Citizens Financial Group's (CFG) CEO Bruce Saun on Q3 2016 Results - Earnings Call Transcript

| About: Citizens Financial (CFG)

Citizens Financial Group, Inc. (NYSE:CFG)

Q3 2016 Earnings Conference Call

October 21, 2016 8:30 AM ET

Executives

Ellen Taylor - Executive Vice President & Head-Investor Relations

Bruce Saun - Chairman & Chief Executive Officer

Eric Aboaf - Chief Financial Officer & Executive Vice President

Brad Conner - Vice Chairman-Consumer Banking

Donald McCree - Vice Chairman and Head of Commercial Banking

Analysts

Ken Zerbe - Morgan Stanley

John Pancari - Evercore

Geoffrey Elliott - Autonomous Research

Erika Najarian - Bank of America Merrill Lynch

Ken Usdin - Jefferies

David Eads - UBS Securities

Vivek Juneja - JPMorgan Securities

Manuel Bueno - Compass Point Research

Gerard Cassidy - RBC Capital

Matthew O'Connor - Deutsche Bank

Kevin Barker - Piper Jaffray & Co.

Matthew Burnell - Wells Fargo Securities

Operator

Good morning, everyone, and welcome to the Citizens Financial Group Third Quarter 2016 Earnings Conference Call. My name is Daniel, and I'll be your operator today. Currently, all participants are in a listen-only mode. And following the presentation, we'll conduct a brief question-and-answer session. As a reminder, this event is being recorded.

Now, I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin.

Ellen Taylor

Thanks so much, Daniel, and good morning, everybody. Thanks for joining us today on the call. We're going to begin things with our Chairman and CEO, Bruce Van Saun; and Eric Aboaf providing overview of our third quarter results. And then we're going to open the call up for questions. We're really pleased to have Brad Conner, our Head of Consumer Banking; and Don McCree, Head of Commercial Banking with us this morning.

I'd like to remind you that you can find our earnings materials on the website at investor.citizensbank.com. There is a presentation there that we're going to walk through.

The lawyers have asked me to also remind you that our comments today will include forward-looking statements that are subject to risk and uncertainties. We provide information about the factors that could cause our results to differ materially from those expectations in our SEC filings, including the 8-K that we filed today. We also utilize non-GAAP financial measures and provide information and the reconciliations of those measures to GAAP in our SEC filings and in the earnings release material.

And with that, I'm going to hand it over to Bruce.

Bruce Saun

Okay. Good morning, everyone, and thanks for dialing into our call this morning. We reported some very strong results today as we continued to execute well on our turnaround strategy for Citizens. Eric will take you through all the key numbers and color in a moment, but let me call out some of the highlights.

EPS for the quarter was $0.56, but that included $0.04 of what we refer to as notable items, the TDR sale gain, partially offset by several charges and write-downs. The underlying adjusted result of $0.52 per share was up 13% linked quarter and 30% year-on-year, really terrific. The good momentum we had in Q2 continued into Q3, and the environment broke our way with good capital markets and global markets activity levels, a bump in LIBOR rates, and a lessening drag from the long end of the curve.

Our team is executing very well. We continue to run the bank better for all of our stakeholders. We remain very focused on delivering a differentiated superior customer experience as the key to our long-term success.

It is nice to see ROTCE reach 8%. We've delivered the controllable part of our original ROTCE block. It's the lower for longer rates environment that has held us back from even better results. But rest assured, we are not waiting around for rates to rise. We are focused on continuous improvement. We delivered 450 basis points of positive operating leverage year-on-year, adjusted basis, and our efficiency ratio has improved by 3% to 63%. We're getting some lift in fees, as the investments that we've patiently making are starting to show some traction. Capital markets and mortgage in particular had strong quarters. We did a good job on net recruiting. We added 47 mortgage LOs in Q3 and 11 financial consultants in wealth.

It will be important to stay focused and to continue to execute well in Q4 and in 2017. We can't expect these types of sequential EPS jumps every quarter, but it's pleasing to see the hard work is paying off.

With that, let me turn it over to Eric.

Eric Aboaf

Thanks, Bruce, and good morning, everyone. Our third quarter results highlight strong progress, as we continued to grow our balance sheet, deliver robust positive operating leverage, and smartly manage our capital base. Our key metrics continue to improve nicely: EPS growth, efficiency ratio, and ROTCE, and this marks the ninth straight quarter that we delivered positive operating leverage.

Our earnings of $0.56 on a GAAP basis includes some notable items that we've detailed on page four of the earnings presentation. As previously announced, as part of our focus on optimizing the balance sheet, we completed the sale of $310 million of home equity and mortgage loans classified as Troubled Debt Restructuring at a pre-tax gain of $72 million.

As part of that work, what we did in conjunction with the TDR Transaction, we conducted a broad technology and operational review related to the home equity business. We ended up writing off some software and adjusting some legacy processes to enhance customer experience and outcomes. The cost of these items was $8 million, which resulted in a remaining benefit from the gain of $64 million.

A further balance sheet optimization initiative resulted in a charge of $16 million, as we completed a deep-dive review of our Asset Finance business and elected to put certain single-product leasing-only client relationships into runoff that were tied for our legacy RBS business model. These relationships don't fit our target client profiles and return hurdles. In connection with this type of decision, our experience is that clients are less likely to work with us to resolve issues regarding the value of the collateral. And this fact coupled with the recent decline in several aircraft valuations resulted in impairment write-downs of $16 million on the residual values on the leases. And lastly, we incurred a $17 million expense associated with our TOP III expense initiatives related to severance and consultants.

So, with that, let's take a closer look at our third quarter 2016 earnings presentation starting with page five. These GAAP results include the notable items in the quarter. On a GAAP basis, we generated net income to common stockholders of $290 million and EPS of $0.56 per share, which was up 19% sequentially and 36% year-over-year.

On page six, you can see the highlights of our third quarter adjusted financial results, which exclude the impact of notable items. We believe this view provides the best picture of underlying momentum. Net income to common of $271 million is up 12% sequentially and 27% year-over-year. We grew net interest income $22 million or 2% linked quarter as we continued to deliver solid loan growth and held them stable. The NIM performance was better than expected as we saw a better an anticipated lift from LIBOR and continued strong results in shifting portfolio mix.

We also continued to make progress on fee income front with adjusted non-interest income up 4% sequentially, driven by strength in mortgage banking and service charges and fees. At the same time, we held expenses relatively stable linked quarter despite our continued investments in frontline personnel. And credit continues to be benign as provision expense was down $4 million. So, on a linked quarter basis, adjusted EPS increased $0.06 or 13%.

Compared to adjusted third quarter 2015 results, net income to common stockholders increased $58 million or 27% with earnings per share up 30%. We grew NII 10%, reflecting strong loan growth and an 8 basis point improvement to NIM. Given higher loan yields and short-term rates, ROTCE was 8.6% in the quarter and adjusted ROTCE hit 8% for the quarter, up 1.4 percentage points from a year ago.

On pages seven and eight, you can see the drivers of our NIM performance this quarter. With one month LIBOR increasing and the continuing mix shift within the retail loan book to more attractive categories, we picked up 3 basis points on loan yields. However, we gave up 1 basis point of spread in the investment portfolio and deposit cost increased 2 basis points, largely tied to the commercial book.

Year-over-year, we picked up 12 basis points on asset yield, reflecting pricing initiatives and improved portfolio mix along with the impact of an increase in interest rates. Additionally, our term funding costs rose by 3 basis points tied to the higher rates and more term debt issuance. The strong performance over the past year, in spite of much lower long rates and a flatter yield curve, is a testament to how effectively we are executing on our optimization strategies.

Our asset sensitivity ended the quarter at 5.8% and a 200 basis points gradual rise scenario compared with 6.8% as of June 30. We have reduced our asset sensitivity modestly and expect it continue to be at the low end of the 6% to 7% range given the likelihood of the pace of Fed tightening will be slower than past cycles.

Turning to non-interest income on slide nine, you can see we continued to make progress. On a reported basis due to the impact of notable items, we grew non-interest income 23% from third quarter 2015. Excluding this impact, non-interest income was up 4% year-over-year. Note that the prior-year quarter had $60 million in benefits from a branch-sale gain and the card accounting change.

Results were okay by another strong capital markets quarter where we continue to see nice traction in loan syndication as well as the impact of establishing our own broker/dealer post RBS separation. We're also regaining ground in mortgage banking. This quarter's results reflect continued improvement in our conforming application mix as well as a decrease in pipeline turn times, all of which helped lead to higher loan sale gains and improved spreads on higher refinance volumes. You can also see continued improvement in service charges and fees with progress in both consumer and commercial, which were up 3% and 5%, respectively, with a benefit from higher volumes and improved pricing.

Our card fees were down year-over-year due to the card reward accounting change. Trust and investment services fees were down slightly. Investment sales were up 14% year-over-year, in line with higher FC count. But as we continue to focus our wealth management efforts on achieving a better mix of transaction and fee-based recurring revenue, our commission revenue is lighter. Other income increased $73 million, almost entirely due to the impact of the TDR Transaction pre-tax gain.

Let's take a closer look at expenses on slide 10. GAAP non-interest expense increased $40 million or 5% linked quarter, including $36 million of notable items largely in salaries and benefits and outside services. On an adjusted basis, non-interest expense increased $4 million, roughly flat with the previous quarter. Salaries and employee benefits expense were down by $11 million. 2Q 2016 included higher payroll taxes and benefits associated with incentive payments. In addition, we brought our head count down by 200, driven by our TOP efficiency initiatives.

Offsetting the reductions in salaries and benefit, our outside services expense was up from relatively low second quarter levels, largely related to higher technology outsourcing and consumer loan product origination costs. As expected, we also saw some more modest increases in equipment and software amortization, given our infrastructure investments as well as a $4 million increase in FDIC insurance costs. In effect, the puts and takes offset each other and we were left with a cost of the FDIC increase.

On a year-over-year basis, our non-interest expense increased $69 million or 9% driven by the notable items. On an adjusted basis, non-interest expense was up 4%, salaries and benefits are up $17 million, largely related to growth initiatives as well as higher revenue related incentive costs.

Our head count is down by almost 200 year-over-year, which reflects our efficiency initiatives more than offset an increase in the Consumer Banking sales force, largely in mortgage and wealth. In third quarter 2016, we continue to make progress against our goals, enhancing the bank's efficiency, even as we continue to reinvest in the business to generate future growth. Our efficiency ratio of 63% improved by 3 percentage points year-over-year on an adjusted basis and 5% over the last two years, as we continue to consistently deliver positive operating leverage.

If we look at our balance sheet on page 11, average earning assets were up $8.7 billion year-over-year or 7%. We generated 10% commercial loan growth and retail loans were up 5% across multiple product lines. Average deposits increased 6%, reflecting our ability to grow lower cost core deposits. And you can see that our borrowed funds increased $2.4 billion, which reflects growth in long-term senior debt and long-term FHLD borrowings, which replace retail and short-term FHLD borrowings as we continue to strengthen our funding profile.

Let's move to page 12 where you can see that Consumer Banking contributed 7% loan growth year-over-year and improved yields 22 basis points. Loan growth was driven by education finance, mortgage and other unsecured retail. Consumer loan yields have increased each quarter this year, reflecting our team's initiatives to improve risk-adjusted returns and the benefit of higher interest rates.

On slide 13, you can see that Commercial Banking experienced another strong quarter. Commercial loans increased 11% year-over-year, with continued momentum in Mid-corporate and Industry Verticals, Commercial Real Estate and Franchise Finance. Our commercial team has improved loan yields by 25 basis points, which reflect an increase in LIBOR as well as the more attractive mix.

Slide 14, deposit costs were up 3 basis points linked quarter, driven by strong commercial deposit growth and rising short-term interest rates, and we are comfortable with this increase. We will continue to find opportunities to balance our desire to grow deposit with the need to defend our margins. On a year-over-year basis, deposit costs increased 2 basis points as our continued pricing discipline largely offset higher short-term rates.

Next, let's move over to slide 15 and cover credit. Overall credit quality remained broadly stable during the quarter despite a rise in commercial charge-offs and non-performing loans tied to energy and commodity-related borrowers. We feel good about our reserve levels in the energy portfolio, but expect to see some modest migration to charge-offs and NPL notwithstanding higher oil and gas prices.

The remainder of the commercial and retail portfolios continue to demonstrate broad stability and the outlook for credit performance in 4Q remains positive. The allowance to loans ratio of 1.18% was relatively stable with the prior quarter. Our allowance to NPL coverage decreased to 112%, given the bump in NPLs, which have already been incorporated into our reserves.

On slide 16, you can see that we continue to have strong capital and liquidity position. This quarter as part of our 2016 CCAR plan, we purchased $250 million of shares from the market at an average cost of $22.60, returning $313 million to shareholders including dividend. We ended the quarter with a CET1 ratio of 11.3%, which reflects our efforts to bring our capital structure more in line with peers. As a reminder, our CCAR plan includes the ability to repurchase up to $690 million of shares during the CCAR horizon, so more to follow.

On slide 17, we provide an update on our key initiatives tied to our turnaround plan. We believe it's important to assess our progress against these initiatives each quarter. We're continuing to deliver [indiscernible] balance sheet growth across the platform.

In consumer, we continue to engage with customers across multiple channels and we are regaining momentum in mortgage and wealth, although we still have room to improve. In commercial, we are seeing a lift in capital markets, benefiting from the establishment of our broker/dealer and this quarter we took steps to refocus our efforts in Asset Finance. All-in-all, good execution across these initiatives is driving our strong momentum.

On slide 18, our TOP programs continue to deliver important benefits. As a reminder, the company launched Tapping our Potential in 2013 with a companywide bottoms-up focus and we estimate it to continuing to harvest ideas to deliver improving revenue and expense trends every year.

These programs have been key to our continued momentum in operating leverage and enabled us to reduce staff in non-revenue areas and streamlined end-to-end processes, while ensuring that we continue to generate good revenue growth, notwithstanding the low rate environment.

With TOP II, we're nearing completion of the program with roughly $50 million in expense base as well as providing nearly $50 million in revenue benefits on an annualized basis for year-end 2016. We kicked off TOP III this summer and have already made good progress across all the initiatives.

In commercial, we completed the end-to-end portfolio management and processes work and are focused on leveraging data to improve customer retention. In consumer, we are particularly pleased with our unsecured lending initiatives and we're also digging in on the brand strategy, and we're ahead of plan on taxes, some of which you see this quarter. Bottom line, we are well on our way to delivering on the $90 million to $100 million we are targeting by the end of 2017.

Let's turn to our fourth quarter outlook on slide 19. We expect to continue to drive attractive balance sheet growth and are targeting average loan growth of roughly 1.5% to 2% over the third quarter. We also expect net interest margin to be relatively stable. We expect some continued improvement in LIBOR, along with a benefit from continued shift in asset mix and the benefit of pay-fixed swap runoff to drive these results.

On the fee income front, we expect puts and takes to result in a relatively stable trends from our adjusted third quarter base of $368 million. We expect capital markets to continue to post strong results while mortgage fees should be down somewhat from exceptional third quarter levels.

Additionally, we may generate some relatively modest securities gains to reposition the portfolio for next year. We plan to continue our discipline on expenses and expect a modest increase given seasonality. Overall, we remain committed to generating strong positive operating leverage, which has been the key to our improvement in EPS and ROTCE. We expect underlying credit to remain favorable, but expect to see a modest build in the quarter for loan growth. And finally, as we continue to grow loans and return capital to shareholders through both dividends and repurchases, we expect to manage our CET1 ratio to around 11.2%.

Overall, we're pleased that we remain broadly on track for our 2016 full year operating earnings guidance we provided back in January. A strong balance sheet growth and in performance, good expense discipline and favorable credit has more than offset lower than projected fee income and the lack of Fed funds hike. Overall, this is a reflection of strong execution and our mindset of continuous improvement.

So, with that, let me turn it back to Bruce.

Bruce Saun

Well, thanks, Eric. Let me just close by acknowledging the good work that Eric has done during his 18 months with us at Citizens. This will be his last earnings call for us, but he'll work through mid-December, staying focused on the 2017 budget and contributing to our initiatives. We're pleased to welcome back former CFO, John Fawcett, from retirement, who step in as interim CFO and help through the year-end work. I'm very confident that we'll be able to attract a high quality permanent successor and Eric, I'm confident that you'll make a very positive impact over at State Street.

So, with that, Daniel, let's open it up to questions.

Question-and-Answer Session

Operator

Thank you, Mr. Van Saun. [Operator Instructions] And your first question comes from the line of Ken Zerbe with Morgan Stanley. Please go ahead.

Ken Zerbe

Great. Thank you. Good morning.

Bruce Saun

Hi, there.

Ken Zerbe

I guess, a question on the net interest margin. Obviously, I heard you say that it benefited from the higher LIBOR this quarter. I think I heard your expectations with the LIBOR is going to continue to increase. So, from a planning perspective or forecast perspective, if LIBOR does start to tick lower for whatever reason, does that also implies there is a direct correlation to NIM or is there any way to lock-in those gains? Or because I think you also – or Eric may have also mentioned like reducing asset sensitivity, was that part of this? Just want to make sure I'm clear on if there's anything you can do to protect that NIM?

Eric Aboaf

Ken, it's Eric. I think the NIM for fourth quarter we expect to be relatively stable. I think LIBOR will clearly be in a tight range. It may float up a little bit in anticipation of the Fed rate rise. But I think there is little movement that we expect beyond that that I think you or others should be concerned about.

I think what we have is we consider the fourth quarter guidance that we gave is we might get a little bit of uptick from the frontend LIBOR, which helps reprice our – with the pricing on our commercial loan book, right. We have some old swaps rolling off, so that will be a tailwind. And against that, we just have the backend long-term rates continuing to flow through the securities and the fixed rate product portfolio. And so, net-net, there's kind of offset between those, and so we expect a roughly flattish fourth quarter.

Bruce Saun

Yeah. I would add the other positive tailwind is our efforts to just keep shifting the mix towards better risk-adjusted return portfolio. So, we're not really that sensitive to LIBOR. Ken, I feel pretty confident in that outlook for the fourth quarter.

Ken Zerbe

Got it. Okay. That's pretty clear. Okay. So it's just sensible even without LIBOR expectations changing, okay. And then the other question I had just maybe more of a broader question on the TOP III expenses. Obviously, you took some cost this quarter. I am aware that your expense guidance includes the underlying TOP III cost, but just maybe help us get a sense like what does it cost to implement, say, the TOP III program ex the one-timers this quarter?

Eric Aboaf

Ken, I think the way I would describe it is, there are really two types of costs that we incur as we prepare for expense efficiency work, right. The first is that we do a lot of legwork both internally and with some amount of external consulting support to determine what kind of opportunities that we have in which areas of businesses and functions and which processes and which parts of our business. And so, there is some kind of preparatory work and you saw that come through, and I think we called that out in the expenses, the higher expense in this quarter, which cost about $6 million, right. In addition, once we do that preparatory work, we need to take severance and reserve effectively for the anticipated head count actions. And then, as those actions take place, those costs bang up against the reserve and you won't see the impacts of that in the forward period.

So, bottom line is you'll see most of the expense preparation and severance this quarter, that's what we've called out. We don't expect that to be significant going forward, but you'll start to see the benefit build over the coming months, as we actually effectuate some of those head count actions in particular, which will benefit starting in the fourth quarter and more and more into the coming year.

Bruce Saun

Yeah. I would just add to that, Ken, if you look at slide 18 where we detailed the TOP III program and break it out into revenues, expenses and taxes, you've got pretty much those costs associated with the bottom two with expenses and the tax work already reflected. On the revenue initiatives, the one that we'll have some costs that go with that is the unsecured lending initiatives. So, as we seek to build that portfolio, we'll have some marketing costs that go with that. But that will just flow into the run rate, and those benefits that we're showing are net benefits. So, I think to Eric's point, we've reflected most of those costs at this point.

Ken Zerbe

All right. Perfect. Thank you very much.

Operator

Your next question comes from the line of John Pancari with Evercore. Your line is open.

John Pancari

Good morning.

Bruce Saun

Hi.

John Pancari

On the margin, just a couple of quick things there. Kind of back to the yields question around loans. Barring any incremental move on LIBOR and barring any move by the Fed, generally what is your expectation for the trend in underlying loan yields? Is it still up because of the tailwind on swaps, on the roll-off, or is the downside pressure still there as new money yields are coming in below portfolio yield? Thanks.

Eric Aboaf

John, it's Eric. Let me give you the color. I think we expect loan yields to continue to inch upwards. The biggest driver of that has been, over the last couple of quarters, our mix shift in particular in consumer. And earlier in the year, it was the uptick in LIBOR, which helped the commercial loan yield.

So, as we think about fourth quarter, right, we think we can continue to drive that mix shift, which is worth a couple basis points of yield on our book. And then we'll just have to see whether LIBOR floats up or not. I think all you have to consider is that as we grow the balance sheet, we also incur some deposit cost and, at this rate of growth, those inch up a little bit as well. We're, obviously, actively managing that. But between the two of those effects, I think we expect to be roughly constant into the fourth quarter.

John Pancari

Okay. Yeah, thank you, Eric. And that does dovetail right into my related question on that was the deposit costs, they did inch up this quarter. And again, is that – that's just given the overall growth and the fact that you don't have a ton of extra room there on your loan to deposit ratio?

Eric Aboaf

Yeah. I think the way I would describe that is that if you're growing deposits at 3%, 4% at market rates, which many other banks are doing, then you don't expect much growth in deposit cost because it's kind of BAU going forward. I think we are growing our balance sheet at closer to 7% on the loan side. We need to fund that with deposits. We found – we've made a conscious choice to increase deposit balances on the commercial side. We found that there are lower costs there than retail in aggregate and on the margin.

And so what you'll find this quarter, for example, we added north of $2.5 billion of deposits quarter-on-quarter, even more year-on-year. When you're growing on a year-on-year basis of commercial deposits in 10% to 15% range, what ends up happening is you end up paying a little more on some of the new money that you're bringing in. Is it manageable? I think we've demonstrated that it is. But it will trickle through the deposit costs and we'll just continue to be careful as we bring in those funds.

John Pancari

Okay. Great. Thank you.

Operator

Your next question comes from the line of Geoffrey Elliott with Autonomous Research.

Geoffrey Elliott

Hello. Thank you for taking the question. You've clearly had quite a lot of growth in the other retail category and, I guess, some of that's down to things like the iPhone Upgrade product. Can you give us a sense of what you think the destination looks like in terms of mix? How much further do you shift towards that other retail category?

Bruce Saun

I'll start and then I'll ask Brad to augment. We think that this is a good important element of our mix shift that we were kind of underweight higher yielding portfolios in credit card and in personal unsecured. So we have really a two-pronged effort here. One is the partner financing, which we have with Apple, which may be able to be extended to other partners. And then, we have a direct unsecured effort largely in our footprint, where we think we can also – largely for our credit card consolidation offers get – offer good usable product to our customer. So those initiatives are helping to grow that. I think in the quarter we've grown that about $150 million, which is nice to see, and that's helping to adjust our overall yields favorably.

So, Brad, maybe you want to add to that?

Brad Conner

I think that's right, Bruce. And we think there's some opportunity in the other partnership area. The other highlight that I would make in terms of sort of other consumer categories that's been helping fly up the margins on our loan portfolios and student lending, we'll continue to have a lot of good progress there. Our education refi product, there's a lot of demand. Third quarter product because that's seasonally high period for loan demand. So, I think good opportunity in both the student loan space and in the other unsecured space.

Bruce Saun

Yeah.

Geoffrey Elliott

And then, I guess, at the other end of the spectrum on shifting around the loan mix, the aircraft leasing portfolio that you placed into runoff mode. What was the background there? What was behind the decision to move that into the runoff category?

Bruce Saun

Yeah. Maybe I'll start and, Don, you can augment that. But we took a hard look at the overall Asset Finance portfolio. And a lot of the business that we had on the books was sourced by RBS. They were the credit provider to large companies, investment-grade companies, and which was a cross-sell that was actually brought to Citizens as we were part of the same family. And when we stepped back and looked at the book, we said, we've got these large aircraft leases which are usually the sole product we have with those borrowers and we aren't going to really be relevant to those borrowers going forward. So they weren't penciling out from a hurdle rate standpoint and we decided and so on a B III basis, the returns were not very attractive. So we put those into runoff, we'll shrink that book and start to focus more on using leasing as a cross-sell into the middle market and into our Mid-corporate customer base. So, it's really an overall strategic shift and it's basically cleaning up some of the things that are a part of our legacy and our history.

But Don, you can maybe add.

Donald McCree

Bruce, I think that's right. And I think it's the last step in the cleanup as we become a public company. Asset Finance is something we've been looking at for the last year, year-and-a-half, and we're really targeting the business completely differently than we have been in the past. And I think it was the one business where we had a very significant mix of non-core Citizens franchise exposures, and this is a cleanup to move those away from the ongoing business.

Bruce Saun

You might, Don, just take the opportunity to talk about some of the other separation initiatives in commercial from RBS because we've made real progress this year in terms of setting up a broker/dealer so we can offer underwriting on our own without RBS, and then also doing a great job of getting a new platform in, in global markets, so we can offer FX and risk management products on our own away from RBS.

Donald McCree

Yeah. And I think I talked about this at the conference about half-a-year ago, which is we were losing portions of our profitability in the commercial bank just because we were paying away good offer spread in the trading rooms and we were paying away portions of our fees on the capital markets side. So, actually completing the infrastructure growth across our dealing runs and also across the growth that you're seeing it come through in the results already and we're highly optimistic as we move forward.

So I'd say we're finished in terms of the investment putting away, save a couple of minor items, and we're operating fully independently. Right now, we should be able to capture the full profitability.

Bruce Saun

Great.

Geoffrey Elliott

Thank you.

Operator

Your next question comes from Erika Najarian from Bank of America. Your line is open.

Erika Najarian

Hi. Good morning.

Bruce Saun

Hi.

Erika Najarian

I was hoping you could help us think through, if the Fed had raised rates in December, what the impact would be on first quarter net interest margin, based on how your balance sheet is positioned today?

Eric Aboaf

Yeah, Erika. Let me start with that and I think you could go back for broad context as to how this affected us last year because if you remember it was a literally 11 months ago, right?

Erika Najarian

Yeah.

Eric Aboaf

And so, soon we'll be to another December month, where the Fed raise rates to 25 basis points and I think you saw some good performance starting into the first quarter. I think mechanically what happens is the Fed rates is raised and then what will tend to play through is that those rates flowed up on a LIBOR basis, the LIBOR rates then are tied to our commercial lending book, 85% of our commercial lending book reprice this. They tend to reprice in arrears, so there will be part of the book will be priced starting at January and other part in February. But we'll get a nice bump into the first quarter as a result.

I think what we've previously said is the value of 25 basis points at the front-end of the curve is worth about $65 million. The challenge is, and we've learned that the hard way, I'd say this past year is that as the backend of the curve moves up, down, sideways or twists, that can have some other effects, including some headwinds, and we obviously had good sized headwinds like other banks had on that this year.

So I think the question will obviously be, will the Fed raise rates, there's a lot of anticipation there, but there has been anticipation before. And then the question is, what will happen to the rest of the curve.

Bruce Saun

If my memory serves me, Erika, I think our sequential improvement in NIM from Q4 last year to Q1 was about 9 basis points and we attributed about half of that to the Fed bump and about the other half to our own initiatives in terms of asset mix and controlling deposit costs. So, just for reference sake.

Erika Najarian

That's good. Thank you. And just a follow-up to that. To your point, if the Fed raises rates, but there is no change in any other part of the curve, is there enough left on the balance sheet optimization initiatives that you could keep your net interest margin stable at that level for the rest of 2017?

Eric Aboaf

Erika, we're still going through our 2017 planning. As Bruce mentioned, we're spending a good bit of time here with Brad and Don and our Treasurer to do that, and we'll give more fulsome guidance in January when it comes to NIM. What I would say is that a boost in the frontend should be a positive, right, an uptick should help – help with an uptick to NIM. Our loan mix initiative should continue that Brad's been shepherding, so we expect that to be a positive.

The challenges on NIM will continue to be intense competition on the commercial side, which Don's team has been navigating through quite well. A little bit of a deposit cost will float up as well if LIBOR comes through and as we grow deposits a bit more quickly than the market. And then it will largely depend on what happens with the backend of the curve. Does the 10-year stay at where it is today, which is certainly a possibility, right, because it flowed back up to where it was – remember, where it was a year ago. It was quite nice when it was at the 2.20% level, not only 2%, but 2.20%. Where is it today where we are or does it move in another direction? I think that's the big open item that I think, to be honest, we'll see more of that develop through December and early January and that will help us give you some good guidance into 2017.

Erika Najarian

Okay. Thank you.

Eric Aboaf

Thanks.

Operator

Your next question comes from Ken Usdin with Jefferies.

Ken Usdin

Thanks. Good morning, guys. If I can ask a question on credit, which has stayed very good for you guys and for everybody else. There's a couple of things kind of going on inside the provision. It looks like you still had some of the energy cleanup coming through and then – but also it looks you had high recoveries this quarter and a pretty sizeable commercial side release. And so, I'm just kind of wondering there's a lot of moving parts in there, could you help us understand the kind of magnitude of the delta and provision we could expect going forward and how that ties into the fact that you guys are still growing loans at a really great upper single-digit pace?

Bruce Saun

Look, I think the credit cost, if you look at it across the year has been relatively stable. So, there is some underlying shifts. We had a lower charge-off quarter. Last quarter, we kind of moved back to the levels we were at in the first quarter. We've had inside the – we've had loan growth, which is adding to the provision, so we've had back book cleanup in terms of credit quality, particularly on the consumer side, which has provided an offset to that. So, we've been tracking in a kind of mid-80%s to 90% range. And I think that's a reasonable expectation. We've guided here to very slightly increased provision in Q4 because of the anticipation that we're going to grow loans in the 1.5% to 2% range. But I don't see anything that's troubling or concerning at this point on the credit front.

Ken Usdin

And so, Bruce, as a follow-up, and it just seems like you still have some of that back book improvement that can carry forward as well, where you might be able to still fund the loan growth build with the cleanup on the home equity and some of the legacy stuff that you referred to?

Bruce Saun

Yeah. I think – and we've been reasonably surprised because just when we think that the covered is clean as can be, we still see some things break our way. So, again, to Eric's point, we haven't given yet guidance yet on 2017 and we will see whether – how long we can sustain that into 2017. But I think certainly into Q4 we think that we can have an offset to the loan growth.

Ken Usdin

Understood. Okay. And then just one quick one. As far as the loan growth is concerned, anything changing as far as what you're seeing in terms of the mix of new production and where you want to see the book continue to grow as you look ahead?

Bruce Saun

Well, I think that the shift that you're seeing is all intentional. So, over in the consumer side, we're seeing good growth in our education refinance product, and we're seeing purposeful growth in the personal unsecured side. We've seen I think some very good growth in mortgages, which is helping to offset a little bit of the pay-downs on the HELOC area. And then on the commercial side, we've had some very steady growers throughout the year that kind of larger end of our customer base, the Mid-corporate and Industry Verticals have been growing nicely. Our Franchise Finance business has been growing nicely and Commercial Real Estate has been having steady growth as well.

So, I don't think we'll see much change there in terms of the mix and the drivers of that growth, but we're fortunate that we've been able to consistently achieve good loan growth, which has outpaced our peers and we think we can continue that. I don't know, Brad or Don, if want to add to that?

Brad Conner

Not really. I think you covered it well. The only thing that I might add to that is the one area of our portfolio which is somewhat intentional that's not growing is the auto business. We're comfortable with the size, it's a very tight margin business right now, and we're sort of holding that a little flat and the growth is coming in the other areas.

Bruce Saun

Right. Don, anything?

Donald McCree

I think you've got it. I think the place we'd like to see a little stronger growth is our middle market, but it is just very sluggish loan demand in that sector and cleaning it up with other sectors.

Bruce Saun

Yeah. And then leasing, given the repositioning, that's likely going to be a...

Donald McCree

Flattish.

Bruce Saun

...stable portfolio as well.

Ken Usdin

Okay. Got it. Thank you.

Bruce Saun

Yeah.

Operator

Your next question comes from David Eads with UBS.

David Eads

Hi. Good morning.

Bruce Saun

Hi, David.

David Eads

I know it's fairly early in the process, but I'm curious if you make comments and reactions to the potential changes to CCAR process, taking out the positive test and basically does that change the way you think about how you might – the pace initially bringing down capital ratios and getting more in line with your average?

Bruce Saun

Yeah. I'll start and Eric, I don't know, if you'd chime in. But look, we're pleased to see Governor Tarullo's remarks and an acknowledgement that banks under $250 billion in size don't have to go through some of the same rigor as the larger banks. I think there were a lot of – having said that, there were a lot of advances in terms of approach and risk management that we'll continue. And I think the supervisors would expect us to continue a fair amount of that. But being out of the drama of whether you have a qualitative pass or fail, as they might think in and of itself, it will just go back in the supervisory process.

I think our philosophy on gliding down that capital surplus has been found. We're a relatively new company separated from our parent, and so we're still demonstrating our capabilities as an independent bank. We have been in a fortunate position where I'd like to say we could have our cake and eat it too, so we've got very robust loan growth. We have very robust returns of capital to shareholders. And having that capital cushion behind us allows us to continue that, which is really helping to drive these very favorable results.

It's important that we get our ROE to higher level so that we can sustain that kind of an approach on a standalone basis once the cushion is gone. So we're really just calibrating how fast to glide that down with what the potential we see out in the marketplace to continue to execute our strategy.

Eric, any further remarks?

Eric Aboaf

Yeah. I would just add, in the near term, the focus on putting capital to work in the right places and recycling it from other areas is kind of paramount now and that we can do and we control and I think you've seen evidence of that. I think you've seen how that has actually helped our ROTCE write-off. ROTCE has been driven by operating leverage, but also by this redeployment of capital. And over time, you've seen us slow down on our CET1 ratios, but we're not in a rush and we want to make sure that we run a safe and sound institution. But I think you have seen a trajectory there of about 50 basis points over the past year and that gives you at least some indication for the time being.

David Eads

All right. That's helpful. And then following up on the lease business and the Asset Finance, I noticed that on your strategic initiatives slide, that's still highlighted in yellow. But it sounds like the message is that you're done with carving out any portfolios and now it's just a function of growing the middle market, leasing franchise and kind of growing the revenue opportunities from here, is that correct?

Bruce Saun

Yeah. And so if you think about that portfolio, we had about $6 billion of assets broadly. We've moved about $1 billion of these aircraft leases into non-core and put them into runoff. We have another of our own low yielding book of leases that we're just going to manage down. So I think the steady state portfolio is going to be around low for us, $4 billion to $4.25 billion. And over time, the duration on that portfolio is about four years. We'll continue to turn that and target that towards our existing Citizens customer base. A lot of that was from us, from RBS and we need to actually integrate this into our offerings with our customers.

And so, I'd say we call it yellow because we're kind of at the last stage of the thought process to restructure it, and now we have to reorient the business and get the calling in place and the coverage bankers to really be understand the product and kind of have a targeted plan where we can expand the product into that customer base. But I think you should start to see that move towards green, now that we've really figured out what we want to do with it. Don, anything further?

Donald McCree

No. I think that's right. The only other comment I'd make is, one of the reasons we like the leasing business is it's a relatively quick engagement with our clients, particularly where we're dealing with prospects we can begin to do business with them much more quickly than we can, for example, with a revolving credit or a term loan, which tends to take six to 12 months to establish that relationship. So, we think it's a quick turn product, which allows to make some progress on our growth of the client base also.

Bruce Saun

Yeah. Good.

David Eads

All right. Thanks so much.

Bruce Saun

Okay.

Operator

And your next question comes from Vivek Juneja with JPMorgan.

Vivek Juneja

Hi. Thanks. Great job in moving from 6% ROTCE to 8% very quickly in two quarters. Bruce and Eric, I want to follow up a couple of things. Capital return, what is your thinking now about going above 100%, as you got pretty close this year in the CCAR 2016?

Bruce Saun

Well, we just answered some perspective on that. But again, we'll wait till we get to the next year. I think we've been on a reasonably good glide path in terms of high return to shareholder and also funding robust loan growth and we'll see. We'll see if there is opportunities, I guess, it's less of a litmus test and a barrier than it was in the past, but I think what we've been doing in terms of gliding that CET1 ratio down 50 basis points or 60 basis points a year for the last two years has served us well. And we certainly still have more room to go on that with that strategy, given that kind of the peer average is in the low 10%s and we're in the low 11%s at this point.

Vivek Juneja

Right. And where do you think, just based on 2016 now, where do you expect – if you could just remind us where do you think your B III fully phased in CET1 will end up by next June?

Bruce Saun

Well, I don't think we've guided that yet, Vivek. We have offered 11.2% as of the year-end. And if you look at the strategies that we've employed is we've been going down, let's call it, 50 basis points or 60 basis points. If you ran that out another six months and it's assumed more of the same, that would get you down to something like 10.9% or something, which would have a 10% handle instead of an 11% handle.

Vivek Juneja

All right, okay. A question on the Consumer Banking fee income side. If I look year-on-year, put aside mortgage banking, which is obviously up very nicely, with the volumes, cards, Consumer Banking fee income is still dull. Can you talk a little bit about what you need to do there to get that going in the direction you've been trying to?

Bruce Saun

I'm sorry, I didn't hear you.

Vivek Juneja

Consumer Banking fee income. When you look at the consumer segment and look at the noninterest income year-on-year?

Bruce Saun

Yeah. Look, I'll start and Brad, I want you to chime in. But part of this is the card accounting change, Vivek. So, I think you have to really – you better serve to focus on the individual line items, and where we've had some growth in service charges, we've had very strong growth in mortgage. Probably the one disappointing area to-date is on the wealth fee line. Having said that, we feel quite positive about what's happening in our wealth business, so we have a strong new leader for that business and we've had very consistent success now in growing our financial consulting force, we added another 11 this quarter.

We've revamped our product set and reoriented the customer targeting more towards mass affluent and affluent, and so we're really focused a bit more on fee-based products than traditional commission products. And that is reflecting a little bit of a drag because you make more money right upfront off your commission products and you build a book on your fee-based products. I'd say proof in the pudding here, our investment sales year-on-year were up 15% versus a year ago, so the sales effort is tracking to the growth in FCs and the better penetration of the customer base, but there is a mix change in the product, which is holding back revenues a little bit for the short term. But in the long run, it's a good thing. Brad?

Brad Conner

Yeah. Listen, on the wealth side, there's just not a lot more to add there. I think you said it exactly right. We feel very good about the underlying drivers. We were adding financial consultants, they are high producing financial consultants, and their sales were strong. As you said, it's just a matter of changing the mix. And then in the long run, that's a good thing. So I think we are little behind what we originally thought. I think we're building the right foundation for us to move forward.

The only other comment I'd make on the consumer fees is that the question sort of dismissed the growth that we've had in mortgage and, to some degree, like we saw everybody seeing strong mortgage refinance activity. But I don't want to quickly dismiss that because there is a really strong underwriting trend, we've said it for a few quarters that we had to slow down on our hiring because we had to get our operations where it needed to be. And we feel like we've accomplished that and we've had two really strong quarters of hiring mortgage loan officers. So we do believe even after the mortgage refinance slows a little bit that we'd be able to see pretty strong mortgage deals into the future. So, I think there's some good underlying trends in mortgage as well.

Bruce Saun

Yeah.

Vivek Juneja

Okay. Brad, we'll have to hold you to that next couple of quarters. Thanks.

Bruce Saun

All right. Thank you.

Operator

And your next question comes from the line of Jesus Bueno with Compass Point.

Manuel Bueno

Hi. Thanks for taking my questions. Quickly, obviously, it's a seasonally strong quarter for student, but looks like you had a – it looks like you had very good growth there. And you had an emphasis on your in-house product, but if you could just give us an update on how your organic originations were and also on the SoFi purchases for the quarter?

Bruce Saun

Yeah. Brad, do you want to take that? So, student – obviously, ed refi has been really the focus, but the seasonal in Q3. And then also the SoFi relationship where we're continuing our flow agreement with SoFi.

Brad Conner

Yeah. Actually really strong across all three dynamics. So, we talked about it earlier on, which is a really very strong seasonal quarter for in-school. So, we saw a nice pick-up in in-school activity. [indiscernible] it's just a product that it's a matter of continuing to inform consumers about the opportunity and it continues to show good growth and we think there is a lot of opportunities to continue to market that product. And there is a little bit more awareness in the marketplace around...

Bruce Saun

Interestingly, SoFi is helping [indiscernible] which has the halo effect for us.

Brad Conner

That's exactly right. And then, as you said, we did do another SoFi purchase in the third quarter and we continue our relationship with SoFi. So we continue to expect to see good growth in student into the future.

Eric Aboaf

It's Eric. I'd just add that the organic mix is almost 95% organic at this point. So what's happening is while we saw the flow [indiscernible] SoFi across the bank and it's quite high in consumer itself because we have purchases from past years that are starting to mature and roll off, those are just getting replenished with [indiscernible].

Brad Conner

Yeah. As an example, our SCUSA portfolio is really just replenishing runoff and we were 91% – our mix of originations was 91% organic, 9% purchase. So it's a strong organic mix.

Manuel Bueno

Excellent. Thanks for the color there. And just quickly on iUp program. You've had the program there now for a year. I know this quarter we only had a couple weeks of kind of the new iPhone launch sales. But, I guess, how credit-wise, how has that – now that you're a year in, how has that portfolio performed relative to your original expectations? And if you could possibly update us on the kind of breakout of the balances for this quarter and your expectations as we move into the fourth quarter, which is generally heavier drive on sales.

Bruce Saun

I guess, the credit experience has been as expected, so there's nothing noteworthy to report on there. In terms of the breakout, we are really not breaking that out. I think it's fine to just leave that as a category because ultimately we'll have potentially more partners. And then, our direct personal unsecured has very similar yield characteristics. So, we will report that as a group. I'd say, though, that we would expect that iPhone could be a real driver as we head into Q4 here that there should be some good momentum behind that. But there is also a momentum in our personal mailing campaign that we have underway as well. So, we see good momentum across both fronts.

Eric Aboaf

The category itself, all the unsecured was up about 30% in the quarter, so it's a good quarter.

Manuel Bueno

Okay. And if I could squeeze one more just on the tax rate. I appreciate the guidance for 4Q that you put in there. But in terms of what to expect kind of as we move into 2017, would you say this is closer to a run rate, tax rate that we should expect?

Eric Aboaf

Yeah. It's Eric. Let me give you a little bit of perspective on tax rate. We started to work on taxes I think in an industrious way in the spring time and folded it into our TOP III initiatives and you're seeing some of the early returns on that. And I think we're doing what the other regional banks are doing. There is nothing special here. We're availing ourselves of Federal R&D tax credit, state investment tax credit. And so, what you saw this quarter was a little bit of a catch-up activity from the prior years.

I think going forward what you'll see is kind of the annual version of those tax credit programs, plus the standard tax benefit that comes from the LIHTC, the Low Income Housing Tax Credit, we do a modest amount of wind farms and some other tax advantage investing. And we'll continue to do that.

So, I think we had a particularly strong quarter this time around. I think you saw that we guided to 31.5% for next quarter, so down now 150 basis points from that 33% area that we were running at. And if you think about it, it's just part of the benchmarking and review of how do you optimize the regional bank and improve ROTCE, right. Part of that is operating leverage, part of that is fee income growth, and part of that is operating with an attractive tax rate. And so it's part of that continued effort.

I think in terms of next year, we'll give a little more guidance in January as we pull together our plan, but I think clearly we're on a nice path here.

Bruce Saun

Yeah. We're on the trajectory that we want to have sustainable. So all those things Eric mentioned, getting our NIM back to the pack and getting our capital ratios back to the pack, getting our tax rates back to the pack, those things all contribute to getting our ROTCE where we want to take it.

Manuel Bueno

That's great. Thank you for taking my questions.

Operator

And your next question comes from the line of Gerard Cassidy with RBC. Your line is open.

Gerard Cassidy

Thank you. Good morning. Bruce, you mentioned in the sales, the TDRs just over $300 billion. If I recall correctly and just over $880 billion or so at the end of the second quarter, should we expect additional sales of TDRs in the next couple of quarters?

Eric Aboaf

It's Eric. I think we – as you think about TDRs, we, like other banks, you go back over the historic portfolio, you do primarily a one-time review and you package a nice sized sale. And the bigger the sale, the better execution you tend to get. So I think this is more one-time than otherwise. It doesn't mean that a year or two from now, there may not be a little bit of follow-on, but I think, you think about those as small and just more as an episodic event or positive episodic event, but one on the left.

Gerard Cassidy

Yeah. Okay. Thank you. Sticking with the sales theme. Obviously, you moved some of these aircraft leases into runoff portfolio. In view of CIT's recent sale of their airline leasing – aircraft leasing business, would you guys considerer selling off that portfolio at some point in the future, or are you just going to leave it and runoff?

Bruce Saun

Yeah. It's a very different ball game. The CIT was commercial aircraft – with the commercial airliners and these are private planes for large companies, and they're pretty bespoken there in their one-off. So, I think what should just end up doing is you work d them through with lessees. So, I don't think this would lend itself to a transaction.

Gerard Cassidy

Thank you. Appreciate the color.

Bruce Saun

Yeah.

Operator

And your next question comes from the line of Matt O'Connor with Deutsche Bank.

Matthew O’Connor

Good morning.

Bruce Saun

Hi.

Matthew O’Connor

Just to follow up on the commercial loan growth. Obviously, again, a bit stronger than the industry, and some of it is the investments that you've made in some of the verticals and [indiscernible]. But just how sustainable do you think the above-average growth is? Because there seems to be some pricing issue at some places, less demand in some areas, and a number of folks seem to be pulling back for one reason or another or just having weaker growth.

Bruce Saun

Let me start and then Eric or Don, feel free to chime in. But I think if you look at maybe the last several quarters, going back 10, 12 quarters, we've had consistent levels of growth and we've largely been tracking the Fed HA data. So, we're growing consistent with the overall market and part of that has been getting back on offense, part of it has been hiring more coverage bankers and building out these Industry Verticals and bringing relationships to us, and just being very selective about where we're playing, building real power allies of strength, and then going out and taking on the business.

So, I'd say we feel that we're well situated to continue that strategy. We saw a bit of a seasonal slowdown in Q3. We are looking for a bit of a bounce back in Q4. I think there is a little bit of election uncertainty that's maybe holding some companies back, which might resolve itself, as we get through the quarter. But anyway, I'll stop there. Don, anything?

Donald McCree

I think you should expect to see us grow with the industry and we are getting some production out of people that we've hired over the last couple of years, as they've done and engage with the clients. I'd say the other thing is, it's deal-by-deal, company-by-company, and it's very aggressive out there, and we're being careful to balance credit, terms and conditions, pricing and loan growth. So, we manage it on a multi-variable equation obviously and we want to protect the NIM while also growing the loan business. So, it will be a balance as we go forward. I agree with, Bruce, what you said.

Matthew O’Connor

Okay. Thank you very much.

Operator

And your next question comes from Kevin Barker with Piper Jaffray.

Bruce Saun

Kevin?

Ellen Taylor

Kevin?

Operator

Kevin Barker, your line is open.

Kevin Barker

Sorry. I was on mute. Good morning.

Ellen Taylor

Hi.

Kevin Barker

Auto net charge-offs increase was about 30% year-over-year to running about 69 basis points versus 50 basis points last year. It seems like there is a little acceleration in the charge-offs on a quarter-over-quarter basis. Is there any particular trends you want to point to, was this related to the Santander portfolio or is this related to your overall organic...?

Eric Aboaf

Kevin, it's Eric. Just to start, I think we had an unusual low second quarter performance in auto. We had done some catch-up on some recoveries the way they – and repossessions the way they flow through. So, I think if you just look at the trends broadly over the five quarters that you have here, you got to adjust the second quarter 2016 upwards. I think, other than that, we've been running in kind of $20 million to $25 million of charge-offs per quarter. There's a little bit of seasoning going through the portfolio, right, because as we don't add net new loans, you don't have that natural drift down of the charge-off that offsets the seasoning of the backlog. So, you're just seeing a little bit of that. But I think it's well controlled. We feel like we're in a good place with auto. We'll obviously see the usual seasonality in fourth quarter, but I think it's a good shape.

Brad Conner

Yeah. I think you said it exactly right. It's a low seasonal quarter. In the second quarter, we saw a little bit of pickup from that. Of course, a year or so ago, we started to expand our credit parameters that's seasoning through the book. But overall, the credit trends are exactly as we would have expected them to be.

Bruce Saun

And SCUSA is performing as expected.

Brad Conner

SCUSA performing as expected. And you'll recall, we actually changed our credit parameters with SCUSA few quarters back and we're actually now beyond the peak of the SCUSA portfolio loss, so that's beginning to come down.

Bruce Saun

Yeah, good.

Kevin Barker

So the macro environment stays relatively benign from where it is right now. Where do you think the normalized credit losses will be on that auto portfolio on an annualized basis?

Bruce Saun

Roughly in the same range.

Brad Conner

Relatively in the range where we are.

Eric Aboaf

Yeah. If you think about the charge-off rate that you see in the materials other than the low quarter is you see some prints in the 60 basis point range, 70 basis point range. I think that's where we expect it to level out, I'd say, in the 70 basis point range, more or less. And then we'll obviously have the quarterly seasonality because, remember, that's quite a factor in the auto business and we think [indiscernible] like through modest economic times as well.

Kevin Barker

Okay. And then a quick follow-up on Jesus' comments about the tax rate over a long period of time. At what point do you expect to reach peer levels for your tax rate? How long do you expect that to take?

Eric Aboaf

That's a good question because I think tax is one of those things that you work on over time and you get better at and is something that we have every intention of doing. And as I've said, some of it is tax credit, sort of availing themselves of tax credit fits into very little bit state by state, but there's a Federal credit and then part of it just the tax advantage investments and there are three or four categories of those. There's low income tax credit, there is historic real estate commercial tax credit, there are some wind farms, all of which that we have begun to do some more of. We'll do those in line with what other banks do. We'll obviously keep an eye out and not do anything that's a little more on the edge because that's not the kind of bank that we are.

I think the question is, how much can you bring the tax rate down? I mean, you see where the peers are, they are in the high 20% range, but it takes time, and I think we're actually quite pleased with the performance so far. We were at 33% for a number of years when tax rate management wasn't a big important item under the RBS umbrella because of the Global Bank structure. Now that it is, you've seen us go from 33% to [indiscernible].

Bruce Saun

Our income is growing very quickly, so that income comes through at the marginal rate, and so you're also – some of your tax planning has to offset that higher levels of income. So.

Eric Aboaf

I think what we will do is in January we'll give a little more guidance as to what we expect in 2017 and obviously, some of what you've seen is a down payment on that, and we'll continue that. Hard to estimate long term, but I think you can estimate some improvements over time.

Bruce Saun

Okay. Thank you.

Kevin Barker

Thank you.

Operator

And our last question comes from the line of Matt Burnell with Wells Fargo. Please go ahead.

Matthew Burnell

Thanks for taking my question Eric, maybe a question for you. The securities portfolio was up about 4% quarter-over-quarter. I presume that's mostly just being driven by deposit growth exceeding your loan growth, but can you confirm that there really hasn't been much of a change and how you are thinking about managing that portfolio?

Eric Aboaf

Yeah. Matt, it's Eric. I think securities portfolio is in a good state right now, it's right-sized for this bank, it's primarily deposits funded, which is the way we like it. You saw us temp down a little bit on the asset sensitivity as we saw some nice rate levels in the late August, early September time period. And we'll continue to position a bit around the curve as that portfolio throws off some good income. I think we've got a very strong treasury team that's got the capability to manage that in a proper way. But I think it's properly sized for the bank. I think it's got a nice mix of MBS portfolio, it's got some swaps layered in, which provides some more clean duration, so that we also manage the convexity characteristics. And then I think over time, we've got some ability to do more with the portfolio as well.

Matthew Burnell

Okay. Thanks very much. And then just a question on the CFO search. Have you said how long you expect that to take? I realize there is no specific date, but do you have a sense as to how long you think that might take?

Bruce Saun

Well, obviously, we've begun. And my experience on these things is they take a few months to identify the right candidate and then list them and get them situated. But I think we'd be targeting to have the person in certainly by no later than the end of the first quarter.

Matthew Burnell

Great. Thank you very much.

Bruce Saun

Okay.

Ellen Taylor

Thanks, Matt.

Bruce Saun

Okay. I think that's it for the questions. And I'd like to thank everyone again for dialing in today. We certainly appreciate your interest. All in all, we feel that we had a really terrific quarter that we're firing on all cylinders and feel good about our outlook. So, thanks again and have a good day.

Operator

Ladies and gentlemen, that does conclude our call today. We'd like to thank you for your participation. You may now disconnect.

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