CITIZENS FINANCIAL GROUP INC annual report, FY2015

Citizens Financial Group, Inc. — FY2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015; filed February 26, 2016. Citizens is a U.S. regional bank headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking across an 11-state footprint. It reported approximately $138.2 billion of assets, 1,200 branches, 17,700 colleagues, and more than five million customers at year-end.

Financial and Operating Metrics

Metric	2015	2014	Change
Net interest income	$3.402 billion	$3.301 billion	+3%
Noninterest income	$1.422 billion	$1.678 billion	-15%
Total revenue	$4.824 billion	$4.979 billion	-3%
Provision for credit losses	$302 million	$319 million	-5%
Noninterest expense	$3.259 billion	$3.392 billion	-4%
Net income	$840 million	$865 million	-3%
Net income available to common stockholders	$833 million	$865 million	-4%
Basic and diluted EPS	$1.55	$1.55	Flat
Net interest margin	2.75%	2.83%	-8 bps
Efficiency ratio	67.56%	68.12%	Improved
Return on average common equity	4.30%	4.46%	Down
Return on average tangible common equity	6.45%	6.71%	Down

Excluding restructuring charges and special items, management reported 2015 net income of $871 million, up 10% from $790 million in 2014; net income available to common stockholders was $864 million, up 9%; adjusted ROTCE was 6.69%, versus 6.13%; and the adjusted efficiency ratio was 66.52%, versus 68.70%. These are non-GAAP measures.

Balance Sheet, Credit, Debt and Liquidity

Total assets increased 4% to $138.2 billion. Loans and leases increased 6% to $99.0 billion, including 7% growth in commercial loans and 5% growth in retail loans.
Total deposits increased 7% to $102.5 billion. Noninterest-bearing deposits were $27.6 billion, or 27% of total deposits. The average total cost of deposits increased to 0.24% from 0.17%.
Short-term borrowed funds declined to $3.4 billion from $10.5 billion, while long-term borrowed funds increased to $9.9 billion from $4.6 billion, primarily because of additional Federal Home Loan Bank advances and debt issuance.
Citizens issued $250 million of subordinated notes in July and $750 million of subordinated notes in December 2015. It repurchased $750 million of subordinated debt held by RBS in December and used $250 million of preferred stock proceeds and $250 million of subordinated debt proceeds to fund $500 million of common-stock repurchases.
Cash flow from operating activities was $1.229 billion. Investing activities used $5.905 billion, principally because of securities purchases and loan growth. Financing activities provided $4.485 billion, primarily from deposit growth and long-term borrowings. Cash and cash equivalents ended at $3.085 billion, down from $3.276 billion.
Contingent liquidity was $23.1 billion, consisting of $2.0 billion of net cash at the Federal Reserve, $17.0 billion of unencumbered high-quality securities, and $4.1 billion of available FHLB capacity. Additional pledged loans provided approximately $11.0 billion of available liquidity.
The company stated that its liquidity coverage ratio exceeded the applicable January 2016 requirement and that it was fully compliant as of the required implementation date.
Net charge-offs declined to $284 million, or 0.30% of average loans, from $323 million, or 0.36%. Nonperforming loans and leases declined to $1.060 billion, or 1.07% of loans, from $1.101 billion, or 1.18%. Nonperforming assets declined to 0.80% of total assets from 0.86%.
The allowance for loan and lease losses was $1.216 billion, or 1.23% of loans, compared with 1.28% in 2014. Total allowance for credit losses, including unfunded commitments, was $1.274 billion.
Commercial criticized loans increased to $2.6 billion, or 5.6% of commercial loans, from $1.9 billion, driven partly by deterioration in the oil and gas portfolio.
Year-end regulatory capital ratios under Basel III transitional rules were 11.7% CET1, 12.0% Tier 1, 15.3% total capital, and 10.5% Tier 1 leverage. Management estimated that the ratios remained above fully phased-in Basel III minimums.

Material Changes Versus 2014

Reported net income decreased because 2014 included a $180 million after-tax gain related to the Chicago divestiture, while 2015 included $31 million of after-tax restructuring and special items. On an adjusted basis, earnings improved materially.
Net interest income grew with balance-sheet expansion, but the net interest margin contracted because of persistent low interest rates, lower loan yields, higher deposit costs, and higher borrowing costs.
Noninterest income declined primarily because 2014 included a $288 million pretax Chicago divestiture gain. Excluding that gain, 2015 noninterest income increased 2%, helped by higher mortgage banking fees.
Noninterest expense declined $133 million, including lower restructuring and special costs. Project Top generated approximately $200 million of run-rate expense savings by year-end 2015.
Consumer Banking net income increased 44% to $262 million, while Commercial Banking net income increased 3% to $579 million. Consumer Banking benefited from lower expenses and credit costs; Commercial Banking benefited from loan and deposit growth but experienced higher expenses and lower fee income.
RBS completed the sale of its remaining CFG common shares in November 2015, completing Citizens’ separation from RBS. Citizens also completed substantial rebranding and no longer uses the RBS name in marketing, subject to limited contractual exceptions.

Guidance, Outlook, Commentary and Risks

Management’s medium-term targets were ROTCE above 10% and an efficiency ratio in the 60% range. The filing cautions that these targets depend on assumptions regarding interest rates, economic conditions, competition, regulatory approvals, and execution.
Management plans to grow Consumer and Commercial Banking, deepen customer relationships, expand wealth management, mortgage, student lending and business banking, improve treasury capabilities, and continue controlled balance-sheet growth.
Management expected approximately $245 million of infrastructure and technology investment in 2016 and approximately $160 million in 2017, compared with $219 million invested in 2015.
The company is asset-sensitive and estimated that an instantaneous 200-basis-point rate increase would increase projected 12-month net interest income by 10.6%, while a 200-basis-point decline would reduce it by 6.4%. Actual results may differ because of deposit behavior, loan prepayments, funding costs and competitive conditions.
Approximately $4.4 billion of the $15.1 billion HELOC portfolio was subject to payment reset or balloon payment between 2016 and 2018; $995 million was scheduled to reset in 2016. Management reported favorable performance to date but identified payment shock as a continuing credit risk.
Citizens and its banking subsidiaries remained subject to regulatory consent orders and remediation requirements involving deceptive marketing, deposit reconciliation, identity-theft and debt-cancellation products, compliance controls, fair lending, mortgage servicing, risk management, information security and anti-money-laundering controls. Substantially all remediation related to legacy matters was expected to be resolved by the end of 2016, but the timing and ultimate costs were uncertain.
Management expected customer restitution and potentially civil money penalties related to compliance deficiencies. The filing states that ultimate obligations could exceed established reserves.
Key broader risks include credit deterioration, oil and gas exposure, low or changing interest rates, deposit competition, liquidity and funding stress, regulatory restrictions, litigation, cybersecurity and technology failures, model risk, goodwill impairment, tax-asset realization, competition, and dependence on third-party or formerly RBS-provided systems and services.
Subsequent events included a January 2016 agreement to purchase between $500 million and $1 billion of student loans, a $369 million purchase completed January 8, 2016, and a January 2016 declaration of a $0.10 per-share common dividend.

Most Important Facts for Investors to Verify

Reconcile GAAP earnings with management’s non-GAAP earnings and confirm the impact of restructuring charges, special items and the prior-year Chicago divestiture gain.
Assess whether loan growth, especially in student, auto, commercial real estate and oil and gas exposures, is producing acceptable risk-adjusted returns.
Monitor criticized commercial loans, oil and gas credit quality, HELOC payment resets, nonperforming assets, charge-offs and allowance coverage.
Review the sustainability of the 2.75% net interest margin amid deposit-cost pressure, funding changes and the Federal Reserve’s rate path.
Confirm continued compliance with Basel III, CCAR, liquidity coverage and other regulatory requirements, including the effect on dividends and share repurchases.
Track progress and final costs of consent-order remediation, customer restitution, potential penalties and related litigation.
Evaluate the company’s ability to replace remaining RBS-related services, systems and infrastructure without disrupting operations or increasing costs materially.
Review goodwill sensitivity: year-end goodwill was $6.876 billion, and the filing states that adverse changes in forecasts, market conditions or reporting-unit valuations could require future impairment.