings Report, Transcript and Summary

Good morning everyone. And welcome to the Citizens Financial Group First Quarter 2015 Earnings Conference Call. My name is Brad and I’ll be your operator today's one hour call. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this event is being recorded. Now, I’ll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin.

Thanks Brad. Good morning, everyone. Thanks so much for joining us today. We’ll kick things off this morning with a review of our first quarter results from our Chairman and CEO, Bruce Van Saun and our newly elected CFO, Eric Aboaf. And then we’ll open the call up for questions. Also joining us on this call today is Brad Conner, our Head of Consumer Banking. I’d like to remind everyone that in addition to today’s press release, we’ve also provided a presentation and financial supplement. And these materials are available at investor.citizensbank.com. I need to remind you that during the call, we may make forward-looking statements, which are subject to risks and uncertainties. Factors that may cause our actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release and quarterly supplements. Additionally, any information about any non-GAAP financial measures, including a reconciliation of those measures to GAAP measures, may also be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website. And with that I’ll hand it over to Bruce.

Well, thanks, Ellen. And good morning, everyone. I'd like to start off by offering a tip of the cap to John Fawcett who retires at the end of the month after serving us well for many years. And I welcome to Eric Aboaf, our new CFO who joined us for his first earnings call after being here for two and half weeks. Good news is Eric is quick study and I don't think will miss a beat. Turning to the quarter, we are off to a good start. I'd highlight the following. So we had solid financial results. We had a successful CCAR submission. We've recruited some terrific top team members. Eric is CFO and Don McCree, formerly of JPMorgan as our new Head of Commercial. We supported the successful follow on offering of RBS own stock, RBS' ownership is now down to 40.8%. And we are navigating through the challenges posed by the environment, and we are executing well against our strategic turnaround initiatives. So all in all as I said a good start. While we have a ways to go on a number of fronts to get the bank operating better, I am pleased overall with the steady and consistent progress that we are making. Our people are working hard, they are taking good care of our customers and they are executing well on our plans. I'll let Eric cover the financials in detail but I would offer first a few high level comments. First off, we are pleased that we delivered positive operating leverage on a year-over-year basis. This is the key to delivering improved results and we are committed to that. We are doing a good job of intelligently growing our balance sheet, though in a sustained low rate environment, it has been a challenge to keep our NIM broadly flat. In order to do that, we are very focused on adjusting our business mix and risk appetite modestly over time to raise our asset yields. In the first quarter, we saw a strong loan growth in commercial, in prime auto, in mortgages and in student lending particularly with our new refi product. We expect favorable trends here to continue over the course of the year. We've continued to benefit from favorable credit costs; we are doing a good job of shifting expenses to more productive uses, keeping overall levels broadly flat. Our investments in getting our fee based businesses to scale are advancing steadily. That said the benefits from these initiatives will play out gradually over time. Mortgage and cash management made good progress in the first quarter, while wealth had a little bit of tougher time. Lastly, I'd highlight that our balance sheet remains strong. We completed a $250 million buyback early in the second quarter and we have the capital and funding strategies in place to continue to grow loans at a good clip. With that let me turn it over to Eric.

Thank you, Bruce. And good morning, everyone. I am excited to join Bruce and Citizens' team to help deliver on the strategy and plan that have been laid out over the last few months. Citizens is fortunate to operate in attractive and growing markets, where it can play an important role in serving both consumer and commercial client. Of course execution is what really matters in banking. And my focus will be to help drive the business initiatives that will help accomplish our goals. Throughout my remarks, I'll refer to the slides in our investor presentation that you can find on our website. To begin let me take you through our first quarter financial on Page 3, which demonstrate a solid start to 2015. Our first quarter GAAP net income of $209 million was up $12 million, or 6% from the fourth quarter. And up $43 million, or $26% from the first quarter of 2014. Diluted earnings per share were $0.38, up $0.02 from the fourth quarter and $0.08 higher than first quarter of 2014. This was driven by our effort to drive revenue growth while actively managing expenses as well as by the continued favorable credit environment. Page 4 summarizes restructuring and other special items for this quarter associated with productivity initiatives that we launched as well as the separation cost from RBS. We recorded $10 million pretax charges this quarter. And while this came in lower than we originally expected. That really just reflects a bit of shift in timing out of the first quarter and into the second quarter. We still expect the same level of restructuring expense for the first half at $45 million to $50 million in total. I'll focus the rest of my comments this morning on the adjusted results, which exclude the impact of these items. Turning to Page 5, we posted strong operating results with net income of $215 million and EPS of $0.39, both of which were stable link quarter and up 30% from the previous year. I am going to cover number of items highlighted on this slide throughout my presentation. But let me mention three important themes. First, revenue was relatively stable linked quarter in-spite of the expected seasonal weakness. And they were up year-over-year as we more than replaced the foregone revenues from the Chicago branch sold last year. Second, expenses were flattish demonstrating the company's discipline as we drove efficiency saving while also reinvesting in a business. And third, credit was benign and was further benefited by a large recovery this quarter. We continue to make strives towards our goal with 10% return on tangible common equity as we generated a strong return on an adjusted basis of 6.7%, which was up nicely from the prior year. On Slide 6, we dive a little deeper into the results for the quarter. On a headline basis, we grew net interest income $28 million, or 3% over the prior year. But that was muted by the Chicago divesture which impacted NII by $30 million. So an underlying basis we grew NII by 5% which was driven by attractive earnings asset growth with improving mix and our continued efforts to defend the margin despite the impact on a low rate environment on our asset sensitive balance sheet. Over the course of the year we also grew earnings asset by 8%, or nearly $9 billion driven by strong performance in both consumer and commercial as we continue to better leverage our capital position and reenergize organic growth. Compared to the fourth quarter, net interest income was down as the impact of two fewer days and slightly higher funding cost was partially offset by continued loan growth and reduction in paid fixed swap cost. Our net interest margin this quarter held up relatively well particularly given the decrease in rate from year end. We saw a three basis point debt to 2.77% in comparison to the fourth quarter on a reported basis. As John Fawcett mentioned on last quarter's call, the fourth quarter margin include a two basis points of non-recurring items. We held loan yields flat on a linked quarter basis through a combination of pricing and mix which I will describe in more detail later. We've defended the margin recently well given the rates are below where we had expected them to be. In our outlook statement, we indicate that this defending the NIM objective will continue until we see rates rise hopefully soon. We did see a full quarter impact to prior borrowing cost so we continue to diverse by our funding base across multiple deposit category than client segment and added a full quarter of senior debt cost given that our issuance came in late in December. We continue to maintain a highly asset sensitive interest rate position, the impact of an actual rise in rate is consistent in the last quarter at approximately 7% in the first year. This is driven primarily by the short end of the curve. During the quarter, we modestly extended the duration on the securities portfolio as we sold 15 year agency pass through to purchase 20 year agency similar to our late third quarter transaction. Even with this trade, the average duration of the securities portfolio fell to 3.1 year at the end of March, down from 3.5 years at year end given the prepayment impact of the drop in long rates. This duration expansion trade resulted in a modest gain of $8 million. On Slide 7, we will cover noninterest income which is an important area of focus for us as we are determined to shift our revenue profile over time. We generated $8 million increase linked quarter in noninterest income which was driven by gains related to the sales conforming mortgages and the previously mentioned repositioning of our securities portfolio, which offset the seasonally lower results and other service charges and fee categories. Year-over-year noninterest income decreased $11 million from the first quarter of 2014. So this reflected the drag from the Chicago divesture of $12 million in fee income. We also posted a $17 million reduction in securities gain, so on an underlying basis we generated noninterest income growth of approximately 5%, with particular momentum in mortgage banking service charges and capital market. Let me take you through each of the fee areas and describe what we are seeing on a year-over-year basis and how our initiatives are gaining some traction. The largest area is service charges where we are seeing approximately 2% year-over-year increase in charges and fees once we have done for the Chicago sale as our new checking product helps drive increase account and household growth. Card fees were relatively stable after accounting for Chicago but we are in the midst of some new card launches that we expect to help drive usage through a more attractive rewards program. Trust and investment services fees was somewhat muted but we continue to grow license bankers and add to our wealth advisors as part of our initiatives. On the mortgage banking front we generated $33 million revenue this quarter including a $10 million gain on sales of conforming mortgage which were previously held in portfolio. Outside of the gain, we were pleased with our mortgage results. We generated nearly 60% underlying increase in our mortgage banking revenue from first quarter of last year as origination volumes were up 87%. We also continue to gain market share. In capital markets, our continued efforts to build out the platform and enhance our loan syndication efforts are paying dividend as we grew fees in this category by 22%. And similarly FX and interest rate products which are often tied to new loans and loans syndications were 5% year-over-year. Moving on to noninterest expense on Slide 8. We are intensely focused on driving continued improvement in the efficiency of franchise. Our goal is to generate strong operating leverage by actively managing our expense base while continuing to invest across the franchise to enhance both our distribution and product capabilities, as well as fund our important regulatory work. Our adjusted operating expenses of $800 million this quarter reflected seasonally higher payroll taxes and increased incentive expense which drove salary and employee benefits up from the fourth quarter. We also saw a decline in outside services which were down from elevated fourth quarter level and included benefit from our efficiency initiatives. Year-over-year, adjusted expense was down slightly due to the $21 million Chicago impact, a variety of other expense initiatives that impacted multiple areas, occupancy, equipment, outside services and so forth, offset by active investment in a number of revenue focused initiatives. So net-net on a year-over-year basis we kept our operating expenses flat despite increased investments to grow our sales force and invest in products and technology. We achieve an adjusted efficiency ratio of 68% which was relatively stable with first quarter of 2014, but improved from the same period last year. Obviously, this will continue to be an area of focus for us. Now turning to the consolidated average balance sheet on Slide 9. Our total earnings assets of $121.3 billion were up 2% from last quarter and 8% from the first quarter of 2014, driven by the benefit of our growth initiatives. In consumer, we generated strong growth in auto, mortgage and student over the prior year. Commercial growth has been broad based with virtually all of our businesses posting solid growth. And the profit continues to grow with average deposits in the first quarter increasing by $800 million, or 1% over the fourth quarter. Over the last year organic deposit growth was worth approximately $9.3 billion or 11%, more than offsetting the impact of the Chicago divesture which was worth $5.2 billion. As one of my first areas of focus as CFO, I plan to dig into loan, deposits and the NIM equation. On first look, we are managing this well but I want to say we can do even better. On Page 10, compared to the previous quarter, consumer banking loan increased nearly $900 million, or 2% as we continue to ramp our own organic origination in auto, mortgage and student. The growth in mortgage is net of the conforming portfolio sale which I mentioned earlier. We also continue to focus on improving the underlying mix of the consumer portfolio in order to boost yields and offset the impact of low rate. This quarter we continued to be satisfied with the good growth in our auto business as we've been able to drive both balance and yield upward in our organic book. As a result, we've decided to target SCUSA volume at about $1.5 billion for 2015. We believe that strong demand for our student loan refinance product and our own auto origination will offset the lower purchases. We also made a tuck-in student loan portfolio acquisition in Q1 for the effective yield and return characteristic. On Slide 11, commercial loan increased by $1.3 billion, or 3% sequentially on strength in industry vertical, middle market, mid corporate and commercial real estate not withstanding continued aggressive competition. Yield cut down a few bits and is obviously an area where we are trying to balance pricing fees and returns. Slide 12 focuses on the liability side of the balance sheet and our funding cost. We grew the combination of checking, savings and money market balances which comprise the bottom two categories by approximately 10% this year or $5.5 billion despite the impact of the Chicago divesture. We supplemented this growth with some term deposits as well as a mix of FHLB and senior debt to further diversify our funding sources. On Slide 13, you can see that our credit quality continues to be strong with net charge-off at $4 million. Our provision expense came in lower this quarter at $58 million. This includes $15 million recovery from a single large commercial real estate credit. But even outside that we continue to see relatively lower levels of gross charge-offs across rest of the book despite continued loan growth. We also continue to benefit from the run-off in the non-core book. This was down nearly$200 million in the quarter to a balance of $1.9 billion. Turning to Slide 14, our capital position remains robust. This quarter we began reporting on our Basel III basis this part of the new regulatory capital rules for bank our size with the CET1 ratio of 12.2% which is well above our regional peers. We are above our LCR requirement and our LDR have been relatively consistent. Post the quarter end in early April, we executed a $250 million preferred issuance and repurchase shares from RBS which on a pro forma basis would impact our CET1 ratio by 23 bip. On Slide 15, we summarize many of our accomplishments and reemphasize our objective of becoming a top performing regional bank. On Slide 16, we played out the key initiatives in our turnaround plan and have progressed during the quarter. And what the outlook holds for the remainder of 2015. We feel the program remains broadly on track. Heightened watch areas continued to be the initiatives where we are hiring in significant numbers or growing market share. We will continue to monitor and report on this for you and we can obviously discuss the more in detail during the Q&A. On Page 17, we summarize some of our key financial target and our progress year-over-year. Our end 2016 target are predicated on a rising rate. That said we continue to develop additional revenue and expense initiatives to help offset any lag that may occur. We may have more color on this by next quarter's call. Now turning to Slide 20, let me summarize some of what you can expect next quarter. But all in the context for the full year outlook that we previously provided. We expect to have linked quarter loan growth that is consistent with the prior two quarters. So 1.5% to 2% with a net interest margin that remains relatively stable from this quarter, so we expect to see continued pressure from low rate, visible needs to defend against. We would expect to generate positive operating leverage of a seasonally weak first quarter thereby improving our efficiency ratio. We expect credit to continue to be strong overall but don't expect to see the same level of commercial recovery that we saw this quarter. So provision expense should return to prior quarter level which is roughly a quarter of low end of our annual guidance range. We are nearing completion of our restructuring and separation activities. So in the second quarter we plan to record $35 million to $40 million in restructuring expense as we do things like rebrand the charter one franchise. And finally we expect that our CET1 ratio will remain relatively unchanged on a pro forma level of around 12% and we will hold the LDR at around 98% to 99%. So with that let me turn it back over to Bruce.

Okay. Thank you, Eric. So in short a solid start to the year. With that Brad, why don't we open it up for some Q&A?

[Operator Instructions] And our first question on line will come from Ken Zerbe with Morgan Stanley. Please go ahead.

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

Well, maybe I'll start and then Brad you can amplify my comments. But fundamentally you have to understand the difference in the private market and overall government backed market. And so a lot of the noise about whether this is a poorly underwritten credit really relates to the government side. The private side has been I think had good risk adjusted return characteristics. For some of the big players people like Chase it just may not be a big enough pond to play in since the government has 93% of the market and the private side only had 7%. For someone like our self the fact that some of the big folks are exiting creates more running room for us. I think we have very good technology. We have a good footprint with good university system in our footprint. We've been very innovative in terms of designing products that really work for customers and benefit customers. Our Ad refi loan is the latest example of that where a student borrower can refinance both government and private loan kind of unique product offering out there in the market place which is taking the market by storm. So when we look at the credit quality, the yield we get related to the risk we are taking, we like it a lot. It also potentially brings in fresh customers to us here demographic is aging that if you can get someone who has now a job and has a good credit score and can consolidate their debt and save themselves money on average our loan save about $150 a month. So the people who refinance that person can grow with us and bring over their checking accounts and as they go through their life phases, they can borrow money on a mortgage and accumulate assets and we can manage their wealth as it grow. So all-in-all we think it fits our strategy quite well. Why don't I turn it over to Brad?

Yes. Bruce, I think you said it extremely well. And the only thing I would probably add is there is -- we've seen a big untapped need in the market place. So you talked about it I think our refinance product really hits the need in the market place as a lot of other folks have exited. That need was out there and we don't really think like a traditional student loan product. These are borrowers who are out of school. They are in their early 30s. The profile of the customer that we are getting in sort of the 785 FICO score, someone in their early 30. They have established themselves so they are really great customer for the bank. And just very few people playing in the space, very attractive customers, and very attractive returns. So just a good market place opportunity.

Okay. Now that's great and helpful. Second question just on expenses. Looks like very well controlled expenses versus our expectations. When we look at $800 million extra restructuring, is that -- because presumably I am trying to think how sustainable that Bruce because presumably you are going to have less on the salary side just going for -- seasonality, but do you expect to rebound some of the other line items or is $800 million minus the seasonality is kind of good starting point for second quarter.

Well, I think what you will ultimately see is -- there is a benefit obviously from the seasonality. But then we are also making offensive investments in some of the areas we are trying to build origination capability. So we are still adding commercial lenders, we are still adding mortgage loan officers, wealth advisors and so our broad guidance for the year was that we are going to try to keep expenses as close to flat as possible. We are trying to have that as a quarterly and annual objective. And that's what we are working hard to accomplish. So I like to think of it is study that zero base take out constantly look for ways to take out expenses that you are not making a good return on those expense dollars. And use that to in turn fund the things that are going to allow you to filled up to your scale in the fee businesses and play offense.

And our next question will come from Matt Burnell of Wells Fargo Securities. Please go ahead.

Good morning. Thanks for taking my question. Bruce, could you give just a little more color on sort of your -- the outlook slide that you provided. I guess specifically in terms of maybe the comments related to wealth management where you are seeing challenges there. You mentioned in the slide that hiring maybe is a little bit slower than you had originally thought. And I guess I am also curious about your middle market outlook as well. You mentioned that business is exceptionally competitive. We've heard that from other banks. Is there anyway that you guys can sort of breakthrough that competitive environment or is it just sort of hand-to-hand combat?

Yes, sure. Both good areas to focus on. I would guess firstly on wealth and Brad can augment my comments again. But we have effectively a pyramid distribution strategy to match the pyramid of consumers that we have in the bank. So we have tier called licensed bankers kind of at the bottom that handles the mass. Then we have another tier called premier bankers who have full licensing to sell multiple products. Then we have tier dedicated financial consultants who simply sell the wealth products with full licensing and then we have the very tipi top of the pyramid is our private banking office. And in three of those tiers we I think made decent progress in the first quarter. So we hired up, we probably grew license bankers about 10%, we grew premier bankers around 10% and we grew private banking team at tipi top from 9 to 12. So we are making some traction. The place that we really did not make traction at all in Q1 was financial consultant. So we had roughly 300 financial consultants and we ended with roughly 300 consultants at the end of the period. So it is kind of quarter where you win some you lose some. And that's I think just a sign that this is attractive area for all banks and market participants. It is not just banks. It is insurance company, it is independent broker dealers and so actually pulling those people in can be tough. We've had good success on year-over-year basis I think we are up 10% in the FCs account but I would just flag that this quarter, it seems like competitive conditions have tightened a bit at that layer of the pyramid. So we are still -- I think our strategy make sense. I think the lead generation coming from the branches is good and improving. So we still have good hopes and ambition for that business. But you are not always going to fire and go four for all on four cylinders. Do you want to add anything, Brad?

Yes, Bruce. Another well said, another job well said. The only thing I would add is so part of that question was so how do you breakthrough. It has been hand-to-hand combat with the financial consultants and as you said we didn't really make a lot of progress. But the one opportunity for us to breakthrough is for us the license banker program is really a brand new program. So we are less than a year at the end of licensed banker program. And while we had difficult time getting net growth out of the financial consultants just from pointing from the outside, the view that license banker program can become a very attractive feeder program for our financial consultant as it gets more seasoned. So I think that is the opportunity going forward is that we transition --

You can grow from within instead of pulling in

Which we have in our hand the opportunity until we build the license banker program. So I think that's the one.

And I just on add the license banker program we are probably somewhere around 370 today trying to get to 600. So we are maybe 65% of the way through getting that up to scale. Second point on the middle market. That is a very attractive area for commercial banks to play in. Often you can really -- it is a small -- either small syndicate or you are the sole banking relationship and so you get a fair amount of cross sale that goes with those relationships. And so what we've tried to do is focus more on account acquisition there is a huge number of middle market companies in our footprint. And I think we probably, we've been building up coverage offices, we haven't had pure kind of what we call BDO a real sales oriented calling program. And so we are putting that in place. We are hiring up about 15 people to actually pursue more new account acquisition. And then we are also making sure we are running surveillance on existing back book customers where they might have a high interest rate, might be susceptible to refinancing with us or away from us and I am trying to make sure that we have the back door closed as well. We are seeing some signs of progress on both elements of that. I think the overall originations were up in Q1. The pipeline looks good for Q2. So again I think we are shading that one Amber just because under kind of the rules of the road for kind of this color coding. If we are trying to gain market share in an area that's one that you just have to monitor more carefully but I am actually pleased with some of the steps that we've taken to combat some of the competitive forces and we are starting to show progress from those steps.

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

Matt, good question. What is attractive about this franchise from my perspective is we have a very effective ability to drive origination through our organic channels like as you kind of highlight whether it is auto, whether student, and it gives us an ability to actually drive those a little more quickly and actually offset some of the natural compression that we get from some of the longer duration product like mortgages which invariably have yield compression. So when we are seeing is really a mix effect here that is boosting the yield. We've got mortgage yields in the portfolio roughly down about 20 basis points year-over-year for example. And we have auto on the other hand up about 30 basis points. We have student up a good bit as well. And so what we are seeing is ability to kind of average up the yield and kind of defends the NIM as we have described.

Brad, you want to add that I mean.

Yes. I have little bit to add. And really most of the improvement in NIM is coming for the organic origination. So we have talked about this quite a bit in auto. We've gone to a more main stream prime credit spectrum as opposed to just link and super prime and what that's done is driven our origination yields are up significantly over the organic portfolio. And in student what happen is as we originate more organic production like the education refinance product, our historic student loan portfolio had some felt loan and things like that and that help to drive it up.

And the other thing Brad too, in auto we've now got much more sophisticated platform with many more pricing sale. I think we've gone from 160,000 or something like ridiculous multiple so we are able to actually price very precisely for the risk that we are taking and get little more yield out of that. So, Matt, the short answer to that really organic. We had SCUSA as a kind of jump start to get fastens in the prime but our organic book is migrating very quickly to the places we want to see it.

Matt, it is Eric. The other thing that we are -- we become more intense on doing is actually tracking the organic and the acquisition mix of growth right. Because it is important that we can drive that organically our own tool processes, sales force and so forth and so if you kind of step back and look at the mix, the mix of organic growth this quarter, this quarter it was about 60:40 right. That's offer good bid from where it might have been two, three, four quarters ago. And we kind of like that mix because it gives us a little more control on the credit, a little more control yield. And I think is a kind of more reliable engine of growth for us.

And our next question will come from Matt O'Connor with Deutsche Bank. Please go ahead.

Good morning. I was wondering if you can elaborate on in terms of the comments of working on some additional revenue and expense efforts to help offset the low rate environment. I have realized you just told us that you will give us more details in 2Q but any just big picture or comments that you can elaborate on that?

Yes, sure. So big picture, those initiatives I would say fall into three buckets. There is some additional expense initiative that we can take more around kind of the organizational design. There are some pricing initiatives in areas where we have complex price structure for example like cash management. And then there are some overall revenue initiatives that really focus on maximizing our distribution channels and retention of our best customers. Whereas our first broad program, we call that Top 1 was a number of -- a vast number of relatively modest initiatives with a few big ones thrown in. The Top 2 if we are going to call this, this new initiative Top 2 is just kind of up to maybe a dozen larger initiatives that are more complex and take more time to basically figure out and design and then project manage. We part some of these initiatives when we went through the first program just to get the first program off the ground and start to get the benefits flowing in. And so now we've gone back and we are doing the work to develop these other ideas. And so there are fewer but bigger impact ideas. For example on the expense side of equation, we are looking at what we are calling ops transformation which is kind of looking at the Ryman reasons of how we are organized to see if we can gain some efficiencies. We also think there is more opportunity in kind of vendor consolidation and vendor management which was part of Top 1 but I think there is more bites to the apple on that one. On the revenue side, I mentioned that looking at how to keep your best customers in the bank and then also how to cross sell better using all your channels fully. We've engaged some consultants who have been in another shops in our peers and had some success and I think there is no reason why some of those programs can't be very effective here as well. So that would be some of the color, Matt. But as it was on the road show when people wish I had all the answers and all the details. I didn't -- I think we are making progress and getting a clear picture on these things. But we don't really have the full details to go into today.

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

I think that just be a good management. I think one of the things that having Eric here now given his background as Global Treasurer of Citi, he certainly understands balance sheet quite well. And so having a fresh set of eyes is to how we are going about our deposit raising strategies, how are we pricing our assets and looking at the risk appetite in a business mix, is there more that we can do kind of squeeze out NIM improvements. I think that's good first thing for Eric to sink his teeth into.

Okay. That something that we can look for more detail in 2Q as well.

Yes. Probably, yes.

And our next question will come from Beck Nanja [ph] JPMorgan. Please go ahead.

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

Geographically or --

Yes, geographically, yes.

Yes. Look I think we are pretty strong, pretty evenly distributed in terms of our success. I would say in the first quarter the North East was probably hit the hardest with some of the weather concerns. I don't want to use the weather as an excuse but I think factoring into that seasonality we probably lost two or three productive days in the branches and kind of the New England region. And not so much in the Mid Atlantic and in the Mid West. New England was hit pretty hard but we do a very comprehensive evaluation of the entire, all the branches in the system and looking at in the footprint, and we force rank and see how things are doing and I think we have -- there is no kind of big variances from the mean. I think the New England and Mid Atlantic and the kind of upper Mid West regions that we have are all kind of pretty tightly punched. I don't know Brad if you want to add anything.

No. You said exactly right, Bruce. I mean little bit of slowness in New England from the weather but other than that no real trends geographically that stand now, yes.

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

Yes. And Eric you can add to this. But I think that's just really seasonality. So we brought in some deposits at year end and some of that went out there is tax payments, and if you look at kind of the period end we saw that pickup again by the end of March. So that will move a round a little bit. But I feel very confident that we are developing good strategies to grow the commercial deposits. If you look at our LDR and the commercial side, we are probably up in the mid 180s which one we look at our peers they are probably 140 to 160. I think partly that's just result of -- we didn't need the funding because we were shrinking the balance sheet for years. And so we had, I like to say go back in the gym and get some muscle back in terms of having good deposit raising strategies and a good focus and a good game plan to do that. And you can see that year-over-year growth in commercials been extremely good. So we brought the LDR and this is a one point, it was like 230, so we are down to the mid 180s and I think we can keep growing and raising deposit cost effectively, building up the cash management business is a key element of that. We brought in talent; we spent a lot of money on technology. I think we are under punching our weight in terms of market share there. So that's a critical plank in the overall program. Eric, do you want to add to that?

Yes. I think the commercial deposit opportunity is one that continues to be significant for us right. We are up in deposit from the commercial side 26% year-over-year largely because we never really try to grow deposit there. Right the bank, they thought they have been deposit on the consumer side. We made commercial loans that actually in a way create quite a bit opportunity. A lot of which you saw over the last year. And what we continue to do is now go down the next level of detail which is what industry segment in which geographies or either a little more credit needy and so we can try middle market or which of them are more cash rich or which of them have both, right. And that's the kind of second and third level analytic that we can put to it. I think the good news is we have a very strong sales force and banker force out there who knows their customers extremely well. And we've been able to channel that energy and one of the things I will be doing more of it just focusing which segment, which sub segment which industry verticals and continue to find more opportunities out there.

One last thing if I may, completely different topic. Restructuring charges. You all said pushed out a little more to the second quarter. Should that mean we see -- those that will be driven by -- for the head count -- should that mean we see little bigger pick up in cost savings in Q2 and later.

Well, some of the costs that are coming in Q2 are really around rebranding. Last stages of separation cost from RBS, the Charter One science coming down and the Citizens unified brand around Citizens. So I don't think there is any direct link to the expense forecast although what I would say is that we are working on the forward view of trying to keep expenses as slight as possible. So there is a constant stream of initiatives and efficiency initiatives that's taking place. And then to Ken's first question, there is reinvestment going back in the growth areas. So I think we are -- we still have a very positive view towards expense management, the rest of this year and the one wild card I think that are some of those extra levers that we talked about. If we can get ops transformation geared up that could create some additional benefits to the equation as well as the vendor initiatives that we are taking. So stay tuned.

And our next question will come from Scott Cyphers from Sandler O'Neill. Please go ahead

Good morning, everybody. Bruce, I was wondering if you could spend just a moment talking about kind of the differentiation between growth that's coming from just the underlying organic growth within the franchise and the internal building you guys have done versus the loan you are purchasing. I only ask just because one of the -- I guess one of the criticism I hear and you guys periodically how much of the growth comes from purchase loan but if the underlying growth is stronger, does that do anything to you need or reliance on purchased growth as you got over the next year or so?

Yes. I mean that's kind of legend out there. I don't quite understand it because from the get go when we laid our plan we said that we would use loan purchases kind of in the beginning of our turnaround plan to use capacity we had on our balance sheet until we were able to build up our own capabilities. In which case we would get the origination to the levels that made sense within our strategy. And so if you look at I think where we were last year to where we are now in the current quarter, we had probably three quarters of the overall and slightly more, exactly close to the 80% of our loan growth was organic. And I think it was 22% or 23% was purchase. So the purchases that we are doing now really the SCUSA agreement are one. We purchased $2 billion in auto last year. We said in the prepared remarks that we are going to target that at $1.5 billion this year because we are seeing I think really good growth in organic auto as dealers increasingly accept us to handle the full credit spectrum including prime customer. So SCUSA was always viewed as a bridge until we were in that position. And so we are seeing the fruits of our investment there. And then also in student, we are a bit surprised to be upside about the take up on this refi product. And so we have I think we outperformed our expectations in terms of student growth as well. And occasionally there will be some portfolios that we can buy like we did a tuck-in one in Q1. But even with that tuck-in we still were predominantly organic. And I think over time you will see as we move into 2016. There is an open question as to how much SCUSA will need. But I don't really us needing to do much anywhere else.

And Scott, Eric. Just to put that in context right. So we are at 75% or 80% organic today right quarter-over-quarter if you go a year ago it would have been 60:40, right, so we are kind of continuing move in that direction and that's part of our objective.

Okay, that's perfect. I appreciate that. And again switch gear just for a second, I don't want to jumping on too much on the sort of your cost initiatives or anything you might have more detail on later but Bruce can you just talk for a second about the balance between funding say additional cost savings versus kind of hitting the target that you got for the most visible of the 10% return on tangible comment, , I think I just mathematically there are ways you could cut costs pretty quickly and still be comfortable to get towards your target but if it was more measured based and like you kind of put things at risk. How do you sort of way that balances as you look at things?

Well, I think in explaining our plan one of the things that we did initially was we benched ourselves in terms of measures to assets to scale. So if you look at our expense load to deposits or to assets, we are actually quite good relative to peers. And I think we are at the bottom at the first quartile. And if you look at revenue productivity relative on the same measure, we got revenue also. So we were making enough income of the balance sheet. Our fee businesses were not at scale. So hypothesis coming in when I came across was we think we have the right level of expenses but we probably aren't spending those expenses where we need to. So let's go attack that. That was the basis for the $200 million. And then let's self fund the investments that we need to get more originators so we can drive more asset growth. And fee businesses is like mortgage, like wealth, like capital markets, up to a scale level so that we could bring the cash register on fee opportunities that go with the size of our loan book and a size of our branch infrastructure et cetera. So that's the real objective here is to get the revenues growing at a faster clip to grow into the potential of the franchise while keeping expenses very muted. I don't think there is a different strategy; alternate of saying could you just start whacking the expense base down. And that's a way to propel yourself to the 10%. I don't think there is enough in that to actually do it. And even if you could do it, it wouldn't put in a sustainable position where you really maximizing the benefit of the franchise. So that's kind of how we set it up. And I still think that holds. Having said that we will be very vigilant and constantly looking for ways of continuous improvement. How can we be more effective and how we serve our customers and more efficient and how we do that at the same time. And that's the mindset that we are trying to instill within the company.

And our next question will come from Geoffrey Elliott with Autonomous. Please go ahead.

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

Yes. No. We have been approved for was $500 million and what we have said is that we want to do that front loaded. So we did as part as front loaded just you can't buying back on April 1, the first $250 million. And I think in the Q3, we are planning to do kind of the next $250 million very early in July. That basically leaves us no dry powder until the next CCAR cycle. And so we have -- our dividend in place, we have asset growth in place but over this period that we were approved to do the $500 million, we will do that $500 million quickly.

And then following up on that you mentioned in the presentation the time of the IPO $500 million to buyback in 2015, $250 million in 2016. Given that the capital ratios look pretty strong in the stress scenario of CCAR and that you now being through that exercise successfully. I mean is there any possibility of getting more aggressive on than the $250 million in 2016.

Yes. I guess what I would say to that is the last $250 million was really part of what we refer to as our conversion transaction. So when originally we had converted all of the capital securities to equity and now we are trying to put the leverage back in the capital structure. And the number we were targeting was $2.75 billion. With this $500 million that just been approved we've had -- that will be $2.5 billion. So that leaves $250 million. We didn't say that was all we would do. That was just kind of the tail of the overall transaction for the conversion transactions. We've targeted an 11% set one ratio by the end of 2016. And we will just have to see kind of what kind of asset growth opportunities we have. We will have to see is 11% still an appropriate number. Is there an opportunity to basically move that down if our peers are lower than that number which they are today? So there are a number of things that would come into play when we consider the next CCAR submission in terms of what we want to do in total. So I would just simply say that the $250 million is kind of lock because it completes the program. And then what else we do is depended on the future circumstances.

And our next question in queue comes from Gerard Cassidy with RBC.

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

Well, I would say the parent launch just was very recent so there is really nothing to reflect at this point. It is the refi product has been very, very strong. So I think we are first to market on that product. And it has been take --had a very good market reception. And then there is a traditional what we call our true fit product which was the student loan for students who are going to college. And that is a seasonal product that tends to be taken down not in the first quarter. So when you look at the mix of what happened in the first quarter is really the lift in this refi product is providing the impetus. And if you then forecast out Q2 would be similar. We have a very big pipeline on that refi product as we look into Q2.

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

Yes. Exactly right.

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

Right now the yields are in the mid five.

Great. And in terms of 10 year fixed or --

Yes. We actually offer multiple terms and it is about 60% fixed, 40% in variable but we do offer various terms on the product and --

And the FICO scores are quite high. They are over 780-ish [ph], correct. Very, very high quality.

Yes, no. I agree the student loans are for banks, it is totally different than the government of course. Moving over the automobile. Obviously, you guys have had some real good growth here as well. What the $13.2 billion of outstanding I think end of March, what percentage would you define as sub prime or lower FICO score loans?

Very, very little. I mean I would say none. I don't know if you could say anything on but technically none but it is certainly less than 3% or something. We are not intending to play in sub prime. We historically played in super prime. We are migrating into prime but that's still very good credit quality paper.

Sure. And the paper they are buying for SCUSA is prime; they are not sub prime paper?

Yes. The average FICO score and that's probably 710, 715, somewhere in that ballpark.

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

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

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

Yes, I think again going -- I don't know if you heard me talk about the tier strategies but it is probably easier at the lower tier because you are presenting opportunities and training for people in many cases. When you get into the FCs, a lot of those people have a comfort zone kind of where they are. And we don't want just compete on price the way some of the independent broker dealers do. So someone who moves has to move their clients with them and there will be some leakage from that. And they have to weigh that versus if they come to your branches how good is the lead generation and the opportunity to build their book with us. And so that's the calibration that goes through when people decide whether they are going to move or not.

And our next question comes from David Eaves with UBS.

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

Sure, Brad, you want to take that?

Yes. I would say we've had good success hiring and you have seen your net -- we've been net growing and we had good success hiring, I would say one of the things that we-- that has happened as we have seen a little bit higher attrition rate of our loan officers than we had expected. But overall we are having good success hiring. It is competitive market place out there; application volume has been really strong for the first quarter. So we've got nice pipeline building. And again it is like lot of the other sales job family, it is just lot of competition in the market place for good talented people.

I think what we are successful in bringing in people overall given that we are playing offence, so we try to build the business. We have I think an ability to warehouse, we are taking jumbo mortgages on to our books. We have a fairly broad product capability, so we can do the things that folks find attractive to serve customers well. And so and we've attracted some strong sales leadership into the house. So I think those things are going well for us. And we just have to get better as Brad said in making sure that when people come they can get their production right up to the levels and they can be effective on platform and we can keep him here. So we had a little issue with attrition but I think overall we are heading in the right direction. We are kind of getting close to the kind of 450 mark and we started at 350. And we are on our way to 700. We got-- we did 42 in Q4, 29 this quarter. You kind of -- if you math outwear we need to be, we got be kind of reproducing these quarters on a consistent basis. We got be putting in 35 to 40 people per quarter for the next seven quarters to get that 700 mark.

Great. And then maybe if you could just touch a little bit on the -- what you are kind of saying in the commercial real estate area? It is obviously an area where he had a lot of other folks seeing really intense competition on pricing terms and do you guys have pretty good growth there. So I was just curious what you guys are seeing there?

Yes. I think it is always fairly competitive market. We hadn't played in a while as part of our RBS and so we've just kind of put some oxygen back in the system with some higher limits and some real targeted strategies where we wanted to grow. And I think we focused more on the high end project so institutional investors who are well known, that's one area the high end office market. We've also done a good job looking after REIT and so that may not be the highest yielding portfolio but the credit quality is very good. And the cross sale for other products and services is high. And I think we have to also look at where other opportunities to play where we can pick up a better yield because we simply stay fully at that end of the market, we won't make the kind of overall yield on our commercial real estate. That something that we are looking at gradually building that up and building up a little bucket of higher yielding stuff that we still think is very safe from a credit standpoint. So that's what we are focused on.

And move to on Ken Usdin with Jefferies. Please go ahead.

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

Yes. Ken, that was really a one off that energy book was just a clean up of RBS and Citizens separating and I think that activity should have always been in Citizens, a reserve based lending business is more of bank business and investment bank business. But RBS was there first and so as they reconsider their strategy and now they are focused, they said look this you always wanted this, this should your so we move that across. I don't really think we will do any loan acquisitions on the commercial side because we've been growing that 8% to 10% organically for a consistent period of time, four, five years. And we are on that trajectory again this year. So I wouldn't see it there. On the consumer side, we've used whole loan purchases last year before we were able to start building up our mortgage loan officers. We've also use the SCUSA as a bridge till we build up our own bigger auto capabilities in prime. And occasionally we will see a student book that we like. We bought I think $50 million one in last year. We maybe bought a $201 million in this first quarter but we also sold some we try to get rid some of the FELP exposure that we have. So net-net I think we are adding -- we haven't added any real loans net in student from a purchase standpoint. So we will be opportunistic. I think one of the things we found in a low spread environment is when we enter into these flow agreement for people who want to use a balance sheet, there is not enough vig in it to pay the servicing fees away and then also for us to make a good return. So I think again we are migrating towards having the capabilities to pro loans at the pace we want organically.

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

I think we've made all of the policy changes that put a square on the side of the regulators. And good business practice. We've also made certain adjustments to kind of over drafting for small items under $5 that we don't think it is right that our customer should pay overdraft fee on that. So all of those changes are in the run rate. So the only thing that really in the comps you looked that on service charges in the first quarter last year we had Chicago in the number. So it doesn't look like we grown but we actually have grown the service charges 2% on an underlying basis. And then in Q4 going to Q1, you just have seasonality and we would expect to see that recover in Q2 quite nicely.

And due to time constraint, we will turn the call back over to Van Saun at this time.

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

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