Citizens Financial Group Inc (CFG) — Q1 2015 Earnings Call Transcript

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 Eric Aboaf, our new CFO, who joined us for his first earnings call after being here for two and a half weeks. Good news is Eric is a quick study and I don't think he 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, is our new Head of Commercial. We supported the successful follow-on offering of RBS's own stock, RBS' ownership is now down to 40.8%. And we are navigating through the challenges posed by the environment and 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 strong loan growth in commercial, in prime auto, in mortgages, and in student lending, particularly with our new refinance 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 a 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 clients. 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 financials 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 the 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 costs 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 a 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 quarter-over-quarter and up 30% from the previous year. I am going to cover a number of items highlighted on this slide throughout my presentation. But let me mention three important themes. First, revenue was relatively stable quarter-over-quarter despite 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 savings while also reinvesting in the business. And third, credit was benign and was further benefited by a large recovery this quarter. We continue to make strides towards our goal of a 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 by $28 million, or 3% over the prior year, but that was muted by the Chicago divestiture which impacted NII by $30 million. So on 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 of 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 costs were partially offset by continued loan growth and a reduction in paid fixed swap costs. Our net interest margin this quarter held up relatively well particularly given the decrease in rates from year end. We saw a three basis point dip 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 included 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 relatively well given the rates are below where we had expected them to be. In our outlook statement, we indicated that this defending the NIM objective will continue until we see rates rise hopefully soon. We did see a full quarter impact to previous borrowing costs, so we continue to diversify our funding base across multiple deposit categories and client segments 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 rates is consistent with 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-throughs 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 years at the end of March, down from 3.5 years at year end due to 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 an $8 million increase linked quarter in noninterest income which was driven by gains related to the sales of conforming mortgages and the previously mentioned repositioning of our securities portfolio, which offset the seasonally lower results in other service charges and fee categories. Year-over-year noninterest income decreased $11 million from the first quarter of 2014, reflecting the drag from the Chicago divestiture 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 a 2% year-over-year increase in charges and fees once we have adjusted for the Chicago sale, as our new checking product helps drive 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 were somewhat muted, but we continue to grow licensed bankers and add to our wealth advisors as part of our initiatives. On the mortgage banking front, we generated $33 million in revenue this quarter, including a $10 million gain on sales of conforming mortgages which were previously held in portfolio. Outside of the gain, we were pleased with our mortgage results. We generated nearly a 60% underlying increase in our mortgage banking revenue from the 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 dividends as we grew fees in this category by 22%. And similarly, FX and interest rate products, which are often tied to new loans and loan syndications, were up 5% year-over-year. Moving on to noninterest expense on Slide 8. We are intensely focused on driving continued improvement in the efficiency of our 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 to fund our important regulatory work. Our adjusted operating expenses of $800 million this quarter reflected seasonally higher payroll taxes and increased incentive expenses, 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 levels and included a benefit from our efficiency initiatives. Year-over-year, adjusted expenses were down slightly due to the $21 million Chicago impact, and a variety of other expense initiatives that impacted multiple areas, such as occupancy, equipment, and outside services, 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 achieved an adjusted efficiency ratio of 68%, which was relatively stable with the first quarter of 2014 but improved from the same period last year. 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 loans over the prior year. Commercial growth has been broad-based with virtually all of our businesses posting solid growth. And profits continue 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 approximately $9.3 billion, or 11%, more than offsetting the impact of the Chicago divestiture, 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 see if we can do even better. On Page 10, compared to the previous quarter, consumer banking loans increased nearly $900 million, or 2%, as we continue to ramp our organic origination in auto, mortgage, and student loans. 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 to boost yields and offset the impact of low rates. 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 effective yield and return characteristics. On Slide 11, commercial loans increased by $1.3 billion, or 3% sequentially on strength in industry verticals, middle market, mid corporate, and commercial real estate notwithstanding continued aggressive competition. Yield dipped a few basis points 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 costs. 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 divestiture. 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-offs at $4 million. Our provision expense came in lower this quarter at $58 million. This includes a $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 the rest of the book despite continued loan growth. We also continue to benefit from the runoff in the non-core book. This was down nearly $200 million in the quarter to a balance of $1.9 billion. Turning to Slide 14, our capital position remains robust. This quarter we began reporting on our Basel III basis as part of the new regulatory capital rules for banks 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 has remained relatively consistent. Post the quarter end in early April, we executed a $250 million preferred issuance and repurchased shares from RBS which on a pro forma basis would impact our CET1 ratio by 23 basis points. On Slide 15, we summarize many of our accomplishments and reemphasize our objective of becoming a top-performing regional bank. On Slide 16, we lay 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 continue 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 this in more detail during the Q&A. On Page 17, we summarize some of our key financial targets and our progress year-over-year. Our end 2016 targets are predicated on a rising rate environment. 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 rates, visible needs to defend against. We would expect to generate positive operating leverage after 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 levels, which is roughly a quarter of the 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?

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 makes you comfortable with the quality of student lending versus the reasons why other banks are trying to exit 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 the overall government-backed market. So a lot of the noise about whether this is poorly underwritten credit really relates to the government side. The private side has 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 has 7%. For someone like us, the fact that big players are exiting creates more room for us. I think we have very good technology. We have a good footprint with a solid university system in our area, and we've been very innovative in terms of designing products that really work for customers. Our new refinance loan is a unique product offering out there in the market, which is taking the market by storm. So when we look at the credit quality and the yield we get related to the risk we are taking, we like it a lot. It also potentially brings in fresh customers. If you can get someone who has now a job and has a good credit score and can consolidate their debt, on average our loans save about $150 a month. Those who refinance 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 grows. 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 that we've seen a big untapped need in the marketplace. So you talked about our refinance product; it really hits the need that is there in the marketplace as a lot of other folks have exited. That need was out there, and we don't think about this as 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 is someone with a FICO score around 785, someone in their early 30s. They have established themselves, so they are really great customers for the bank. And there are very few people playing in the space, very attractive customers, and very attractive returns. So just a good marketplace opportunity.

Okay, that's great and helpful. My second question is about expenses. It appears that expenses were very well managed compared to our expectations. Considering the $800 million, I'm curious how sustainable that amount is, Bruce. I assume you'll see a decrease in salary expenses going forward due to seasonality. Do you anticipate an increase in any other line items, or is $800 million, adjusted for seasonality, a reasonable baseline for the second quarter?

Well, I think what you will ultimately see is that 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 as a study that zero-base take out, constantly looking for ways to take out expenses that are not returning a good return on those expense dollars, and use that to fund the things that will allow you to build up your scale in the fee businesses and play offense.

Good morning. Thank you for addressing my question. Bruce, could you provide a bit more detail on the outlook slide you shared? Specifically, I’d like to know more about the challenges in wealth management that you mentioned. You noted that hiring might be slower than expected. Additionally, I’m interested in your perspective on the middle market outlook, considering you pointed out that it's highly competitive. Is there a way for you to navigate that competitive landscape, or is it primarily a direct struggle?

Yes, both are important areas to focus on. First, regarding wealth, we have a distribution strategy that aligns with the different levels of consumers in our bank. At the base, we have licensed bankers who serve the mass market. Next, we have premier bankers who are fully licensed to sell a variety of products. Then, we have financial consultants who specialize in wealth products with full licensing, and at the top is our private banking office. We saw decent progress in the first quarter across three of these tiers. We grew the number of licensed bankers by about 10%, premier bankers also by around 10%, and expanded our private banking team from 9 to 12. However, we did not achieve growth in the financial consultants segment. We started with roughly 300 financial consultants and ended the period with about the same number, which reflects a mixed quarter. This sector is attractive to all banks and market participants, including insurance companies and independent broker-dealers, making it challenging to attract these professionals. Year-over-year, we saw a 10% increase in financial consultants' accounts, but competitive conditions seem to have tightened in this quarter. I believe our strategy is sound, and lead generation from the branches is improving, so we remain optimistic about that business, although it’s not always going to be perfect. Would you like to add anything, Brad?

Yes, Bruce, another well-said point. The only thing I would add is that part of that question was 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 opportunity for us to breakthrough is that the licensed banker program is really a brand new program. We are less than a year into the licensed banker program, and while we had difficulty getting net growth out of the financial consultants just from a historical perspective, the view is that the licensed banker program can become a very attractive feeder program for our financial consultants as it gets more seasoned. So I think that is the opportunity going forward as we transition from within instead of pulling in externally.

I would like to add that we currently have around 370 licensed bankers and aim to reach 600, which means we are about 65% towards our goal. Regarding the middle market, it represents a highly appealing segment for commercial banks. Often, we either work with a small group of banks or establish a sole banking relationship, leading to significant cross-selling opportunities. We are focusing on acquiring more accounts since there are numerous middle market companies within our reach. Although we have been expanding our coverage, we haven't had a dedicated sales-oriented program for business development officers, so we are now implementing that. We are hiring approximately 15 people to enhance new account acquisition. Additionally, we are closely monitoring our existing customers who might be paying high interest rates and may consider refinancing with us or elsewhere, ensuring we maintain our relationships effectively. We are noticing some positive trends in both areas. Overall, originations increased in Q1, and our pipeline looks promising for Q2. While we are cautiously optimistic as we try to gain market share in this area, I am encouraged by the steps we've taken to address competitive challenges, and we are beginning to see progress.

That's great color. Thank you very much and then just quickly for Eric. Eric, you mentioned higher yields in both auto and student. How much of the higher yield was due to, I guess, an acquisition or maybe multiple portfolio acquisitions you 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 whether it is auto or 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 products like mortgages which invariably have yield compression. So what 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 average up the yield and kind of defend the NIM as we have described.

Yes, I have a little bit to add. Really most of the improvement in NIM is coming from the organic origination. We have talked about this quite a bit in auto. We've gone to a more mainstream prime credit spectrum as opposed to just link and super prime, and what that's done is driven our origination yields up significantly over the organic portfolio. In student, what happens is as we originate more organic production like the education refinance product, our historic student loan portfolio had some FELP loans and things like that, and that helps to drive it up.

And the other thing, Brad, too, is that in auto, we've now got much more sophisticated platforms with many more pricing sales. We have 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 a little more yield out of that. So, Matt, the short answer to that really is 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's Eric. One of the things we are focusing on is tracking the balance between organic growth and growth from acquisitions. It's crucial for us to drive growth organically through our own tools, processes, and sales force. If we look at the growth mix this quarter, it's around 60% organic and 40% from acquisitions, which is a positive change compared to where we were a few quarters ago. We like this mix because it gives us more control over credit and yield, making it a more dependable engine for growth.

Good morning. I was wondering if you can elaborate on 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 big picture comments that you can elaborate on that?

Certainly. Looking at the broader picture, these initiatives can be categorized into three main areas. First, we have some expense-related initiatives focused on organizational design. Second, there are pricing initiatives targeted at simplifying our complex price structures, particularly in cash management. Third, we are pursuing overall revenue initiatives aimed at enhancing our distribution channels and retaining our best customers. Our initial program, which we refer to as Top 1, included many smaller initiatives along with a few significant ones. In contrast, the new initiative, which we are calling Top 2, consists of up to a dozen larger and more complex initiatives that require more time for planning and execution. We had set aside some of these initiatives during the initial program to focus on getting it up and running and start realizing benefits. Now we’re revisiting these other ideas, which are fewer but potentially have a bigger impact. For instance, on the expense side, we are examining ops transformation to improve our organizational efficiencies. We believe there are additional opportunities in vendor consolidation and management, which we touched upon in Top 1, but feel there is more potential to explore there. On the revenue front, we are focusing on retaining our top customers and enhancing our cross-selling efforts across all our channels. We've brought in consultants who have successfully implemented similar strategies in other companies, and we see no reason those approaches can't work well for us too. That gives you some context, Matt. While I was on the road show, I sensed the desire for more detailed answers, but we're still in the process of gaining a clearer understanding of these initiatives, so we don’t have all the specifics to share 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 side project?

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

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

Hi. I have a couple of questions for Bruce and Eric. Looking at the consumer side, Bruce, you mentioned working on improving that area. We've noticed some growth in consumer deposits. Can you provide more details on which markets are performing better?

I believe we have a strong and balanced performance overall. In the first quarter, the Northeast region experienced the most challenges due to weather factors. While I don’t want to attribute everything to the weather, it did affect our productivity, resulting in a loss of two or three operational days in the New England area. The Mid Atlantic and Midwest regions were not as impacted. Despite these challenges in New England, we conduct a thorough assessment of all our branches and analyze their performance. Based on our evaluations, I don’t see significant deviations from the overall average. The New England, Mid Atlantic, and upper Midwest regions are performing quite similarly. I'm not sure if Brad has anything to add.

No, you said exactly right, Bruce. A little bit of slowness in New England from the weather, but other than that, no real trends geographically that stand out.

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, Eric, you can elaborate on this, but I believe it largely relates to seasonality. We received some deposits at the end of the year, and a portion of that has been withdrawn due to tax payments. By the end of March, we noticed a rebound. There will be some fluctuations, but I am very confident in our strategies for growing commercial deposits. Our loan-to-deposit ratio in the commercial sector is likely in the mid 180s, compared to our peers who are around 140 to 160. This is partly because we haven't needed funding as we've been reducing our balance sheet for several years. We have essentially gone back to the drawing board to strengthen our deposit-raising strategies while maintaining a focused approach. The year-over-year growth in commercial deposits has been very strong. We've seen our loan-to-deposit ratio drop from about 230 to the mid 180s, and I believe we can continue to grow and attract deposits efficiently. Expanding our cash management business is a critical component of this effort. We have invested significantly in talent and technology, and I think we have more potential in terms of market share. So this is an essential part of our overall strategy. Eric, would you like to add anything?

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

One last thing if I may, completely different topic. Restructuring charges have been pushed out a little more to the second quarter. Should we expect to see a larger increase in cost savings in Q2 and beyond as a result of the headcount changes?

Well, some of the costs that are coming in Q2 are really around rebranding. The last stages of separation costs from RBS, the Charter One transition coming down as we create a 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. There is a constant stream of initiatives and efficiency initiatives that are taking place. And then to Ken's first question, there are reinvestments going back into the growth areas. So I think we still have a very positive view towards expense management for the rest of this year. The wild card, I think, is the extra levers I talked about. If we can get operations 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.

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 criticisms I hear and you guys periodically have done is how much of the growth comes from purchased loans, but if the underlying growth is stronger, does that do anything to your need or reliance on purchased growth as you go 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 as a bridge until we were able to build up our own capabilities. In which case we would get the origination to levels that made sense within our strategy. If you look at where we were last year to where we are now in the current quarter, we had probably three-quarters of the overall loan growth, slightly more, approximately close to 80% of our loan growth was organic. I think it was 22% or 23% that was purchased. So the purchases that we are doing now are really the SCUSA agreement. 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 really good growth in organic auto as dealers increasingly accept us to handle the full credit spectrum including prime customers. So SCUSA was always viewed as a bridge until we are in that position. We are seeing the fruits of our investment there. Also in student, we have been a bit surprised by the upside about the take-up on this refi product. We have outperformed our expectations in terms of student growth as well. Occasionally, there will be some portfolios we can buy, like we did a tuck-in one in Q1. But even with that tuck-in, we still were predominantly organic. Over time you will see, as we move into 2016, there is an open question as to how much SCUSA we will need. But I don't really see us needing to do much anywhere else.

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 whether portfolio acquisition akin to the one you did in the fourth quarter of the energy book, would also be part of that future capital consideration.

Yes. Ken, that was really a one-off that energy book was just a cleanup of RBS and Citizens separating. I think that activity should have always been in Citizens; a reserve-based lending business is more of a traditional bank business than an investment bank business. RBS was there first, and as they reconsidered their strategy, they said, look, you always wanted this; this should be yours, 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. 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 used SCUSA as a bridge until we build our own bigger auto capabilities in prime. Occasionally, we will see a student book that we like. We bought, I think, $50 million in one last year. We maybe bought a couple million in this first quarter, but we also sold some; we try to get rid of some of the FELP exposure that we have. Net-net, I think we are adding — we haven't added any real loans net in student from a purchase standpoint. We will be opportunistic. One of the things we found in a low spread environment is when we enter into these flow agreements 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. If we are migrating towards having the capabilities to push loans at the pace we want organically.

Understood. And my second one just on consumer service charges. The 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, etc., as far as growth potential or future drags in that part of the 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 overdrafting for small items under $5 that we don't think it is right that our customers should pay an overdraft fee on that. So all those changes are in the run rate. The only thing that really in the comps you looked at, on service charges in the first quarter last year we had Chicago in the number. So it doesn't look like we've grown, but we actually have grown the service charges 2% on an underlying basis. In Q4 going to Q1, you just have seasonality, and we would expect to see that recover in Q2 quite nicely.

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.