Citizens Financial Group Inc (CFG) — Q1 2016 Earnings Call Transcript

Thanks Brad. Good morning everyone. We really appreciate you joining us. We know it's a busy day. We’re going to kick things off with our Chairman and CEO, Bruce Van Saun, and CFO, Eric Aboaf reviewing our first quarter results and then we’ll open the call for questions. We’ve also got in the room with us today Brad Conner, Head of Consumer Banking, and Don McCree, Head of Commercial Banking. I need to remind everyone that in addition to today’s press release, we have also provided presentation and supplemental materials, and those materials are available at investor.citizensbank.com. And of course our comments today will include forward-looking statements, which are subject to risks and uncertainties. We provide information about the factors that may cause our results to differ materially from those expectations in our SEC filings including the Form 8-K we filed today, and we also utilize non-GAAP financial measures and provide information and reconciliation of those measures to GAAP in our SEC filings and earnings material. And with that, I’m going to hand it over to Bruce.

Thanks Ellen. Good morning everyone and thanks for dialing in. Q1 was another good quarter for Citizens. Let me briefly cover a few of the highlights. We were pleased that we continue to achieve good loan growth. We’re bringing new customers into the Bank. We’re doing a good job of delivering better risk-adjusted loan yields and in managing our deposit costs. As a result, our net interest margin was up 9 basis points versus Q4 with half the benefit resulting from the Fed December rate hike and half coming from our own actions. This strength in net interest income was partly offset by weakness in fee categories, which is partly the result of seasonality, partly market conditions, and partly some challenges in getting full traction on a couple of initiatives. That said, we’re addressing the underlying challenges and we’re hopeful that market conditions are improving as the year goes on. Our discipline around expenses remains excellent. We have a mindset of continuous improvement, and we recycle savings to fund investments into our growth initiatives. I was pleased that our tangible book value per share grew by 2% sequentially to $25.21. And then we raised our quarterly dividend by 20% to $0.12 per share. Our CET 1 capital ratio remains very robust at 11.6%. Our credit metrics remained strong and stable. An increase in NPAs and reserves related to the SNC review of oil and gas loans was largely offset by improvements in retail loans, including a planned TDR sale that Eric will fill you in on in a minute. We feel our oil and gas exposure is modest and it's well reserved. We continue to focus on delivering well for all our stakeholder groups, including customers, colleagues, and communities. I continue to see good progress across the board. In addition, we are focused on improving our risk and regulatory capabilities, and feel we put forth a strong effort on our CCAR/DFAST submission. With that, let me turn it over to Eric to take you through our financials in more detail.

Thank you Bruce, and good morning everyone. In the first quarter, we continue to make progress around our growth, efficiency, and balance sheet initiatives. We are managing the balance sheet to generate attractive loan and deposit growth and actively managing NIM. We continue to control costs and deliver strong operating leverage. And once again, credit costs are well-behaved as we navigate through the current economic environment. My comments this morning refer to our first quarter 2016 earnings presentation which you can find at citizensbank.com. Let's start on Page 4, with our first quarter financial summary, where we provide our GAAP results of $223 million and $0.41 a share. On Page 5, on a linked quarter basis, GAAP net income of $223 million was flat to the fourth quarter on strong NII, seasonally light fees, flat expenses, and stable provision. Compared to the first quarter of 2015, net income increased $8 million or 4% to diluted EPS growth of 5%, driven by positive operating leverage of 3%. On a year-over-year basis, we grew revenue by $51 million or 4%. Net interest income of $904 million increased 8%, reflecting strong average loan growth. Non-interest income declined $17 million or 5%, as growth in service charges and fees were more than offset by lower mortgage banking fees and the impact of the card reward accounting change. Year-over-year, we continue to make measurable progress against our goal of enhancing our efficiency while reinvesting in the franchise. Expenses were up only 1%. Our efficiency ratio of 66% improved 2% relative to the first quarter of last year. Provision was up $32 million on a year-over-year basis, but first quarter 2015 included the benefit of large commercial recoveries of $22 million. Importantly, credit costs also remain stable linked quarter as commercial credit began to normalize and we saw improving trends in our retail book. Note that tangible book value per share is now $25.21, up 2% relative to year end 2015. Let's move on to Page 6. We saw a nice lift in net interest income this quarter, which was up $34 million or 4% from fourth quarter on the back of 9 basis points of NIM expansion. We continue to generate attractive average loan growth of 2% with strength in commercial, student, and mortgages. On a year-over-year basis, net interest increased $68 million or 8% due to strong average loan growth of 7%. These results also reflect our improving net interest margin. So as you can see on Page 7, our net interest margin increased 9 basis points linked quarter, as our loan yields expanded, given the benefit of the December Fed rate increase and we continue to shift our mix to higher yielding asset classes. We were also able to hold deposit costs flat notwithstanding the Fed rate increase on average across our businesses. These benefits were partially offset by the impact of a lower federal reserve stock dividend. The margin expansion this quarter came in stronger than we had anticipated. While loan yields rose in sync with high LIBOR and Prime rate, our deposit cost remained low. Specifically, we consciously lowered pricing of consumer interest-bearing deposits down 4 basis points as we saw good DDA growth. Commercial deposit cost did move up in response to the Fed tightening, quite a bit less than expected. Now, we do expect deposits to creep up in the future and betas to normalize; we were quite pleased with the results we produced this quarter. We'll provide some more color on our NIM expectations for the second quarter shortly, as we are also keeping a close watch on the long end of the yield curve. Relative to the first quarter of 2015, net interest margin also expanded 9 basis points, benefiting from improved loan yields and mix, and a more efficient investment portfolio, partially offset by higher volume costs. We maintained a stable asset-sensitive position and ended the quarter at 6.9% compared with the fourth quarter of 2015 at approximately 6.1%. On Slide 8, let's take a closer look at non-interest income. Our linked quarter results reflect both the impact of normal seasonality and service charges in card fees, as well as some continued pressure from the market volatility, investment services, interest rate products, and foreign exchange. This actually maps a rebound in our capital market fees. I need to remind you that our results also reflect a $7 million decrease in cards fees related to the rewards expense accounting change we discussed last quarter. Without this change, card fees would have been down $3 million linked quarter but up $5 million year-over-year or up 8%. On a year-over-year basis, we posted 7% growth in service charges and fees, driven by both continued household growth, as well as our treasury solutions pricing initiatives in both commercial and business banking. Investment service fees were up year-over-year, notwithstanding the recent market volatility, and we’ve now seen two strong quarters of that FC hiring, which should help drive future growth. In mortgage banking, we continue to see higher applications quarter-on-quarter and year-over-year, but the lower consuming mix and MSR valuations are impacting fee revenues. In the first quarter of 2015, our results benefited from higher gains on loan sales. Turning to expenses on Slide 9, we’re continuing to do a great job of self-funding our investment initiatives as expenses were stable linked quarter and up only 1% on an adjusted basis year-over-year. Linked quarter salaries and benefits were seasonally higher by $16 million as payroll taxes and incentives increased, while occupancy costs were slightly higher. We offset this increase by spending less on outside services as well as lower other expenses, which included the impact of the cards reward accounting change. On a year-over-year basis, salaries and employee benefits were up, modestly reflecting continued investments in growth initiatives to help drive top-line revenue, partially offset by our efficiency programs. Let's jump over to Page 11. In consumer, we continue to grow balances at a nice pace, up 2% linked quarter and 7% year-over-year, driven by effective opportunities, predominantly in student mortgage. We’re also seeing a nice uptick in our unsecured retail loans, which include the iPhone product. Consumer loan yields increased 11 basis points, reflecting the benefit of higher prime rate as well as continued improvement in mix. On Slide 12, commercial loan demand was strong this quarter. Commercial loans increased 3% linked quarter and 9% year-over-year as we continue to build momentum in more attractive return areas. On both a linked quarter and year-over-year basis, we generated growth across most of our target areas; commercial real estate, corporate finance, franchise finance, mid-corporate, and industry verticals. Slide 13 focuses on the liability side of the balance sheet and our funding costs. Average interest-bearing deposits grew $613 million or 1% linked quarter with particular strength in checking and savings and money markets. Our deposit costs remain stable this quarter, reflecting disciplined balanced pricing actions in consumer banking as I mentioned earlier. On Slide 14, I’ll hit the highlights on credit quality metrics, which remain relatively stable with the fourth quarter in aggregate. Our NPLs were essentially flat at $1.1 billion notwithstanding a $210 million increase in oil and gas non-performing loans following the March make review and revised regulatory guidance related to multi-tiered structures. This increase was largely offset by improvements in retail from several items, including a roughly $100 million reduction in retail non-performing loans due in part to the TDR transaction I’ll cover on the next page, a benefit from reclassifying a pool that did not include energy loans and a broad overall improvement in retail credit. Provision expense in the quarter was stable at $91 million. During the quarter, we increased reserves on the oil and gas portfolio by $30 million to $61 million, which included a $17 million overlay. On Slide 27 in the appendix, we provide more detail on the oil and gas portfolio with reserves now at 6% for the more price-sensitive portfolios. This reserve build was partially offset by a release of roughly $60 million in reserves tied to moving the TDR portfolio to held for sale, along with favorable trends in retail performance. Our allowance to loan ratio came in at 1.21% while our allowance to NPL ratio was 113%, both of which are relatively flat to the fourth quarter. Overall, we feel good about credit quality and reserving levels. So we will continue to closely monitor the oil and gas portfolio. On Slide 15, we provide more details on our TDR transaction. As we’ve continued to focus on optimizing the balance sheet and generating more attractive returns on capital, we’ve worked to identify additional areas like portfolio sales and securitizations where we can drive benefits. During the first quarter, we identified a $373 million portfolio of consumer real estate TDR loans that we plan to sell late in the second quarter or early third quarter. We transferred these loans to held for sale which lowered our NPL by $97 million. Once the transaction closes, given current home values, we expect to realize a moderate gain as well as benefit on risk-weighted assets and provide a partial offset to third-quarter formulated increase in FDIC assessment cost. On a net basis, these assessment costs are expected to have a very modest impact on second half 2016 expenses and no impact on our previous full year guidance. On Slide 16, you see our strong capital and liquidity ratios. You also see that we executed a sub-debt buyback of $125 million in March outside of the traditional CCAR process. On Slide 17, we’ve laid out the key initiatives that support balance sheet and fee growth in our turnaround plan, as well as incremental initiatives and assess progress during the quarter. We’ll continue to lay strong foundations and gain momentum across most of these initiatives, and are intensely addressing some of our challenges in mortgage while making solid progress in wealth and asset finance. Turning to Slide 18, let me summarize some of what you can expect next quarter, but all in the context of the full year 2015 outlook that we previously provided and that we broadly reaffirmed today. So compared to the first quarter of 2016, we expect to produce linked quarter loan growth of roughly 2%. We also expect net interest margin to be relatively stable, based on the curve as of March 2016, which reflects some pressure from the long end as I mentioned earlier. We are tightly controlling the margin and believe there's more we can do organically to control our deposit costs and improve our loan yield. We still anticipate the Fed moving price this year, but we'll stay focused on what we can control. We do expect mid-single digit fee growth without any 2Q security gains. We expect modest expense growth in Q2 as efficiency initiatives provide a partial offset to continued investment spend. We would expect to continue to generate strong positive operating leverage, thereby improving our efficiency ratio, profitability, and returns. We expect underlying credit metrics to remain largely stable with a modest increase in provision in Q2 driven by volume growth. And finally, we expect to see our CET 1 ratio come in at 11.6% and we will manage the LDR to around 98%. With that let me turn it back to Bruce.

Thanks Eric. In short, another solid quarter in executing against our turnaround plans. The key takeaways are shown on Slide 19. So with that Brad, let's open it up for questions.

Can we start by discussing the fees and the mortgage hiring you mentioned? It seems the production on the jumbo side remains quite strong. Are there any initiatives in place to enhance and diversify conforming originations?

Why don't I start and flip it over to Brad? One of the challenges we've had is that we put in a new system. I think we said on the last call around the time that the change came in and we had to originate TRID compliant loans, so that took some work ultimately to bed down that system and get back to good operational metrics. That has slowed down our net hiring both in Q4 and Q1. So we're treading water a bit, but we expect that now I think we've got that under control, and the operating metrics continue to improve. So we should now be able to move towards positive net recruiting throughout the rest of the year. Part of that effort is to really focus on markets and producers that can deliver a greater mix of conforming originations compared to what we've currently which has roughly been about 60% non-conforming and 40% conforming. So I think part of it is selection, part of it is market geographic focus, and then also having that operational excellence because those conforming-oriented producers need to make sure that they can get their mortgages through the pipeline relatively quickly. So I'll turn it over to Brad.

Bruce articulated it very well. I would just like to add that, as you noted, we implemented our new loan origination system alongside TRID. One of the challenges this created for us in terms of conforming production was that to introduce this system, we had to put some of the necessary product development work on hold. We are diligently working to launch new products that will be more appealing to conforming loan officers. Bruce, you are absolutely right in pointing out that we faced some operational stress and challenges, which I believe are affecting our ability to attract conforming loan officers more than non-conforming ones. We are making significant efforts and feel that we are turning a corner in our operations. We have increased our operational headcount and experienced a positive turnaround in our pipeline, especially in March, which was a strong closing month. Therefore, we believe we are on the path to starting to hire more conforming loan officers and gaining traction in that area.

Thanks for the update. I’d like to hear a bit about the increase in the dividend this quarter. I understand there isn't much to discuss regarding the next CCAR, but could you provide any insights on how that might affect your thinking about the trade-offs between dividends and buybacks moving forward?

Well I think we want to maintain a strong and healthy dividend that grows. And so this is a step in that direction. We'd like to be in a payout ratio of 25% to 30%. So taking care of the dividend is kind of job one. I think the next thing when we think about capital management, we want to make sure we're funding loan growth. So where we have attractive opportunities to grow the loan book, bring new customers into the bank, we want to make sure we're doing that. And then we also want to be shareholder friendly and buy back our stocks with the most of most that we can do. I think we're in the kind of strong position at this point, given the relatively high capital ratios to peers that we can do it all for the time being. So we are able to raise the dividend. We can fund reasonably aggressive loan growth and we can be I think reasonably aggressive at this point in time in terms of the buyback that we've been able to effect over the past couple of cycles and we'll wait and see what we're doing in this cycle. Eric do you want to add anything to that?

I'll just add that last year we obviously had our first non-objectionable pass for CCAR. This year we were committed and gave as much work as we did a year ago. So we've kept up the internal pace of all the improvement and remediation and making sure that we're leading the pack as opposed to just barely there on the requirements. And I think that gives us some confidence to put in for an appropriate return of capital to the shareholder, while balancing the strength of the franchise. But as Bruce said, we have very, very strong capital ratios, top of the leaderboard, and so that gives us some confidence.

I have a couple of questions, thanks. Regarding the dividend increase, Bruce and Eric, it seems like this was a bit off cycle. Did you need to get special approval from the board or from the Fed? Can you walk us through the process a little?

Go ahead, Eric.

Let me just take that. This was part of our annual CCAR app a year ago. We had paced it. Why? Because we wanted to pay dividend levels with income growth. You’ve seen us deliver on that income growth quarter after quarter after quarter, driven by the positive operating leverage and the performance of the franchise. This is a natural time during that plan to raise the dividend and given we deliver on the income; we had done the app a year ago. We and the board went ahead with that increase. We didn't need to have ask anything special from the regulators. The only place we did do that was on the sub-debt buyback which we did back in the February/March time period, and I think as I mentioned in my opening comments, that was a special ask over and above the annual CCAR.

I know that you can't tell me about CCAR. Can you talk a little bit about how you're feeling, given the very strong capital position you are still in? Either of you?

I think it's a little hard for us to comment at this point with the submission just filed. But I do think we continue to invest in our capital planning and management capabilities. I think we really keep upping our game. We know what we need to do to get strong in this area. So we feel good about the effort that we put forth and the progress that we are making. And on the quantitative side, as we said, we've got relatively strong capital ratios relative to peers. And so I think you would expect us to be kind of in sync with where we've been historically.

One more, nice job on the NIM. Just, can you talk a little bit about efficiency ratio and anything that we should think about as we look out, in terms of where you're all expecting that to go?

Let me take it and Eric, I will flip to you. But we are targeting ultimately to bring that down around 60%. And the key to doing that is positive operating levels. So the holy grail here, if you will, the mantra is that we got to grow our revenues faster than our expenses. We've done that for a number of quarters in a row. You can see again, this quarter year-on-year basis, 3% positive operating leverage. If we keep doing that, that efficiency ratio is going to improve. It is 2% better than it was last year, and I think you can see those kind of moves provided we continue to execute our plan. Eric?

I'll just add that we're going to keep chipping away at this quarter after quarter, 200 basis points a year, 0.5 point a quarter. You can do the math. The NII growth will help. Some of the seasonal rebound we expect from fees will help. And then we've got to be extremely disciplined on our expenses. You saw them up 1% year-over-year, flat sequentially. We've got to find a way to come in at the low end of our expense guide and we've got to find a way to come in at a strong operating leverage, and we have every intention to meter out and to carefully invest but only behind revenues, as opposed to the other way around.

I just wanted to see if you can give us your updated thoughts on your ROE walk for the full year? What your updated expectations are in terms of what you're targeting for end of the year ROE and what are the main drivers there?

Yes, we provided detailed guidance during the January call and left the ROTCE calculation to your discretion. As Eric mentioned, we are generally comfortable with the full-year guidance we discussed today. However, we anticipate some fluctuations. There are initial headwinds in fee revenue affecting not only us but the entire industry, and we need to address that. If we fall short of the fee guidance, we aim to compensate by achieving higher net interest income, where we are off to a strong start, and by managing our expenses effectively, which we are consistently looking to optimize. Overall, when you consider the various factors, we believe we are on track to meet our expectations for the year. Despite some challenges in the oil sector, we remain confident in our initial full-year guidance. ROTCE is expected to rise as we achieve positive operating leverage, see significant EPS growth throughout the year, and begin stock buybacks in the next CCAR cycle. Eric, do you want to add anything?

Let me just add that this is a marathon, not a sprint. We do it every quarter and trying to build on the last assessment about we've got to get the efficiency ratio improved quarter after quarter. And we think as we do that, and then manage the mix of the top line and expenses, we can make some headway on it. Clearly we want to get out of the 6%, the high 6% range to the high 7% and we will figure how to get to the next step. It's going to be quarter after quarter, inch by inch.

And on that note is it fair to say that when looking at that full-year guidance, if you do achieve that, that you're in that 7% to 7.5% ROTCE range?

At this point, you can do the modeling. I think that is what the modeling of the guidance suggests, which we provided back in January. As we mentioned in the opening, we are broadly affirming that guidance, and that includes the range you just quoted.

Thanks, Eric, and one thing on energy. What do you include in the non-price sensitive portfolios for energy?

I think you've just got the standard downstream retail, that sort of thing. So I think we've been pretty standard with the others in the industry.

Midstream, downstream.

Just a couple of NIM questions. Can you talk about how much more, call it organic opportunity there is to drive NIM higher over time, whether it's the mix shift or managing liabilities like you benefit from those quarters? How much left is there of that?

I think it's a never-ending battle with rates where they are today. We've got a really nice lift from the Fed hike that came through on the yield side both in consumer and commercial. There's a little bit left of that because some of that came in in January and February for a couple of their portfolios, given how they're contractually repricing. So we have a little bit of a tailwind there. On the other side of the ledger, the long end is a lot lower than it was before, so that creates a bit of a headwind that we have to work through. So given that, it means we have to keep being intensely focused on our deposit cost kind of management and we've got to build balances and do them in a disciplined way. I think commercial clients will always be asking for a little more rate because their loans were priced. So we've got to address that and we have to find a way to navigate that carefully. And then I think on the loan yields mix side, I think that is an area of tailwind that we have confidence in to continue. So I think we said broadly stable into the second quarter, up or down a basis point or thereabouts. So kind of in that range. I think the second half of the year will kind of depend on where the Fed goes and also where market expectations are, where the back end of the curve bounces around to.

And as we think about eventually further increases in Fed funds, at least hopefully; do you expect similar leverage to the next one or two increases? Like how do you think about how linear leverage this. So quarter, you got 4 or 5 basis points to benefit, it seems like, from the Fed? Is that a good starting point for the next 25 or do you start having pressure on the deposit rates?

When we provided that guidance in January, the forward curve then anticipated an increase in June followed by another in December, which still seems reasonable to us. I'm not certain the market shares this view, but based on economic data and feedback from our customers, it suggests that this would be a wise approach for the Fed. When we issued that guidance, we estimated a $35 million benefit this year from the June increase and around $5 million from the December increase, which has minimal impact on 2016 but will clearly benefit 2017. There remains a positive impact from this, although, as Eric mentioned, the curve has flattened at the back end, which presents some challenges.

I believe the next increase will provide significant benefits. It may not be equal to the $50 million a year from the first increase, but it will be close. This would also make it harder to reduce our deposit costs as easily as we did before; for instance, we lowered them by 4 basis points this quarter. That's not something we can achieve consecutively over two quarters. However, I want to emphasize that we are examining every aspect of our pricing structure, our client acquisition methods, and how we manage our portfolio to identify potential opportunities.

Yes. If you look at our yields relative to the peers, now we've closed the gap almost all the way from. Where we used to have a fairly significant gap and where we still have a remaining gap is in our cost of funds. So we know we still have work to do there.

Can you provide some insight on your strong capital position as presented, especially regarding the minimum requirements? What do you think it would take for you to return more than 100% of earnings? Would the Fed need to provide clear guidance for you and your peers to do so, or do you have to interpret the situation and take a risk? I'm not suggesting you pursue that this year, but could you consider asking for more than 100% of earnings in the future?

I don't think you want to go first. I would say we are comfortable with the path we have been on. When the plan to separate Citizens from RBS was announced, we started with an almost 14% CET 1 ratio. Over the past 2.5 to 3 years, we have gradually reduced it to 11.6% through paying dividends and executing our conversion transactions, which functioned like a buyback, along with strong loan growth around 8%. We feel good about this progress. As a relatively new company, our earnings are currently below our long-term targets, so we need to increase our sources of capital. However, it’s advantageous that we have strong capital backing, allowing us to pursue aggressive loan growth and approach the CCAR process with reasonable confidence. I don’t believe it would be beneficial for us to consider exceeding 100% at this moment.

In terms of the ideal capital level, at some point, we presume Citizens and your peers will get there? In your view, what is the ideal Tier 1 common ratio that you think you can run the company at? I'm assuming the current level's too high.

If we compare to our peers, the average or median is around 10%. Most of them feel a bit heavy at 10% and aim for a range between 9% and 10%. Currently, we are at 11.6%, and we need to continue executing our plan, increasing our earnings, and gradually reducing our capital ratio. I don't see a reason for us to maintain a premium indefinitely. Our business model and stress test results don't indicate that we require a higher ratio compared to our peers. It's really about observing where others are heading, and we're working to align ourselves with them over time.

Great. And then, just finally, your loan to deposit ratio obviously is in the high 90s. Where do you target that? Are you comfortable where you are now or would you be comfortable going over 100% loan to deposits? What's your guy's view on your loan to deposit ratio?

Gerard, it’s Eric. For now, we're quite satisfied with our operational range around 98% to 99%. This approach is healthy for a regional bank, and we aim to manage it in a straightforward manner by ensuring we have the right balance of deposits against loans. We generally maintain a slightly higher liquidity coverage ratio, primarily due to our larger retail deposit base, which gives us confidence to operate closer to 99% rather than the 90% some others maintain. Over time, as regulatory benchmarks, like the liquidity coverage ratio or the net stable funding ratio, become established, we will evaluate our situation. Currently, we are well above the 90% LCR requirement and have surpassed 100%. Once the net stable funding ratio becomes more defined, we will assess whether adjusting our strategy makes sense. For now, we are comfortable with our current position.

First question, it looks like student lending continues to grow really well. Are you guys seeing any noticeable increase in competition in the student lending market from other banks?

I will turn it over to Brad.

Yes. I would say we are definitely seeing some competition in the refi loan space. So we haven't seen a lot of new players in the in-school space. We've seen players like SoFi and Darian and others in the refi area. But I would say at this point, margins are holding nicely. There is still good strong demand, so we feel good about the opportunity. But yes, there is some competition in the refi space.

But it's not bad competition, right, because it creates awareness among borrowers. You see TV ads out there so we don't have to spend on the TV. But it allows us for direct marketing and online channels to close loans.

I think it's a very good point, Eric. There's a lot more awareness among consumers about the ability to refinance student debt. I think you're absolutely right on that point.

Does that level of competition or increase ultimately change the pace of growth in student lending in the next few quarters?

Our view is, no. There is still an enormous opportunity in the marketplace in terms of consumers who are eligible for student loan refinancing, and so demand will remain strong for the foreseeable future.

I think that the thing that we think about is as you maintain this growth rate, you come to, what's the theoretical asset allocation you want to that asset class. And so I think this is a juggernaut that can continue to grow on our balance sheet and then do we want to have options to move some of those assets off the balance sheet through sales or securitization. So I think it's a rich man's problem at this point.

Fair enough. And Just the other question I have in terms of the capital markets business, can you just remind us how your business may differ from other banks? I know the first quarter is a very difficult quarter, but it looks like your capital markets revenue held up pretty well?

Don?

There's a lot of syndicated finance in our capital markets and a lot of bank content versus institutional content. So the fourth quarter's obviously a tough quarter as the whole market basically shut down on the volatility of the high-yield market and the institutional market. We actually came through quite clean versus a lot of the competition, and we're able to take advantage of a few very attractive opportunities that were available in the first quarter. And that's really what drove the first-quarter revenue. As we move into the second quarter we see continued progress in that. The breadth of opportunity is growing and as we are getting a little bit of thaw in the broader capital markets, we're seeing transaction flow increasing. It will be a little market dependent around actually how we close all of those and where they fall over the next few quarters, but we are quite encouraged about the breadth of activity here.

Yes, if you look at, historically, the second quarter has been a relatively strong quarter for capital markets fees, and I would say that at this point our pipeline is tracking with those historic builds for Q2.

It seems like you obviously have a capital problem yet obviously need to grow revenue. You're attempting to do that. So why not look at potentially acquiring non-bank in order to accelerate the fee income growth and utilize your capital base?

At this stage, our primary focus is on the organic opportunities available to us. We believe that through our turnaround plan, we can achieve strong organic growth. We must also show that we can enhance our capabilities and manage the bank more efficiently, which we feel we are already accomplishing. However, there will come a time when we consider using some of our excess capital for acquisitions, particularly in fee-based businesses. It's important to approach this cautiously since these businesses usually carry higher valuations. Many of them, such as wealth management or capital markets, might have assets that are not held permanently. Therefore, careful structuring of these deals is essential. I think that will be further down the line, and I don’t foresee pursuing any acquisitions in 2016. As we continue to improve our operations, we might begin exploring opportunities potentially in 2017 or 2018.

Is that decision being made mainly because of regulatory constraints, or is it due to your own choice to strengthen the core operations as they currently exist?

I think it's our decision. But I do think you have to bring all of your stakeholders along when you start to move in that direction. I think shareholders want to see us running the bank better and we have said that there is a lot we can do in that regard. So they want to see us deliver against that before we start getting distracted with doing more. I think regulators as well, have seen us make progress on things like CCAR and moving to heightened standards and some of the other things where the bar is going up and you have to stay focused on that agenda as well. So I think you just need to demonstrate that you're running things well and I think all the stakeholders will say, yes, you have earned the right to go out and do some more. But I don't think we're quite at that point, at this point.

And then, on auto lending, you've pulled back from the market and reduced the amount of capital you allocated to auto done well with charge-offs and delinquency rates have increased significantly through 2015. Could you just give us a feel for what you're seeing in the market right now, and your expectations through 2016 and into 2017 regarding that market?

I will start and Brad and even Eric can chime in. But I think that we made conscious decisions to move into the prime lending space from super prime. So the increase in charge-offs tracks higher yields as well. So the returns in the business have gone up over this period. And I would say from Q4 to Q1, we have actually seen an improvement in terms of delinquencies and other measures around credit. So I think we've stayed very disciplined. So we've expanded our risk appetite a bit. We're disciplined in terms of terms and conditions and in terms of the different markets not playing in sub-prime. But we needed to do that because the reality was that in super prime, you couldn't make a good return on capital. So that's really what's behind that but I'll let Brad provide some color.

Bruce, I think you said it extremely well. And to your point, 30-day delinquencies were down for us, 90-day delinquencies were down for us, charge-offs were down, the portfolios' performance are tracking right in line. We're made a conscious decision to grow our assets in other areas with a little bit higher risk-adjusted returns, like student, like we talked about. But we are actually quite comfortable with where we're at right now in auto, and feel very good about our credit performance.

What I'm add is that tapping the brakes a little bit on our originations and slowing down growth gave us the opportunity to adjust pricing. Guidance that falls right to the bottom line. We might do that again at some point or this is a classic asset class. It doesn't have as high returns as you would like, it actually has good stable credit dynamics, but not as high returns as you would like. And we'll be looking at pricing, we will look at securitization, we'll look at all the things you can do to essentially optimize this more over time.

And you could expect that as a percentage of our total loan assets, this will decline over time as we seek other opportunities to deploy our capital into better risk adjusted return areas.

Question on fees. So you I think affirmed the guidance this year for fee income growth in the 2% to 3% range. But if I look at the guidance for Q2 and the Q1 result, it looks like fees are trending down kind of low to mid-single digits for the first half. So I'm trying to understand where some of the improvement will come from in the back half.

Yes, Eric, why don't you pick that one up.

Yes, let me start. I think the key factor for fees has been service charges, which make up 40% of our portfolio. As you analyze the numbers, remember that our original guidance of 5% to 7% was based on the old accounting framework, while card fees do impact reported results by 2 to 3 percentage points. It's important to keep that in mind when making comparisons. That said, the real growth needs to come from investment activities. I'm pleased to say we experienced a 3% year-over-year increase despite the challenging markets we faced in January and February, which many of you can recall. As we shift toward conforming mortgage activity, it presents a natural opportunity for growth. Maintaining a strong pipeline and increasing originations by 5 to 10 percentage points is very impactful, and we have several initiatives in progress to achieve that. Although this takes time, we are confident it will materialize. Lastly, I believe there is potential in the capital markets, considering a strong second quarter and positive economic indicators for the latter half of the year. There has been a noticeable improvement compared to the sentiment in January and February. Each of these areas requires effort, but we are committed to finding ways to advance.

Eric, if I can chime in very quickly, I think you hit it well. You mentioned it in your opening comments, we have had two very good recruiting quarters in a row with financial consultants. Difficult quarter, just because of the market volatility, but we feel very good about the underlying trends both in hiring and sales results in investments. So I think we feel quite optimistic about the opportunity in wealth and investments. One other quick thing to highlight, first quarter is a seasonally low quarter for deposit fees. So that's something to consider as well.

The other thing I want to mention is that in my earlier remarks, I indicated there will likely be some fluctuations this year. We may be slightly delayed on fees, which we will need to offset with improved net interest income or enhanced expense performance. Overall, we are reaffirming our guidance, but expect some variations. Also, for the second quarter, the guidance to mid-single digits assumes no securities gains, although we usually have some. If we experience similar securities gains as in Q1, that could elevate the figure to a high single-digit number. I just wanted to clarify that point as well.

If I could, just as a follow-up, drill down specifically into the card segment, which I know has been a key growth initiative for you. It looks like you saw nice improvement in the average yield in that portfolio this quarter. Was that primarily a function of the higher prime rate this quarter? Or did you also see some improved revolve rates? And also any commentary around penetration would be helpful as well.

Let me hit the financials first, and then Brad will describe a little more of the business activity under the surface. The yields tend to do well in the first quarter, probably was exactly as you describe. Primary came up and so the book repriced and that gained a very nice lift. Probably you just had pay down activity on some of the book. You roll through some of the acquisition fees that you may have seen in the third and fourth quarter, and so you end up with more fully priced balances which gives you a second tick up. So those were the two on the financial side.

I think you hit it well. We launched a new card product last year, as a much improved value proposition which has improved revolve rates and card activation and usage pretty significantly, but it's also given us the ability to move away from the promotional rate. So that's been an influencer as well.

Great. Brad, is there anyone else on the line? Do we have any more calls on queue?

Okay, great. Well, thank you everybody for dialing in today. Really appreciate your interest and have a great day.