Citizens Financial Group Inc (CFG) — Q3 2015 Earnings Call Transcript

Thanks, Brad. Good morning, everyone. Thanks so much for taking time to join us this morning. We're going to kick things off with our Chairman and CEO, Bruce Van Saun. Eric Aboaf will also be reviewing our third quarter results, and then we'll open the call for questions. In the room today with us are also Brad Conner, Head of our Consumer Bank, and Don McCree, Head of our Commercial Bank. 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 make forward-looking statements that 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 we filed today containing our earnings release and quarterly supplement. Additionally, any information about any non-GAAP financial measures, including a reconciliation of those measures to GAAP, may be found in our SEC filings, in the earnings release, and in the quarterly supplement that are available on our website. And with that, I'll hand it over to Bruce.

Okay. Thanks, Ellen, and good morning. It's a pleasure to have the chance to review our earnings release today. In addition to being joined by Eric, Brad, and Ellen on the call, as usual, I would like to extend a warm welcome to Don McCree, who is now heading our commercial business. I'd also like to publicly thank Steve Woods and Bob Rubino for the terrific job that they did in leading the commercial business on an interim basis. So let me offer a few comments on the quarter before I hand it over to Eric to take you through some of the financial details. We're very pleased with our continued ability to drive positive operating leverage in a challenging environment. We're executing well on our strategic initiatives. We're delivering good loan and deposit growth while investing in our fee-based businesses. We continue to find efficiencies in our cost base that allow us to self-fund the investments we're making in growth, in technology, and in risk and compliance. Positive operating leverage was 4% revenue growth over 1% expense growth for 3% on a year-over-year basis. It was 1% over zero expense growth for 1% on a sequential quarter basis. This is driving our efficiency ratio and our profitability improvement. We also are pleased with the efforts to arrest the NIM decline, as we grew our NIM by 4 basis points in Q3. We're focused on boosting asset yield through mix, risk appetite, and pricing adjustments, and on halting the growth in the cost of our deposit growth. Eric has been very intensely focused on this with our business heads, and we're making good traction on that front. A few other items to note. First off, our top two initiatives are on track. Second, our asset sensitivity continues to be stable with the second quarter. As we know, the Fed will eventually move rates, and in the meantime, we have profitability levers to pull. And thirdly, our balance sheet metrics all remain strong across capital, liquidity, funding, and credit. A real highlight for us in the quarter is that we continue to attract great talent into leadership positions at the company. Besides Don, we've brought in new heads of wealth, mortgage, and retail distribution over the past several weeks and we've added a distinguished Fed alumnus to our Board. This is an important byproduct of our separation from RBS and our journey to independence. So with that, let me turn it over to Eric.

Thank you, Bruce. And good morning, everyone. Overall, I feel good about the progress we are making in delivering our growth and efficiency initiatives. We are actively managing the balance sheet to deliver attractively priced loan and deposit growth, and we continue to demonstrate strong expense discipline in the face of a challenging industry landscape. In my comments today, I'll refer to our third quarter earnings presentation, which you can find at citizensbank.com. Let's start on page 3, with our third quarter financials. On a reported basis, we generated GAAP net income of $220 million, which was up $30 million, or 16%, from the second quarter, and up $31 million, or 16%, from the third quarter of 2014. Diluted earnings per share were $0.40, up $0.05 from the second quarter and up $0.06 from the third quarter of 2014. Linked-quarter results reflect revenue growth and lower non-interest expense, driven by a $40 million decrease in restructuring charges and special items. We also recorded $7 million in preferred dividends this quarter associated with our $250 million March issuance. Those dividends are accrued on a semi-annual basis, so we won't record a dividend again until the first quarter. In the second quarter, we recorded the final restructuring charges and special items associated with our efficiency initiatives, separation from RBS, and the Chicago divestiture. Page 4 outlines these items. For the remainder of the slides, I'll cover our reported results in this quarter compared with prior period adjusted results to highlight our core trend. Turning to page 5, we posted solid operating results with net income of $220 million and EPS of $0.40. Net income increased $5 million, or 2% linked quarter, as the benefit of revenue growth and lower expense was partially offset by a higher tax rate. Relative to the year-ago quarter, net income was up 9% and EPS was up 11%, reflecting 4% revenue growth and relatively stable expenses. These results are a nice clean quarter, with little in the way of noise, no restructuring charges, and no unusual items. We had a slight uptick in other income offset by a slightly higher tax rate, but the P&L reflects our fundamentals. We continue to generate positive operating leverage on both a linked quarter and year-over-year basis. We grew revenue by 1% linked quarter on good growth in net interest income. On a year-over-year basis, we grew revenue 4% with traction in both net interest and non-interest income, as we made progress on our growth initiatives. We continue to focus on managing costs, and this quarter, we held expenses flat as we build efficiency improvements while also reinvesting in the business. We continue to make measurable underlying progress against our goals of enhancing our efficiency. These efforts resulted in a 66% efficiency ratio in the quarter, down nearly a point from the second quarter and 2 points lower than the prior year quarter, given the benefit of positive operating leverage. Credit costs also remained relatively stable on both a linked quarter and year-over-year basis. Our return on tangible common equity remained relatively stable at 6.6%, up slightly over last year, as we paid our first semi-annual preferred dividend and had a slightly higher tax rate. Our tangible book value per share grew 2% to $24.52. On slide 6, let's take a closer look at net interest income, which grew $16 million, or 2% linked quarter, driven by good loan growth, an additional day in the quarter, and a 4 basis point increase in our net interest margin. Compared to the third quarter of 2014, net interest income grew $36 million, or 4% over the prior year, driven by an 8% increase in loan growth, partially offset by a slight decrease in the net interest margin due to continued pressure from the low rate environment. Over the past 12 months, we grew earning assets by 5%, or $5.8 billion, reflecting good momentum in both commercial and consumer, as we continue to deleverage our enhanced lending platform, technology, product set, and strong capital position to serve our clients. On page 7, we are really keenly focused on defending the margin in this extended low rate environment. In this quarter, we took additional steps to further enhance the efficiency of our balance sheet. We reduced the size of our cash and short-term investment portfolio, along with the associated collateralized borrowings that funded this position. This was worth 3 basis points. We have also been focused on fine-tuning the mix of our loan portfolio and ensuring that we are gathering deposits in a more cost-effective manner. Consumer loan yields were up as we continued to grow attractive opportunities in student and auto. Underlying commercial yields picked up slightly. We remain highly focused on driving originations in select products that exhibit wider margins and stronger returns such as middle market and industry verticals. We did see slightly higher deposit costs, given the impact of some second-quarter promotional pricing. That said, we are encouraged that we have been able to slow the uptick in cost through a better product mix, targeted marketing, and sharper pricing discipline. We are continuing to maintain our asset sensitivity. We are at 7.1%, assuming a 200 basis point gradual rise in rates off the 12-month forward curve compared with last quarter at approximately 7.2%. This sensitivity is concentrated at the short end of the current yield curve, and the first 50 basis point move would generate significant benefit over a flat rate scenario. On slide 8, non-interest income decreased $7 million linked quarter as we saw good results in both capital markets and mortgage banking. In the third quarter, we experienced an MSR valuation swing of $8 million and capital market fees declined in line with overall market trends. These declines were partially offset by growth in other income and service charges and fees, while card fees, trust and investment sales, and FX fees were all stable linked quarter. The growth in other income included the impact of an $8 million gain that we recorded on the sale of two branch properties. The remainder of the growth in other merely reflects normal puts and takes across the number of lines in this category. We also saw a $7 million decrease in securities gains this quarter compared to last quarter. On a year-over-year basis, non-interest income increased $12 million as the benefit of higher other income, card, and trust and investment service fees was offset by decreases in mortgage banking fees, FX, and capital market fees. Moving on to non-interest expense on slide 9. Given the prolonged low-rate environment, it's particularly important that we do a good job on expenses. We remain committed to our goal of generating strong operating leverage by actively managing our expense base while continuing to invest across the franchise to both enhance our products and distribution capabilities. Third quarter expenses came in at $798 million, down slightly compared to the second quarter, reflecting lower costs across several categories. Year-over-year adjusted expense increased $9 million, or 1%, as lower salaries and benefits and amortization of software were more than offset by an increase in other expense, depreciation, and outside services. Headcount decreased modestly during the quarter and remained relatively flat compared to the third quarter of 2014, even though we added roughly 430 salespeople across our consumer and commercial growth initiatives. As I mentioned earlier, we achieved an adjusted efficiency ratio of 66%, which was down nearly 1 point from the second quarter and down 4 points from the prior year quarter, given the benefit of positive operating leverage. We continue to stay focused on delivering our growth and efficiency initiatives, including the Top II programs to continue this favorable trend; while it's in its early days, Top II is on track. Now turning to the consolidated average balance sheet on slide 10, because of the balance sheet repositioning that I mentioned earlier, our total earning assets of $123 billion were relatively stable with last quarter, as growth in commercial and retail loans was offset by a decrease in short-term investments. Consumer loan growth reflected continued momentum in student, mortgage, and auto loans, which was partially offset by a continued decline in home equity balances and the rundown of the non-core portfolio. Commercial growth was driven by commercial real estate, franchise finance, and corporate finance. As I mentioned, we continue to refine our strategies to grow deposits in a more cost-effective way, and here we also continue to gain traction. Average deposits in the third quarter increased $2.5 billion, or 2%, over the second quarter and were up $9.3 billion, or 10%, over the third quarter of 2014. On slide 11, consumer banking loans increased $863 million, or 2%, sequentially, driven by growth in student, mortgage, and auto. Consumer loan yields increased 1 basis point, reflecting continued improvement in mix, as we focus on attractive opportunities in student and auto origination. On slide 12, commercial loans increased $524 million, or 1%, linked quarter, driven by growth in commercial real estate, franchise finance, and corporate finance. We're being thoughtful about how we claim commercial, given strong competition and our effort to improve risk-adjusted returns and yields, and our results also reflect some normal seasonality. Slide 13 focuses on the liability side of the balance sheet and our funding costs. Average interest-bearing deposits grew $2.1 billion, or 3%, linked quarter, with particular strength in money market. We were also making progress in growing DDA accounts. While our deposit costs crept up again this quarter, the pace of growth slowed as we began refining our retail promotional rate offerings to be more targeted than in the first few quarters following last year's Chicago divestiture. We also carefully calibrated some above-market commercial deposit pricing. Compared to a year ago, average interest-bearing deposits increased $8.4 billion or 13%. On slide 14, we've laid out the key initiatives that support the balance sheet and fee growth in our turnaround plan, as well as our incremental top two initiatives and assessed progress during the quarter. We are continuing to lay strong foundations and gain momentum across most of these initiatives and are intensely addressing some of the challenges in mortgage and wealth. In asset finance, we need to shift our origination strategy, given RBS's retrenchment in the US, as they had been an important source of flow. On slide 15, I’ll hit the highlights on credit quality, which remained benign, with net charge-offs at $75 million and a provision of $76 million. Asset quality remains very good. Our NPLs were down $16 million, or 2% in aggregate in the quarter. Our allowance to loans remains relatively stable at 123 basis points, while our allowance to NPL ratio improved from 114% to 116%. We do not see any meaningful issues in our relatively modest-sized energy portfolio. Turning to slide 16, our capital position remains robust. This quarter's CET 1 ratio was 11.8%, which was well above our peers. We're above our LCR requirement, and our LDR has been relatively consistent. In August, we executed a $250 million subordinated debt issuance and repurchased shares from RBS, which on a pro-forma basis impacted our CET 1 ratio by 22 basis points but had no impact on our total capital ratio. Turning to slide 17, let me summarize some of what you can expect next quarter, but all in the context of the full year 2015 outlook that we've previously provided and that we broadly reaffirm today. Compared to the third quarter of 2015, we expect to produce linked quarter loan growth of roughly 1.5%, broadly consistent with recent quarterly levels. We also expect net interest margin to remain stable with Q3. We will continue to focus on improving asset yields and better managing the cost of deposits. We expect modest expense growth in Q4 due to technology projects coming on stream and seasonal factors. We would expect to continue to generate positive operating leverage, thereby improving our efficiency ratio, profitability, and returns. We expect underlying credit metrics to remain strong and favorable, but we would expect the provision to build in Q4. Finally, we expect that our CET 1 ratio will remain relatively unchanged from the Q3 11.8% and we will manage the LDR to around 97% to 98%. With that, let me turn it back over to Bruce.

Thanks, Eric. And I guess, in summary, we feel pleased with our performance this quarter. We have a good plan and we're executing well against that plan. So with that, why don't, Brad, we open up the line and take some Q&A?

Good morning.

Hi, Matt.

Could you just talk about the approach to managing the balance sheet going forward with rates seemingly staying lower for longer? And even if we do get an increase, maybe it's just 1 or 2. You guys are obviously very asset-sensitive. How do you think about maintaining that asset sensitivity versus maybe bringing it down a little bit to protect the NIM going forward?

Yes. Why don't I start, Eric, you can add to it. We've consciously maintained relatively stable asset sensitivity. We do think the Fed will move, and I'd like to refer to our position as a coiled spring that will release and deliver some meaningful net interest income benefit. At this point, late in the zero cycle, to go increase our asset duration meaningfully would potentially snatch the feat from the jaws of victory. So we will take some steps at the margin to recognize that the horizon is being pushed out and it's likely to be more gradual than initially we anticipated, the market anticipated, but I don't think we should change the position in a substantial way.

Matt, I'd add the following. Our asset sensitivity is highly concentrated at the front end. 80% of it literally comes through in year one, and 6% front-end in year two. So the opportunity cost isn't particularly large. To close down our position, it's not as if we put on a five- or ten-year duration positions. We literally have to put on one- and two-year swaps, and if you think about what you can earn on that, it's actually quite small. And so the payback, even based on current forward curves, and clearly they swing around, is 3 to 4 times. So you're really in a position where we feel like there's some decent upside, even with these lower forecasted and slower forecasted rate increases once perhaps every six months. That's a better position, and that's a position that we'd prefer to hold for the time being.

Then just separate from the rate discussion, as we think about the balance sheet optimization that you made some good progress on this quarter, and obviously that helping the NIM, how much more of that is there to do from here? It's obviously good if you can grow net interest income and keep the balance sheet stable, but how much more opportunity is there to, call it, re-mix, or as you mentioned, tweak some deposit pricing, how much more and how much does that play out in the NIM over time?

What we have is we have an opportunity to continue to defend NIM with rates in a relatively flat scenario here. We've been, for example, on the deposit side, we've been inching up our deposit costs by about 2 basis points per quarter over the last three or four quarters. We've been able to slow that down to 1 basis point, and you can imagine, we're trying to slow it down even further. With Don and Brad's support, we found some good opportunities on the deposit side to do that. On loans, the work continues. It's primarily product mix in consumer; it's tactical pricing and returns and some mix in commercial, a mix of product mix there in commercial and pricing acumen and intensity. That, in a way, helps us defend the back book roll-off which continues. So in a flat rate environment, we have the ability to keep NIM stable. We will try to tick it up a little bit, but we've got it stable, and for the time being, until we see some real rate rises, we have some confidence in being able to continue to deliver that.

Okay. Thank you very much.

Great. Thank you. Good morning, everyone. So I guess, first of all, I thought it was great that you guys were able to keep expenses down, given the further investment in the business. Could you just give us an update, though, on where you stand with Top II going forward, or at this point?

Yes, sure. So in Top II, as you recall, Ken, there were three major categories. One was expenses, one was pricing initiatives, and then one was the broader revenue initiatives. On the expense side, we're making excellent progress around the main two thrusts there. One is what we call ops transformation, where we are stepping back and taking a look at how we're organized and making some changes, and kind of ultimately we're aiming for the hat trick, we like to call it. We want to have a better customer experience, better risk controls, and of course efficiencies, and we're starting to see some of those efficiencies come through. They'll come through additionally in Q4 and have a full-year effect on 2016. We also have a greater effort to work through vendor contracts, and looking for opportunities to consolidate and get better pricing from vendors. That has been part of Top II, and that is also flowing through as we work through that initiative. So we feel quite confident that we've already got that in motion. We are starting to see some of the benefits come through, and it is on track. Pricing, similarly, a bunch of that is on the commercial side; cash management is one area. We're rolling that out in waves, and so you're going to start to see that flow through here in the second half of the year. Then we will get a full-year effect of that in 2016, so we see that tracking to expectations in terms of client impacts and our ability to execute that program. On the third bucket of revenues, we have a couple of major thrusts there, which are in pilot phase. That's largely on the consumer side; there's a little bit on the commercial side there, as well. So we've been running the pilot through Q3, we've expanded the pilots into Q4, and we're putting the infrastructure in place to do the full rollout early in 2016. Everything we've seen in those pilots is positive in terms of our ability to deliver the revenue potential on the full program. So, broadly speaking, I'd say, we feel good about the program taken as a whole.

All right. That's great. Then just really quickly, on the iPhone financing, I know it's a small piece of your business, but any commentary on how that financing program has been going?

Yes, look, I'll start, Brad, you can obviously add more depth and color to it, but I'd say we were very pleased. First off, that we were able to secure the partnership with such an iconic company like Apple, and they certainly have high expectations for their partners in terms of delivering an outstanding customer experience. What we're most pleased about is we've certainly executed the program extremely well and have really satisfied Apple as a worthy partner, and the customers are getting good experiences as they come into this program. It is ramping about to expectations, so it's a relatively modest pilot in the stores at this point. It will move later to online, which will ramp it up to greater size, and then obviously, you get into the whole Christmas season, and through Thanksgiving to Christmas is a sprint. So we do expect to see a fairly good level of ramping up in Q4, but we're very pleased with what has occurred to this point.

Bruce, you did a very good job of covering it. Also, it started very much in line with what we expected. It was a nominal impact on the quarter, about $60 million in balances for the quarter, so it was a nominal impact on the quarter, but it is giving us confidence that it's a very viable program for us in the long run. You said it well; we're pleased, and Apple is pleased, and the partnership is off to a very good start, so there's strong potential for the program for the long run.

Great. All right. Thank you very much.

Okay.

Hi, good morning. My first question is on the efficiency ratio. You clearly have made good progress year-over-year from 68% to 66%, and given that, like Matt said, investors are much more of the mindset of lower for longer. Could you take us to have much more improvement that could be in 2016 in this efficiency ratio if rates don't normalize?

I believe the main point is to maintain our focus on achieving positive operating leverage. No matter what happens with interest rates, we are in a strong capital position and have the capacity to grow loans. If we successfully enhance our net interest margin, that will directly contribute to ongoing revenue growth. We're actively investing in our fee-based services. Some of the team members we’ve brought on will need time to fully integrate, which should contribute positively to our fee expectations moving forward. We will continue to recruit and strengthen these areas while managing the costs associated with hiring. This should help us achieve positive operating leverage. On the expense front, we have made significant efforts to self-fund the investments required for our growth. This involves continuously reviewing our expenses to identify inefficiencies and eliminate unnecessary costs, allowing us to keep overall expenses as flat as possible. We have succeeded in this for the past two quarters, which is impressive considering our investments in technology and growth strategies, alongside regulatory requirements. We anticipate that it may become more challenging. We expect a slight increase in expenses in Q4 due to technology depreciation and software amortization coming into play. However, we are fully committed to achieving positive operating leverage, which will enhance our efficiency ratio and boost our profitability and return on tangible common equity. As we prepare our budget for next year, the entire management team is focused on this goal.

Got it. And just a follow-up question for Eric. Given that you're compliant with the LCR, should we think about the size of the securities portfolio from here relative to your loan and deposit growth?

The securities portfolio is right-sized, to be honest. We run an LCR above the requirements but not way above purposefully. So we got a good-sized balance sheet. You saw that we compressed it a bit this past quarter as we took out some collateralized borrowings that we didn't think were particularly valuable to have and in the LCR world you don't get credit for that. That had a small reduction effect on the portfolio, but the portfolio is properly sized. Over time, you'll see that we will use a mix of MBS and treasuries from that portfolio and then classic vanilla interest rate swaps to manage the duration. So it's within the range, probably go up and down a bit here and there, but within the range for now.

Okay. Thank you so much for taking my question.

Hi, Eric. Hi, Bruce. A couple of questions. Can you update us on your plans on loan portfolio acquisitions, since that was something that you all had done more actively last year and even earlier this year? Third quarter, it doesn't seem like you had anything material, but if you could just update us on that?

I'd say we always do those portfolio acquisitions as a bridge to building out our own capabilities. The SCUSA arrangement was put in place before we had really rolled out our broader platform and our ability to really penetrate the prime sector of the market. And as we have been able to scale our own capabilities up, we've been scaling back on that SCUSA flow agreement. We also opportunistically entered into an arrangement with SoFi on the student loan side. We like the overall marketplace and the product that they originate, which has characteristics of very high credit quality and good risk-adjusted returns like our own growth, so that allows us to accelerate our growth a little bit. That is a modest-sized program. It's about $500 million over the course of the year. Other than that, at this point, we don't have much going on or much that we are looking at. But we will continue to be opportunistic. As I said, we have a very good capital position, and we're putting that capital to work through our own channels and building client relationships and building our book of relationships and customers that we can cross-sell into. But again, if there are opportunities that come up, we will take a look.

Yes. You did a great job. I was just going to add one point to this, which is we did step the SCUSA portfolio purchases down from the second quarter to the third quarter, and you can expect, we expect one more step down in the fourth quarter. So it will actually be a little bit smaller still in the fourth quarter, so we're continuing to step that down.

Okay. And on the resi mortgage side?

When you look at the maps on the quarter, probably around 10% of the net loan growth was the net purchase volume, so it's quite a modest number, at this point.

Good. That means even resi mortgage, you are doing through your own originations now, more and more?

More and more, right.

Certainly. The change in the MSR affected us in several ways. We experienced a $6 million recapture on our MSR asset in the second quarter and encountered a $1.7 million impairment this quarter. Overall, there was about an $8 million fluctuation in mortgage fees from quarter to quarter, which negatively impacted mortgage revenue. Additionally, we observed a 10% decline in application volume in the third quarter, primarily due to market conditions, which align with general market trends. On the hiring front, looking at the year-over-year numbers, we are still making steady progress. The net hiring was relatively flat in the third quarter, largely due to intense competition for quality loan officers. While we are successfully attracting loan officers, there is significant competitive pressure in the market. Another factor influencing this was the distraction caused by the total resting implementation and the trade implementation that took place in early October, which added strain to our operational capacity and that of the broader industry. Consequently, we had a net increase of only one loan officer in the third quarter.

Yeah. All right. And the good news underlying is that we continue to increase our market share.

Right.

So as we're going to loan officers, our market share for each of the last three quarters has continued to pick up. The originations in the quarter were up on a sequential quarter basis, so notwithstanding that applications were down a little bit, the actual originations that came through were up. On the management change, we had a couple of our folks looking to retire at the end of the year who have been good soldiers for us, both on the wealth side and in mortgage. And we're fortunate that we are able to go out into the market and attract some real talent into the organization.

Okay, great. Thank you.

Hello. Thank you for taking the question. On the final exit of RBS from your shareholder structure, whenever that happens, could you talk about what impact that's going to have on you, operationally, either in terms of where you get more flexibility or where potentially there is a bit of dissynergy in that they have been helping you get some business?

I believe that the impact will be minimal at this point. The effects of RBS reducing their ownership and scaling back their global activities have largely already been felt. We identified that the asset finance sector was one area where we were receiving referrals from their credit book and relationships. However, we anticipate that this support will diminish over time, and we need to devise a plan to replace it. We have some ideas in mind, but we're currently treating that initiative to grow the business with caution until we figure it out, something that is a priority for Don. On a broader scale, in the capital markets, we have leveraged their platform and collaborated in certain areas, and we have plans to eventually transition away from their FX and derivatives platform to utilize our own starting in Q1. This transition will enhance our flexibility regarding the products we offer and increase our ability to compete effectively in the market. This presents a potential advantage for us. Regarding RBS's risk oversight responsibilities, we've generally received positive support from them as we shift from a defensive to an offensive strategy regarding changes in our risk appetite. Therefore, I don't foresee any significant changes resulting from their reduced oversight responsibilities. Overall, most of the effects are already reflected in our current results or forecasts.

Thanks. And then, switching topics, a little bit, the step-up in commercial yields this quarter, what was behind that? Was it mix or was it pricing improving?

Eric, why don't you take that and then flip it to Don for color?

The core of that is some pricing discipline. We saw origination yields across commercial tick up almost 20 basis points. There tends to be volatility from quarter to quarter, but that was a larger than typical uptick, and if you dig deep, what we've been doing is working very tactically with our bankers and helping them with benchmark data on pricing so that they can price effectively on new business. That's been quite productive, as well as about three months ago, four months ago, it would have been in the middle of the second quarter, we rolled out our updated returns calculator, which also gives them some real insight and tools. So we've been helping there and that has begun to get some nice traction and we are starting to see the results of that. Obviously, there will be some volatility from quarter to quarter. But we're pleased with some of those early results.

Eric, that's exactly right, and I feel that that's fully embedded in the commercial bank division right now. I'd point to the fact that we are doing less low-margin business, which is moving the overall book slightly up. And as Eric said, it will move a little bit quarter to quarter, but we feel like the discipline is fully embedded.

Excellent. Thank you.

Hi, thanks. Good morning. My first question is just on the fee outlook. It's the one path that you guys don't talk about in the explicit guidance. Eric, I heard your point about some of the third-quarter items were certainly in line with market behavior. Can you just give us an update on your outlook for fee growth trajectory and any changes versus prior expectations, if any?

I would just say, Ken, we did have a clause in our outlook statement about fees at the time where we said we anticipate fee income growth. Typically, that is not part of the outlook. But anyway I would say in general, the fourth quarter has some seasonality to it. So when we look at some of the activities on the consumer side, we typically see a nice little seasonal updraft there. We had, on the commercial side, a relatively quiet third quarter, and there's often seasonality there as well. We typically engineer a few leasing transactions in the fourth quarter. So there is some optimism around our ability to move the chains both on the consumer side, as well as on the commercial side. Eric, you want to add to that?

No, that covers it well.

Thank you, Bruce. Stand corrected. I see it on the deck. Second question, on CCAR, when you got your original approvals for the three years, it included the $250 million for next year. I know we haven't even gotten scenarios yet for next year, but my question is just do you think you'll even be able to contemplate a different ask than that original $250 million or are we really talking about 2017 CCAR for a CCAR ask than that original $250 million you got for 2016?

I should clarify that the $250 million is part of a multi-year agreement we established with the Fed in order to align our capital structure with that of our peers. Ultimately, this was connected to a total of $2.75 billion in buybacks along with the issuance of capital securities. We've completed this process, and the remaining $250 million is included in our next CCAR submission. However, this does not reflect our future plans for the next CCAR submission. We need to evaluate our capital sources and uses, estimate the growth of our balance sheet, and determine our dividend policy. We will also consider how to reduce our CET 1 capital relative to our peers. We will have discussions with the Fed about this and go through the necessary processes to reach our decisions. It's important to note that the $250 million is not fixed and can change.

Okay. Then just one quick clarification then on that $250 million, was that $250 million just a year thing, meaning that was that $250 million, in fact, could that still even happen in the first half and not even be part of the 2016 program or is it distinctly part of the second half and beyond '16 program, whether you ask for more or not?

Yes, I'm not sure I completely follow, but I'll just try to explain. So in the four-quarter CCAR submission that we just had approval for, we've had two $250 million transactions, which we've already executed. This $250 million was indicated to be in the next submission and early in the period for the next submission. We will certainly look to do that and then potentially something additional as we work through the plan for the next submission.

Understood. Perfect. Thank you, Bruce.

Good morning, Bruce, good morning, Eric. Thanks for taking my question. My first question really relates to what looked like pretty stable balances in the commercial business, the C&I business specifically, and pretty healthy growth in the commercial real estate portfolio. Could you give us a little more insight as to what the trends are in both those portfolios, and if that's going to be a primary driver of your growth in the fourth quarter?

Yes, Matt, let me start, and then Don will weigh in, as well, to give you a little texture. You saw some average balance growth in C&I. In particular, you saw a little bit of small dip, EOP, on the C&I line. On the other side on the ledger, on the CRE, as you described, you had nice sequential growth of 6%, which was particularly healthy and robust. There are some movements there. Originations have been, on commercial, and in C&I, in particular, have been pretty decent all year, including this past quarter, a little less activity on draws, which tends to sometimes be seasonal. But it's a business where we continue to see some momentum on the one hand, and on the other hand, it's intensely price competitive, and we're also being disciplined and careful about where and how we grow that.

Yes, I think, let me just add to that. That's exactly right. It's a tale of many cities. We're seeing really good growth in real estate; we're seeing really good growth in franchise finance, a little bit of weakness in our asset finance business, a little bit of weakness in our mid-market business. The mid-market business is entirely due to utilization. A suspicion there, although we haven't fully proved out, is much of that has to do with commodity prices and general economic outlook in some of our mid-market areas. We just think our clients are borrowing a little bit less money at this split second, and we also see that in the opposite indicator, which is growth in our deposits. So we feel very good about where we are in terms of quality of intensity, quality of upgrades, of personnel developing pipelines, quality of calls in terms of corporate finance calls, as opposed to just lending calls. So all the indicators we see in the franchise are excellent and we think we're setting the stage for continued growth in the business.

So Don, are you getting an elevated level of pay downs in the third quarter versus the second quarter, which we've heard from a couple of the other regional banks?

I haven't seen it necessarily in pay downs. We've seen it in utilization, so less draws under existing commitments. And it more than explains the entire total reduction in C&I loans, so we are growing in underlying portfolios, but we are also building our pipelines and we don't see the overall commitment book decline.

Pay downs were actually in line with the average for the last five quarters. Pay downs were actually a little lighter than in the second quarter, for that matter, so just on the utilization line this quarter, which tends to be jumpy. We have utilization, quarter-over-quarter, you see swings in utilization of $300 million, $400 million, $500 million, and so obviously carefully working through it, but not particularly out of the ordinary.

Eric, my second question is for you, in terms of the cost of the long-term debt has come down quite dramatically. The balances have increased a bit over the past year. Is there much more you can do in terms of bringing the cost of your long-term debt down as part of your NIM planning?

Long-term debt is, like you say, it's long-term, right. There's a limit to what one can really do. We have tended to issue floating or issue swap to floating, which gives us some flexibility, and obviously, we'll manage that in the scheme of our duration position. From a perspective that we have is that over time, we have said that we'd add a little bit of senior debt to the stack just to be a little more balanced. That said, we'll do that carefully and modestly, given the rate environment. But if there are some low points in the curve, it's also a nice time to pull a little bit of that down, put it on the balance sheet, and do it at a time before the rates pop up.

Thanks for taking my questions.

Thank you. Good morning, Bruce, good morning, Eric. Can you share with us your thoughts about capital? You've touched on it already, but you guys obviously have capital levels, your common equity Tier 1 ratio is above the peers, as you pointed out. What's your comfort level in where you think that could get to, and what strategies would you use to bring it down?

Well, we've done up to now, Gerard, is a combination of actually the conversion transactions, which in effect buybacks. We've had a dividend policy set at 25% to 30%, and we had an ability and a desire to really grow loans and grow the loan book and growth to that strong capital position. I do think it is a bit of a loop here, as we put that excess capital to work, it helps drive revenues. It helps drive that positive operating leverage and it helps improve our returns. Then the more capital we can self-generate, then we can feel confident that we can meet all the requirements to run the business without having to have that cushion. So the calibration in terms of the timing for removing some of that surplus really is linked to some degree to how quickly we can get our returns up so that we're self-sufficient and we're not hamstrung when we see good opportunities to grow loans. We don't want to be drawing down that capital for position that's below us, so that to me is the timing. It will be a combination, going forward, of probably faster than peer loan growth. Ultimately, when we're in a sustainable position to be able to do that, then we can look to increase the buybacks and bring that capital level back to where peers are. There's no reason, at the end of the day, once we're through our turnaround period, that we should have a new guy premium, if you will, quote-unquote, and a higher capital level than peers. There's nothing in the mix of our business, our risk appetite, our stress losses under CCAR, that would say there's a requirement for the medium-term or longer-term, to hold extra capital than peers. I do think we are just managing our way through this and using it as an advantage right now as we work to improve our overall performance.

Thank you. I agree with you about the new guy premium is not going to be needed. If we get to 2017, and I don't think the regulators will allow this in '16 CCAR. But if you all, the industry, not just Citizens, are given the opportunity to give back in excess of your estimated earnings in that CCAR. Would you guys consider doing that, where you could really bring it down to get that ROE to a higher level?

I think, I'd fall back on my previous answer. So I don't know if I want to be pinned down to timing. We have got a lot of things over 2016 and 2017 that we have to see play out in terms of the path for the Fed and the path for our profitability improvement. So I do think we'll certainly monitor the signals coming from the Fed and where the peer group looks likely to go, and over time, continue to try to narrow that differential.

Great. Then finally, shifting gears, you guys mentioned that you had a deposit program in place with higher rates, which you have started to fade away going into the third quarter. Are there any plans for 2016 for any deposit specials, where you look to grow the deposits through maybe higher rates or special products?

It's Eric. We are managing deposits on a quarter-to-quarter basis. Recently, we've scaled back on some of the more aggressive promotional campaigns we've been running in consumer deposits over the last few quarters. With Brad's support and guidance, we are also being cautious to stay aligned with our peers rather than trying to lead the way, which has helped us control the increases we've experienced. Month after month, we've seen improvements, even during the third quarter, and we expect this trend to continue. Similarly, on the commercial side, we've been adjusting some older balances, and that will persist. As interest rates rise next year, the market rate will likely increase as well, and we typically lag behind in our response. We've shared our betas, which show that there is usually more lag in consumer deposits compared to commercial. Additionally, we are continuously reevaluating our consumer product offerings to encourage higher checking account balances, especially for those low-interest balances. On the commercial side, expanding our cash management business helps attract more checking balances, tying in with the funding cost opportunities we've identified.

Okay. Thanks, Eric.

Morning.

Hi.

Just a quick question, back to the margin. I mean, it's good to see the pricing and the other yield initiatives that are benefiting the margin, and it sounds like that's sticky, and that the margin could hold at this level. Could you talk about the risk that it could come at the cost of loan growth as you focus on these pricing opportunities and then what that could mean for annual growth for 2016 in the total loan balances?

John, this is Eric. I'll begin by discussing the margin, specifically the yield improvements we have noted, particularly in loans, which are influenced by our product mix. As we increase our student loans and other higher-yielding products like organic auto loans, we see an advantage in our yields. This trend is also evident in the commercial real estate sector, where we are becoming more disciplined, especially in our REIT business, while also expanding into different areas. This shift in mix is a natural approach to maintaining or even improving yields. The next aspect is the pricing of commercial loans, where we need to be cautious. Don and I are aware that pushing too hard on price can disrupt volume, so our goal is to identify the right balance for pricing that allows us to secure loans with good yields and maintain volume. This is something we focus on daily. Don, would you like to add anything?

I'd agree with that, Eric. I think the important thing is we're really managing this on a client-by-client, loan-by-loan basis, with a lot of senior intention to it. So we're making smart decisions on where we want to play and where we don't want to play. And I don't think our effort to be disciplined on pricing is going to have a particular effect on volume. I feel it's a competitive market out there, and we're trying to stay as disciplined as we can, both on the credit side and on the pricing side, but we see lots of opportunity.

So given that, could this 1.5% linked quarter loan growth expectation carry through for 2016 and therefore we're looking at somewhere in the ballpark of 6% annually?

What we've said consistently this year is that we will give you our 2016 guidance in the January call. But what we've proven since we've been a public company is we can shoot for something like that. We've been able to deliver it, but I really don't want to get drawn in on 2016 until January.

Okay, that's fine. Then one last question is on the ROTCE. As you acknowledged early in the call, it was relatively stable here around 6.6% or 6.7%. Can you just update us on your thoughts around the pace in the improvement in that ratio that you expect, barring any help from the Fed?

Yes, I believe that ties back to your previous question. We are very focused on achieving positive operating leverage. Currently, we are increasing our capital due to share repurchases authorized under the CCAR, which may create a slight challenge in the calculations. However, the upside is that we are also increasing our book value per share, which is a good sign. Looking ahead, we anticipate that everything will align in the next CCAR cycle. If we can demonstrate consistent profitability growth and reintegrate buybacks regularly on a quarterly basis, we should avoid building capital at the same rate.

Hi, good morning. Maybe just one last one from me. If you could talk a little bit about the capital markets line. You dipped a little bit from a really strong second quarter. I was just curious how much of that is due to market factors versus seasonality and timing and just the general lumpiness of that business?

I'll take that. I would point to just the volatility in the market in the third quarter. It was across high-grade, high-yield, and the syndicated lending market. It was just tremendously volatile, and the market seized up really toward the back end of the summer, and that was on top of what we usually see, which is a summer slowdown, in terms of the transactional business. So, I do think it was a tough comparison with the second quarter, as you said, which was a very strong quarter. We're seeing reasonable activity as we move into the fourth quarter.

Yes, as I indicated in an earlier answer today, we typically see a seasonal pick-up in the capital markets area in Q4, and it looks like our pipelines would give some confidence to that statement. All right. Well, that's all the questions that we have for today. So thank you for dialing in and joining us this morning. And again, we feel we have another good quarter, pleased with our performance, executing well. And feel quite confident about our future outlook. So thank you and have a good day.