Citizens Financial Group, Inc. 2014 Form 10-K Summary
Business context and reporting period
Citizens Financial Group, Inc. filed an annual report for the fiscal year ended December 31, 2014. The company is a regional bank holding company headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking across an 11-state footprint. It had approximately $132.9 billion of total assets, 17,700 employees, 1,200 branches and more than five million customers at year-end.
The filing also includes fourth-quarter 2014 results. Citizens completed its initial public offering in September 2014; RBS Group remained the controlling shareholder with 70.5% ownership at December 31, 2014.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income | $3.301 billion | $3.058 billion | Up 8% |
| Noninterest income | $1.678 billion | $1.632 billion | Up 3% |
| Total revenue | $4.979 billion | $4.690 billion | Up 6% |
| Provision for credit losses | $319 million | $479 million | Down 33% |
| Net income | $865 million | $(3.426) billion | Returned to profitability |
| Net income excluding specified unusual items | $790 million | $671 million | Up 18% |
| Net interest margin | 2.83% | 2.85% | Down 2 basis points |
| Efficiency ratio | 68.12% | 69.17%, excluding goodwill impairment | Improved on comparable basis |
| Return on average tangible common equity | 6.71% | $(25.91)% | Improved materially |
Net income benefited from improved credit quality, higher net interest income, lower deposit costs and reduced hedging costs. Reported 2013 results included a $4.4 billion pre-tax, $4.1 billion after-tax goodwill impairment charge.
At December 31, 2014, total assets were $132.9 billion, loans and leases were $93.4 billion, deposits were $95.7 billion and stockholders’ equity was $19.3 billion. Loans increased 9%, led by commercial loans, residential mortgages and automobile loans. Deposits increased 10%, with noninterest-bearing deposits representing 27% of total deposits.
Liquidity remained supported by core deposits, secured borrowings and liquid securities. Reported contingent liquidity was $19.5 billion, including $14.5 billion of unencumbered high-quality securities, $3.5 billion of unused FHLB capacity and $1.5 billion of net cash at the Federal Reserve. Including available discount-window capacity, total available liquidity was approximately $27.8 billion.
Capital remained strong, although ratios declined as the balance sheet grew and capital was optimized. The year-end Basel I Tier 1 common equity ratio was 12.4%, total risk-based capital ratio was 15.8% and Tier 1 leverage ratio was 10.6%. Fully phased-in pro forma Basel III CET1 and total capital ratios were 12.1% and 15.4%, respectively.
Material changes versus the prior comparable period
- Reported net income improved by $4.3 billion, primarily because 2013 included the goodwill impairment charge.
- Comparable adjusted net income increased 18% to $790 million.
- Commercial Banking net income increased 9% to $561 million, while Consumer Banking net income decreased 25% to $182 million because of lower mortgage banking and service-fee revenue.
- Net charge-offs declined to $323 million, or 0.36% of average loans, from $501 million, or 0.59%, in 2013.
- Nonperforming loans and leases declined to $1.1 billion, or 1.18% of loans, from $1.4 billion, or 1.65%.
- Non-core assets declined 19% to $3.1 billion.
- The Chicago divestiture was completed in June 2014. The sale included 103 branches, $4.8 billion of deposits and $1.0 billion of loans and generated a $288 million pre-tax gain.
- Citizens issued $1.5 billion of senior unsecured notes in December 2014 and increased long-term borrowed funds to $4.6 billion from $1.4 billion.
- Citizens repurchased approximately $334 million of common stock from RBS and issued $334 million of subordinated debt to RBS in October 2014. It also paid $666 million of special dividends to RBS during 2014.
- Operating cash flow was $1.4 billion. Investing activities used $10.3 billion, principally for securities purchases and loan growth, while financing activities provided $9.4 billion.
Guidance, outlook, management commentary and risks
Management’s two- to three-year objectives included return on tangible common equity above 10% and an efficiency ratio in the 60% range. The efficiency initiative was expected to deliver approximately $200 million of savings by the end of 2016; management reported achieving 28% of targeted savings during 2014.
Management expected modestly higher charge-off rates in 2015 and 2016 as commercial recovery opportunities diminished, home prices stabilized and non-core portfolios continued to run off. The company expected to invest approximately $280 million in infrastructure and technology in 2015 and about $170 million in 2016. It also expected approximately $34 million of annual incremental stand-alone public-company expenses and approximately $55 million of one-time separation expenditures through 2016.
Key credit risk includes the potential payment shock in older HELOCs. Approximately 29% of the $16.0 billion HELOC portfolio, including $4.6 billion of drawn balances and $3.8 billion of undrawn balances, was subject to a payment reset or balloon payment between 2015 and 2017.
Regulatory matters remain material. The Federal Reserve objected to Citizens’ 2014 CCAR capital plan on qualitative grounds, restricting capital distributions above 2013 levels until a new plan was approved. CBNA was also subject to an OCC remediation agreement and restrictions related to its financial subsidiaries. The banking subsidiaries remained subject to OCC and FDIC consent orders concerning consumer-product practices. Future restitution and civil monetary penalties were possible, and the filing states that ultimate amounts could exceed established reserves.
Other significant risks include the prolonged low-interest-rate environment, margin compression, deposit competition, credit deterioration, mortgage repurchase demands, litigation, cybersecurity and operational failures, reliance on RBS transitional services and systems, rebranding and separation execution, regulatory capital and liquidity requirements, and the potential market impact of RBS divesting its remaining ownership by the end of 2016.
The filing reported mortgage repurchase demands of approximately $158 million and indemnification requests of $99 million from 2009 through 2014. Of claims presented, $88 million had been paid for repurchases and $33 million for indemnification. The company repurchased $25 million of mortgages and incurred $8 million of indemnification costs in 2014.
Most important facts for investors to verify
- Whether adjusted earnings growth can continue after excluding the Chicago divestiture gain and other special items.
- Progress toward the greater-than-10% ROTCE and 60%-range efficiency objectives.
- Results and regulatory acceptance of the 2015 CCAR capital plan, including implications for dividends and share repurchases.
- Status of CBNA’s OCC remediation plan and the OCC and FDIC consumer-compliance consent orders.
- Performance of HELOCs entering payment resets through 2017 and any related increase in delinquencies, provisions or charge-offs.
- Credit quality trends as commercial and automobile lending expand and non-core assets run off.
- Funding costs, liquidity metrics and compliance with Basel III and the modified liquidity coverage ratio.
- Costs and execution of the RBS separation, technology migration and rebranding program.
- Future mortgage repurchase, indemnification, litigation and regulatory exposures.
- Actual timing and method of RBS’s remaining share disposals and the resulting effect on CFG’s stock price and governance.