Citizens Financial Group, Inc. (CFG) Q2 2017 Earnings Report, Transcript and Summary

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. Currently, all participants are in a listen-only mode. Following the presentation, we'll 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 so much, John, and good morning to everyone. We are really appreciating 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 results. And then we'll going to open up the call for questions. We are really please to also have on the call today with us is Brad Conner, Head of Consumer Banking and Don McCree, Head of Commercial Banking. And I'd like to remind everybody that in addition to our press release today, we've also provided presentation and financial supplement and these materials are available on investor.citizenbank.com. Of course, our comments today will include forward-looking statements and those are subject to risks and uncertainties. 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 in our earnings material. And with that, I am going to hand it over to you Bruce.

Okay. Thanks Ellen. Good morning, everyone. And thanks for joining us our call today. We are pleased to report another quarter of strong results as our momentum continues. We've got terrific leadership team and continue to execute well on our strategic initiatives. We are balancing our desire to build the great franchise for the long term with our need to deliver consistent financial progress near term. We are turning the corner 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 spend for culture, our mindset of continues improvement and how we run the bank, and our commitment to excellence and key capability are the unique ingredients that will allow us to standout 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 impact. 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 is a 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 the series of revenue and expense initiative that we project will benefit pretax income by about $100 million by the end of 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 capability including some great progress that we are 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 are playing often and making investments that will strengthen us well into the future. We also announced the 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 CCAR period, we aimed 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's get started with our second quarter financials. We'll 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 first quarter which as a reminder included the benefit of approximately $23 million related to the settlement of certain state tax matters that contributed $0.04 EPS. On an underlying basis excluding the benefit, net income for the second quarter was up 7% and EPS was up 11% in each quarter. Year-over-year, net income was up 31% and EPS up 37% year-over-year. Our second quarter results included $26 million pre-tax charge related to impairment on aircraft lease assets primarily in our non-core portfolio which is in runoff mode reflecting a more recent continued decline in value of select category with aircraft. The impact of these impairment reduced noninterest income by $11 million and noninterest expense by $15 million. In order to better understand our underlying performance, we've prepared a supplemental schedule which backs this impairment out of PPNR and re-classes them as credit related cost. On this basis, our total credit related cost 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 impairment, our operating leverage was 7.4%, reflecting revenue growth of 10.1% and expense growth of 2.7%. Net interest income of $1.03 billion increased 2% in linked quarter driven by loan growth of 1%. And net interest margin increased 1 basis point in each quarter and 13 basis points year-over-year. We'll 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 lease impairment. 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 impairment. On an underlying basis, the efficiency ratio includes 132 basis points with 60.4% and 435 basis points year-over-year. We delivered second quarter ROTCE 9.6% which was relatively stable with first quarter but increased on 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 further efficiencies and revenue opportunities for us, while funding investments to drive future growth. Taking a deeper look into NII and NIM on Slide 5 and 6. We continue to deliver strong balance sheet growth, which helped us drive a 2% increase in NII for the quarter. We grew average loan 1% linked quarter and 6% year-over-year, and I'll provide some additional detail on the growth in a few minutes including the impact of our balance sheet optimization effort. Net interest margin increased 1 basis point linked quarter and 13 basis points year-over-year which reflects a nice improvement in loan yields given the pickup in short rate and the benefit of our balance sheet optimization effort which are improving the mix of our portfolio for its higher return category. These benefits were partially offset by a 2 basis points drag try to increase securities premium amortization at the average 10 year yield decreased about 20 basis points linked quarter. We also saw an increase in funding cost 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 the rise in short rate and the impact of seasonally lower DDA balance. Note that we grew period and deposits by over 1% in the second quarter and spot LCR 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 impairment reported in other income. Excluding the impairment, linked quarter fees were up slightly driven by another record quarter and capital market due to continued momentum as we leverage the investments we made in talent and broadening our capability. Market continued to be strong in the second quarter which helped drive robust activity in loan syndication. We grew loan syndication fee 23% as we increased the number of lease or joint lease transaction 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 up from a seasonally lower first quarter. Letter of credit and loan fees increased 7% driven by an increase in commercial loan prepayment fee. Most remaining fee categories were stable in quarter. On year-over-year basis, we delivered very good noninterest growth of $26 million, or 7% on an underlying basis. We are pleased by strong contribution provided from the capital market business given our expanding capability and from mortgage banking which benefited from higher production fee. We also saw momentum in card fee which reflected the benefit of revised contract terms for processing fee which commenced in the first quarter along with higher purchase volume. Turning to expenses on Slide 8. We saw $10 million increase in linked quarter expenses which include $50 million impact from the lease impairment reported 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 cost associated with our branch rationalization effort and seasonal maintenance cost were higher in the first quarter. Outside services cost of $5 million higher as a result of an increase in consumer loan origination and servicing cost. Year-over-year expenses increased 4% including higher other expense driven by the $15 million in lease impairment but were up 3% excluding this charge. Salaries and benefit expenses were stable as the benefit of the change and the timing of incentive payment for the first quarter this year offset an increase in compensation and impact of strategic hiring. We continue to look for ways to self fund our growth initiative and are doing a good job of finding efficiencies and staying disciplined. Let's move on and discuss the balance sheet. On Slide 9, you can see we continue to grow our balance sheet and extend our NIM. Overall, we grew average loan 1% linked quarter and 6% year-over-year, driven by strength across most of our commercial business line and education, mortgage and unsecured retail on the consumer side. The growth in commercial loan is partially offset by the sale of $596 million of lower return in commercial loans and leases nearly end of the quarter associated with our balance sheet optimization initiative. 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 continue to improve given our balance sheet optimization effort along with continued discipline on pricing. It also benefited from higher LIBOR rate during the quarter. We were in well position to capitalize on the rising rate environment. With assets and security to a gradual rise in rate at 5.5% versus 6% last quarter. Our asset sensitivity is naturally moderated given the rise in the 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 is led by continued strength in the residential mortgage, education and other unsecured retail loan which continues to be driven by our product financing partnership and a personal unsecured product. We are also seeing ongoing benefits from our focus on enhancing our portfolio mix by driving growth in higher return category. As I mentioned in 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 rate, we've expanded consumer portfolio yield by 12 basis points in the quarter and 30 basis points year-over-year. We also nice growth in commercial with average loan increasing 6% year-over-year, where we continue to execute well in commercial real estate, mid corporate and middle market, industrial vertical and franchise finance. The increasing rate and enhanced vigor around five portfolio returns had helped drive the 16 basis points improvement in linked quarter and 52 basis points increase year-over-year. On Page 12, looking at the funding side. We saw a 7 basis points increase in our total funding cost, driven by an increase in deposit cost which included the impact of seasonally lower DDA and the impact of $1.5 billion senior debt issuance. Year-over-year, our cost of fund was up 14 basis points reflecting a continued shift to greater long-term funding along with the impact of higher rate. 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. Compared with the growth in the larger company segment of our commercial book. The nonperforming loan this year decreased 3 basis points to 94 basis points of loan 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-off increased modestly from the first quarter while our commercial net charge-off was lower by $5 million. Provision for credit losses of $70 million was $5 million less than charge-off. This was the decrease of $26 million from first quarter level. However, including the lease impairment, total credit related cost was stable at $96 million. As we increase the mix of higher quality retail portfolios in our overall loan book, our allowance to total loans and leases has come in at 1.12% while the NPL coverage ratio has been relatively stable at 119%. This also reflects continued run off the in non-core portfolio. On Slide 14, you can see that we continue to maintain 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 return over $200 million to shareholders including dividend. It's also worth noting the total amount returned to shareholders in the 2016 CCAR window was $957 million including dividend. As you know, we received the 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 a 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 benefit from executing against our strategic initiative. We are intensely focused on developing strong customer relationship and growing the franchise in a profitable and sustainable way. In a consumer business, we are committed to building strong relationship with our customers and through our talent advice and product strategies along with enhancing our distribution network and digital offering. These investments are well aligned with our wealth effort, as we also continue to enhance our advisory capabilities and build out a Mass Affluent and Affluent guiding proposition. We continue to drive attractive loan growth across the 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 enhance return. In wealth, we saw nice life 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 and shifting the mix of sale towards more fee based business which came in at 38%, up from 20% in Q2, 2016. 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 a secondary origination which was up 14% year-on-year, an increased as a percentage of total origination from 33% to 38%. In commercial, our expanded capabilities helped deliver another record quarter in capital market. As we continued to leverage the investment we've made in broadening our capability. Treasury solution is on the right track with fee income growth up 8% year-over-year, and strong momentum in our commercial card program. Mid-corporate and middle market benefited from our initiatives to deepen customer relationship with loan balances increasing 4% and deposit up 11% year-over-year. We've seen strong balance sheet growth in our expansion market and more modest growth in established markets. Moving on to Slide 16. With TOP III event have successfully delivered efficiency that have allowed us to self funding investment to improve our platform and products offering. In 2016, our TOP II program delivered $105 million in annual pretax benefit across our revenue and expense initiative. We've 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 continue improvement and 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 $105 million in 2018. On the revenue side, we are focused on building new channels primarily to enhancing our digital capabilities and building out our direct to consumer mortgage program and leveraging our call centre to offer solutions to our customers. We also plan to add corporate partnership and installment lending expand C&I lending in the Southeast and to expand our commercial real estate offering. We'll also continue to build out our fee generation capabilities in the mortgage business and securitization capabilities for third commercial client. On the efficiency side, we'll continue to focus on simplifying our organization, leveraging centers of excellence and rationalizing roles and responsibilities for that bank. We'll take a hard look at reengineering key processes to leverage automation and become more efficient. We'll optimize our technology infrastructure and streamline our network support. Our 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 for our shareholders. On Slide 18, you can see the steady and impressive progress we are making against their financial target. Since 3Q, 2013 our ROTCE has improved from 4.3% to 9.6%. Our efficiency ratio has improved by 6 percentage point over that same timeframe from 68% to 61.9%, or by 8 percentage point to 60.4% on an underlying basis. And EPS continued on a very strong trajectory of wealth more than doubling the $0.63 from $0.26. The rate of growth and improvement continue to outperform peers over the period. That we realize we still have worked 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 margin to continue to expand by about 3 basis points linked quarter given continued improvement in our earnings asset yield and improved funding mix. We continue to project full year loan growth to be with in 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 a strong second quarter result in capital market. 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, a modest increase in net charge-off. And finally, we expect to manage our CET1 ratio to around 11% and expect the average LDR to be around 98%. With regard 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, plan and credo statement. 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 layout what would distinguish us in a crowded banking landscape. A strong culture focused on the customer, our commitment to financial discipline and achieving excellent capabilities in key areas. And on Slide 22, we make the case that there is plenty of fuel left in a tank to propel our ROTCE higher. The same levers that propelled us from roughly 4% ROTCE to 10% are still in place. And our management 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 how we run the bank 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, Merril Lynch. Please go ahead.

Yes. Thank you for taking my call. Good morning. 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 relatively to your risk profile and size. And I am wondering as we look further out over the next two or three years. Should we expect on your capital total payout into grow and Bruce may be give some insight on how you are thinking about dividend versus buyback in future CCAR?

Yes. Sure. So what we've been progressing through time since separation from RBS is what I referred to as a glide path of normalizing our capital ratios. And this year we gave guidance range that we likely ended 10.7 to 10.9 down from roughly 11.2 when the year started. I still think we will achieve that so we are on track to come in within that range. And I think we can continue to follow a glide path down in subsequent CCAR in the second half of this CCAR cycle i.e. the first half of 2018 and then in future CCAR cycle. So our view is that we so far have been a bit prudent as a new company, keep a little bit of capital buffer, give us flexibility to both grow loan and return good level of capital to shareholders. And we can continue to do that into another cycle or two. There is no reason at the end of the day that our -- we should have to sustain that buffer or loss profile, credit loss profile were 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 are hearing from peers is they'd all like to be lower as well. So we are following them down. And if they continue to move down and we can continue to move even further. So with respect to dividend versus capital, I think we have always viewed it's important to have a good dividend on the stock and have a good yield and now that the Fed appears to have no longer a bright line at 30% payout ratios, we are 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 $850 million is up meaningfully from what we repurchase 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 buyback stock and we can grow loans. I don't know John if you want to add anything for that.

No. I just think that with respect to the buyback I think we are feeling very strong about that outlook. And I think one thing we are trying to do is the balance our opportunities to deploy capital internally against returning that to shareholders. And I think we'll have to do that -- to do that going forward.

Thank you. That was clear. Just as follow up question. Given your more robust loan growth prospects than peers and you also mentioned in your TOP IV initiative, expanding commercial lending in the Southeast. In line of 97% LDR how should we think about your deposit gathering strategies from here? Really how should we think about pricing from here in terms of trying to and keep up the pace of loan growth and deposit growth. And whether or not buying deposit further down the line is part of the plan.

I'll start and John you can -- 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 now basically we've been on treadmill where when we grow loans we grow deposits at similar clip. Where we've focused has been on the commercial side where when RBS ran into difficulty and we ran a balance sheet down, we ran off a lot of the commercial deposit base. So we've been now on a mission to go out and get the operating count and grow interest bearing deposit from the commercial side. I am pleased to see that this quarter, by quarter end of spot basis their LDR low on 60. It had been its higher 250 at one point. So I think there are still more room to run in terms of leveling that out and maybe ultimately getting that commercial LDR in 140 to 150 ranges which I think is probably where peers are. So we had that going on the consumer side, continuing to focus on better tools, better data analytics into customers so we can make more tailored offers and we can bring in incremental fund that our customers have away from us but we 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 will 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 like to bring that down a bit maybe 95 to 97. But we are very comfortable with where we are. Our LDR is really, really strong so the fact that we have so many consumer deposits and we termed out a lot of our wholesale borrowing with the senior debt issuance and terming out some our FHLB advances. We have a very strong overall funding profile. John, you want to add to that.

Yes. Just, well, I think the growths in our deposit are tracking in line with our expectations. We are optimizing our balance sheet across businesses, targeting higher value customer segment and looking at longer-term growth in the checking and cash management businesses. And on that last two on the commercial side where we are seeing some growth. We are making investments in our technology replatforming, and we think that's going to pay us nice growth in the deposit side going forward. And one other point, we've been able to deploy these deposits with very attractive returns. And that's double digit well above capital and so we are feeling very good about where these deposits are getting deployed given, unique opportunities on the asset side.

Yes. And just to your last point, Erika, I don't think we are in the market or in the hunt to go out and buy deposits. I think we think we can grow -- we probably look at digital strategy to gain some additional deposits before we go out and actually go purchase deposits.

The next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.

Good morning. I was hoping you can elaborate a little bit on the outlook for about 3 basis points increase in the NIM. On the one hand it's little bit better than I think, most peers are playing to but it's also coming off of a second quarter NIM that was up only 1 basis point. And obviously you are one of the more asset sensitive bank and I think in prepared remarks you mentioned there is an increased drive from the bond premium amortization -- gather if you look at the two quarter progression of NIM, I guess I would have thought to maybe all the 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 I'd say is there were some idiosyncratic factors in Q2 that needed the increase that we expected to see. The first one was that not only did we not get parallel shift when the Fed move which can dampen the full benefit of your position. Your asset sensitive position. 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 2 basis points impact on the NIM. And John you can talk about third quarter but in brief we would not expect to see the 10 year move dramatically. It will be ranged down so we are not relying on a rebound in order to get the 3 basis points lift. So the hit happened in Q2. Does that show you upside beyond the 3 basis points in Q3 if you saw a reflation 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 issuance size of about half of that but as you are seeing it's been very conducive in the market when rates come down to go and issue and lock in spreads in attractive financing term. So we upsize and we went earlier than we had anticipated which I think is a right thing to do. Again, it's locks and it was a bit opportunistic and 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, I think you covered it. Bruce, I'd just say reiterate the point of -- the two points were related, security premium amortization we had a both the 5 year and the 10 year were down, cost of 20 basis point quarter-over-quarter. And that led to a desired effect on data offering. So as you mentioned, those are the latest. So when you look at out the 3Q, couple of points I made there. I think you made the point that we are not relying on increases in the 5 and 10 years in order to support that outlook. So I think that's important to note. We are just indicating that the absence of that drag we are expecting even now we think more of range bound view. And the other point I hasten to add is loan yield are expected to expand similar to the second quarter. We had strong loan yield expansion in the first and second quarter. We are expecting to see that in the third quarter. The June hike of course we'll see that fully layered itself in the C&I book, but I'd mention the fact we are going to see the full quarter effect of the March hike on our large HELOC portfolio. And some of you may know we only get two months of benefit in the second quarter with that portfolio. And we are going to full three months in third quarter. So those are the leases that I highlighted. We feel good about our guidance which we give.

Your next question comes from line of Ken Zerbe with Morgan Stanley. Please go ahead.

Hi, thanks. I guess two questions in particular. One of your peers was BB&T, but they announced sort of 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 buyback shares, did you put in any kind of acceleration that more buyback could be done in the first half or did you spread it equally over the course of the year? Thanks.

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 day one of the quarter. So we've been doing that. If we want 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 you look out first quarter next year, is the factors the underlying drivers of the 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 take up all things equal. Thanks.

Well, I think we are going into this year. We had a roughly, if my memory serves me 325 or 330 of charge-offs a provision last year and coming into this year. We took that up to potentially I think move it to down 425, 450 or something to 475. So our expectation was that as we continue to grow loans, we 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 it will certainly be well below the next goal post of that range. You can see what we are tracking to. And I think the reason for that one is that commercial has still stayed relatively pristine. We don't see any material trouble spots or migration areas. You can always get hit with the so called scud missile. But we hope we don't see any of those. But in any case commercial outlook continues to be good. And then on the consumer side, there are kind of assets, the high quality assets that we are putting on in those portfolio 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 would continue to be favorable and so it's not. Yes, 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 are still pretty optimistic about both Q3 and then the Q4 outlook. I don't know if anybody here wants to try and --

It's Don. I think that's exactly right and we got a very good process now that we call to the portfolio and have a lot of early warning signal. So we can see out a few quarters in terms of general trends in the portfolio. And as we do continue to participating and grow in this market, we are staying -- we are trying to stay very disciplined from our new origination standpoint knowing markets are very aggressive right now.

And Brad you said, maybe you could comment, you had the runoff of some legacy core assets which is -- we are getting some recoveries there and that's helping. And it creates the room for you to grow some of your [Multiple Speakers]

Exactly. And as you said, Bruce, the stability of the asset that we are putting on remains very good. Delinquency looks strong. We had given a little bit more detail guidance two months back about what our range or losses would look like over the next -- through the next year and half or so. And we remain very confident in the guidance that we gave there. All the trends remain right in line with what we talked about.

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

Thank you, good morning. First, you mentioned your desire to become a top performing bank and you gave us I think it was on slide 20, 21 some of the internal niche or 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 a those metrics?

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 set out to achieve when we went on the IPO journey. We are getting damn close. So that feels quite good. But stay tuned. I think we will in due course be rating putting out the ROTCE target obviously efficiency ratio, ROA, those are the measure that investors look for. And I think as we've said we've plenty of fuel in the tank to continue to execute our strategy, what works for us going from 4 to roughly 10, should work for us going forward. And we should -- we have plenty of capital to put the work to grow the balance sheet, reduce the share count. I think we've been investing in the key businesses to broaden our capabilities and figure out how to deepen relationship with our customers, whether they are on the commercial side or consumer side. We are starting to see some benefits flow from those investments which have 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 will continue with that. So if we can continue to pull those levers I think it won't be too long before we'll be able to put out a new set of goal posts.

Very good. And then John, you mentioned on slide 29 I should say, you guys shows the interest rate sensitivity trend and you highlighted here that as rates go up, the asset sensitivity has naturally migrated to about 5.5%. As we look out over the next 12 months, where should we see that trend progress to?

Yes. Your question, I mean we like where we are right now. I think that we plan to remain an asset sensitive bank and we plan to keep that upside potential and gas in the tank as you heard from Bruce earlier, there will be pressure over interest rate tightening cycle which is pretty natural. But like I said we will continue to have an outlook for exactly where that will be but we expect to maintain a strong asset sensitive positive 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 it had two hikes since then. And we've now are positioned at about 5.5% so the gradual rise to 200 rise scenario. So I think that will give you an indication that just naturally as we get deeper into the hike cycle that sensitivity start to fall. So we are not fighting that or just kind of letting that drift down but relative to peers we are still one of the more asset sensitive banks.

Your next question comes from the line of John Pancari with Evercore. Please go ahead.

Good morning. On the expense side, just given now that you've laid on the TOP IV program and on top of the progress you made on TOP III in all itself, 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 2018 and maybe another way to put it, what type of efficiency ratio could we expect for 2018 as this starts to get layered in? Just trying to get idea where we are going with this when it hits the numbers. Thanks.

Yes. It's little early to give the 2018 guidance. I think what we've seen from these TOP programs historically is we are pushing that operating leverage to a 3% to 5% guidance range. I think if you went back a couple of years ago it was probably 2% to 4%. So it's helpful in that and continuing to sustain a good level of positive operating leverage. So I'd probably leave at there for now. We are not ready to give 2018 guidance but it's certainly helpful to enhance modestly and sustain the operating leverage outlook. And 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 advisors and investing some great new technology offerings in digital and data analytics and things that we are 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 the bottom line and keep the positive operating leverage at close to the top of our peer group on a consistent basis.

Okay. All right. And then separately just on credit. I'm sorry if you provided some detail already but I know you mentioned that your trends are intact from a 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 lower use car values and all that. Wanted to get your updated thoughts on how you are trending there on the lost -- 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 total share national credit books as of today? Thanks.

I'll let Brad go first and Don you can follow and John feel free to chime in.

Yes. So on auto, let me roll back a little bit and remind that we did expand the credit of the -- to get the better risk adjusted yield or returns in auto. So we have seen the auto --

Your test really super prime and then we move into the prime.

Exactly.

We are seeing that migration and I don't think anything out of bounds from what we --

And exactly where I was going. We are seeing that migration. We are seeing a little bit of losses come off exactly the way we had projected and losses are moving right in line with what we had [Multiple Speakers]

It's important to note the foot side of that is higher yield on the book.

Exactly, higher yield on the book. And so we look at the trend I mean certainly we are seeing a little bit of reduction in used car value but very much in line with what we had projected. We talked about that for last quarter in terms of making an adjustment to our provision for that expectation that's trending very much in line. In fact, what I'd say we saw this quarter a used car value stabilized. So that was good sign for us.

The other thing Brad that you might point out is many of the autos that we are financing are in favorable sub segments to the market.

So we are highly concentrated in pickup trucks and SUVs which we've had-- which have performed better in terms of used car value and the projection of those asset car, those car classes are also better. So again I think I just go back to where we started which is we are very much in line with what our expectations were at the time that we priced the vintages, we were seeing the trend move very much in line with our expectation and really no areas of concern.

Great. Any color on that John?

Yes. Just like I said risk adjustment returns by going into prime and 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. Don on--

John, on the SNC book, I really don't think about in terms of what the lead position. I think the lead position; I'll have the exact numbers into 20% of range. If I had to guess across the overall SNC portfolio, but the important thing there is two things. One is on the origination side, and you are speaking the cap market space were climbing the lead table very nicely. So we are kind of top five and all of those in lead table from middle market origination which we are really pleased with that. And we are leading many more deals on the capital market side. Then in the overall SNC book, the real key to me is, are we earning an adequate return on each of those capital commitments. So we have a much disciplined process as we deploy capital, 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 as part of our optimization program exiting those credits where we are not good progress in terms of building broad relationships. And the important thing for me is, we just every quarter adding incremental capabilities to be able to service the clients and operate in a high quality way and the acquisition of Western Reserve this quarter is an important addition to the arsenal in terms of being able to provide high quality M&A advice.

And the next go to line of David Eads with UBS. Please go ahead.

Hi, good morning. When we look at the loan growth outlook maybe if you just give a little color on what you are hearing in terms of customer demand. And I guess quickly on the commercial side. And then is the outlook you guys 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 to John. But I said we are pretty consistent with outlook that we gave in Q2. So we had kind of 1.5% spot expectation which we hit if you exclude the late in a quarter loan sales. And partially that's a reflection of some of the uncertainty still down in Washington that we saw that boost in soft data after the election that people are hopeful that there is a Republican President and Congress and that we should be able to affect their 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 sort 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 we expand now to Vivin and to HP. So I feel good that the balanced 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 Don for some quick color.

Yes. I completely agree with that. We are seeing a lot of engagement with clients. But lot of is around refinancing. So the net new money demand is still pretty tepid out there. So I'd say about 50% of our growth is probably net new money and 50% of our growth is refinancing of other bank clients. So still -- we feel very good about what we are seeing in our origination pipeline. We like to see a boom in cash financed M&A but we are not seeing it yet. We are 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 are able to capture more than a fair share. I don't see any reason that's going to change. Part of our expansion effort into the Southeast and growing New York Metro and growing the Midwest where we've added a lot of bankers and new leadership in those markets will allow us to add net new client. That's what's going to drive the balance of our net new money growth as we guys look forward --

And we just brought new head of the healthcare industry in as well. Brad?

I think he said pretty well but I mean on the small business side probably a very similar story to Don which is the demand is somewhat tepid but it's in that way for a while. Obviously, the mortgage refinance activity is down just for the rate environment. But in the other consumer areas it's been relatively stable and strong demand as you said we carved out some nice niches that seemed to have quite a bit of run rate to them and our view going forward is relatively similar position.

Great. Thanks for the color. And just one on the securities book. I mean looks like the end to period balances were down a little less than a billion buck, the average was pretty much unchanged. Was there any kind of repositioning or anything going on there that we should be aware of going forward?

No repositioning there, just a same approach that approach we look at that as a liquidity back stop and way to moderate our interest rate risk profile. And it drives where our LDR levels which are quite strong. So nothing to --

Or there maybe we were holding some money out when rates were lower in terms of the reinvestment and cash flow, would probably the only thing I'd highlight there.

There 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 are firing on cylinders. We will 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.