Citizens Financial Group Inc (CFG) — Q4 2015 Earnings Call Transcript

Thanks, Brad and good morning everybody. Thanks so much for being with us today. We’re going to start the morning off with our Chairman and CEO, Bruce Van Saun and our CFO, Eric Aboaf reviewing our fourth quarter and full year results and then we’re going to open up the call for questions. With us today are also Brad Conner, our Head of Consumer Bank, and Don McCree, our Head of Commercial Bank. I’d like to remind you all that in addition to the press release, we’ve also provided a presentation and financial supplement, and you can find all those materials on our website at investor.citizensbank.com. And of course I need to remind you that during the call, we make some forward-looking statements which are subject to risks and uncertainties. And the factors that may cause our actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed containing our earnings release and quarterly supplement. Additionally, any information about any non-GAAP financial measures, including reconciliations of those measures to GAAP measures 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’m going to hand it over to our CEO, Bruce Van Saun.

Well hi and good morning everyone, I appreciate you dialing in. 2015 was the year of significant progress for Citizens. We completed our separation from RBS becoming fully independent in late October. Our financial progress was in line with expectations and guidance in spite of a lower rate environment than anticipated. We achieved good loan and deposit growth, we delivered positive operating leverage and savings from our efficiency initiative kept expenses flat notwithstanding significant investments in growth areas and in technology. We made strides in improving our product offerings and service quality and customer satisfaction is trending upwards. We hired some great talent including Eric and Don right here with me and we have some great new initiatives on the colleague front like leadership development and career mapping. Our risk management capabilities continue to strengthen, we have had a good result on CCAR and we’re working hard to achieve the regulators tightened standards. And we continue to deliver enhanced technology capabilities including a new backup datacenter, a new mortgage platform and expanded online and mobile capabilities, so all-in-all, solid performance on all dimensions, backing well against our turnaround plan. We ended the year with a good fourth quarter and we feel good about our trajectory as we head into 2016. In Q4, we achieved good loan growth, as well as good NII and fee growth. We had expected to do even better but the leveraged credit markets became challenged during Q4 disrupting some of our capital markets pipeline. Hopefully that market will come back later in Q1. Expenses increased modestly given technology-related spend and 6 million of costs largely associated with our growth and efficiency initiatives. Additionally, our credit provision grew by 15 million versus Q3 due to a reserve build. Earlier this year, we have seen back book improvements offset our reserve build tied to loan growth, but the back book is now so clean and we don’t expect to see much of that continuing. The balance sheet remains robust with excellent capital liquidity and funding position and strong ratios and metrics. For the full year, highlights include 13% adjusted EPS growth, positive operating leverage of 3%, 8% average loan growth and tangible book value per share growth of 5%. All of which I might add compare very favorably with peers. So now I’d like to turn it over to Eric to give a little more color on the financials.

Thanks, Bruce, and good morning everyone. Since Bruce covered some highlights, I’ll direct you to a few pages in our slide deck for details on Q4. On Slide 6, we grew adjusted EPS by 5% this quarter and 8% compared to the fourth quarter of 2014. This was supported by good operating leverage with revenues increasing by 4% and expenses rising by 2%. We improved the efficiency ratio by 135 basis points year-over-year. On Slide 9, our NIM increased by 1 basis point this quarter. We did well in growing our loan yield by adjusting our mix and risk appetite while maintaining pricing discipline. We also reduced interest-bearing deposit costs by 1 basis point this quarter, which reflects our progress in refining our offerings and pricing strategies. However, we lost 1 basis point due to higher cash balances linked to some long-term funding we raised this quarter along with the associated borrowing costs. On Slide 10, non-interest income rose by 9 million in the quarter, driven by both consumer and commercial service charges and fees, aided by our treasury solutions initiative and some seasonal effects. Capital markets fees fell short of expectations due to fixed income market disruptions during the quarter. Securities gains increased slightly to mitigate a decline in other income, particularly since the third quarter included an $8 million brand scale gain. On Slide 11, as anticipated, our adjusted expenses rose quarter-over-quarter due to higher technology expenses. This was influenced by the establishment of our new backup data center and the execution of various technology and operations initiatives aimed at enhancing offerings and fostering future revenue growth. Aside from this increase, we maintained steady salaries and benefit costs. We also achieved solid loan growth in both the consumer and commercial segments during the fourth quarter, which you can review on Pages 13 and 14. In the consumer sector, growth was bolstered by continued expansion in mortgage and student loans, along with growth in the other retail category, which includes our unsecured iPhone financed products that reached $220 million in balances by year-end. We have effectively shifted our growth focus to higher return categories, leading to a 4 basis point increase in consumer yield for the quarter. Additionally, we witnessed significant growth in commercial loans, particularly in commercial real estate, as client relationships developed earlier in the year began to mature. We also maintained our strong performance in corporate franchise finance and corporate finance, which helped balance the reductions seen in middle market lending as borrowers there reduced line utilization. Overall, the measures on our balance sheet displayed results stronger than anticipated, as you can see on the next couple of pages. Moving on to Slide 18, we compare our performance against the guidance provided in January 2015. Overall, results were largely in line, balance sheet growth targets were met, and while revenue growth was slightly lower than expected primarily due to first-half interest compression, we managed to offset this with focused expense management and favorable credit conditions. On Slide 19, we made good progress with our strategic initiatives. Most are on track, but let me highlight a few challenges and our responses. In mortgage, our new Head, Chris Morris, has developed a clear plan aimed at achieving operational excellence following the introduction of new hedge fund platforms in Q4 of last year, which temporarily hindered our throughput and impacted net recruitment. We believe this strategic execution will lead to stronger performance in 2016 in areas like hiring, retention, and productivity. In wealth management, under the new leadership of John Bahnken, we saw a strong upswing in recruiting this quarter and anticipate positive momentum as we enter 2016. We plan to further transition to fee-based models, and in asset finance, we are repositioning this as a cost of products for our corporate clients in light of recent losses from the RBS customer referral. We saw good progress in Q4. In summary, we delivered solid results both for the quarter and the year, and we continue to make significant strides in our strategic initiatives, efficiency efforts, and balance sheet repositioning. We are well-positioned as we head into 2016. Back to you, Bruce.

Thanks Eric. I'd like to elevate a little starting on Slide 20, to focus on our goals in turning around Citizens. We aspire to be a top-performing bank that delivers well for its stakeholders with serving customers well at the heart of our culture. On Slide 21, we show some of the objectives we have within our plan. We made good progress in 2015, pretty much across the board well there's still more to do, we are a work in progress. On Slide 22, you can see the financial targets that we laid out and the steady progress we are making in improving our results. So with that as a backdrop let's shift to our outlook on 2016. Slide 23, the markets are off to a rough start so far but our planning assumption is still for steady U.S. GDP growth, solid loan demand and say one to two more rate hikes coming in July and possibly December. To deliver strong performance, we have a few key objectives: we need to sustain robust loan growth and we need to keep NIM stable to trending up on an underlying basis. Rate hikes if they come will deliver additional benefit. We need to drive our key initiatives and we need to deliver better fee growth. And we will need to keep finding ways to constrain expense growth given our plans and necessary investments in growth initiatives. As we do that well we will again deliver meaningful positive operating leverage. That will cover a normalization of provision and it will drive good growth in earnings. And of course we want to continue to work down our capital surplus through loan growth, a higher dividend and share repurchases. So let's move on to Slide 25. And our guidance, Eric back to you.

Here you can see fairly detailed ranges played out for all key balance sheet and income statement growth measures. A few key items I call out: loan growth of 6% to 8% and NII growth of 7% to 10% with NIM improvement of 6 to 12 basis points, the forward curve assumes a rate hike in July and December, which would help us get to the high and robust range if they occur. Fee growth of 5% to 7%, expense growth of 2.5% to 3.5% as our efficiency measures provided a greater OpEx investment spending in 2015, well in 2016. Provision normalization to a $375 million to $425 million range, and CET 1 ratio of 11.2% to 11.5%. As an overall comment, we expect we could achieve a better level of revenue growth in 2016 than 2015, due to better performance on demand and on fees, this will cover a slightly higher expense growth and a modest comp from 4Q provision levels. We have laid out some useful details behind these growth rates on Slides 38 to 40 in the appendix too. Please take a look at your leisure on Slide 39 for example we detailed the impact to NII of the December 2015 rate hike which is worth 40 million to 50 million and the potential impact is too more in 2016 for the forward curve that we used at the time when we concluded our plan which would be worth 30 million to 40 million. The bulk of this additional benefit is from the July 2016 hike as well as minimal impact from the December '16 hike in the forthcoming year. If we don’t get in more hikes we will have to pull harder on our other NII levers and to view expenses to find offsets. Also note that the current dividend on the Fed stock decreases NII by 17 million and costs us $0.02 a share. We should also highlight that on Slide 41 there was an accounting change for cards reward that we make prospectively in 2016 which you will need to factor into your models. Our outlook for Q1 is shown on Slide 26, fairly straightforward overall to some typical seasonal impacts to consider. So let me turn it back to Bruce to wrap-up.

Okay thanks Eric. So just in terms of good plans to improve its performance, we are building things the right way to be sustainable for the long-term while being mindful of our need to show improvement in our financials in the near-term. We consider 2015 to have been a successful year on all fronts. And we will continue to stay focused on execution in 2016 in order to deliver another successful year. So with that let’s open up for some questions. Brad?

Just starting because the energy is such an important topic, I know your energy portfolio is very small, but can you comment on any potential weakness or anything we have seen in that portfolio when you reserve build do you have last quarter?

Yes, I would say the portfolios that would be most impacted by changes in price levels would be two, the reserve base lending portfolio and oilfield services portfolio. Their combined level of outstandings in those portfolios is about 700 million so it's not very big in the loan book it is over 100 billion. And I would say we have relatively good diversification so there is good granularity in terms of the supply to those credits and there is a little bit of migration going into classified but it is nothing that we are seeing increase in NPAs or anything that we have really boosted our reserve levels meaningfully at this point.

Okay, it is perfect. And then just another question on expenses, the expense guidance obviously this quarter had higher outside services fees and tax spending, is that the same main driver of expense growth going forward or does that come down and other areas kind of increase a little bit, just trying to understand the trajectory there?

There are a few moving parts there and I will let Eric augment my comments but, one of the same that we are doing is we are engaging in an outsourcing effort for our infrastructure support with IBM and so you are seeing that line go up a bit and you see other expenses within offset and salaries benefits can offset. So until that is fully migrated which should be complete by the end of the first quarter, there will be a little geography there. But in the long run that is designed to save us money that’s part of our top initiative and I think the migration is going reasonably well. There is also a little bit of seasonality there in outside services to try and get some projects across the line, we have had a little bit of spike there. So I would say that was really the driver Ken. Eric, I don’t know if you want to add anything else?

Yes, I’d just add that the equipment expenses are probably as a result of some of the spending that we have done to drive some of the revenue growth that you have seen whether it's on mobile, whether it's on some of the other functionality in treasury solutions and cash management, as well as some of the infrastructure, so you got datacenter expenses that come through. And those are right at this level maybe up a little more and that’s part of why, we need to keep finding offsets over time and why we have been very focused for example on headcount which is actually down this quarter and salaries and benefits generally.

Can you give us an update on maybe your near and longer-term ROE targets?

Yes, sure. So we are still putting that goalpost out there that the medium-term target is 10%. I think we will continue to make progress towards that in 2016 we’ve given you fairly comprehensive guidance and you can work through and see that there will be progress. The exit rate tends to be about 1% higher than the full-year rate according to earlier analysis that we had shown you, I think that still holds. So anyway we’re making meaningful progress in '16 and we’ll wait and see how 2017 plays out before we give any firmer guidance on that.

And then just separately what’s the appetite for acquisitions as you think maybe in the near-term and then if there is not interest in the near-term, what might be of interest longer term and what are you waiting for?

Yes sure. So I think right now we’re still a work in progress as I said. So there is plenty of opportunity for us to run the bank better and capitalize on areas where we see good revenue growth potential organically. And so that’s what we’re really focused on and I think it would be a mistake to get distracted and start running off and to do deals. So I wouldn’t see us looking harder things in 2016. I think once the bank is running better and we’ve achieved some of that potential organically then we could start to look at the possibility of some things. I think you’d likely want to dip your toe in the water gradually before you went out and did anything big. So maybe some bolt-ons in some of our fee-based activities or maybe some little fill-ins in terms of smaller banks where we think it’d fit nicely into our overall franchise. But I think that is still a ways out now.

I just had a quick question related to the revenue guidance your NIM expectations for 2016 are up 6 to 12 basis points assuming two more rate hikes. Can you just talk about the revenue expectations and NII guidance if rates don’t go higher from here?

You should refer to Page 39 in the slide deck, where everything is clearly outlined. Eric, I’ll let you take it from here, but I want to emphasize that we’re not heavily dependent on rate hikes in 2016. Our plan was based on the forward curve, which includes one hike in July and another in December. The December hike won’t significantly benefit 2016; it will mainly impact 2017. If the July hike occurs, it will be advantageous for us. If it doesn't, we are projecting a benefit of $30 million to $40 million, which is manageable. In that case, we may need to focus more on earning asset growth, loan mix and yields, or controlling expenses. If the hike happens, it will support us in reaching the higher end of our expectations, but if it doesn’t, we need to make up that shortfall elsewhere. Eric?

Yes. What I had is the client just envisions the continuation of what he really saw last year with regard to loan growth right on average is there any asset growth. And then the stability we saw in NIM in the second half of the year. You actually saw that pick up a couple of basis points from 2Q to 3Q another basis point from 3Q to 4Q. And so the plan is pretty straightforward, we continue to grow loans, we continue to grow average earning assets and we hold NIM flattish to up a bit as we leg into some of that mix shift as you see us doing in particular on consumer. And then what I’d say this past December hike right. The one that was just short while ago literally a month ago actually gives us 3 to 5 basis points. Why because LIBOR pulled it up commercial loans have started to re-price already and that gives us a little bit of a tailwind. So we have confidence that while there is good work to do, real work to do that to continue on the kind of the pricing efforts, the mix and management efforts and the discipline that the loan growth coupled with the NIM kind of guard rails that we’re on plus a little bit of tailwind from that December hike, we should be able to continue to deliver good progress on NII growth in the coming year.

You can see on the previous page how our growth rates in 2015 compared to 2014, and our assumptions for 2016 compared to 2015. There are no actual spreadsheets included. We have shown that we haven't been able to grow our earning assets, as Eric mentioned. However, in the second half of the year, we started to expand the net interest margin. We believe these are areas where we can continue to see improvement. Excluding the noise from Chicago, we’ve experienced around 4% fee growth, and we anticipate being able to increase that to 5 to 7% based on the investments we’ve made in product quality and service in our commercial offerings, such as cash management and capital markets, as well as adding staff in mortgage and wealth, particularly in consumer. This is not overly ambitious; it is simply about maintaining the strong execution we've demonstrated in 2015.

And then perhaps just turning to credit quality can we just talk about the increase in the commercial non-performing this quarter and then perhaps more broadly, can you just talk about what you are seeing in terms of credit quality on both the commercial and the retail side? Just starting from variable levels here but can you just talk about your expectations about reserves off from here particularly given your strong loan growth expectations?

Well let me start and then I'll go first to Don to talk about commercial matter and then Eric can chime in as well but our guidance range of 375 to 425 if you consider that we were at 91 in Q4 that would annualize to roughly 365 and what happened in Q4 is that we continued with a steady level of NCOs around 31 bps and then we started to build the provision type of loan growth and earlier in the year we had back book cleanup so we were effectively having credits come through to offset that need to build the reserve and so it was less pronounced earlier in the year. We think that has pretty much run its course so now what you would expect to see is very-very modest migration on the NCOs, but we need to keep building the reserve because we are going to have deepened levels of loan growth so that we’re calling out here so that's really what's driving that overall range we don’t see anything from that shifting in the consumer portfolio is maybe a little higher because our risk appetite has shifted, in commercial we’re keeping our eye as we said on energy but nothing that is rattling us at this point and nothing really broadly across the portfolio is migrating so again we feel quite good about this range we are offering, Don do you want to talk about?

Yes, I would echo everything that Bruce said I think as I look across the entire portfolio we continue to feel very good about it and it's highly diversified we have got our eyes on oil and gas and then describe that the quite picking non-performers in the fourth quarter was one real estate situation which we've had our eyes on for several years it just slipped into a non-performing status so it is something we've been aware of it's been reserved and really has no overall impact on the credit quality of the broad book.

Eric, anything?

So overall NCOs were relatively steady in the range 1.60 billion this quarter up from 1.35 billion so just up 25 million and kind of within the range of what we've seen so clearly a place for us to be watchful and careful but it has been in line with our expectations.

I think maybe just sort of a follow-up on the prior question about levers to pull if the rate outlook becomes for us I guess more flattish and I think specifically what I’d do with that is the volume is about at 540 where you have got the 1% to 1.5% efficiency or variable so I guess that Eric if you can just talk about what kind of stuff is already baked in and I imagine that's sort of top two related stuff in that 1% to 1.5% and then it should be rate outlook not 10 out of the 4 the coverage you suggested where maybe some places that you would have additional leverage on the cost side that you would be thinking about these initially?

Yes there is always opportunity I mean just to share the big picture right we are continuing to invest in a disciplined way on expenses on headcount at the frontend kind of the frontend sale and we continue to spend some on technology and you see that coming through so this past year we had that real effect of the top one program and part of the top two program coming through and that shows you on Page 40. A real sizeable efficiency pay I think as you look through next year right what we’re starting to see is that continuation of the top two savings I think we mapped that out in quite a bit of detail this past summer and there is at least a percentage point of savings that will come from that incremental to 2015 and so we have high confidence there. I think beyond that we are obviously disciplined as we go so over decide transforming the operations and working on procurement right there is always the long list of opportunities that we focus on we have done de-layering in the past but that doesn’t mean that we don’t go back and make sure that our headcount expansion is very disciplined on the frontend sale and continue to look at some of the middle office and back office personnel so well they have to do that and I think the easy part of that down graph over and above up to is that if revenues don’t come in, in certain areas where it could be more to give for example then you are not paying out commissions so that naturally falls to the bottom line. Beyond that, that we are going to have to work hard and find the areas to address and you could imagine we don’t put a budget like this together without having a list of 3, 4, 5, 6 items that we are already working on in contingency that we can pull if we don’t see the economic activity that we would have anticipated.

I would just add that Top II was structured differently from the first top program, so we estimated that around 60% of the benefits would originate from revenues and 40% from expenses. One reason we are confident in our increased revenue outlook is due to initiatives like our checkup program and pricing strategies, which are generating momentum in revenue comparisons. You will see that difference. We are dedicated to ongoing improvement, and if there was a Top I and a Top II, one might speculate that a Top III could be on the horizon. Our goal is to continually ensure we are running the bank efficiently and maximizing the utility of every dollar spent on expenses and investments. Additionally, if rate hikes do not occur, we have other options to explore, such as driving more asset growth or adjusting our focus to improve yield. Therefore, while we may expect some potential for increasing net interest income as a counterbalance, you're correct that we need to reassess our expenses if revenue growth proves challenging.

Within your guidance you have 6% to 8% loan growth next year, could you speak to the drivers of that loan growth between whether it's portfolio of purchases or organic growth? And then what mix of assets do you expect to drive most in that growth?

Yes, I'll begin by saying that in 2015 we had about 80% of our loans originated and around 20% were purchased, particularly in the consumer sector. Initially, we focused more on purchasing auto loans, but as we enhanced our prime auto origination capabilities, we reduced our auto purchases. We're still interested in the student loan sector, and we have established a partnership with SoFi, allowing us to purchase some student loans while decreasing our auto loan acquisitions. Moving forward, I expect to see a continued trend in this direction, with us being selective about purchases. As we expand our team of originators, we may fully meet our origination goals. Currently, we believe we are acquiring high-quality assets that align well with our capabilities and can slightly boost our growth rate. Additionally, it's worth noting that our growth is well-balanced between consumer and commercial sectors, as evidenced in Q4, where both areas showed strong opportunities. Now, I’ll turn it over to Brad and then Don to share their insights on the opportunities within the portfolio.

Yes Bruce I mean I think you did a very nice job of laying it out. I think one of the areas that we have seen a lot of growth in 2015 has been the student OEM and we are still very optimistic about that there is good momentum assuming and I think that will be a driver of organic growth for us. You talked about it we had slowed down the purchase of this skew to offset but that’s really more of a maintenance mode as opposed to growing but we like the relationship with SoFi which will supplement the loan growth in student. We expect to see some continued growth in mortgage. We have actually been in position where our home equity portfolio has been going down a little bit of time in 2015. But we are reaching that point now not abstaining meet back into the growth mode, so we have a very-very strong application and closing quarter in the fourth quarter in home equity and we will probably see. It would be modest I think you can probably see some growth in home equity. But the nice thing about build asset classes that we are talking about during your growth is you are contributing to our improving yield to non-proving margins.

Yes, exactly and not to mention the afterlife back end which has very attractive merging.

And on the commercial side, we were very pleased with what we saw last year. Our growth areas which were real estate, industry verticals, mid-corporate and franchise finance, so we saw solid double-digit growth in all of those verticals while also keeping a good pricing discipline and a good credit discipline, which I think is the balancing access we will continue to focus on in 2016. And in '16 we expect to see some more growth in the middle market, we did quite a lot of hiring across our middle market since last year and it's taking a little while for those new bankers to begin to ramp and begin to get traction, so we expect to continue to see good growth what we saw in '15 and get a little bit of incremental growth out of our mid-market channel. So overall we're expecting to grow slightly lower than 10% in terms of loan and interest growth. And the other thing we think we will see in '16 is even more acceleration in the fee lines as we begin to take advantage of some of the investments that we've made around capital markets and treasury services in particular.

Great. Eric, anything to add?

No, that's a wrap.

You mentioned the Apple program driving some growth. Could you speak to you where you expect that to go, over the next couple of quarters given that you had $220 million on your balance sheet as of the fourth quarter and then what your expectations are for a mix of yield compared to your other portfolio off of that programming?

Yes, this is Brad. As I may be Eric had mentioned in his comments we ended the year at $220 million in balances and we would expect we continue to see that to grow. I would tell you it's a little hard to pin down exactly where we see it going for a couple of reasons. We're actually somewhat limited in the scope of that initiative to-date in that it's available only in the Apple store and it's only available for the current model. So there will be a few drivers that dictate where that program goes, do you expand that beyond just the Apple store, do you later launch new product, do you extend the program beyond just the current model following and so forth. So I guess the way I would sum that up is we would certainly expect to see volume in one quarter in a row we're one quarter in and we generated $220 million so you're certainly going to see growth. There are some questions to how fast that growth will be given some of those parameters. We're very pleased with the program we think we provided a very good customer experience. Can't speak for Apple but I think they would say the same. They're very pleased with how the program is going so far. So we’re optimistic it is a nice program and there are nice assets for us in terms of yield and more jobs, so very attractive return for us.

Yes. To summarize that I think the wildcards are when do they open the online offering, beyond just the stores, which we’re working through with them and then when do they launch their new phones which you'd have to ask them not us. Those are the things that could really spur an uptick. And then the thing we like about this too is these loans generally have a relatively high yield and so not too dissimilar from credit card balances, and they don’t have the same acquisition costs to us as credit card balances and growing a credit card book so, it's a relatively efficient way for us to increase a nice higher yielding asset class.

I wanted to just dig in a little bit more into the commercial real estate portfolio you put up some pretty good growth in the fourth quarter. Wanted to see if you can give us little bit, around your thoughts on your ability to continue to grow that I know that's still a notably undersized portfolio for you at Citizens and also I know the spreads in that business are getting incredibly thin, so where do you see the opportunities within commercial real estate to grow?

I'll have Don answer that one.

So you know we've had a portfolio historically which has been largely the REIT portfolio which has generally been lower margin than our overall real estate book right now. A couple of years ago we began to move into the construction lending business which is higher margin, so we have seen our margins in real estate on a blended basis go up and we expect to continue to see that. As I think Eric mentioned we took down a lot of business over the last two or three years with very targeted sponsors and very targeted NSAs on the construction side and we’ve only just started to fund a lot of that. So there's some embedded growth in the book that we expect to see just as private mature and we begin to fund commitments that we've made already. We think we can grow the construction businesses at between a little over 10% as we move into 2016 we're seeing good flows. I expect the weak business to stay roughly flattish and that's the lower margin business so I think you'll see blended growth of slightly under 10% and margin uptick as we roll through '16. And I think as you mentioned margin, we are cognizant of where we might be in the real estate cycle it’s been a very-very strong market for the last several years. We're not saying that in positive dynamics are changing we don’t really see the terms changing but we're keeping an eye on that as we go into '16 and we will be disciplined based on what we see the marketplace doing.

Okay, that's helpful. And I guess on that same general point can you help us with the and give us the average new loan yield that you're seeing on new production in some of your main portfolios including commercial real estate but as well as in your other loan portfolios in commercial and consumer?

Yes. The loan yields on new production fluctuate significantly from quarter to quarter, but I can provide some directional information. In our core portfolios, we tend to set yields that are higher than the overall portfolio by about 30 to 40 basis points as we expand into industry verticals like middle market and franchise finance. This variation occurs each quarter, yet it benefits the average yields we achieve. This has been a key factor in maintaining steady yields in commercial segments. Additionally, there is a slight increase in asset finance, where yields average around 10 basis points above the general portfolio. Conversely, in areas like commercial real estate, there is a slight decrease of about 10 basis points. Nonetheless, we believe there are good economic opportunities for the right risks and terms. In the corporate sector, which we haven’t focused on as much due to its higher-grade clients, we see a narrative of 30 to 40 basis points in mortgage originations, emphasizing cross-selling opportunities and broader relationships. This mix of factors guides our management team's focus on where to emphasize and invest in different areas. Don highlighted our hiring initiatives in the middle market, which is an obvious area for growth due to that 30 to 40 basis point lift and the associated benefits, including deposits and cash management. This reflects our strategic approach to driving growth, improving margins, and achieving our desired net interest margin.

And Brad just on the consumer side, the kind of rough gross yields, roughly 5% on student kind of run through for the kind of a couple of those relationships?

Yes, you bet. So we’re about a 50-50 mix on student between fixed and variable and our variable yields on student would be somewhere in the 4 to 5 range, of course it’s first day price on fixed size would be somewhere in 6 to 8 range it is a little higher on initial program as opposed to the refi program because that’s a little bit higher quality asset. So more like 605 more like 8 on the initial program, so that’s what should lead to those yield improvements for us as we grow the student business, really being the mid-30s in auto. And it’s a variable rate product obviously that you thought would be in the low-30s.

Number one, just couple of shorter-term, and near-term ones, the terms under consumer agreement on auto loans are you still buying loans for them and just reduce shopping and we have better stand? Any color on that?

I’ll start and Brad if you want to call out. But we’re buying at a rate of around 750 would be our target for 2016. And that deal runs a little bit into the first half of 2017. So that’s what we’re at.

Yes I think that’s right we did 200 million of purchases in the fourth quarter which was down from the third quarter again probably didn’t arrange that well, deal a very good one.

And certainly with the near-term, does deposit cost given the December rate hikes, have you seen any change in the rates that you are seeing from your competitors or your year-end flow?

Yes, Vivek, it’s Eric. Let me take that. As expected, right the first hike has not resulted in a lot of movement in rate. So let me kind of decompose for you, on the retail side there has literally been no movement. They have actually been up to down fixed in a few geographies and obviously we look at everything, we look at every geography, every city, we are looking at the online players and we’re looking at the community banks. And it’s actually been very-very quiet there. And so that gives us some confidence, that the betas that we’ve been talking about are sound and as you recall the betas are kind of over the cycle betas. So the data on retail is going to be quite low for the first rate hike for a couple of quarters. So that I think bodes well for us. On the commercial side, there is always the job volume, because commercial clients have done a lot out there their loans re-pricing a LIBOR and some of them come back on deposits and obviously that's the business we’re in, I think there wasn’t much change in December what you saw a little bit in January. And I think as you see the months stay through February and March, we’ll have some amount of uptick and so it could be a little bit, but you’re talking a handful of basis points on that side. And so as you look at it, we actually have some confidence we’ll deliver good deposit pricing in the first quarter, today it is some nice corresponding uptick on loan yield, because those on the commercial side and that's a big driver for the 5 basis point higher NIM guidance in the first quarter.

Okay, great and perfect. I have a longer question looking at your guidance. Your non-interest income guidance I want you to clarify the rates that you have given that 5% to 7% rate does it just based on reported non-interest income, which include securities gains and secondly very strong quarter on the net interest income and the fourth quarter given that on the 5% to 7% growth are you assuming still soft capital markets, is that's what's keeping it low. Could you talk or give a little more color on that on those two?

Yes. Look I first off in the phase I think there is an element of securities gains, which I think will continue, so I think we will from time-to-time be making repositioning decisions in the portfolio and as we kind of cross up $5 million or $10 million here and there that's I think ongoing income, so as you would expect to see, so yes so the non-interest income guidance covers the whole category. When you strip out some of those like one-timers like the impact of Chicago, we think we grew about 4% last year and the 5% to 7% growth guidance is really where you will get the uptick, I think if you would look for the uptick with the rebound in capital markets hopefully that market stabilizes, and the leveraged credit markets and that won't be a drag away like it was in Q4 and we’re building at our product capability, so as we've moved away from RBS, we've had to add our own capabilities and we were sharing some of those dollars with RBS and that was dollars 400% to us when we get our broker dealer stuck off and when we move off on to our own FX and derivatives platform which yields additional revenue opportunities that come from that. We've invested in the cash management business and are doing a better job across selling, we've gone out and hired more sales resources to get better penetration, as our whole product is set, so we have some good upside on the commercial side, and similarly on consumer if we can get the mortgage business going in the let’s say we took a little pause here in the fourth quarter, as we had to move and be focused on our system and the rest curtailer compliance I think that goes well and will provide some lift and then well we are very under penetrated as well and I think we had a great recruiting quarter in Q4, we've got in 12 FCs best quarter we've had in the long-long time coincidently or not we have had a new competitive well, we have high hopes for so in both mortgage and loans we have new leadership and I think both have hit the ground running. So I think it's a bit across the board and yes you are right it's the great if we could exceed 5 to 7 but I think fees in general in the industry have been a little sluggish in the environment and so I think we're just being measured and hopefully that's a range that we can step up from 4 and get into that 5 to 7, Eric do you want to add anything.

And I’d just add that the anchor on fees is the first one right sort of charges and fees which is cash management as well as certain charge on deposits overdraft and card fees and so forth so it is the core of what we do that sort of start in key line is over 40% of our total fees that was up 2% for the year, but up 8% year-over-year this quarter why because some of those fees or increases that we've talked about as product cost to our time of place really and so I think we have some confidence that that can anchor the fee growth of 5% to 7% and then given that that 40% of the fee line and then some of the other areas that we've covered, I think all the areas where we’re really driving hard on and will update as we go during the year.

On the last point on the service fees, can you just talk obviously a pretty good progress there, can you talk about how much of that was related to commercial fees versus retail and then maybe kind of what you think you are and how much more opportunities there are from the re-pricing and reselling of the contracts on the commercial deposit side?

Yes. Let me start there and there is some textures that I'd like to weight in. I think the way to look at that is that there is probably order management around the 5 million to 6 million of increase so we saw there from the fee re-pricing and the cash management and that covers that's nice on the commercial stock, as well as some of what we do in cash management on the consumer side. Followed by just some a little bit of uptick in seasonality that will get in 4Q, so that's the kind of the anchor point that caused a $6 million drop. Now that wasn’t there in the first three quarters of this year but should grow through consistently for four quarters next year and that's the basis, gives it a little more in that fee increase that caused to $5 million to $6 million just trying a little more but I think we've seen the both of this and now we are coming back at parity levels of fees right we are not planning to fee we’re just trying to catch up for not having re-pricing for four or five years and we feel like we’re at a good point with our clients and with the value that we offer.

And Eric the only thing I would add, it's Don, is we’ve seen with some of the sales hires that we made, particularly on the transaction banking side, good momentum and actually incremental business away from price increases. The challenge there is, its long lead-times in terms of clients are moving their business from one bank to another due to technology. And then it's a question of rate of ramp of actual utilization. So I’d say our momentum on winning business is ahead of the revenue progression. And that will be incremental for 2016 to just I am sure as to exactly the speed of it.

And so I think commercial is a real opportunities because we have said we are under penetrated in terms of the products set in extent of cross-sell that we have. Brad in Europe we’re trying to grow household. And so that’s going to create a little bit of tailwind. And then also better penetration in business liking, I guess would be the other area.

And we will get some of the benefit of the price increases in business plans as well. And we’re driving some of it to improve cash flow, which is up about 2%.

Yes.

Great, thanks for all that color. And then maybe Eric if you could touch a little bit more into deposit environment. What's in the efforts you guys have done and where you think the opportunities are to grow deposits, also with an eye to keeping pricing as flat as possible?

Yes, let me explain the situation with deposits at these rates. There is work happening on both the retail and commercial sides, with a thorough focus on each. In retail, we've been concentrating on growth over the past few months and quarters, emphasizing non-price driven offers. Our main focus is on checking accounts, particularly those with low interest rates. We are also doing this on the commercial side and with our cash management product, which has a low effective interest rate. This has been showing positive growth. If you examine our DDA and checking accounts from the balance sheet, you'll see that they have increased by 2% quarter-on-quarter and 6% year-on-year. You can clearly observe that DDAs have been stable over the last three quarters, especially with interest over the past four quarters. We are successfully engaging clients in a way that is not focused solely on price, which is what we aim for. It's essential to maintain this focus going forward. Additionally, our investments in cash management will enhance functionality and help us improve our value propositions to attract clients, which is central to our deposit strategy. Regarding deposits, there is generally a slight fluctuation, which is typical for banks. We tend to manage these fluctuations judiciously since they stem from our clients. The challenge is doing this in a disciplined manner. In the commercial sector, we have revisited some of the larger deposit pools related to the Chicago divestiture from last year, which were promotional deposits. After the Fed's decision in September, we transitioned away from prior promotional rates. While we experienced some attrition, we have reset and stabilized at a manageable level. We’ve implemented similar strategies on the retail side, exercising discipline on a regional basis. Our teams are looking for continued opportunities in money market accounts, but we are stepping back from CDs, similar to industry trends. Overall, we are pleased with the performance of our interest-bearing deposits, which have decreased slightly, and we intend to keep pushing in that direction.

Brad, do you want to add some color?

Just one point I was going to add, which is I think one of the biggest opportunities we have on the consumer side is in real estate. So, we talk a lot about our investment in growing that, growing our fee business, which it will. And if you look at other opportunities on the deposit side, probably missed opportunities, penetration of low interest or non-interest bearing deposits with our wealth customers. And we are working on a new value proposition and new deposit checking product for our wealth customers that will be growing out maybe and we think that’s a very good opportunity for us.

Just one follow-up question, I understand that we don’t have the CCAR parameters yet. But given where your stock is trading relative to tangible book, Bruce, what is your appetite in terms of maximizing your ask relative to what you think your earnings power is going to be over the next year or two?

So, we’ll go through the process. And I think our guidance of an 11.2 to 11.5 says that we're still going to be, I’d say, moderate in our appetite as opposed to all out aggressive. And part of that reason is having a capital surplus that we’re using to fund loan growth that was not our ROE today is not high enough to fund that level of loan growth. I want to make sure that we're taking full advantage of the opportunity to add customers and grow the franchise. And it's good to have a little bit of cushion there in the overall capital ratio and that helps feed the ROE, it’s kind of a circle. So we’ll get our ROE up then we don't need as much of a surplus. So I would say over-time we're clearly looking to get back to the pack. And so if our peers are running at 10 or 10.5, there's no reason we shouldn't run where the peers are running. Once we're fully operating, the way we want to operate in our returns or where we want them to be, it is, I think we do look at the opportunity to buy back the stock and where it's trading. And it is attractive here, we think. And so that will be factored into our thinking. But I just wanted to give you the guardrails we’re coming down on a gradual glide path, and it's somewhat also dictated by how fast we can get the ROE up, and generate more capital and then we don't need that cushion.

Good morning. I think you've covered everything. But just what would be some of the areas of concern that you could have this year, and where you had pull-back here and leads you to low end of your loan growth guidance.

I guess at this point, we don’t see, I think good demand in housing, there'll be a little less refi than last year, but the purchase market seems pretty firm. Auto seems to be doing very strong and there's certainly a need for student debt refinancing. So, I think the drivers on the consumer side look pretty solid to us. And the one wildcard I guess is what happens with Apple iPhone upgrade, we could get a wildcard there. But hopefully is a positive surprise because I think we're being moderate in terms of how we're looking at that. And then on the commercial side, really, there'd be more cyclicality would be the concern, it's just stock market is presaging concern over a slowdown and therefore corporate CEOs and CFOs decide to pull back a little bit on investing, or on line utilization, and that could have an impact. But maybe, Don, you want to add a little…

I think that's right. I think for me the loan growth is, it’s all about the economy. And we still continue to think the U.S. economy looks pretty good, jobs look good. So are anticipating a decent year in terms of growth. And I think it really comes down to loan demand based on commodity levels and economic activity. So, I don't think that there'd be any other variable that would cause us to say we would pull back.

Good morning. Thanks for taking my questions, just a couple of very quick follow-ups. You've mentioned your exposure to energy or at least specific to the higher risk areas of energy. I just want to confirm as you said in the past the total energy portfolio remains below 1% of your loan book.

The total energy portfolio, I think, it's about 1.6 billion in terms of outstanding. So it’s below 2%.

And then just following-up on the last set of questions, you mentioned that corporate confidence is really the big risk in your outlook for commercial lending. But it also sounds as if you've not heard that from your conversations with your borrowers, at this point. So that the downturn in the markets over the past couple of weeks really hasn't filtered through to your borrowers’ sense of confidence, at this point, correct.

I think that's correct, obviously anybody who’s depending upon the high yield market or the institutional loan market is on the guidelines right now, because they’re effectively close. One of the things we have heard and we just published our Fifth Annual M&A survey for mid-market companies is an expectation across our client base that M&A activity could be quite interesting in this year and the next year, just as people struggle a little bit with top-line growth and look to supplement their businesses. So, there is a desire to grow and a desire to transact out there. So, we’re hearing a solid message of expansion among our clients. And that impact needed to be through combination or it could be through organic growth.

Maybe one, it makes for Don to say. When you getting through commercial credit cycles in the past, what are the early indicators that you’ve seen which is started through flash back before you grow the portfolios start to deteriorate? And how are those performing this time around?

So I think the right answer that is, we go through, in my past and certainly now, we go through rigorous review of our portfolios on a continuous basis with our portfolio management teams. And relate those credit based on financial performance, covenant compliance, and a whole variety of different things. And we obviously did that through’15 and that’s been very modest deterioration in credit grades. So, that’s usually early signal that you start to see people missing covenants and people having financial deterioration. The other thing in my past has been what really tends to per institutions is concentration. And we do have a very rigorous concentration management system. I think one of the interesting things that I see at Citizens is just core diversification in the portfolio given that it's a mid-market lending activity predominantly is very-very great, both on a geographic basis, on an industry basis, on an individual credit basis. So, I think there is a little bit of a hedge in the overall portfolio also. So we would look for credit deterioration in the terms of credit grades, we would look at any concentrations in industries that are troubled as things that we would flash really to us, so we’re not seeing them to any extent at this moment.

Just two quick ones, first of all, on the expense guide for the year. Does the growth contemplate this assessment? And if it does, can you just help us understand how much that is as a part of it?

On what assessment, I’m sorry Ken.

The deposit issuance assessment…

We have a base care in our forecast. And we haven’t, I don’t think it settled out yet as to what the amount the big banks will pay and the timing on that. So, yes, we are working off the base case.

So it's in the base case, so you have it in your expense outlook?

We’re operating on a continuum of where we’ve been historically without an increase at this point, because it’s not certain the timing and the amount of that increase.

So if you were to get formalized, you would then have to add that to your forecast?

That’s correct.

Second question, Eric you’ve done some good work with restructuring some of the long-term debt. And I just wanted to ask you what opportunities do you continue to have there? And also in the original debt for stock swap, preferred for stock swap, what are your plans this year as you look ahead to that original 250? So in aggregate, what opportunities you still have to lower the wholesale funding cost side?

I think on wholesale funding, we’ve done some substitute adjustments actually over the last year and half to two years really when it comes to swap portfolio that I think what you’ve seen in the announcement was sub-debt repurchase, which is anticipated in this summer, obviously allocated on the CCAR ask, the $500 million of the old RBS on sub-debt would be retire. And that one would obviously help with our funding costs. And then I think that is actually the rest of the program. Obviously need to right into a little bit of senior debt where we finished with mix of fix and flowed and three year and five year. But that would be modest in size. And then I think the last part of that place and which is really one out of our treasury area is how do you continue to position the first carefully around rates and take advantage when rates pop up a little bit, and manage around the curve and we’ll keep doing that.

So Ken I’d say the thing that presents an opportunity if you have this right to repurchase 500 of RBS and stop that. And depending on where rates are at the time, as we can refinance that with senior, which still be a spread differential to stop that versus the senior. And if we can choose it down, the amount of it that we have in the stacks. So obviously there is a full coupon saving on that. So we are working on that. We’re studying that we have to consider that in our CCAR request. But there is I think some potential upside there relative to our outlook and our guidance.